This is Richard Wolff from Democracy At Work responding to another Ask Prof Wolff question
from our Patreon community. This one comes from Sam, and Sam is interested in the level of
corporate debt in the United States, and whether it's going to blow up the American economy.
That's a very important question. Sam rightly points to the fact that debt of corporations has
been rising. Let me begin by underscoring that. Because of the terrible crashes that the American
Capitalist system underwent (the dot-com crash in 2000, the subprime mortgage crash in 2008,
and now the COVID crash in 2020 and 2021) in each case, the government rushed in
to try to prevent it from being an all-out collapse, like what we had in the 1930s,
by pumping money into the economy, and by bringing interest rates down to where they had never been
in American history before — at or near zero, year after year, for almost two decades. Wow.
And what this did is very important. It was a kind of message, an incentive,
to every corporation in America, that no matter what your problems are — whether
you make the wrong product, nobody wants it anymore, or you chose the wrong technology,
or you're in a struggle with your workers, or your shareholders are bothering you — the easiest,
quickest, and cheapest way to cope with the problem? Go get some of that money
the Federal Reserve is pumping in, because it's virtually free, with an interest rate near zero.
So they all build up way more debt than they've ever had before. Remember,
back in 2008, our economy collapsed because the debt was too much. We call
it “the sub-prime mortgage crisis,” because people could not pay their mortgage payments.
That’s a debt, a mortgage. And if you couldn't keep up
the monthly payments you have to make, to hold on to the house you borrowed to buy, you lose it.
So we know that we can get really close to collapse,
and we have more debt now than we did back in 2008.
Sam goes on to ask, “Well, is it going to blow up, or would the government step in?” I have no doubt
whatsoever that I can answer that question. The government would step in, because the government,
after all, is very close to those bankers, and those others that are worried about all of this,
far closer than they are to us. They do what those bankers and big businesses want. They're
used to that. They are themselves typically bankers, and big business men and women anyway.
So yeah, the government will step in, but here it's important to understand what it
means “the government will step in.” Here's what happens when the debts become too much.
Somebody breaks. Somebody has just more debts than they can cover. If you go back to 2008, it was the
Bear Stearns stock brokerage, it was something called Lehman Brothers, a century-old, huge bank,
and they couldn't cover their debts. The people they had lent to wern’t paying them back,
and they couldn't pay back their creditors, and the system fell apart. It wasn't just the
people who did business with Bear Stearns or Lehman Brothers. It was in everybody's head,
“I can't lend money to him, to her, to this bank, to that, even not overnight, because if
they declare bankruptcy between now and tomorrow morning, then they don't have to pay me, and I've
lost an enormous loan, and I can't risk it.” And suddenly, in banker's language, the system
“froze.” The normal borrowing and lending to one another, which is in the trillions every few days,
stopped on a dime. Nobody would dare lend.
Nobody could borrow, and without that the system was on the edge of collapse.
So here's what the government came in and did. It did two things. To the people who were desperate
for a loan, the government gave them one. And to people who were desperate to be able to lend,
the government said, “Lend to me. There's no risk. I'll pay you back.” Or in reality, what they were
saying, “If I don't pay you back, getting your money is not your problem, because it'll be a
question of whether you can survive for the next few days, because the economy then collapses.”
So the government steps in. Will that always work? Answer: probably not, but we can't be sure,
because what would end the process is if the government stepping in like that (telling the
lenders “lend to me,” and telling the borrowers “borrow from me,” in effect
inserting itself between lender and borrower) that only works if the lenders and the borrowers
trust the government. Our government isn't deeper debt than it's ever been before,
it's actually contemplating, as I speak to you, a possible war with real adversaries,
not poor countries like Afghanistan and Iraq, but the Soviet Union, China, her ally,
and so on. At this point you are going to be asking the government to step in
at a time when its credibility, and its credit, are under the severest stress,
probably in the history of the country. So yeah, we are treading in very dangerous
waters. We have solved the problems along the way of the last 20 years, particularly
by a monetary explosion that leads any sane person to say “uh oh.” We may have solved the problem of
the three crashes in this new century, but we may have done it in a way that's a bigger problem for
this economy than whatever the problems were that it was an effort to stop, or to solve.
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