MW: Do you see the growth of the financial sector as a positive development, or not?

Michael Hudson: Its behavior has become antithetical to the development of industrial capitalism. 19th century reformers inspired by Henri St. Simon in France sought to reorganize finance from debt financing to equity financing. But today's economy is going in just the opposite direction. It's replacing stocks with bonds and loans by banks and buyout funds, creating debt that is not being used to build up the productive capacity to pay back this debt with its interest charges. The result is what classical economists called unproductive debt.

MW: The financial sector seems less inclined to lend to develop useful products and enterprises. It prefers to repackage other people's debt (like mortgage-backed securities) and market them to gullible investors. Are the investment banks responsible for the massive expansion of credit and debt presently destroying the middle class and ruining the country?

Michael Hudson: That's what's happening. But a major reason why savings are flowing into these banks because the tax laws make it more profitable to debt leverage than to invest in industrial capital. The tax system has shaped a market where it pays more to speculate than to invest in building up new means of production. The financial sector has been deregulated on the logic that whatever makes the most money is the most efficient. The product that banks are selling is debt, and help in corporate takeovers, mergers and acquisition. Credit is a product that's almost free to create. Its main cost of production is the lobbying expense to buy Congressional support.

Michael Whitney: Getting to the Heart of America's Economic Crisis

I can only hope that Mr. Obama will not pull a Tony Blair New Labor turnabout and revert to Clinton's pro-Wall Street, anti-labor type of policy. If that really were to happen, it would cause such disillusionment that it could fracture the Democratic Party irreparably.

I hope the opposite will happen, and I¹m doing what I can to help bring that about. But regarding politicians, I can only speak for my friend Dennis Kucinich. He has asked me to organize a Roosevelt-type Brains Trust of economic and political advisors to develop a program to re-industrialize America and save it from succumbing to the kind of polarization that was known as the Spanish Syndrome after the 16th century, and the Roman Empire syndrome before that: an economy where the wealthy magnates made themselves tax-free, shifted the burden onto labor and industry, and withdrew into their estates as economies lapsed back into localized subsistence production.

So all this has happened before, again and again. There is no automatic guarantee of progress. It has to be steered. Right now the only parties steering it are the large financial institutions on behalf of their wealthy clients. Hardly by surprise, their attitude is anti-labor.

I think economic circumstances will help impel Mr. Obama to make a swing back toward more classically progressive economic and tax policies. And I can't think of any other candidate who is in as good a position to force Congress to go along with his reforms. He can come out and back candidates willing to oppose the more recalcitrant Democratic Congressmen and Senators.

Michael Whitney: Getting to the Heart of America's Economic Crisis

So here's my question: The middle class is being squeezed like never before while the chasm between rich and poor gets bigger and bigger. Do you think we are we approaching a crisis phase in this inequality gap, or am I being an alarmist?

Michael Hudson: For a crisis to occur, there needs to be at least two opposing forces or trends. The worst problem about America's present quandary is that there seems to be no force opposing financial polarization. Without a counterforce, without an opposition to the financial Counter-Enlightenment that's taking place, economic horizons will continue to shrink here.

We're indeed entering a Two Economy society. John Edwards picked up the theme and almost the same wording that British Prime Minister Benjamin Disraeli made popular in the late 19th century. He created Britain's Conservative Party in its modern form, recruiting compassionate conservatives known as Young England. Much like the socialists decrying the unfairness of the market economy in the brutal form it took in Britain. Their dream was to make industrialization compatible with a more socially minded morality. Disraeli's major political adversary was not socialism but liberal free-market ideals that urged nations to compete by lowering their wages ­ what today is called a race to the bottom. His welfare legislation was highlighted by the public health system introduced from 1874 to 1881 and promoted under his motto Sanitas sanitatum, Health, all is health. Compare that to today's conservatives!

In 1845, three years before the Communist Manifesto and the revolutions that swept across Europe in 1848, he addressed the horrors of unbridled laissez faire in a novel, Sybil, or The Two Nations. The subtitle referred to the rich and the poor, two nations between whom there is no intercourse and no sympathy, and Š who are not governed by the same laws. Although Disraeli placed his hopes in a morally regenerate aristocracy, he assigned the loftiest ideals to Sybil, the daughter of a factory worker. And when the novel's protagonist, Egremont, asks about conditions in British cities, a young stranger, dressed modestly in black, explains that although "men may be drawn into contiguity, they still continue virtually isolated. . . . In great cities men are brought together by the desire of gain. They are not in a state of co-operation, but of isolation, as to the making of fortunes. . . Christianity teaches us to love our neighbour as ourself; modern society acknowledges no neighbour.' `Well, we live in strange times . . . society may be in its infancy,' said Egremont . . . `but, say what you like, our Queen reigns over the greatest nation that ever existed.' `Which nation?' asked the younger stranger, `for she reigns over two. . . . Two nations; between whom there is no intercourse and no sympathy; who are as ignorant of each others habits, thoughts, and feelings, as if they were dwellers in different zones, or inhabitants of different planets; who are formed by a different breeding, are fed by a different food, are ordered by different manners, and are not governed by the same laws.' `You speak of--' said Egremont, hesitatingly. `THE Rich and THE Poor.'"

Disraeli depicted financial interests as the villain (popularizing the myth of the Jewish banker). His major political adversary was not socialism but liberal free-market ideals that urged nations to compete by lowering their wages - what today is called a race to the bottom. The Conservative Party's economic compassion, however, was limited by the fact that it also was the party of landowners, above all those in the House of Lords who blocked the Liberal attempt to tax groundrent in 1909. The dichotomy is not merely between an elite and the masses, or between the vested interests and the downtrodden, the cultured and the great unwashed. It is something much more specific. These two nations, two cities, actually are two economies - Economy #1 (production and consumption) vs. financial and property-based Economy #2 which controls the economic surplus in the form of savings and investment. And the different characteristics of these two economies go far beyond the merely economic dimension. I cite this example to show what a true compassionate conservatism might be. It would be a good framework in which Pres. Obama might present his policies in ways that would maximize support from groups that used to be called liberal Republicans. Much of the business community might come on board if he balances his program well. In fact, it was a British Conservative banker, Geoffrey Gardiner, who drew my attention to Disraeli's novel. Charles Dickens Tale of Two Cities expressed the same idea of cities divided between the idle rich and those who had to work for a living. It is hard to imagine any politician writing such a novel today, although the socialist Michael Harrington popularized the theme in the 1960s in The Other America, and Democratic Vice-Presidential candidate Edwards campaigned in 2004 on the two Americas theme.

MW: How do we turn this trend around and push for changes to strengthen the middle class while providing a safety net for those who have slipped through the cracks? Do we need to rethink how we deal with people who are stuck in a cycle of grinding, unrelenting poverty?

Michael Hudson: The left wing focuses on people who have slipped through the cracks, the poor and the homeless, and ethnic and racial minorities. But the most serious problem lies at the economic core. Failure to restructure it and take control of finance will lead to excluding more and more people from participating in what you call a middle-class life.

As the Roman Empire polarized, the economy and its political wrapping were beyond saving. All that Christianity was able to do was provide charity on an individual basis. It could deal only with symptoms, not root causes. When the point has been reached where you can deal only with people who have slipped through the cracks, the long-term game is lost.

The problem is that the economic system as such is broken. So we're back to the beginning of this interview: What is needed is an alternative to the post-classical economics of the Chicago Boys and their fellow financial lobbyists.

So many points we've covered here over the last years... so nothing new perhaps?

you can decide.