Skip to main content

We all know there's plenty of blame to go around as far as the destruction of the American economy.  Unregulated banks-gone-wild, turning the financial system into a huge international casino, deliberately issuing bad loans ... we're all familiar with that by now.

But I stumbled across yet another reason the economy is in such bad shape, and, unlike these other things, it's not being addressed, at all and, if left alone, it will profoundly affect the economic future of us all.

It was an interview on Democracy Now with Thomas Geoghegan, a lawyer, author, and author of many books and articles, including a new one on this very subject for "Harper's".  

The jist of his argument is this:  That without usury laws, and caps on interest rates, capital (money) is drawn, on a massive scale, into the lucrative world of making loans, and away from actually making stuff, which has a much lower return on investment.  

Follow over the bump ....

As he writes in the new Harper's Magazine cover story:

"We dismantled the most ancient of human laws, the law against usury, which had existed in some form in every civilization from the time of the Babylonian Empire to the end of Jimmy Carter’s term."

Now here's the real explanation of what is going on:

Historically, and even up through movies like It’s a Wonderful Life with Frank Capra and Mr. Potter and George Bailey, the interest rates in this country were capped at eight percent, nine percent. In the 1970s, we began to deregulate this, and then we had a massive big bang with a Supreme Court case that effectively knocked out all the interest rate caps. And we have today, taken as common, that banks can charge 17, 18, 19, 30, 35 percent, not to mention payday lenders charging 200, 300, 400 percent in states like Illinois, California

Can you imagine a world in which lenders were unable to charge more than 9 percent on their loans?  No, of course you can't, because you're alive now.  In a world where paying 24.99 percent on your credit card because you were late on one payment is a reality for a LOT of people.  Hell, 9 percent is now considered a pretty darned good interest rate for, say, a credit card.  And to think that charging more than that used to be illegal!  

But not now.  Now they can charge whatever they want.  And it's helping destroy the economy.  Here's why:

And in effect, this sealed what had been a trend throughout the country, which is lifting these interest rate caps for banks and giving consumers easy credit on the premise that they would just pay tons and tons of interest so that the banks were protected if the loan weren’t repaid. In fact, the banks had incentive to hand out credit cards and hope that the loans would not be repaid, because the interest rates on these credit cards were so high.

You know, if you are Mr. Potter in It’s a Wonderful Life and can only get six percent, seven percent on your loan, you want the loan to be repaid. Moral character is important. You want to scrutinize everybody very carefully.  But if you’re able to charge 30 percent or, in a payday lender case, 200 or 300 percent, you don’t care so much if the loan—in fact, you actually want the loan not to be repaid. You want people to go into debt. You want to accumulate this interest. And this addicted the financial sector to very, very, very high rates of return compared to what investors were used to getting in the real economy, the manufacturing sector, General Motors, which would give piddling five, six, seven percent returns.

So the capital in this country began to shift in the financial sector. That’s why the financial sector began to bloat up. That’s why we ended up, by 2006, having a third of all profits going into the banks and the financial firms and not into the real economy.


We created all these incentives for money to go into speculation, derivatives, because we addicted the economy to very, very high rates of return by squeezing money out of people. And the way in which we disinvested from the economy was, in my view, not so much globalization or trade as the fact that we had preteens in shopping malls who were running up, you know, debts where they were paying 25, 30 percent interest, when investors could only get five, four, three percent from our globally competitive industry.

So the "real economy" was badly undercapitalized.  

Ever wonder why General Electric now has a financial division?  In addition to the big auto companies, who (we take for granted) have their own financial divisions as well?  Because there's where the real profits can be made:

And even worse, we began to turn industry into a banking itself. General Motors, General Electric began to operate banks, because that’s where they made the big profit, in the loans to consumers, uncapped interest. It’s a very destructive situation.

How do we all fit into this?  Well, we're all part of the system that created this mess, because those of us who actually make stuff for a living have had serious wage stagnation and have tried to make up the difference by going into debt, which has just fed the monster:

So where does labor fit in in all of this? People lost the ability to get wage increases and got the ability, an incredible ability, really unknown in previous times, to get credit cards with which they had high rates of interest. So, unable to get wage increases, people—or unable to get union cards, really, people got credit cards and began running up these great debts, which addicted the country to high rates of return in the financial sector, so that people were kind of spending their way out of the real economy, pushing more and more money, by the fact that they were going into debt, into this virtual financial sector economy. So, really, the inability of people to raise their own wages and the incredible ease with which they could get credit instead helped create this flow of capital out of manufacturing and into finance. You know, we, the little people in this country, helped finance the bloating up of this financial sector and really the downsizing of our own jobs in the real economy. We sent the signals, you know, to investors to put money into the financial sector and not into the manufacturing sector.

AMY GOODMAN: You say US workers increased their productivity over the past thirty-five years, but real wages actually decreased.


So what is the solution?  Well, obviously, it's to cap interest rates!  Will that happen?  Ha!  You're dreaming!  We're living in a world where the banks pretty much call the shots.   Senator Durbin is suggesting a cap of 35%, which I would guess doesn't have a snowballs' chance in hell of passing, and that's a RIDICULOUSLY high number!  

9 percent.  It used to be 9 percent.

And we wonder how things got so screwed up.   Just for convenience, here's a link to the Democracy Now interview again.

I'll end this with a great quote from this article:

"The crash has laid bare many unpleasant truths about the United States. One of the most alarming... is that the finance industry has effectively captured our government - a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF's staff could speak freely about the U.S., it would tell us what it tells all countries in this situation; recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression we're running out of time."  (The Atlantic Monthly, May 2009, by Simon Johnson)

Somebody's gotta lead on this.  I don't see Obama doing it, not with Geithner and Summers calling the shots.  So who's going to do it?  

Beats me.  

Originally posted to Inky99 on Mon Apr 13, 2009 at 10:30 PM PDT.

Your Email has been sent.
You must add at least one tag to this diary before publishing it.

Add keywords that describe this diary. Separate multiple keywords with commas.
Tagging tips - Search For Tags - Browse For Tags


More Tagging tips:

A tag is a way to search for this diary. If someone is searching for "Barack Obama," is this a diary they'd be trying to find?

Use a person's full name, without any title. Senator Obama may become President Obama, and Michelle Obama might run for office.

If your diary covers an election or elected official, use election tags, which are generally the state abbreviation followed by the office. CA-01 is the first district House seat. CA-Sen covers both senate races. NY-GOV covers the New York governor's race.

Tags do not compound: that is, "education reform" is a completely different tag from "education". A tag like "reform" alone is probably not meaningful.

Consider if one or more of these tags fits your diary: Civil Rights, Community, Congress, Culture, Economy, Education, Elections, Energy, Environment, Health Care, International, Labor, Law, Media, Meta, National Security, Science, Transportation, or White House. If your diary is specific to a state, consider adding the state (California, Texas, etc). Keep in mind, though, that there are many wonderful and important diaries that don't fit in any of these tags. Don't worry if yours doesn't.

You can add a private note to this diary when hotlisting it:
Are you sure you want to remove this diary from your hotlist?
Are you sure you want to remove your recommendation? You can only recommend a diary once, so you will not be able to re-recommend it afterwards.
Rescue this diary, and add a note:
Are you sure you want to remove this diary from Rescue?
Choose where to republish this diary. The diary will be added to the queue for that group. Publish it from the queue to make it appear.

You must be a member of a group to use this feature.

Add a quick update to your diary without changing the diary itself:
Are you sure you want to remove this diary?
(The diary will be removed from the site and returned to your drafts for further editing.)
(The diary will be removed.)
Are you sure you want to save these changes to the published diary?

Comment Preferences

    •  The Atlantic Monthly article was spot on. (9+ / 0-)

      I hope everyone here reads it. I keep commenting that the oligarchy is pretty much running the show, and everyone keeps saying "democracy will save us". Unfortunately, I fear that democracy is broken and our politicians are corrupted. Even if Obama's heart is in the right place, he's not taking the steps he needs to take to remove the influence of wealth from our political system. I hope he changes course soon. We're running out of time.

    •  Really Great Analysis (1+ / 0-)
      Recommended by:

      ...of the article. This brings an important truth forward that is little understood and considered.

      We, in the western world, take interest for granted, but nearly a third of the world does not. Indeed, using interest as a compounding factor in transactions is strictly forbidden -- and has been for millennia.

      Islamic finance is considered the most ethical banking system on the planet. Rather than charging interest, the bank becomes your equity partner in whatever venture you wish to use the money for. From this comes responsibility, cooperation, community, and reputation-based integrity. Oh, and profits. The Arabs learned a long time ago that interest is a parasite that enslaves national economies, and the people they serve.

      Indeed, the earliest economic clashes came from a culture clash between the Jews, the Arabs, and the nascent Christians. The money changers were driven away on many occasions and the conflicts continue right here, right now.

      Thanks for a great read.

    •  potentially several diaries from that article (0+ / 0-)

      and the interview, he's very good, and that's one of the best written articles on this mess.
       Article in Harper's may be is online soon if not already.

      Hear is "one of them" edscan 3/27/09

      by KenBee on Tue Apr 14, 2009 at 06:36:59 AM PDT

      [ Parent ]

  •  The money quotes (15+ / 0-)

    the finance industry has effectively captured our government -

    recovery will fail unless we break the financial oligarchy that is blocking essential reform.

    Larry and Tim are card carrying members of the oligarchy.

  •  One only has to look around at countries such as (5+ / 0-)
    Recommended by:
    gogol, snakelass, bowtieguru, Inky99, GMary

    China, India even Dubai and the mass scale production and massive cities to wonder where Americas real interests have been for....well for as long as I can remember.

    The only reason the GOP seems to have existed for the past 35+ years is to act as a spoiler on any policy that affects the profitability of their benefactors.
    Take for instance the knowledge that the cries of 'drill, baby drill' can be countered by Rudolph Giuliani in the fact the United States has NOT built a new oil refinery since 1976.
    "We haven't built a refinery, I think, in 30 years."

    Something is serious FUBAR with the regulation of the financial system in the US when NO money goes into investing in REAL tangible businesses that will have to employ Americans. It is particularly disheartening to consider with all the profit the oil companies make off of the US public they see no reason to build refineries to provide long term jobs for Americans.

    35 years of BS from the banks and doing whatever the hell they wanted has eliminated anything Americans have to be proud of that "THEY HAVE BUILT WITH THEIR OWN HANDS". Whilst China builds amazing architectural marvels shown on National Geographic, bridges are collapsing in America from lack of interest. Yet this maintenance problem is not isolated to bridges, but seems to have spread everywhere (Katrina anyone).

    It makes me sick, particularly this senseless crap that is taking place tomorrow. When a government chooses to spend money IN the USA on its own citizens instead of encouraging offshoring, negligence and tax havens, and THEN people protest this, it is absolute madness.

    "In our every deliberation, we must consider the impact of our decisions on the next seven generations." Law of the Iroquois Confederacy

    by Unenergy on Mon Apr 13, 2009 at 11:01:00 PM PDT

  •  Well, if we had a 10% cap on interest rates (3+ / 0-)
    Recommended by:
    snakelass, craiger, Taunter

    the world would be different.

    Obviously, if you were in the money of lending unsecured to people you don't know and limited to charging 10% per annum, there are lots of people to whom you would not lend.

    I could live with it, but I don't rely on borrowed money.

  •  You lead, I lead, (5+ / 0-)

    we all lead.

    There is a very simple way to avoid userous interest . . . don't borrow.  You don't even have to forgo the convenience of the card . . . just pay it in full every month.

    As Micawber said to David Copperfield:

    "Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

    Nothing has changed . . . they still can't charge you interest on money you don't owe.


    •  You sound patronizing (1+ / 0-)
      Recommended by:

      Some folks a) really don't better and b) are being lied to their face by people who will make a buck off them.

      I am absolutely sure to live well within my means, but I tell you, 1 year out of college I was a financial wreck.  If my parents didn't "bail" me out and give the opportunity to recover from my school and overenthusiastic spending by giving me an interest free loan, I would have spent probably a decade or more climbing out of that hole.

      Most people don't get bailed out. Some make a single mistake and are effectively screwed over for years so that the financial undead can live off their blood.

      Please temper your scorn for those who screwed up.  I hate to think we live in Dickensian times again. I thought we had improved as a society since then.

      Make sure everyone's vote counts: Verified Voting

      by sacrelicious on Mon Apr 13, 2009 at 11:15:29 PM PDT

      [ Parent ]

      •  That wasn't patronizing, that was advice. (4+ / 0-)

        There was no scorn or superiority there.  Re-read the comment. It was just advice not to borrow. It's good advice. People are losing 20% of their income over their whole lives so they can buy everything 6 months earlier than they would if they waited until they could afford the purchase. I understand sometimes people have to go into debt because of health reasons or other emergencies. The advice is, if you can avoid it, don't go into debt.

    •  That's great, but (5+ / 0-)

      I had to put some medical expenses on a credit card during a time when I didn't have health insurance.  It was stuff that could not be put off, emergency stuff.

      It was quite a bit of money.

      I think I read where a majority of bankruptcies in our country happen to people who have gotten in over their head with medical expenses.

      Sometimes you don't really have a choice, which is why there were usury laws in the first place.

      William Casey "We will know that we have succeeded when everything the public believes is false"

      by Inky99 on Mon Apr 13, 2009 at 11:49:41 PM PDT

      [ Parent ]

      •  Great argument - for national health insurance (8+ / 0-)

        Major medical expenses can bankrupt someone without high interest rates.  Indeed, the face value of many major procedures would give the average person negative net worth the day he walked out of the hospital; interest only adds insult to injury.

        We may disagree on proper interest rate regulation, but I would hope we could agree that the health care payment system is preposterous.

        •  That is mentioned further in the interview (3+ / 0-)
          Recommended by:
          gogol, snakelass, Taunter

          THOMAS GEOGHEGAN: If private employers were not paying healthcare costs to the private sector, the private insurance industry, a lot of that money could go for wage increases. It also could make the country much more globally competitive. You know, in this congressional campaign that I just finished, I argued for an increase in Social Security, single payer, basically for the government taking over non-wage labor costs so that the globally competitive parts of the economy could lower their labor costs, hire more employees, people could actually get pay raises, and the government would be assuming these non-wage labor costs, which are so, so important to making the country globally competitive. It’s what many of our high-wage rivals are able to do. And they run trade surpluses; we run trade deficits.

          And yes, we can certainly agree on what you said here.  :)

          William Casey "We will know that we have succeeded when everything the public believes is false"

          by Inky99 on Tue Apr 14, 2009 at 12:02:18 AM PDT

          [ Parent ]

          •  Healthcare would be a huge boon (3+ / 0-)
            Recommended by:
            snakelass, Deward Hastings, Neon Mama

            I don't think shifting the benefits burden to the government would have a great effect on employment - remember, taxes would have to increase by a commensurate amount - but simply increasing labor force flexibility would be worth moving things around.

            I also believe single payer could operate with dramatically less overhead than private insurance, but I don't want to threadjack any more than I have...

  •  Banking overdraft fees (10+ / 0-)

    combined with check cards that are accepted as credit cards can put the interest rate at over 3500 percent. They simply charge $35.00 for an overdraft less than one dollar caused by using a check card.  Instead of stopping the transaction at point of sale, they claim it overdraft protection.

    Now Bank of America is charging overdrafts for pending transactions that have not yet posted even if there is also a pending deposit.

    Like payday lenders, these practices target lower incomes who cannot carry a cushion in their checking account balance.

    Poverty is the worst form of violence. - Ghandi

    by mary13L on Mon Apr 13, 2009 at 11:06:40 PM PDT

    •  It's the same with credit cards, (1+ / 0-)
      Recommended by:

      if an approved purchase (not even necessarily posted) puts you over the credit  limit.  You get the fee PLUS (many times) the default interest rate, even if you pay off the over the credit limit amount within the same billing cycle before your end of month statement gets cut.

  •  Another expert against high interest rates (8+ / 0-)

    Naked Capitalism recently noted Adam Smith's support of strong usury laws in The Wealth of Nations -- and he thought 8%-10% was too high.

  •  Great diary. (5+ / 0-)

    In my limited understanding, the financial system is supposed to (1) allocate capital efficiently, and (2) manage risk. Let's take a look-see at how things have gone in that regard.

    (1) Normally, "efficient" capital allocation would mean that it's not difficult to borrow money for worthwhile, productive causes. If money is flowing to efficient endeavors, this should help the economy as a whole. Past 8 years = FAIL. As you point out, money has been directed towards ever kookier financial instruments, instead of towards small business and other productive efforts.

    (2) Managing risk. Do I even need to say anything here besides FAIL?

    When I saw the title, I thought the diary would be about the Fed policy of keeping interest rates (not for credit cards/consumers, but for banks) outrageously low. This of course helped create the giant bubble that exploded all over our 401ks.

    •  Thanks. I think they should be like utilities (3+ / 0-)
      Recommended by:
      snakelass, Leap Year, Matrix Dweller

      and run with the same sort of strict regulatory guidelines that, say, your gas company operates under.

      They should provide loans the way the electric company provides electricity.

      It should be a boring business.  With a set profit margin.  And that's it.

      William Casey "We will know that we have succeeded when everything the public believes is false"

      by Inky99 on Mon Apr 13, 2009 at 11:52:27 PM PDT

      [ Parent ]

      •  I completely agree (5+ / 0-)

        That is exactly what banks should be. Boring, highly regulated utilities.

      •  Regulatory guidelines (0+ / 0-)

        Strict regulatory guidelines protect incumbents.

        The gas company and the electric company and the cable company, at least within a local area, are natural monopolies.  They have a continuously declining average total cost curve.  So there isn't much choice in regulating prices.

        Finance companies may be a bit similar, but it is nowhere near as difficult to start a competitor.  By regulating prices, you eliminate the ability for a new entrant to compete on price - and what else do you have when your product is money (yes, I understand, brand and convenience and service - but let's be serious)?

        Also, regulators get captured by major players.  You will notice that at least one bank gets shut down every week, but the Fed/FDIC constantly intervene (on ever more concessionary terms) to protect their beloved C and BAC.  This financial crisis happened at the heart of the regulatory system, in the big banks and AIG.  It didn't happen in hedge fund land.  I wouldn't have too high hopes for future regulation.

        •  sorry but I don't worship the "invisible hand" (1+ / 0-)
          Recommended by:
          Matrix Dweller

          considering that said hand has been shoved up the ass of just about everybody lately.

          I don't really CARE about the supposed "free market" principles.  I care about what works for people.

          And heavily regulating banks so that they provide loans and liquidity, the way that the gas company provides methane to my neighborhood is something I do NOT have a problem with.

          The common good should trump all, not economic theory.  

          True free markets exist only in a few rarefied situations, like, say, black markets where there are a lot of suppliers.  

          William Casey "We will know that we have succeeded when everything the public believes is false"

          by Inky99 on Tue Apr 14, 2009 at 12:49:39 AM PDT

          [ Parent ]

          •  Free market principles (1+ / 0-)
            Recommended by:

            I don't really CARE about the supposed "free market" principles.  I care about what works for people.

            I agree with you.  If running something on "market" principles is less efficient or effective than running it under state control, I'm all for it.  I support state-controlled military and roads and health insurance, which puts me to the left of chunks of the Administration.  I want to nationalize failed banks instead of simply gifting them with taxpayer money to maintain some fiction of "private enterprise;" indeed, I have written over a hundred posts on this since mid-September, before the actual bailout vote.

            I just seem to disagree with you on the specific matter of capping retail interest rates.  I think it's a great example of a competitive market that has driven down costs.  I think the high costs cited in the article apply to people who would not even have had credit in a regulated environment.  I think regulated rates would lead to a few expensive incumbents instead of dynamic new entrants.

            We disagree, but we are both proposing what we believe to be practical approaches to improving people's lives.

  •  Wells Fargo, now with usury (5+ / 0-)
    Recommended by:
    gogol, snakelass, rosabw, danmac, londubh

    in the form of payday loans at a 120% interest rate.

  •  Completely counterproductive (0+ / 0-)

    Way back in the good old days of usury laws, entire segments of society were prevented from accessing mainstream credit.  In the event of an acute financial need, they had three options:

    No money;
    Borrow money from a relative/friend;
    Borrow money from organized crime.

    There are people whose risk of default means that they can only be served profitably at high rates.  The big bad payday lending operations don't make that much money anymore; competition has actually driven rates to a pretty marginal point.  As I mentioned in another thread, Advance America (the largest payday lender in the US) watched its operating income decline from approximately $120mm in 2004 (on $570mm of revenue) to $83mm in 2008 (on $676mm of revenue).  21% to 12%.  Most single-unit payday lenders are probably around breakeven.

    Cap interest rates - like capping the price for any other good - and you simply freeze people out of the market.  Can't see how that's helpful.

    •  we just made borrowing from organized crime legal (9+ / 0-)

      As long as they had a bank charter.

      fact does not require fiction for balance

      by mollyd on Mon Apr 13, 2009 at 11:35:43 PM PDT

      [ Parent ]

      •  Major difference (0+ / 0-)

        You default with Advance America, they hurt your FICO score.

        You default with organized crime, they hurt you.

        Let's not overdo the "crime" meme.  Payday lenders (or subprime lenders, or any other finance companies) may not be the prettiest part of our world, but they are very different from the mafia.

        •  Oh really? The Banksters that are in control now (5+ / 0-)

          make the mafia look like a bunch of boy scouts...



          The key point is that neither the public, the Fed nor the Treasury seem to understand is that the CDS contracts written by AIG with these various non-insurers around the world were shams - with no correlation between "fees" paid and the risk assumed. These were not valid contracts as Fed Chairman Ben Bernanke, Treasury Secretary Geithner and Economic policy guru Larry Summers claim, but rather acts of criminal fraud meant to manipulate the capital positions and earnings of financial companies around the world.

             Indeed, our sources as well as press reports suggest that the CDS contracts written by AIG may have included side letters, often in the form of emails rather than formal letters, that essentially violated the ISDA agreements and show that the true, economic reality of these contracts was fraud plain and simple. Unfortunately, by not moving to seize AIG immediately last year when the scandal broke, the Fed and Treasury may have given the AIG managers time to destroy much of the evidence of criminal wrongdoing.

             Only when we understand how AIG came to be involved in CDS and the fact that this seemingly illegal activity was simply an extension of the reinsurance/side letter shell game scam that AIG, Gen Re and others conducted for many years before will we understand what needs to be done with AIG, namely liquidation. Seen in this context, the payments made to AIG by the Fed and Treasury, which were then passed-through to dealers such as Goldman Sachs (NYSE:GS), can only be viewed as an illegal taking that must be reversed once the US Trustee for the Federal Bankruptcy Court for the Southern District of New York is in control of AIG’s operations.

             AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.

          Distilled to one sentence: The bailout of AIG is equivalent to the US Taxpayer bailing out Madoff's admitted (and now convicted) Ponzi Scheme.

          Are the CDS Contracts of AIG Really Valid?

          The key point is that neither the public, the Fed nor the Treasury seem to understand is that the CDS contracts written by AIG with these various non-insurers around the world were shams - with no correlation between "fees" paid and the risk assumed. These were not valid contracts as Fed Chairman Ben Bernanke, Treasury Secretary Geithner and Economic policy guru Larry Summers claim, but rather acts of criminal fraud meant to manipulate the capital positions and earnings of financial companies around the world.

          PS: This isn't MY analysis, this is the analysis of Institutional Risk Analytics. If you don't understand who they are, you should - they're one of the most-respected groups out there when it comes to banking system analysis. If they're willing to print something this damning....

          You default with organized crime, they hurt you.

          How many Americans do you think our Banksters have hurt? Who have lost their jobs, who are now homeless or worse, who have committed suicide because of what is going on.  These Banksters make the Mafia look like 'rank amatures.'  

          The Federal Reserve controls the interest rates, and that hasn't worked out so well for this country for the past century or so, has it?

          The Treasury Department is a wholly owned subsidiary of Goldman Sachs and Wall St. firms.

          by Badabing on Tue Apr 14, 2009 at 12:01:56 AM PDT

          [ Parent ]

          •  AIG? (0+ / 0-)

            I think we agree that we should not bail out AIG.  From your footer, it even seems we might agree that the Treasury has protected Goldman like a beloved child holding the Holy Grail.

            I think we disagree on how the Federal Reserve controlling interest rates has worked out - I would suggest that a great part of our prosperity is due to the dollar's stability over the past century, and the sooner the Fed could get back to focusing on this and away from trying to run the world's largest hedge fund the better we all will be.

            I'm not sure how any of this has to do with whether we should impose retail usury laws.

            •  Whose prosperity (5+ / 0-)

              I remember as a kid wondering why we didn't build nice things anymore. I would look at a school building from the late 19th-early 20th Century for example, and they were these really well built, ornate and well made pieces of architecture. Then I would look at modern building and what pieces of shit they were and wonder - what changed? We haven't lost the able workforce? Materials are actually cheaper to come by. And, of course, there's no shortage of architects willing to design excellent schools.

              It took me studying economics to finally figure it out: monetary policy is what changed. The Federal Reserve system has slowly but surely drained the wealth from our nation. Of course, this is an oversimplification - both in terms of architecture and monetary policy. But it is generally correct. We have gone from a prosperous nation to slaves of debt.

              And this was long before the current fiasco.

              There are other factors that have led to our demise. Ridiculous defense spending - corporatization and offshoring jobs and the tax base for example.

              But our monetary policy is one of, if not the single biggest factor.

              •  Are you sure? (0+ / 0-)

                That's one explanation.  Here's another:

                The buildings from the late 1800s that you see today are not representative of the buildings that existed in the late 1800s.  They are representative of the buildings from the late 1800s that were so well made that no one has torn them down and they have not fallen down in the past century and change.

                Urban areas a hundred years ago were full of decrepit slums, as well as pretty public buildings.  The old decrepit slums are long gone, replaced with new buildings and, in some cases, new slums.

                Look at it this way - when you go to Rome, you see nothing but gorgeous buildings from the Middle Ages.  Do you really think every building had amazing frescoes?  Of course not; it's just that the ones without distinctive characteristics have long since been torn down.

                As for the Fed, I don't know how or why you would think it drained the "wealth" of the nation.  We have never been as productive.  We have never had as long life expectancy.  Our per capita position relative to Western Europe is not that different from immediately before WWI.

                The "prosperous nation" that existed before the Fed still had unbelievable rural poverty in the South and Appalachians - yes, orders of magnitude worse than today.  That "prosperous nation" had tubercular slums in every major city.  And of course 15+% of the population was excluded from even that poor economy on the grounds of race.

                The Fed merely replaces a generally deflationary monetary policy (a hard gold standard) with a slighly inflationary one (fiat currency).  Given the social welfare we expect from a modern government, I don't see how we would get by in a gold environment, where significant deficit spending almost immediately creates a sovereign debt crisis.  Think of it as a nation forced to issue debt in a foreign currency (gold) instead of a currency it can print (dollars).

                We are much better off for having the current arrangement.

    •  I think you might have it backwards (5+ / 0-)

      People don't get high interest rates because of risk of default, they get high interest rates because the bank CAN get high interest rates from them.

      People who don't NEED to borrow money don't have to pay higher rates for the simple reason they don't need to borrow the money as much.

      This assumption that you're "punished" by high interest rates because you're a credit risk is a myth.  You are exploited because you're desperate.  

      It's pure demand driving up the cost.

      The banks aren't in the business of judging and punishing people, or rewarding them with low rates.  It's pure demand.

      William Casey "We will know that we have succeeded when everything the public believes is false"

      by Inky99 on Mon Apr 13, 2009 at 11:59:58 PM PDT

      [ Parent ]

      •  Backwards and Forwards (0+ / 0-)

        Supply and demand exist at the same time.

        You need to eat.  If you don't eat, you will die.  But the price of food is (often) not high, because there is plenty of competition to sell you the food, from McDonald's to the fanciest restaurant, from supermarkets to farmer's markets.

        Billy needs money.  Badly.  So he is willing to pay a high price.  But that doesn't mean he will pay a high price, because if there are dozens of people trying to sell him the product, they will compete on price and drive down the cost.

        Few people buy houses all-cash.  But mortgage prices are often very low.  Why?  Surely the borrower needs to borrow.  But there are plenty of people who want to lend, and he goes with the cheapest one.

        The market for subprime credit is plenty competitive.  If it weren't, the guys who are in it would make more money.  As they did before competitors entered.

    •  you are forgetting a key element (3+ / 0-)
      Recommended by:
      danmac, Snarcalita, Calamity Jean

      you're right that the people who rely on accruing huge debts at high interest will all of a sudden find themselves in desperate need of more money.

      Though the reason they needed to rely on high interest loans in the first place is because of wage stagnation.

      Now that the usurious loans will have run dry, they will hopefully demand higher wages.

      Said wages will, of course, not be forthcoming.

      So, upon growing frustrated with their individual effort, workers will band together in unions and bargain collectively for a living wage from their employer, decreasing the gap between rich and poor (the growth of which I'd be willing to bet corresponds to the increase in consumer debt and the raising of interest rates).

  •  Trivia (1+ / 0-)
    Recommended by:

    For what it's worth, GE developed it finance division because its industrial strength gave it a AAA rating; with lower borrowing costs than banks, GE Finance has generally made a strategy of competing on price.  Driving costs down.

    GM and the other auto companies got into the finance business not because they thought it would be a great way to access the lucrative mortgage market (although that is where it took them) but rather because they wanted to provide lower cost financing for purchasers of their cars than banks.  GMAC offered better deals than banks because it was cross-subsidized by the manufacturing business.  Ask Chrysler what it's like to try to run an auto company without a captive lender.

    •  Oh please (3+ / 0-)
      Recommended by:
      chowder, snakelass, Matrix Dweller

      GM got into the finance business to make money.  NOT to "provide lower cost financing for purchasers of their cars".

      Nobody thinks that a company like GM is in the business of charity.

      They did it because they could offer one-stop shopping for people, just suck them into the deal -- "you want to drive the car away today?"  And make money.  

      William Casey "We will know that we have succeeded when everything the public believes is false"

      by Inky99 on Mon Apr 13, 2009 at 11:55:53 PM PDT

      [ Parent ]

  •  turns out greed is not good. (3+ / 0-)
    Recommended by:
    snakelass, Neon Mama, Calamity Jean

    next we'll find out that pride really is a sin too.

    "Michele Bachmann is like the demi glace of wingnuttia." - Chris Hayes, Countdown, 2/18/09

    by rasbobbo on Mon Apr 13, 2009 at 11:58:46 PM PDT

  •  Jack Welch - industrialist or usurer? (0+ / 0-)

    A lot of the money he made for GE was from financing.

  •  Usary: Banks Pimp the whole economy (1+ / 0-)
    Recommended by:
    Matrix Dweller

    It is an efficient system that must be kept in check but it is certainly out of control when we are essentially taxed by banks sending our money to a non productive entity just to enrich a few while breaking the backs of those trying to establish themselves. Debt slavery must stop by ending the corruption of money in politics.

  •  Hey, wait a second. (0+ / 0-)

    If we ban high interest loans won't that just create a black market for them and create organized crime?

    So the conventional wisdom is that prohibition on alcohol didn't work and led to organized crime.  Prohibition of gambling didn't work and led to organized crime.  Prohibition on drugs doesn't work and leads to organized crime.

    But lending money, nah, the mob would NEVER get into that if credit became difficult to get.  Right?

    Not that I don't support rational regulation of all of these things and accept that a black market will always be inevitable.

    But 10 percent?  There'd be a burly man in a suit on every corner offering cash loans.

    Yes, Santa Claus, there is a Virginia. And it went Democratic.

    by Anarchofascist on Tue Apr 14, 2009 at 02:36:26 AM PDT

  •  $20 for $30 (0+ / 0-)

    That is the going rate on the high seas. $20 for $30 is what a loan shark usually gets.  That does not seem so bad.  It's only $20.00  

    I would like to see a law where banks and credit card companies can't just raise the limit from $2,500 to $18,000 on a whim.  All of the sudden people with low limits are given thousands of dollars of credit they never asked for.  Little by little, small emergency by small emergency, the amount used creeps up.  Then, your transmission goes out.  Another $2,300.    Before you know it that $2,500 credit card you felt safe with now has a balance due of $13,000   How did you get there.  Oops, the 16th falls on a Monday.  It's Friday and you thought you had plenty of time to mail that check out.  Too late.  Your interest just went from 6% to 18%   If you were never given that extra $15,000 in credit that you did not ask for, you would be in much better shape.  You would have found a way to have your transmission fixed without racking up more debt.  This is how we got here.
    Funny story, a lot of people aren't paying it back.
    Oh well.  

    I believe in President Obama, and The Beatles

    by bookkillrr on Tue Apr 14, 2009 at 05:01:47 AM PDT

  •  Usury should be a CRIME (0+ / 0-)


    Ecosystems empowerment for the rural poor.

    by 1Eco on Tue Apr 14, 2009 at 05:27:50 AM PDT

  •  I Still Think There's a Role for Globalized Mfr (0+ / 0-)

    Because the stuffmaking sectors have the same potential with free trade, they can drop their labor costs to trivia, which gives them an astronomical markup potential.

    Then an importing biz, at least a little bit like a financial company, can pay investors jackpot returns, and this will begin to suck investment out of normal-return stuffmaking business even in sectors that don't have offshoring (yet).

    In my sector we have west Asia. The markups are so gigantic that a $ 1,000 custom made tool can be bought wholesale from w asia in this country, by any idiot with no offshore connections, for $100 in lots of one. Dealing directly with w Asian exporters, and lots of say 100, the $1,000 item can be bought for around $10.

    I think the usury situation in financials is correct of course, but I think the principle was rolled out for the entire economy. Free trade for mfr, financial deregulation, and illegal immigrant domestic labor oops that obviously doesn't occur.

    It's all about slave labor and astronomical markups, in all sectors.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Tue Apr 14, 2009 at 06:00:06 AM PDT

  •  And don't forget fees, which is a bigger issue to (0+ / 0-)

    many people than interest. Let's say you lose your job and literally have $0 left to pay your cc.  Generally the late fee is $39(even if you manage to pay the bill, and they receive your check a day or an HOUR late).  Because you lost your source of income and you didn't pay last month, the cc company will probably cut your credit line, making you very close to your credit limit, and quite possibly over when you add in the late fee.  A few months of that plus the default interest rate means it's nearly impossible to get back on track.

  •  Who said (0+ / 0-)

    that an interest rate over 10% is morally wrong? It stuck in my head but can't remember who said it or in what context.

    All my peeves are my pets.

    by yinn on Tue Apr 14, 2009 at 07:08:41 AM PDT

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site