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.
THOMAS GEOGHEGAN: Yes.
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?