Money For Nothing

by: Paul Rosenberg

Sun Mar 29, 2009 at 09:00


Sunday Morning Connecting the Dots:

(1) There's a new report out on predatory lending and race in California from the Center for Responsible Lending, "Predatory Profiling."

(2) Thomas Geoghegan has a new article at Harpers on the rise of usary "Infinite debt: How unlimited interest rates destroyed the economy" (behind a paywall, but interview with Amy Goodman on Democracy Now! here).

(3) Former chief economist of the International Monetary Fund, Simon Johnson, has an article at The Atlantic, "The Quiet Coup", about which the editors say, "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 following chart from Johnson's article shows the growing dominance of the financial industry.  Josh at TPM notes, "As you can see, the pivot in each case is around 1980."  Gee, I wonder what happened then?

Paul Rosenberg :: Money For Nothing
(No.  You can't blame it all on Reagan, as Geoghegan explains below.  Still.)

Three: The Quite Coup

Johnson explains, in tandem with the chart above:

From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight-a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

As background to that, Johnson has this to say, as a former IMFer:

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn't be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn't roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there's a deeper and more disturbing similarity: elite business interests-financiers, in the case of the U.S.-played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Just in case you thought it was only Paul Krugman.  Conclusive proof: It's not.

As if to illustrate the above, Ken Silverstein at Harpers offers these two tidbits:

First:

Rahm Emmanuel: Sleeping at wheel pays well

By Ken Silverstein

From the Chicago Tribune:

    Before its portfolio of bad loans helped trigger the current housing crisis, mortgage giant Freddie Mac was the focus of a major accounting scandal that led to a management shake-up, huge fines and scalding condemnation of passive directors by a top federal regulator.

    One of those allegedly asleep-at-the-switch board members was Chicago's Rahm Emanuel-now chief of staff to President Barack Obama-who made at least $320,000 for a 14-month stint at Freddie Mac that required little effort...

    Emanuel's Freddie Mac involvement has been a prominent point on his political résumé, and his healthy payday from the firm has been no secret either. What is less known, however, is how little he apparently did for his money and how he benefited from the kind of cozy ties between Washington and Wall Street that have fueled the nation's current economic mess.

Second:

This Sounds Vaguely Familiar: Where was Larry Summers in 1999?

By Ken Silverstein

Worth reviewing this story from the New York Times, November 5, 1999:

    Congress approved landmark legislation today that opens the door for a new era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper to enter one another's businesses...

    "Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century," Treasury Secretary Lawrence H. Summers said. "This historic legislation will better enable American companies to compete in the new economy."

    The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation's financial system.

The dissenters, led by Senators Byron Dorgan and Paul Wellstone, were generally derided as retrograde anti-free marketeers who just didn't understand Wall Street and the geniuses who ran it.

How to tell the Democrats from the Republicans:

    You can't.



Two: Infinte Debt

During the 1970s, the U.S. banking system stood as an intermediary between oil-exporter surpluses and emerging market borrowers in Latin America and elsewhere. While much praised at the time, 1970s petro-dollar recycling ultimately led to the 1980s debt crisis, which in turn placed enormous strain on money center banks.3 It is true that this time, a large volume of petro-dollars are again flowing into the United States, but many emerging markets have been running current account surpluses, lending rather than borrowing. Instead, a large chunk of money has effectively been recycled to a developing economy that exists within the United States' own borders. Over a trillion dollars was channeled into the sub-prime mortgage market, which is comprised of the poorest and least credit worth borrowers within the United States. The final claimant is different, but in many ways, the mechanism is the same.

Subprime mortgages weren't the whole of this story, however.  Indeed, they are a relatively recent addition to a broader wave of predatory lending that's been growing for a very long time.  And that's the focus of Geoghegan's most recent piece in Harpers.

I'm a both/and, not an either/or kind of guy, so I wouldn't go as far as Geoghegan does.  But the repeal of usury laws that he discusses has been very much overlooked heretofore, and he provides a welcome corrective to the current discussion.  Here's an excerpt from the beginning of the Democracy Now! interview:

AMY GOODMAN: ... The crisis has been largely blamed on deregulation of the financial industry and lax government oversight. But a new article in the latest issue of Harper's Magazine argues otherwise. It reads, quote, "no amount of New Deal regulation or SEC-watching could have stopped what happened...The problem was not that we 'deregulated the New Deal' but that we deregulated a much older, even ancient, set of laws." The article goes on to say, quote, "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."

The article in Harper's Magazine is written by Thomas Geoghegan, a Chicago-based labor lawyer, recent congressional candidate and author of many books. His most recent is See You in Court: How the Right Made America a Lawsuit Nation. His Harper's article is called "Infinite Debt: How Unlimited Interest Rates Destroyed the Economy." Thomas Geoghegan joins us from Chicago.

We welcome you to Democracy Now!

THOMAS GEOGHEGAN: Hi, Amy.

AMY GOODMAN: It's good to have you with us. OK, how did we get here? Or how did they get us in this mess?

THOMAS GEOGHEGAN: In the article, I talk-that appeared in Harper's, I've talked about the fact that we've not focused enough on the big deregulation that precedes all other deregulations, and that's the ceiling that has existed on the financial sector since time immemorial on the amount of interest that banks can get from their clients, their customers, their depositors. 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 [inaudible]-

AMY GOODMAN: Tom Geoghegan, let's go back to that 1978 case, Marquette National Bank v. First of Omaha Service Corp. Explain the significance of it. What was it?

THOMAS GEOGHEGAN: Sure, that's the Brown versus Board of Deregulation for the financial sector. The case-Justice Brennan, of all people, opinion said that banks that operate-out-of-state banks that were subject to the National Banking Act of 1864, signed by President Lincoln in the middle of the Wilderness Campaign, effectively preempted any state regulation capping the interest rates of those banks when they sent their credit cards in from out of state. Now, back in 1864, banks in Delaware weren't operating out in Nebraska or handing out credit cards across the country, and there was no such thing as Visa or MasterCard.

The effect of this was that the big national banks were not subject to any state usury law, because the Banking Act of 1864 had no interest rate cap on it, not contemplating the kind of situation that we're in today. 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.

So, reinstating federal usury laws clearly has to be part of the financial system reforms.  Furthermore, Geoghegan explains why it needs to be part of labor's agenda, since the runaway growth of the financial sector sucks money out of the manufacturing sector, severely intensifying the struggle between capital and labor within that sector:

AMY GOODMAN: Our guest is Thomas Geoghegan. He has a very interesting piece in the latest issue of Harper's Magazine. It's called "Infinite Debt: How Unlimited Interest Rates Destroyed the Economy."

Tom Geoghegan, you talk about how, with no law capping interest, the evil is not only that banks prey on the poor-they've always done so-but that capital gushes out of manufacturing into banking. When banks get 25 percent to 30 percent on credit cards and 500 or more percent on payday loans, capital flees from honest pursuits like auto manufacturing. Now, I've just come back from Grand Rapids this weekend, and going through Detroit, they're in a dire situation-

THOMAS GEOGHEGAN: Yes.

AMY GOODMAN: -talking about money fleeing from the auto industry.

THOMAS GEOGHEGAN: Sure. I feel one of the reasons I am in favor of the bailout of the auto industry is, aside from all the other reasons, a sense of guilt that we set up all the returns in this economy in favor of financial firms and really disinvested from industry. 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.

And this isn't some left-wing progressive critique circa 2009. Adam Smith, in The Wealth of Nations, warned how important it is to have interest rate caps on the financial sector, or all the money will gush into there and out of productive uses. Keynes, in The General Theory of Employment, Interest, and Money, the great classic, 1936, has a little chapter at the end saying, "Yes, we have deficit spending. I've got this way of getting out of the Depression. By the way, we've got to keep the interest rate caps on the banks."

Well, we took that stuff off, the thing that was kind of an instinct in human and legal civilization, from the time of the Code of Hammurabi up to the present, and 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.

AMY GOODMAN: In your history of usury, basically, from ancient times to today, you're also giving a labor history, a labor history of this country.

THOMAS GEOGHEGAN: Sure.

AMY GOODMAN: Explain.

THOMAS GEOGHEGAN: Well, history-historians like Niall Ferguson, conservative historians and progressive historians, many economic historians, see history as nothing but a turf war between three groups: the manufacturers, workers and the bondholders, or the financial sector.

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.


One: Predatory Profiling

All this brings us to the Center for Responsible Lending's new report, "Predatory Profiling".  Regarding the report, CRL says:

New CRL analysis finds that California's payday lenders overwhelmingly locate in African-American and Latino neighborhoods, even after controlling for income and other factors, draining $247 million in the process.

Payday loans trap working households in long-term debt at annual interest rates of over 400 percent. In California and elsewhere, African Americans and Latinos make up a disproportionate share of payday loan borrowers.

Our analysis reveals that payday lending storefronts are most heavily concentrated in African American and Latino communities in California, even when controlling for other factors which may influence a payday lender's location such as household income. In addition, we find that the racial and ethnic composition of a neighborhood is the primary predictor of payday lending locations. This finding differs with an analysis of mainstream financial institutions such as banks, where the primary explanatory factors of location are not tied to race or ethnicity.

Predatory Profiliing analyzes the relationship between the proximity and clustering of payday lending locations and African-American and Latino neighborhoods in California and explores the primary factors influencing payday lenders' locations, as compared to bank branches.

In this report, CRL finds that:

  • Payday lenders are nearly eight times as concentrated in neighborhoods with the largest shares of African Americans and Latinos as compared to white neighborhoods, draining nearly $247 million in fees per year from these communities.
  • Even after controlling for income and a variety of other factors, payday lenders are 2.4 times more concentrated in African American and Latino communities. On average, controlling for a variety of relevant factors, the nearest payday lender is almost twice as close to the center of an African American or Latino neighborhood as a largely white neighborhood.
  • Race and ethnicity play a far less prominent role in the location of mainstream financial institutions, such as bank branches. While race and ethnicity account for over half of the variation in payday lender location explained by neighborhood factors, they explain only one percent of the variation in bank branch locations.

California should follow the lead of fifteen states and the District of Columbia in implementing a comprehensive, small-loan rate cap of around 36 percent. Such a measure is the only solution to the debt trap perpetuated by payday lending. California should ensure that credit is offered on reasonable terms, giving struggling families the opportunity to save and begin on a path to a more secure financial future--particularly in the African-American and Latino communities that lose $247 million in wealth annually to service payday loans.

The maps in this report are highly reminiscent of the maps in the One Region report from the Center for Social Inclusion that I diaried about last weekend in "Coloring Opportunity: The Regional Geography of Structural Racism in The NYC Region".

Here's a related map from that report, as a reminder. It's a map of financial institutions in the NYC region. Red Xs are check cashing stores. Green $s are banks.

The maps from this new report vividly demonstrate the concentration of predatory lenders in low-income communities of color in California:

City of Los Angeles

Los Angeles Region

San Diego Region

San Francisco Bay Area

Fresno

Bakersfield

It should be noted that the big story of the past decade in California has been the explosive growth of the Central Valley, where Fresno and Bakersfield are both located.  The region was the earliest and most hard-hit by the sub-prime mortgate collapse.

The Concentration and Proximity of Predators

Here's a chart comparing the concentrations of predatory lenders in white commuinities vs. communities of color.  Each concentric circle is another half-mile farther out:



Here's a chart of the factors influencing the proximity of predatory lenders.  The influence of race is utterly staggering:




Here's a chart of the factors influencing the concentration of predatory lenders.  The influence of race is even more staggering:



And, by way of contrast, here's a chart of the factors influencing concentration of bank branch locations.  Race disappears as a factor:



Conclusion

This diary has been a brief tour of the issues and people impacted and implicated in the current financial crisis, which has been 30 years in the making.  As a candidate, Barack Obama promised a politics of inclusion.  As this diary indicates, there are a lot of different people, and different specific issues that ought to be included in any serious, responsible and equitable resolution to this crisis.  But are they all represented at the table?  Of course not.  Whose represented at the table are almost exclusively those who have caused the crisis--and they are negotiating with themselves.

Whatever this is--more of the same, or more of the same with fries on the side--it's definitely not "change we can believe in."


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Money For Nothing | 8 comments
Another tour de force (4.00 / 2)
a few thoughts

1) What happened circa 1980 that had a profound stimulative effect on the financial "industry" (should we call the mafia the crime industry?!)

This happened.

2) All races are under assault by the culture of narcissism and spiritual dearth, but in reference to those whose melanocytes produce sufficient pigment to be seen in the epidermis: if someone is oppressing you, quit piling on and start defending yourself.

3) Obama, who was always a Red + Blue = Purple, Ben Nelson in Harold Ford Jr.'s body type of guy - is never going to govern as a Progressive.

I would simply ask people to let any feeling of betrayal go, and realize why you fought for him in the first place: to buy time. Realize that in 2012 Obama is likely to be the Democratic nominee if he runs; and if he doesn't run it will likely be H. Clinton.

Unless we magically transform into a proportionally representative parliamentary system, the other choice will be the Republican nominee.

Unless the Republican party magically transforms into something other than proto-fascism, it becomes absolutely necessary to lock them out of power for as long as we can.

Yeah, yeah I know "the lesser of two evils is still evil". But I don't consider Obama evil to this date.

He has chosen to pursue status quo ante policies where I think change is called for, but that is disingenuous, not evil.

Hearken back to Chris Bowers's "Grow Liberalism" strategy. Obama buys you time to do that, and I suggest avoiding attacking him from the left with more energy than you are using to "Grow Liberalism".

I have argued that "the Left" punches far below its weight because it has insufficient conceptual unity.

Is the Left trying to bring Honda Civics to every family on the globe, or do we want clean air and water?

Is the Left for jobs with declining consumption, or do we mean jobs = middle class lifestyle?

Is the Left for global government or local or the national status quo?

Is the Left populist or just economically populist with elite morality and religious views?

Spend the Obama years on "Growing Liberalism" and answering tough questions about the future of civilization.


Why should I get over my feelings (4.00 / 1)
betrayal. He isn't buying time.  He is stalling.  A real progressive would stop stalling and reverse coarse, and we should have had that this time out.

I don't see a conflict between the middle class lifestyle and lower consumption.

My blog  


[ Parent ]
In Fact, That's What Europeans Have (4.00 / 1)
Europeans have more leisure time and better quality of life (French or Italian food and wine, anyone? universal health care?) but less material goods, and they seem to enjoy themselves just fine.  

"You know what they say -- those of us who fail history... doomed to repeat it in summer school." -- Buffy The Vampire Slayer, Season 6, Episode 3

[ Parent ]
And let's not forget (0.00 / 0)
that most of the disgusting levels of consumption are not coming from the middle class.  The middle class don't purchase hummers.   If we could reduce this group to middle class status it would solve probably sixty percent of our consumption problem and give us a new set of leaders which would be even better.

My blog  

[ Parent ]
I remeber reading that "infinite Debt" article and just feeling like a (4.00 / 2)
huge piece of the puzzle clicked.  the beauty of the argument, to me, was that it didn't explicitly require bad faith actors, or corrupt politicians or anything. (though these things are extra pieces that could be easily added).  All it was, at it's heart, was an analysis of our current system, resulting in a conclusion that our system incentivized the type of behaviour that resulted in our current mess.

Design Matters (4.00 / 2)
Prohibitions on usury have been around for thousands of years, because the necessity is obvious.  Remove them from the design of society, and you find out why.

"You know what they say -- those of us who fail history... doomed to repeat it in summer school." -- Buffy The Vampire Slayer, Season 6, Episode 3

[ Parent ]
Do these pay-day places ever answer questions on their demographics? (0.00 / 0)
I am always curious, when I see these types of population/demographic breakdowns, whether the people who decide where to put these institutions have been asked what formula they use for their placement?  Do they keep their demographic research an industry secret, or can they defend themselves with some formula that it would be possible to check?  I can't believe they just randomly drop their stores-fronts anywhere, and it doesn't end up looking like that's what they're doing, either.

No Idea, Really (0.00 / 0)
But there's so much data out there others have collected, they probably don't have to do any actual research of their own.  No idea how they operate, really.  Just saying that it's not that hard.

"You know what they say -- those of us who fail history... doomed to repeat it in summer school." -- Buffy The Vampire Slayer, Season 6, Episode 3

[ Parent ]
Money For Nothing | 8 comments
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