Infinite Debt: How unlimited interest rates destroyed the economy
Thomas Geoghegan, Harper’s Magazine, April 2009, p31
In this scathing essay, Mr. Goeghegan enumerates the problems of allowing interest rates to escalate to grotesque and immoral levels. His analysis and insights are fascinating and worth consideration. He says what many are thinking and few are saying: that our current problems weren’t caused by bad bankers or a collapsing housing market. Instead, they were caused primarily by our lust to consume beyond our means and to “earn” absurd rates of return quarter after financial quarter. We gave up our manufacturing sector to pursue easier money in the financial markets.
Want to get a peak under the hood of our economy to get an idea of the roots of the collapse? Check out the article. Here’s a teaser.
And then 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, and which had been so taken for granted that no one ever even mentioned it to us in law school. That’s when we found out what happens when an advanced industrial economy tries to function with no cap at all on interest rates.
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. Sure, GM is awful. Sure, it doesn’t innovate. But the people who could have saved GM and Ford went off to work at AIG, or Merrill Lynch, or even Goldman Sachs. All of this used to be so obvious as not to merit comment. What is history, really, but a turf war between manufacturing, labor, and the banks? In the United States, we shrank manufacturing. We got rid of labor. Now it’s just the banks.
Or think of GM, which, like GE, really makes its money by running a bank on the side. “After a while,” said a friend from Detroit, “the only reason they were making cars was so they could make loans.”
Who helped the financial sector make too much? We did. In a sense, we use our credit cards to help liquidate our own jobs, the kind we used to have in Michigan and Ohio. By little teaspoons, the people who go into debt for kitty litter pull a bit more capital out of one sector and pour it into another.
This growing gap between how much we produced and how much we earned led to a bizarre paradox: as the economy grew, individual people were actually becoming worse off. Even people who were making more money were living in a way that put them deeper in debt. I think many of these people, strung out, began making wild consumer purchases as objective correlatives for the fact that they had no time to consume. It seems that the less time there is to consume, the more consumers spend.
The change in credit-card caps also had a bad effect on the moral character of the nation. Because interest rates were so high, the banks no longer wanted borrowers with good moral character. Look at the way lending has changed just since the time I was in law school in the early 1970s. Even then, the mantra of my teachers in contracts and commercial paper was: “The loan must be repaid!” I have a friend, a professor, who still quotes that refrain. But it’s out of date. At interest rates of 25 percent, or 50 percent, or 500 percent, lenders don’t really want the loan to be repaid—they want us to be irresponsible, or at least to have a certain amount of bad character.
But as we now know, with low-interest mortgages—even the subprimes— the interest rates really were high, because they were variable. People took these loans in the same way they got credit cards, and paid no interest for the first three months. They were teasers or loss leaders. And even if those rates did not rise “variably,” a mortgage with very little down is a guarantee that the new “owner” is so house poor that he or she will need other kinds of debt to get by—credit-card debt at 35 percent.
Didn’t labor care? No, all they cared about was Mexico, and never mind that the trade deficits were much greater with Canada. Labor, apparently, isn’t troubled when we lose our jobs to white people.
Fourth, we should require the banks we bail out to cancel an appropriate amount of consumer debt—especially in instances where people would have paid back the principal by now had the interest rate been more reasonable. My retired schoolteacher, the one with the husband who is deep into Alzheimer’s and who has already paid $3,000 on a $1,700 loan, should be let off the hook. The banks we have bailed out should follow the Golden Rule: just as their own debts have been written down or paid off, so they in turn should do unto others.
Social democracy, Europeanstyle, which Schumpeter did not expect, is desirable. Sure, I’d like the European governments to run up a bit of public debt to pump up demand over there—I don’t think that’s so immoral. What’s immoral is to pump up demand, as we have, by handing out easy money at high interest and driving people into debt.