Wednesday, April 22, 2009

The Public Interest

It was the spring of 1979. My father found the car, a 1971 Plymouth Satellite that became known as the "Satellite of Love." A former Schlumberger field car, it was well-kept and cost $900. I had saved the money and could have paid in cash, but being a recent college graduate I wanted to establish credit. So, I made an appointment with a loan officer at my bank so that I could borrow the money to pay for the it.

When the loan officer explained to me that I needed collateral in order to take out at loan, I responded that I already had the money in the bank and that I simply wanted to establish that I could take out a loan and pay it off. So, the bank happily loaned me the $900 at a marginal interest rate, complete with a plan to pay them off in a year via an automatic withdrawal from my savings account. Cashiers check in hand, my soon-to-be fiancee drove me from San Antonio to Kingsville where I picked up the car and she met my parents. The automatic withdrawals commenced, and a year later both the car and a good credit rating were mine.

That's how it worked back then. Today, lending institutions want borrowers to do anything but pay off their loans, thanks to a 1978 the Supreme Court decision Marquette National Bank v. Omaha Service Corp. This cursed moment in American history in essence overrode usury laws by holding that state anti-usury laws did not apply to nationally chartered chartered banks. Thus, a bank chartered in Nebraska could operated branches in Illinois free from the inconvenience of obeying Illinois anti-usury legislations.

Marquette set the stage for banks to charge today's usurious loan rates of 25-30%, for credit card companies to do the same, and for both to ladle on arcane and often undefined loan fees. It also broke ground for the scourge of predatory payday loans, on which primarily poor people and military service families find themselves taking in short-term loans that they can't pay off because because interest penalties swiftly accrue to 100%, 2oo%, even 700%. Thomas Geoghegan and Daniel Brook spell this out in the April edition of Harper's, in their essays "Infinite Debt" and "Usury Country." The articles are available on-line for a fee, so I urge you to purchase the edition at your local news stand, as the two articles make for essential reading.

Between the two of them, Geoghegan and Brook explain how lenders now have no incentive whatsoever for borrowers to pay off loans, as the interest are so high that lenders want to collect them indefinitely. In the process, banks and credit companies have overseen a massive transfer of wealth from the middle class on down to the financial sector, created a nation of individual debtors, contributed to the decay of the manufacturing sector, and even forged the impetus for their own destruction.

Geoghegan explains what happens "...when an advanced industrial economy tries to function with no cap at all on interest rates:"
...the financial sector bloats up. With no law capping interest, the evil is not only that the banks prey on the poor (they have always done so) but that capital gushes out of manufacturing and 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. 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 to not 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. (Geoghegan, Harper's, April 2009, p. 32)
And the irony is that banks didn't keep their ill-gotten gains. With interest rates -- and therefore profitability -- so high, they kept making and investing in bad loans until the whole house of cards tumbled about them. At which point they turned to the very taxpayers they had been screwing for a bailout.

But aren't household incomes higher than ever? Sure, but so are expenses. Incomes are higher because both parents work, which means daycare, two cars and all of the expenses from gas to maintenance to insurance that come with them, more eating out, and so on. As for single-parent homes, well, who do you think takes out the payday loans?...

President Obama now appears open to an independent commission that would investigate the Bush Administration's legalization of torture. Harper's reports that at least some of the impetus may be a result of good old-fashioned infighting between the Department of Justice and White House political advisors. Unlike anything that ever happened in the Bush Administration, the political people may have lost out. However it happens, too many nauseating stories like this one have made it clear that the approval and practice of torture by Americans and American agencies must be investigated. And if former high-ranking people go to jail, well, somehow we'll survive...

We haven't heard from the Colton Kitchen Project for a while, but they're still forging ahead, despite structural problems like this: "Our public schools don't have kitchens, they have reheating stations..."

Wow! "Beeping birds" indeed! The caption doesn't do this photo justice...


Kathy said...

Is Thomas Geoghegan the same person who ran for Rahm Emanuaels seat in Illinois? The labor activist?

Anyway, I never thought of it that way before, but the point he makes about capital and people fleeing the auto industry to go into banking is valid.

The same thing could be said about teaching. Too many good teachers leave the profession because they're lured by big money in other industries.

If we reign in banking and reduce their bloated salaries in the process, it's possible other industries would be able to attract and retain talent and grow stronger in the process.

(BTW, nice Plymouth!)

K. said...

That car was a classic! It was also a popular police department car.

Geoghegan lives in Chicago, so I bet it's the same guy. It's a terrific article. I came away thinking that capping interest rates is more important than nationalizing banks. If you want to write your Congressman about something, this is it. In my case, it will instigate another comical and clueless exchange from Dave Reichert.

Sylvia K said...

Love the car! Things were so simple and straightforward then, and how totally screwed they are now! Great post! Thanks, I try to write about it all these days and get so frustrated that I just end up sputtering!

Steven said...

Well done! It must be difficult to read & post articles like that without becoming apoplectic...I have a theory that you can gauge the economic health of a community by the number citizens divided by the number of payday loan stores. I'm still working on the figures and percentages, but I think we're all in trouble, no matter where we live.

The Colton School project hits a nerve with me...they have done this to schools EVERYWHERE! And around here, the high school students leave campus at noon and hang out at the supermarkets...feasting on all the good food available there.

K. said...

Steve, your algorithm rings true.

Payday loans are a scandal and should be illegal. They cluster around military bases like suckling pigs and they're ubiquitous in poor neighborhoods. And always with a sunny disposition and claims that they want to be good neighbors. John Lennon would say that they've learned how to smile as they kill.

K. said...
This comment has been removed by the author.
Ima Wizer said...

ha, ha, ha, thanks for the link!