Thomas Geoghegan, writing in a recent issue of Harper’s Magazine, puts forth a theory that at first glance seems almost too silly to voice, let alone take seriously. He argues that it was not derivatives, hedge funds, gambling insurance companies, or excessively paid financial executives that destroyed our economy, but rather crippling interest rates levied on the poor and middle class.
Yet as I read his exhaustive argument, which is filled with a fascinating history of a sector of the finance industry that has remained largely out of public scrutiny, I came to believe that his analysis was very compelling and politically astute. The excerpts below won’t do Mr. Geoghegan or his ideas justice, but hopefully they will pique your interest enough to read the full article.
Geoghegan writes,
“Here’s what happens: the financial sector bloats up. With no law capping interest, the evil is not only that 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 (those corner store fronts that offer “cash now” and will advance you money against an upcoming pay check), 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.”
“Who graduates from Harvard and Yale and goes into the auto industry, let alone steel, trucking, or farming? Next to no one because, as I have noted in earlier posts, in the last 10 years profits from the financial industry have skyrocketed from 10% to 40% of all corporate earnings.”
Geoghegan continues,
“Think of the growth of the health-insurance industry, for example. 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.””
Geoghegan analyzes how this trend led to the destruction of organized labor, the erosion of middle class manufacturing jobs, and excessive borrowing by the poor and middle class. He writes:
“Over the past forty years, employers have found ways to cancel any earned right, of any kind, at any time. I’d say that with a competent lawyer any employer can cancel any promise to any worker. As a result, people learned it was not rational to save. In particular, right around the time Reagan took office, companies began to figure out that they could go in and out of Chapter 11 in order to dump their obligations not just to workers but also to retirees. As a labor lawyer, I saw firsthand in bankruptcy court the shocking way in which companies could cancel retirees’ health, severance, and pension rights, though some were federally insured. Although we now think of the middle class as a debtor class, people came into these Chapter 11 cases not as debtors but as creditors — yes, creditors, because big wealthy companies owed them pensions. By the time the “reorganizations” were over, the creditors had managed to hang on to five cents on the dollar, maybe ten. Often the companies weren’t “bankrupt.” The parent firm was simply shutting down the subsidiary and taking all the loot. The shock of all these lost property rights turned into anti-wisdom that the old steelworkers passed down to their children and grandchildren: “Why save? There isn’t any point.” Sure people stopped saving. Planning for the future no longer made much sense.
But in a developed country, no labor movement can succeed if it loses its base in manufacturing. The reason is this: although service-sector unions can raise the wages of the working poor, they don’t do much for the middle class. A labor movement that has lost its base in manufacturing will never be a “player” in setting the wage levels in either sector — manufacturing or service.”
Geoghegan concludes with five policy imperatives that are critical to resolving the long term negative impacts of the current financial crisis:
- First, we have to pass a new type of law against usury that caps interest rates at 9 percent.
- Second, we should establish state-owned banks that would issue credit cards with interest rates much lower than those private banks charge.
- Third, we should insist on having at least one or two “public guardians” appointed as directors at the banks and all the other financial firms that we have bailed out. These directors would push capital into the manufacturing sector.
- Fourth, we should require that the banks we bail out cancel an appropriate amount of consumer debt — especially in instances where people would have paid back the principal by now if their interest rate been reasonable in the first place.
- Finally, we need to think about ways to “inject equity” directly into the accounts of working people rather than into banks.