APRIL/MAY 2009

Creating Community Prosperity
Crystal Arnold

Re-Localizing Capital
Jeff Golden

How Unlimited Interest Rates
Destroyed the Economy
Amy Goodman interviews
Thomas Geoghegan

Honoring the Duh-Design Principles
Shaktari Belew

Stimulating Local Agriculture
Jody Woodruf

Fresh Food From Small Spaces
R.J. Ruppenthal

Small Farm Renaissance
Chuck Burr

Where Are the Seed Growers?
Don Tipping

Try it On Everything!
The Healing Power of EFT
DVD Review by Jill V. Mangino

A Naturopathic Perspective
on Vaccination Choices
Michael H. Shuman

Safety and Protection
Peter Moore

Cosmic Calendar
Salina Rain

BACK TO TOP

How Unlimited Interest Rates
Destroyed the Economy

Amy Goodman Interviews Thomas Geoghegan

“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 Obama administration has unveiled its $1 trillion plan to buy toxic assets from banks and restore the financial system. But should we return to the way it was? Amy Goodman, co-host of Democracy Now!, spoke with Chicago lawyer Thomas Geoghegan last March about his Harper’s Magazine cover story, “Infinite Debt: How Unlimited Interest Rates Destroyed the Economy.”

Amy Goodman: The economic crisis has been largely blamed on deregulation of the financial industry and lax government oversight. But your article in Harper’s Magazine argues otherwise. You wrote “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. 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.” How did we get here?
Thomas Geoghegan: We’ve not focused enough on the big deregulation that preceded 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 customers. Even up through movies, like It’s a Wonderful Life, historically 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 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 and California.

Explain the significance of the 1978 case of Marquette National Bank v. First of Omaha Service Corp.
That case effectively preempted any state regulation capping the interest rates of banks when they sent their credit cards in from out of state.

The effect of this was that big national banks were not subject to any state usury law, because the National Banking Act of 1864, signed by President Lincoln, had no interest rate cap on it, not contemplating the kind of situation that we’re in today. When out-of-state banks were subject to the Banking Act of 1864, banks in Delaware weren’t operating in Nebraska or handing out credit cards across the country, and there was no such thing as Visa or MasterCard.

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 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.

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 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 high rates of return compared to what investors were used to getting in the real economy, the manufacturing sector, 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.

You talk about how, with no law capping interest, the evil is not only that banks prey on the poor 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 manufacturing.
Even worse, we began to turn industry into 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 (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.”

We took off what 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 debts where they were paying 25, 30 percent interest, when investors could only get five, four, three percent from our globally competitive industry.

In your history of usury, from ancient times to today, you’re also giving a labor history of this country.
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.

People lost the ability to get wage increases and got an incredible ability, really unknown in previous times, to get credit cards with high rates of interest. So, unable to get wage increases, people unable to get union cards 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 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 say US workers increased their productivity over the past thirty-five years, but real wages actually decreased.
Yes, if you look at the amount of money that went into actual wage, as opposed to non-wage labor costs. One of the tragedies of working people in this country is that we don’t have single payer healthcare. If private employers were not paying healthcare costs to the private insurance industry, a lot of that money could go for wage increases. It also could make the country much more globally competitive. I believe we need an increase in Social Security, single payer, basically for the government taking over non-wage labor costs so that the globally competitive parts of the economy could lower their labor costs, hire more employees, people could actually get pay raises, and the government would be assuming these non-wage labor costs, which are so important to making the country globally competitive. It’s what many of our high-wage rivals are able to do. They run trade surpluses, we run trade deficits.

As the economy grew and Wall Street was just blooming, individual workers were actually becoming worse off.
They went from being creditors to debtors. That’s what is so insidious about this whole process. Not only were people being denied wage increases, but they were losing their savings, at least in the sense of losing the kind of security that they used to have. I saw that as a labor lawyer in Chapter 11 reorganizations, seeing all these companies now taken over by financiers, and squeezed for as much profit as they can, go belly up after outsourcing occurred. And then, people would be brought into court as creditors, not named as parties, but because they had claims to retiree health insurance and so forth, and would just be stripped of these rights.

In addition to people not having the wage increases that they needed, because of lack of unionization, because of the fact that the healthcare system was devouring up the money that would have been there to pay for them, they were also losing their savings and, worse than that, losing the sense that if they entered contracts with their employers, the money would be there at the end of the day. So you had this destruction of future-oriented thinking just at the time that the credit cards were being handed out to them, and it was kind of “live for the moment.”

Explain this issue of people who are getting their healthcare from the company—a pension, retirement, and today we hear, on the issue of bonuses, you can’t break contracts. But what happens to all of this, for example, when a company decides to just declare bankruptcy?
Well, they aren’t really bankrupt. That’s the first thing. It’s just that these firms set up subsidiary corporations that go into Chapter 11 and get “reorganized.” It’s very easy to shed unsecured obligations. And virtually all uninsured, non-insured pension obligations and all healthcare obligations and other supplemental benefits that people earn over a lifetime are completely unsecured and are the first thing to go in a reorganization.

So, over the 1980s, 1990s and, if any were left, by the early twenty-first century, the ’01s, people would be dragged into court as creditors and emerge as debtors. And the debtors—that is, the big companies—would walk away with enormous savings. And these companies were really just subsidiaries often of firms that were really quite well off. But they used the device of subsidiary and corporation, they used the ease of going in and out of Chapter 11, or just liquidating these subsidiary corporations and starting over with a different framework, to shed all these obligations. Or they just went out of business altogether and put the money into speculative financial sector type things, which were supposedly going to bring huge returns.

When did usury become legal?
I would say that it happened slowly through the late 1960s and early 1970s. You know, there were, at first, very limited deregulations to make sure it wouldn’t go too far. The first state laws that deregulated usury usually said, “We’re only going to let you do this if you pass a test of having good moral character. We’re going to investigate your reputation in the community. We at the Department of Financial Regulation will make findings that your reputation for honesty and fairness is such that we can let you get out of these interest rate caps to lend money more freely to consumers.”

But then that all went by the by, it was anything goes, and soon you had the most predatory behavior going on without any kind of check into moral character or otherwise, which was the fig leaf to allow this deregulation to occur at the state level. And then came the Marquette Bank ruling, where it became pointless to try to regulate it at all, because all the states were effectively preempted when they’re dealing with the big Chase and Citibanks and out-of-state credit card issuers.

You make four major points of what you think has to happen now.
My major points change from month to month, but I still stick with those that are in the article. First of all, we ought to have an interest rate cap in this country. Senator Durbin proposed 35 percent, but it should be much lower than that, especially for the banks that we’re bailing out. I’d slash it at least by half.

Second, I think that there should be something in this country like the Europeans have, the Germans in particular, which are state-run banks that make low-interest rate loans to consumers and are a wonderful alternative to the payday lending system that is being put up in most states.

Third, I think that as long as we’re in the process of bailing out the banks, we’ve got to restructure them. That’s one of several grievances I have against the administration plan. And in particular, at the very least, I think that there should public guardians on the board of directors who will, from inside, ensure that these banks are much more in the nature of fiduciaries and guardians and do what banks ought to be doing in this country: pushing money into the globally competitive parts of the economy, accepting lower rates of return, not squeezing money from consumers. It’s not enough to have external outside regulation. You have to change the internal corporate structure of the banks. And I think some kind of codetermination with the public at the board level is the way to go.

And finally, I think that we have to inject equity not only into the banks, but to the people who the banks are lending to. We’ve got to make people more creditworthy. And one of the ways of doing that and encouraging future-oriented thinking is, I believe, for the President and the administration right now to make a big point about promising people that if they work for a living in this country they will get a decent public pension to live on when they retire. So, instead of cutting back on entitlements—and all the veiled sounds coming out of Washington are to that extent—I would increase the replacement rate of Social Security from our very low level now, which is something like 40 percent on average, to the amount that other developed countries pay on average, which is closer to two-thirds of working income.

Where do you see the labor movement today under an Obama administration and the Employee Free Choice Act, which I think the large corporations—Starbucks, Costco and Wal-Mart—are joining together to launch a massive advertising campaign against?
The Employee Free Choice Act is crucial for labor. Some sort of labor law reform is important. But I would urge people in labor and all friends of labor throughout this country that if we’re really serious about bringing back the labor movement through changes in laws, which are absolutely crucial—not just Employee Free Choice, but bankruptcy laws, all sorts of laws that allow us to hold corporations liable for their wage obligations—we have to do something about the filibuster in the Senate. It has to be removed. It has to be taken away. It’s destroyed the labor movement over and over. Labor laws have gone down the drain because of the filibuster.

Under Carter, we could have had labor law reform, but for the filibuster. It passed the House, got majority in the Senate, went down the drain because of the filibuster. Under Clinton, we could have had labor law reform, but for the filibuster—passed the House, got a majority in the Senate, went down the drain because of the filibuster.

The stimulus plan that Barack Obama just proposed could have been great. It went down the drain because of the filibuster. We had to negotiate—it got through, but it got negotiated away. The same is going to happen with the Employee Free Choice Act.

Until you move to a Senate that is more majoritarian, the reality is that you’re going to be in a situation where you have a very unequal, unfair, often unethical and oppressive economy, because you can’t get the changes that you need. You can’t get the New Deal reenacted with the kind of filibuster that is in place today. FDR couldn’t have had the New Deal if he had had the filibuster that we have now, where any senator can just raise his hand and say, “Well, I would like to filibuster this. I don’t actually have to get up there and argue. I would just like to do it and require two-thirds—sixty votes of the Senate to get measures through.” The New Deal would never have happened.

Thomas Geoghegan is a Chicago-based lawyer and author of many books. His most recent is See You in Court: How the Right Made America a Lawsuit Nation. Democracy Now! is a national, daily, independent, award-winning TV and radio news program airing on over 700 stations. Providing access to people and perspectives rarely heard in the corporate-sponsored media with independent and international journalists, ordinary people from around the world, grassroots leaders and peace activists, artists, academics and independent analysts, co-hosts journalists Amy Goodman and Juan Gonzalez broadcast on Pacifica, NPR, community and college radio stations; on public access, PBS, satellite television (DISH network: Free Speech TV ch. 9415 and Link TV ch. 9410; DIRECTV: Link TV ch. 375); and atwww.democracynow.org.

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