In the April, 2009 issue of Harper’s Magazine Thomas Geoghegan gives an in-depth analysis of the present economic crisis in the US. In his article “Infinite Debt: How unlimited interest rates destroyed the economy” he argues that the uncontrolled rise of interest rates are key to understanding why the US economy is so screwed up. High interesest rates, he maintains, are more important than the deregulation of the New Deal.
Geoghegan looks at the causes of the decline of manufacturing. Why is the auto industry so messed up? Why is the US not producing any tangible products anymore? What are the consequences of this shift for the middle class and for the working population?
The article presents a very convincing explanation why capital in the US has shifted from the manufacturing sector to finance. If investor X sees that he could either put his money in the auto industry and get an 8% return or he could invest in the financial sector and get upwards of 35%, one need not wonder why capital is shifting to finance. It would have to be a very principled investor to not be lured by such figures.
In the past 20 years the US has seen interest rates blast through the roof. The deregulation of the banking sector has brought with it the successive crumbling of traditional usury laws. As Geoghegan points out Western Civilization has always maintained strict limits on interest rates. It goes all the way back to Babylon. The present day empire, however, has succeeded in removing the traditional caps on interest. Even though the Federal Reserve has kept interest rates relatively low, banks and other lenders are able to pass on outrageous interest rates through creative mechanisms like variable interest rates and a confusing web of fees and fines.
Why is this so important? I will try to summarize Geoghegan. For one it has made investing in financial institutions extremely profitable. Returns in manufacturing don’t even come close. This has led to a general divestment in manufacturing. This causes the loss of blue collar jobs, a weakening of the ability of American manufacturers to compete on the global market and an increased trade deficit.
The ramifications go even further. The loss of manufacturing jobs has led to the weakening of the unions. Workers in the financial sector are harder to organize. Moreover, reduction of manufacturing jobs has led to the increase of unqualified service jobs. These jobs are poorly paid, the workers are harder to organize and when there are unions they are not as influential as the traditional labor unions.
Here again my naive mind keeps screaming - “We Can Change This!” Reinstating strict laws limiting interest rates charged by banks is something even Joe the Plumber would vote for. It would not be difficult to convince the public, if they aren’t convinced already, that paying 50% interest on credit card debt should be should be outlawed.
2 comments:
Gus, I didn't read the article just your post. I think there is a fundamental misunderstanding in your blog.
(1)The stock market does not pay interest, It pays a ROI or return on investment. When an investor buys a stock he is buying a small piece of a company. People did not buy GM stock because they built bad cars. They should be allowed to fail. But now GM doesn't stand for General Motors it stands for Government Motors!
(2) Usury is the practice of charging people a high interest rate not paying them a high interest rate or in this case a large return on investment. If you don't want people to invest in the market the best way to do that would be to put a return of 35% on Treasuries and all the money would flow out of the market into T-Bills. Of course even the Chinese are beginning to see investing in America as a bad Idea. The metastasizing government both federal and state are spending money like a drunken sailor. I feel sorry for my kids and their kids, kids, kids. Paying off a debt of which they will draw no benefit at all. Oh well what can I say. The takers now out number the producers. God help us.
I would recommend reading the article.
I didn't say that the stock market pays interest. So much I do know. The article is talking about a general societal trend away from manufacturing. Obviously if an institution like Citibank is able to charge it's customers upwards of 35% on things like credit card debt, then the stockholder is going to eventually profit. Obviously the 35% doesn't go directly into the stockholders pockets but she will eventually profit. It makes a company (better said monster) like Citibank very attractive to attract capital. Why would some rich dude waste his time investing in a looser like GM when he can make tons at a place like Citibank.
That's the main point.
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