Renowned Chicago labor lawyer and prolific author Tom Geoghegan recently wrote an article for Harper’s titled, Infinite Debt: How unlimited interest rates destroyed the economy. In this article, Geoghegan traces the development of “payday loans” and the destruction they cause in our current economy:
Some people still think our financial collapse was the result of a technical glitch—a failure, say, to regulate derivatives or hedge funds. All we need is a better chairman of the SEC, like brass-knuckled Joe Kennedy, FDR’s first pick. It’s personnel—it’s Senator Gramm’s fault. Or it’s Robert Rubin’s fault.
In fact, no amount of New Deal regulation or SEC-watching could have stopped what happened. Hedge funds in themselves did not cause Wall Street to collapse. Some New Deal–type regulation was actually introduced in recent years, but it failed to do much: think of the Sarbanes–Oxley Act of 2002, which made CEOs swear an oath that their financial statements were not fraudulent. No, the deregulation that led to our Time of Troubles was of a deeper, darker kind. The problem was not that we “deregulated the New Deal” but that we deregulated a much older, even ancient, set of laws.
First, we removed the possibility of creating real, binding contracts by allowing employers to bust the unions that had been entering into these agreements for millions of people. Second, we allowed those same employers to cancel existing contracts, virtually at will, by transferring liability from one corporate shell to another, or letting a subsidiary go into Chapter 11 and then moving to “cancel” the contract rights, including lifetime health benefits and pensions. As one company after another “reorganized” in Chapter 11 to shed contract rights, working people learned that it was not rational to count on those rights and guarantees, or even to think in these future-oriented ways. No wonder people in our country began to live for the moment and take out loans and start running up debts.
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.
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, 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.
While I do not believe the “payday loan” practice should be altogether outlawed, I can not stand by my elected representative Luis Gutierrez (D-IL) while he pushes forward “H.R. 1214, the Payday Loan Reform Act 2009.” According to the Consumerist,
A House subcommittee wants to legalize payday loans with interest rates of up to 391%. Lobbyists from the payday industry bought Congress’ support by showering influential members, including Chairman Luiz Gutierrez, with campaign cash. The Congressman is now playing good cop, bad cop with the payday industry, which is pretending to oppose his generous gift of a bill.
“While they may not be JP Morgan Chase or Bank of America, they’re very powerful. Their influence should not be underestimated,” Gutierrez, the top Democrat on the Financial Services subcommittee in charge of consumer credit issues, said in an interview this week.
While that last quote is hilarious in its transparent acknowledgment of his fear of the financial sector and what would happen if they were to forego their campaign contributions, the law itself seems like a joke.
After watching members of the military fall prey to exorbitant payday loans, Congress in 2006 capped the interest rates for military payday loans at 36%. Fifteen states have similar caps or outright bans.
On Gutierrez website, he released the following:
The status quo in the payday lending industry is unacceptable. The Payday Loan Reform Act says “NO” to the status quo. It would protect millions Americans from abusive lending practices in one fell swoop. I look forward to hearing the testimony of our panelists and also look forward to a lively debate on this controversial issue.
391%? This law protects no one. It might as well not exist, and in fact does more harm than good because it will make it harder to move towards serious reform in the future. Congressman Gutierrez can be reached via the following ways and means.