Political Animal

Blog

July 11, 2012 1:10 PM Paving Stones of the Road To Insolvency

By Ed Kilgore

Anyone old enough to remember the facts of economic life as they existed before the 1970s is aware of the many changes that have occurred in how middle-class Americans try to organize their finances. But when you add them all up, as Phillip Longman does in the July/August issue of the Washington Monthly (his essay is tellingly titled “The Hole in the Bucket”), it’s pretty alarming. Real wage growth for most Americans stalled. Retirement security took a big “hit,” thanks in part to a Social Security “reform” package in 1983 that significantly boosted payroll taxes while reducing benefits, making Social Security much less of a great deal for Baby Boomers than for their parents. At roughly the same time, the private pension system began to shift from defined benefit to defined contribution plans which not only reduced the security (and in many cases, the value) of pensions but also made retirement savings largely voluntary.

As low-to-moderate income Americans struggled to make ends meet, something else happened that escaped general attention until subprime mortgages took their terrible toll on the economy: an “epidemic of predatory lending,” as Longman calls it:

Usury law is, in the words of one financial historian, “the oldest continuous form of commercial regulation,” dating back to the earliest recorded civilizations. Yet starting in the late 1970s, some powerful people decided we could live without it.
First to go were state usury laws governing credit cards. Before 1978, thirty-seven states had usury laws that capped fees and interest rates on credit cards, usually at less than 18 percent. But in 1978 the Supreme Court, in a fateful decision, ruled that usury caps applied only in the state where the banks had their corporate headquarters, instead of in the states where their customers actually lived. Banks quickly set up their corporate headquarters in states that had no usury laws, like South Dakota and Delaware, and thus were completely free to charge whatever interest rates and fees they wanted. Meanwhile, states eager to hold on to the banks headquartered within their borders promptly eliminated their usury laws as well.
Later, in 1996, the Supreme Court handed usurers another stunning victory. In Smiley v. Citibank it ruled that credit card fees, too, would be regulated by the banks’ home states. You might think that market forces would set some limits on how high credit card fees and interest can go—after all, there are only so many creditworthy borrowers, and much competition for their business. But with shrewd use of “securitized” debt instruments and hidden fees, banks and other lenders found they could make more money from those who could not afford credit cards than from those who could….
And along with the payday lenders came new, more vicious species of loan sharks: subprime credit card issuers, auto title lenders, private student loan companies charging up to 20 percent APR, check-cashing outlets, and subprime mortgage brokers and lenders. Just the hidden fees—what Devin Fergus of Hunter College-CUNY calls the “trick and trap fees”—on student loans, mortgages, and credit cards sucked billions of dollars a year off the balance sheets of American families.
Meanwhile, of course, expanding mortgage credit, combined with continued generous tax subsidies for those who borrowed to buy a home, drove up home prices beyond all reason, while causing millions of Americans to overinvest in real estate as the bubble grew. And then, catastrophe.

So the housing and financial crises were not disasters that came out of nowhere, but the culmination of decades of bad public policies that stretched middle-class budgets to the limit and then destroyed much of the meager wealth families had managed to accumulate.

We won’t get out of this mess any faster than we got into it, but it’s important to understand that it wasn’t the result of some sort of generational moral failure (as professional scolds like the Washington Post’s Robert Samuelson like to claim) but of bad collective decisions that created some very wealthy winners and a lot more losers. The July/August issue of the Monthly has some good ideas for turning things around, but Longman’s succinct description of the paving stones on the road to insolvency is truly essential reading.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • Burr Deming on July 11, 2012 1:49 PM:

    As I understand it, payday loans in Missouri can legally include interest rates up to 1950 percent. There seems to be no realistic limit on how far to go in bartering with a drowning person for a life line.

  • Ron Byers on July 11, 2012 2:16 PM:

    On the good side of all this is the decline of the traditional loan shark business. Organized crime just can't compete with citibank and the payday loan companies.

  • Mimikatz on July 11, 2012 2:20 PM:

    As I said in comments to the previous post on this subject, given the corruption in our politics the chances of reforms being enacted are vanishingly small. So what is the end game here? Slowly declining standards of living? Debtors prisons? Paid for by what remains of the middle class? A Bonus Army of the young indebted marching on Washington? What?

    And what if Romney wins, and the financial sector's predators are really unleashed?

  • JM917 on July 11, 2012 3:21 PM:

    I'' bet that it won't be long before someone on Fox starts advocating imprisonment for debt. It will be sold as an impovenment on unemployment insurance, Medicaid, welfare, and other such liberal frauds--as a "reform" whereby those long-term unemployeds who've fallen hopelessly behind on their mortgages, car payments, credit cards, and payday loans can "work off" what they owe in return for being relieved of the need to pay for food, shelter, and periodic trips to the local emergency room.

    In the ancient world this would have been called enslavement for debt.

    Just wait...

  • biggerbox on July 11, 2012 3:33 PM:

    The important thing to note is that these changes didn't just happen by accident. They were pushed by the bankster class, to enable massive wealth transfer upward. And now a key beneficiary of this movement, Mitt Romney, is running for President.

  • massappeal on July 11, 2012 4:22 PM:

    Here's one idea for dealing with this problem: bring back usury laws.

    It doesn't seem likely to happen soon, but Saul Alinsky's (shh, don't tell Breitbart's disciples) Industrial Areas Foundation has been doing some organizing on this issue through their "10% Is Enough" campaign: http://www.10percentisenough.org/

  • c u n d gulag on July 11, 2012 4:24 PM:

    All of that, and the odious laws passed by Congress in 2005, which made bankruptcy much more difficult that ever before. And helped worsen the Real Estate crisis in 2007-2009.

    Also too - the new 'Debtors Prisons' for poor people who can't afford to pay some local fine, and are arrested, charged additional fees and interest, and left in jail until this damned scam is paid.

    We need to blow the whole feckin' economic system in this country.

    As that feckin' idjit Donald Trump once said - "If you owe the band $100,000, the band owns you.
    If you owe the bakd $100,000,000, you own the bank."

    In that one case, The Donald was right.

  • Mitch on July 11, 2012 4:38 PM:

    @Mimikatz

    "So what is the end game here?"

    The end game is the next round of Dark Ages. This is the only logical outcome of modern "conservative" ideology.

    Untouchable aristocracy who play by their own rules, allied with theocratic demogogues to keep the masses in line. All supported by uneducated serfs who have no rights, save for the right to serve and whose work and wealth flows only upward to pay for the indulgences of those with power.

    These are the three castes of era Medieval Era, the Estates of the Realm. The nobility, the clergy and the commoners.

    Modern "conservative" policies are devoted to this ideology, although few seem to realize it. As evidence, I will put forth the continued flow of wealth to the richest of the rich, the expansion of religious domination into the public sphere and the on-going efforts of the Right to restrict the voting ability, educational opportunity and social influence of your average American - while INCREASING the influence of corporations and individuals with wealth.

    Nobody should be surprised by this. Those with power almost always seek more power. And the bulk of the population will march along to this beat, just as 98% of the population of Medieval Europe willing served as nearly subhuman serfs for a millenia or more.

  • Marko on July 11, 2012 5:05 PM:

    Legalize usury? No problem
    Legalize gambling? No problem
    Legalize poll taxes? No problem
    Legalize unlimited campaign funds from anonymous sources? No problem

    Legalize marijuana? Fuhgetaboutit

  • ryan on July 12, 2012 4:19 AM:

    Every time I see this spambot it takes me a beat longer than it should to actually understand the URL. This time I was like: A gel o v e r? What does that mean? until my brain properly processed it as Age-lover.
    Still not checking it out, though.

  • paul on July 12, 2012 12:04 PM:

    @Mimikatz:

    Your comment about crowding out old-fashioned loansharking is interesting because it shows how a "legitimate" entity can outsource legbreaking as well.

    If you try to resist the seizure of your stuff, you can have your kneecaps broken at taxpayer expense; if you end up in a privately-run prison because you failed to satisfy a court-ordered payment plan, you can have them broken by fellow inmates.