The Senate just stopped limits on credit card rates. Sometimes it takes a socialist to say the obvious:
“When banks are charging 30 percent interest rates, they are not making credit available,” said Mr. Sanders, who noted credit unions are limited to 15 percent. “They are engaged in loan-sharking.”
The banks have been given, loaned and guaranteed trillions. They are given access to money at very close to zero percent. They then lend it out at much much higher rates. As Sanders notes, 1/3 of credit card holders are being charged more than 20%, some as high as 40%.
That’s usury. More to the point, it means that for all intents and purposes they aren’t making credit available.
Does anyone wonder why consumer spending dropped again? Would you borrow at 20% to 40% to buy anything other than food or pay for housing, when jobs are still being lost at over half a million a month? No one with any sense would.
Months ago I noted that the simplest way to get banks lending again would be to either have the Fed lend directly to consumers, or have the FDIC take over a major bank like Citigroup or Bank of America and use that bank to lend at decent rates.
Instead of doing that, the Bush and then Obama administrations decided to give money, guarantees, loans and nearly free money to banks which were impaired and which needed to gouge their customers as hard as they could to make a profit. The result is that treasury secretary Timothy Geithner keeps saying the financial sector is fine, while more Americans lose jobs, consumer spending drops, banks won’t allow homeowners to get out from under bad mortgages even when it would save the bank money, and a new round of foreclosures is on its way.
On top of that, the mark to market rule was changed to allow banks to keep assets on their books at mark to model (ie. mark to fantasy) values.
All of this money will have to be paid back eventually. The strategy is simple enough.
1) Give the banks money.
2) Let them not acknowledge as much of their losses as possible.
3) Allow them to gouge taxpayers for as much as possible, to dig themselves out of the hole over a number of years.
The end result of this is going to be Japanification—at best. Not a “lost decade” as many folks have said, but a semi-permanent wavering between slight job gains and job losses, where a good economy never, ever, comes back. And because the US, unlike Japan, is not a net exporter, it’s questionable how long Japanification can work in the US, in any case.
The banks took trillions of dollars of losses. The refusal to make them take their losses; the refusal to wind up any of the big banks; the refusal to recognize that what is important isn’t the banking system but what the banking system does, and thus the unwillingness to cut past the big banks and lend directly means that those trillions of dollars of losses are going to have to be paid back by consumers and taxpayers. You will pay. You will pay not just in high interest rates, but in lower wages, and for many of you, a lack of jobs. The economy will not, before the next recession after this downturn, return to the same level of employment the US had before this crisis.
All of this because neither party, and neither President, had what it took to stand up to the banks.
Formerly T-Bear
This madness looks to be the case of collapse the system now and have a modicum of control or collapse the system later when no control is at hand. Either way, collapse is happening. And if anyone is paying attention, the hyper-wealthy are among the largest losers, notice the Forbes billionaire listing lately? Down significantly. Worldwide.
This is economic collapse, not a mere depression. The failure to recognize this fact will bring down the world’s economy altogether.
rumor
“Not a “lost decade” as many folks have said, but a semi-permanent wavering between slight job gains and job losses, where a good economy never, ever, comes back. ”
The thing that worries me most about this is that it allows for continuous bear market rally sentimentality and I suspect that enough of the public is gullible enough to buy it for a long, long time. Good times are just around the corner, just around the corner, just around the corner, we just need to spend a little (lot) more deficit money, just some more, just some more… until one day even that can’t hold together and America is right and truly doomed (maybe a bond dislocation, who knows?). As crazy as it sounds to me to be saying it, that ultimate telltale sign could be a long, long way in the future. We could live through years, maybe a decade of this crazyland.
senecal
Nouriel Rubini predicts today that the renminbi COULD become the global reserve currency, displacing the dollar, in perhaps ten years. There’s a reasonable time frame for full collapse”.
However, it’s already happening. In California, for example, falling tax revenues are putting the state in the red at a rate of $2 billion a month (already up to $13 billion.) The state is asking for TARP assistance, while also laying off teachers, cutting services, and looking gingerly at pension obligations. Foreclosures and unemployment are leading the national averages in California. A sort of reverse Grapes of Wrath, with families forced to move to cheaper locations, is already underway.
Jim
Yes, if we could just “stand up” to the banks.
By doing so, we would be asking the economic base (capitalism) not to act in accordance with its own objective law (maximum profit)–the objective law that defines capitalism.
Then we could ask the superstructure (both political parties, Congress, MSM, the courts, etc.) not to support the economic base.
Seeing the world as purely subjective is called idealism. It’s subjective and idealist to say that simply “standing up” to the banks would be able to solve the problems.
Ian Welsh
It’s been done before and in other locations. It’s also not about maximum profits, since there were no profits in the last 8 years from the financial sector. Nor is capitalism always and everywhere about maximum profits, especially since capitalism as a pure entity exists virtually nowhere.
Formerly T-Bear
In the last forty thereabout years a fundamental change has occurred in which management has usurped the authority and prerogatives of corporate owners through the institutionalization of large capital investment funds concurrent with the atomization of ownership by small investors. Reagan’s “simplification” of the tax code removed the tax barrier for management to award itself ever larger “incentives”. This is reflected in the meteoric rise in the ratio of earnings between management and labour, now in excess of 400:1, the recent kerfuffle over bonuses and retention payments highlights this trend as well.
Textbook “capitalism” does not exist, owners rarely have significant control of any sizable corporation, and none at international level. The international corporation is controlled by other corporate holding companies, many set up by the founding figures, Rockefeller is the stunning example of this phenomenon. Almost any business interest that involves great control of the market, of production, or requires longevity must assume corporate form. Even farms, once the family core of agriculture must take on the corporate form in order to be considered for loans necessary for their operations, few banks would consider otherwise.
What does not exist is an economic model that portrays and emulates the modern developments and superstructural additions necessary to a basic economic processes. Without a functioning economic understanding, what Ian is describing is the only rational outcome that can be put in place by those holding a bankrupt economic model. And that outcome will result in collapse of the system.
senecal
” Nor is capitalism always and everywhere about maximum profits, especially since capitalism as a pure entity exists virtually nowhere.” (Ian)
I have to agree with Jim on this one, and, I think, T-bear. Capitalism is certainly very “impure” (as the current bail-out of banks by taxpayers clearly proves), but that hasn’t changed its drive for profits. Neither will whatever future regulations on financial transactions are enacted.
Even dispersal of ownership (T-bear’s point) does not lessen capital’s drive. The ultimate driver is you and me and our 401K, where we always demand the highest return.
Ed
I live in Manhattan, and maybe we are insulated from what is going on elsewhere (the hyperwealthy seem to have designated Manhattan as one of their bases for controlling the rest of the world), but I see a huge disconnect from what I see on the blogs and what I see going about the city. New stores and restaurants are opening, the bars are packed, subways are packed with people going to work, no one seems concerned about the economic “collapse”. Now a few months ago, the island seemed a little emptier, less crowded. But now, its as if its still 2006.
I wonder if what I see isn’t the effect of the TARP money hitting here first. Maybe the government will be able to bail out the economy of the financial centers and fail elsewhere. But I’m starting to think the show can be kept on the road for another two or three years.
Then the bottom will fall out. The historical precedents for getting public finances this screwed up are very, very bad.
Ian Welsh
No, 401Ks don’t demand the highest return, and they don’t get it. I think a post on how the capitalist system actually works, as opposed to the theory is necessary.
In actual companies, the rule is to push for oligopoly or monopoly, not for competition.
In individual compensation, it’s about power, not about economic utility of any sort.
In terms of investment returns, ordinary investors routinely get completely hosed and the big money investors demand and generally get much higher returns than you or I, among other things because they can borrow for much less than ordinary people, because they can leverage higher and because they can shelter much more money than ordinary folks can while still investing that money at very high (fake) returns.
Profit is also depends completely on how you measure it. In reality the financial sector didn’t make any profit in the past 8 years, it was operating at a loss. But plenty of profits were booked, and bonuses, comissions and salaries paid on them, even though they were illusionary. They made a profit by moving the losses to the future.
This also leads to the question of externalities, which if not properly accounted for mean that profits are just money moved from one set of people to another.
Monkeyfister
It needs to be noted that CitiGroup holds the Purchase/Travel card contracts with most of the US Government right now. Citi is teetering. If any Big, Zombie Bank will be “Mega-FDIC’d” it will be Citi. Contract started 01OCT09 and it is a five-year contract…
BoA was dumped by the US Gov’t for Citi.
Worth noting.
–mf
rootless-e
“On top of that, the mark to market rule was changed to allow banks to keep assets on their books at mark to model (ie. mark to fantasy) values.”
Is that the socialist position: that current market price is value?
RickD
“Seeing the world as purely subjective is called idealism. ”
No it’s not. The two concepts are only tangentially related to each other.
Indeed, idealism, historically speaking, is a philosophy far more based on objectivism than subjectivism. The admission of subjectivity into philosophy is a relatively new idea, while idealism dates back to Plato.
As for whether the goal in capitalism is to “maximize profits”, I suspect the person saying this doesn’t know many capitalists. Capitalists are far too self-interested to concern themselves with the desires of the non-thinking corporations.
Each capitalist is a self-interested entity, who is far more interested in maximizing his own income than in maximizing the profits of any abstract entity such as a firm. If capitalists were primarily interested in maximizing profits, CEO pay would not be so drastically outpacing the rate of inflation. After all, a quick and easy way to increase profits would be to enforce far more competitiveness (as opposed to largesse) when it came to executive compensation.
Tim F.
Hi Ian,
A point that came up in the New Yorker among other places: who is the irrational actor in all this? Most average consumers had nowhere near the information to accurately judge their investments. Any securities trader who turned down the fat but poisoned paycheck lost his job.
It seems to me that a key bit of information is to know who did act irrationally, or at least if you take their job at face value. Banks practically threw houses at people who couldn’t pay. Who doesn’t want a house? Take Phil Gramm. It was touchingly naive of him to think that unrestrained capital markets would make the world better forever. Strangely, unlike most stricken with the bug, Gramm’s naivete did not make him poor.
Similarly, a number of Democrats will screw their constituents and probably the American economy. But they won’t go broke and their probably won’t lose their job. Is that irrational?
I’m troubled by honestly not knowing how rational behavior can possibly save us.
Ian Welsh
Tim, yeah, I’ve written on that a number of times.
For example, from Feb 2008:
https://www.ianwelsh.net/why-financial-crises-will-keep-happening/
I would not say that most home buyers were long term rational, but as you point out they didn’t have the necessary info to be rational.
Another:
http://firedoglake.com/2008/07/12/no-no-no-gretchen-no-the-financiers-were-not-shortsighted/
Ian Welsh
As my friend Stirling likes to say, since disaster has not been sufficient, catastrophe will be necessary. That is to say, the US will have another crisis, this one so big that even printing money won’t be able to stop it. Once that happens, there is a possibility of rationality returning, there is also a possibility of nice right wing populist government taking over, and there’s a possibility of permanent bananastanism. Who knows? What I do know is that Obama has proved that the system cannot currently fix itself because the incentives are all wrong.
Daddy-O
Never been here before. Never heard of you before.
But this post made me want to cry…
Are we really that close to the end? Now? I can practically SEE my money becoming more and more worthless. Maybe it isn’t too late to emigrate.
Ian Welsh
Nah, probably one more economic cycle to go, perhaps more. But I do think the suck, for ordinary folks, is going to get worse.
Jim
I want to address several issues.
First, subjectivity and idealism. The question of the relation of thinking to being, the relation of spirit to nature is the paramount question of the whole of philosophy…. The answers which the philosophers gave to this question split them into two great camps. Those who asserted the primacy of spirit to nature … comprised the camp of idealism. The others, who regarded nature as primary, belong to the various schools of materialism. The law of gravity exists whether you think it does or not. I can think I am a tree but that does not make me a tree. It is with this understanding that I use the term idealism.
Second, theory. I believe we need more scientific understanding of economic theory, not less. Without this we have an understanding based on what anyone thinks, which is not a basis for deeper understanding. We must have reasoned analysis of structures, material forces and objective reality, which drive, motivate and provide incentives to investors, policy makers and bankers.
Third, the nature of the crisis. The question I am asking is, “Is this crises of the system itself? “ If it is, then the solution can’t be found with in the system.
Fourth, competition within capitalism. Capitalism is predatory and competitive at the same time. They are not mutually exclusive. More profitable corporations gobble up the less profitable or the near bankrupt. At the same time Intel is competing ever day with AMD. Google with Yahoo, GM with Toyota, Wells Fargo with Bank Of America, Boeing and Airbus.
Formerly T-Bear
Ian: “I think a post on how the capitalist system actually works, as opposed to the theory is necessary.”
Please do and Don’t forget a bit about how diminishing utility of money works, it is a source of huge politico-economic propaganda and ignorance.
Jim’s issues:
# 2 we need (a) more
scientificconcise understanding of economic theoryEconomic education in schools is basically nonexistent. Economic terms are used with abandon, often incorrectly or with disregard to definition making richly rewarding their usage by propagandists, demagogues, and other deceivers. No shared economic definition is widespread, there being no shared understanding between speaker and listener of most economic terms, the tower of babel effect, also the divide and conquer effect. Your scientific term is misleading as it confers a nonexistent legitimacy to economic understanding.
# 3 “Is this crises of the system itself? “ If it is, then the solution can’t be found with in the system.
There does appear to be no solution to the current crisis being used by those handling the crisis. Although arguable, the current policy of throwing money at the problem, does not appear to be working, in either the financial sphere or in the “real” world economics, no model exists that connects the fact of unimaginable wealth being consumed and any recognizable outcome being assured. The fullness of time will have the answer.
# 4 Capitalism is predatory(.)
Tis all that needs be said. All else is misdirection. “More profitable” has no bearing on predation of other corporations; income is the culpable cause (see definition problem at # 2). In the prior Great Golden Age a story survives of two railway Barons, Vanderbilt and Frick (if memory serves) Vanderbilt attempting to acquire Frick stock and supplant the competition, As Vanderbilt bought, Frick ran his stock printing presses, the more stock Vanderbilt bought, the more stock became available. The object lesson is that Vanderbilt had the income to conduct such an exercise, and Frick had the cunning to separate Vanderbilt from his cash – two capitalist predators meet. The users of the railroads paid the bill – as usual.
Apologies for trespassing on Ian’s patch.
Qbert
I have a novel idea: don’t live on credit, especially credit card debt. After I ran into bankruptcy a couple of decades ago, I vowed never to carry a credit card balance again. And I haven’t. It’s surprisingly easy to do. In addition to not having to worry about one’s credit rating, one gets the pleasure of contemplating how much of one’s paycheck is NOT going out the door in the form for interest.
(Oh, I do use credit card for convenience; I just pay it in full every month. I’m sure the credit card companies hate me. Another pleasant thought.)
Joe Blow
I have been lucky to make enough money to buy houses early and never refinance. I have never carried a credit card balance and I run $30,000 dollars through a year. THey pay me 1% or a whopping 300 bucks. still, its nice and better than paying.
Never go to a store unless you actually need something. Buy that and maybe something else on sale that you could really use. Then leave.
and watch your vacation and gift spending. If you have to borrow, don’t do it. (Oh for this Xmas I am giving myself a $3,000 credit card debt! – not!)
Bruce Wilder
The Zombie banks are now:
Vampire Banks.
Still undead, but stronger, smarter, better-dressed and immortal.
ChristianPinko
Qbert – My current credit card debt comes from graduate school, when I was getting by on adjunct teaching jobs and had no choice but to live, in part, on my credit cards. It’s not always possible to avoid using plastic: and even if it is, that doesn’t justify usury.