For all we've heard and learned about the economy lately, it sometimes seems more complicated than it really is because of what we're not allowed to talk about.
For instance - one real reason our financial system went kaboom is this widely accepted financial lie:
When a lender doesn't have evidence that a borrower is a good risk at 5% interest, that borrower is more apt to pay 7%, or 10%, or 20%, or even 400%.
- Millions of foreclosed homes carried Adjustable Rate Mortages whose interest rates that can exceed 20%.
- Millions of underpaid Americans receive, and grow to depend on, credit cards offering quick money at 30% interest and beyond.
- 500% annual interest is an actual rate for "payday loans" by lenders who pray the principle won't be paid back.
Starting in 1978, for the first time since Biblical days, the USA made it all legal.
But unlimited interest rates are a famously corrupt practice known for thousands of years as usury. In less than 30 years it has destroyed the world economy.
What would happen if the Obama administration made usury illegal again tomorrow? For starters, millions of distressed homeowners could stay in their homes, and neighborhood property values would soar.
That sounds pretty good. What else would happen if it was illegal to charge more than 5% interest for loans?
For a few weeks, some homeowners with great credit ratings and 5% mortgages would feel cheated when their neighbors suddenly had an equally good deal. But except for a few racists, they would stop complaining as soon those cheap foreclosing neighbor homes went off the market, and their own homes gained back most of their previous value, reversing a key factor in the current crisis.
If high interest loans became illegal, bankers and lenders would wind up penalized in proportion to how much they prey on desperate consumers and naive first-time homeowners.
Institutions that make an honest living investing in industry and small businesses, and charge consumers fair rates, would be rewarded and would not suffer from the strict law against usury at all. In fact, their prospects would be buoyed by the rising value of homes and improved prospects for businesses.
Others would have clear guidance to write down some of their holdings. Instead of vaguely calling them Toxic Assets (which always makes me think of Mel Brooks' The Producers - "It's Toxic Assets A Flop, the investors should expect to lose their money - by the way we're off to Rio..."), banks would have to sort loans into at least three piles: ones that are fair and likely to be repaid, ones where they were defrauded by a consumer, and those where lenders took advantage of borrowers with predatory rates that must be changed. (The latter is something judges already do, called a cram down - and at this very moment, financial lobbyists are talking to your Congressman and financing his next campaign, to make sure that if you aren't behind in your payments yet, or failed to ask for one before you went bankrupt, you won't be eligible for a cram down.)
Likewise, financial instruments based on those loans wouldn't be hard to evaluate anymore: the ones whose stated value promised returns based on high, adjustable rate home loans that can go to 10%-30% would be adjusted to a post-usury valuation.
All good. So good in fact that, with real estate values recovered, predatory lenders punished, productive lenders rewarded, and derivatives properly re-evaluated, it's not clear the US would have to bail anyone out. So besides being a moral imperative, it could save us a few trillion dollars.
Is there a down side? Are our pensions and 401Ks still so heavily invested in usury and predatory lending that ending them would wipe us out? Is that what Obama believes, but dare not tell us?
These questions are informed by a wonderful interview with Thomas Geoghagan last week on Democracy Now!. In his current Harper's Magazine cover story “Infinite Debt: How Unlimited Interest Rates Destroyed the Economy” (subscribers only) Geoghagan explains the current crisis with an astonishing history of usury.
Prior to the Marquette National Bank v. First of Omaha Service Corp court case in 1978, states could put limits on interest rates, and many states did.
Geoghagan easily makes the case that in a free market, where capital can choose whether to invest in folks who actually make things - buy steel, employ labor, and ship products for 5% returns -- capital will naturally flow to a financial sector that can charge unlimited interest without producing anything. This isn't a progressive, left or modern idea. It's in Adam Smith, Alfred Keynes, the Code of Hammurabi and the Bible.
And sure enough, during this bubble the financial sector more than doubled in size. These days, with real wages falling, and no guarantee or prospect of health care, who can say no to those expensive credit cards and loans? What bank wouldn't want to get what Tony Soprano would get? So capital fled from industry, and the financial sector ballooned worldwide - until it all collapsed.
Senator Bernie Sanders introduced usury limits legislation earlier this month that would limit credit card interest rates to 15%. I don't see any record of Obama's reaction.
So, do you think team Obama might be persuaded to hold financial institutions accountable, call for an end to usury, and end the current crisis efficiently, at the consumer level, so a solid recovery can trickle up?
Please don't be mad if the diary title is misleadingly optimistic. I can Hope, can't I?
Updates:
Great response! Thanks for putting it on the Rec List.
Many insightful Comments from folks in financial industries - credit cards, insurance, credit unions.
Several say they'd rather lose their own jobs than see the current system continue.
Several readers have complained about the misleading title - so I put it in quotation marks.
...Now I've outright changed it. Original title: "Obama Saves Economy: Makes Usury Illegal Again".
Apparently Obama is ignoring Senator Sanders call for an end to usury. The truth is, Obama has been a tremendous disappointment in this respect and still needs his "feet held to the fire" - as he used to say. Several participants want ongoing action. I've joined Bernie Sander's Facebook Supporters page, and at the top there's a Post about this diary. Join us!
Thanks goodasgold for correcting an embarrassing error early on.
Tidbits:
Apparently under Islamic Finance, you're not allowed to charge interest.
Likewise, Christianity used to be incompatible with any interest charges. From Jim P:
150 years ago or so Christian churches capitulated to capitalism and the growth of materialism as a competing faith, and redefined the term to mean "unreasonable interest."
One financial expert pointed out a potential downside to ending usury: once interest rates are reasonable, folks with worse credit simply won't be able to get a credit card.