Company stores are a method of debt bondage imposed upon workers trapped within the grip of a local monopoly. The archetypal company store is located in an isolated "company town", such as a third-world sweatshop. Many times over the past 500 years, laws have eliminated company stores and company towns (e.g., the British Truck Acts). But over the last 30 years, we have witnessed the emergence of America as a "company country", in which a monopoly over finance has allowed changes to the laws that have reduced the majority of the American population to debt bondage.
To see this clearly, I highly recommend the article in this month's Harper's Magazine by Thomas Geoghegan, the labor historian and political candidate. He boils the cause of the current financial crisis down to one simple fact: the legalization of usury thirty years ago.
The problem was not that we "deregulated the New Deal" but that we deregulated a much older, even ancient set of laws...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...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: (first) the financial sector bloats up....capital gushes out of manufacturing and into banking. When banks get 25 to 30% on credit cards, and 500 or more percent on payday loans, capital flees from honest pursuits, like auto manufacturing...Second, as we shifted capital out of globally competitive manufacturing, we ran bigger trade deficits. Third, as we ran bigger trade deficits, we required bigger inflows of foreign capital. We had "cheap money" flooding in from China, Saudi Arabia, and even the Fourth World. Fourth, the banks got even more money, and they didn't even consider putting it back into manufacturing. They stuffed it into derivatives and other forms of gambling...It was what scientists call an autocatalytic reaction. It just kept going.
...Along with the collapse of anti-usury laws, we have also seen the deregulation of virtually everything else bankers do. Now banking is a fee-based business, too. First, people run up huge debt, and then they start making overdrafts and bouncing checks, and then come the hidden fees. There are overdraft fees, fraud-detection, and fees the banks just make up for no reason at all.
- Thomas Geoghegan, "Infinite Debt", Harper's Magazine, April 2009.
This analysis is simultaneously deep and accessible, learned and common-sensical, it is brilliant. Like all great insights, you say to yourself "That's so obvious. Why didn't I think of that?" You must read the article. The rest of this diary is just some thoughts that Mr. Geoghegan's article triggered.
What is the discount rate for human beings?
We have watched the economic classes of America reduced to penury, beginning with the poorest class and now reaching the professional middle class. It is as though the American population were placed on board a multi-stage rocket whose purpose has been to put the financial elites into an economic orbit - a place where they do nothing but never fall. As long as your stage's financial fuel hadn't yet been consumed, you thought you were along for the whole ride. That's my personal analogy.
To put this analogy of the deliberate destruction of the American economy into terms that an economist might recognize, we have the insights of Herman Daly on the infamous "discount rate". That is, the means by which we assign valuation to events that might occur in the future. The abuse of the discount rate was at the heart of the derivatives madness.
Present-value maximization says to kill (the goose that lays the golden eggs) under certain circumstances...Any commercially valuable species that is not too expensive to capture, and whose rate of reproduction for all population sizes remains below the interest rate, will be exploited to extinction. If the interest rate represents a kind of average of the biological growth rates of all exploited species then we have a truly destructive process. As slower growing species are eliminated the average growth rate of the remaining species (and the interest rate) will increase. Some species will always be below average, and thus candidates for extinction, until there is only one remaining species! Of course there are other factors that influence the interest rate and will likely stop this process short of absurdity...
economists argue (that) present-value maximization is socially beneficial since value gained is greater than value lost, other things equal. The problem is that other things are not equal...if we know anything at all about interest rates, we know that they are variable and uncertain - far more so than biological...Following present-value maximization as a general rule appears to be a case of micro rationality adding up to macro irrationality.
- Herman Daly & John Cobb, Jr, "For the Common Good"
( I want to give a reference to Kossack "Turing" for his diary "Economic Fundamentalism: How Reagan and Bush Killed the Golden Goose" http://www.dailykos.com/... ) which brings Adam Smith into the picture.)
The over-fishing of species is the perfect analogy for the usurious exploitation of the various classes of Americans. In both cases the demands of a profit rate set by some ivory tower financiers has disastrous consequences in the flesh and blood world. In America, each class went economically extinct when its ability to service debt fell below the "harvest" by financial entities clawing to meet their quarterly numbers.
As the last class below the financial elites, the professional class, is devoured by layoffs, debt deflation, and loss of savings in the meltdown, the financial elites will have achieved their "single species" ecosystem. The remaining species is the new peons. A global class of interchangable, disposable workers. Marx's reserve army of the unemployed with cell phones.
Prisons
Of course, this class of peons being hopeless and uneducated, they must be managed for their elite masters. That is why the last thirty years have also seen the rise of the Prison Industrial Complex within the U.S. We now have the highest rate of incarceration on the planet - right here in the "land of the free". Most prisoners are jailed for non-violent drug possession charges and most of them are minorities. That people with no economic future would turn to drugs for some pleasure is no surprise. That the drug laws would be enforced primarily on the minority poor is also no surprise. That is why many call the failed War on Drugs "Jim Crow II".
Voices like the Economist magazine, the former President of Mexico, and many other mainstream somebodies have called for an end to the punishment-only approach to drug addiction. But, I don't see it ending soon. The prison business is extremely lucrative and corrupt. We just had the Pennsylvania judge who threw innocent people in jail for a kickback. We have private prisons that are deathtraps for the inmates. The inside of our jails are beyond the law. This is part of the machinery of exploitation and class extinction.
That said, the jails are not beyond the reach of corporations. In true "company store" tradition, they overcharge inmates for everything from phone calls to clothing. They use prison sweat labor to compete in the free market. All in all, it is sickening to view America from this vantage point.
Spooks
Another exponential growth industry over the last thirty years has been the illegal shenanigans of secret intelligence agencies, paid for by the same U.S. taxpayers being driven to extinction. We have had Iran-Contra and BCCI. We have had illegal wiretaps, secret kidnappings, torture, assassinations, beyond-the-law mercenary armies - all excused by the "global war on terror" and the mantra of "privatization".
Privatization of military and intelligence functions is a step on the road to dictatorship by the financial elites. In "The Shadow Factory" by James Bamford, we learn that the NSA has been in bed with Verizon and AT&T since 911 and has outsourced its wiretapping to various Israeli high-tech companies. The line between government and industrial spying is as blurred as the line between national and private armies.
The Bottom Line
We will fail in our attempts to reform banking until we cut off the flow of money that makes the banks so politically and economically powerful - the proceeds of usury. As long as usury continues, the trajectory of our nation's descent into the hell of private prisons and semi-private spying as the only "industries" in a country stripped of manufacturing will continue unabated.
Go read Tom Geoghegan's article!