From Democracy Now March 24, 2009. Amy Goodman talked to recent House candidate Thomas Geoghegan about how the dismantling of usury laws is highly responsible for the destruction of the American economy.
The Obama administration unveils its $1 trillion plan to buy toxic assets from banks and restore the financial system. But should we return to the way it was? We speak with Chicago lawyer Thomas Geoghegan about his new Harper’s Magazine cover story, “Infinite Debt: How Unlimited Interest Rates Destroyed the Economy.” Geoghegan writes, “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.”
Transcript below the fold.
AMY GOODMAN: The Obama administration has unveiled its plan to stabilize the banking industry. On Monday, Treasury Secretary Timothy Geithner announced the government plan to buy up as much as $1 trillion in troubled mortgages and other risky assets from banks. Wall Street was certainly happy with the plan with all the major stock indexes soaring as soon as the market opened. The Dow Jones Industrial Average ended the day up nearly 500 points. Investors saw the plan as a way to rescue the US financial system, clearing a path to recovery from what many have described as the worst economic crisis since the Great Depression.
The crisis has been largely blamed on deregulation of the financial industry and lax government oversight. But a new article in the latest issue of Harper’s Magazine argues otherwise. It reads, quote, “no amount of New Deal regulation or SEC-watching could have stopped what happened…The problem was not that we ‘deregulated the New Deal’ but that we deregulated a much older, even ancient, set of laws.” The article goes on to say, quote, “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.”
The article in Harper’s Magazine is written by Thomas Geoghegan, a Chicago-based labor lawyer, recent congressional candidate and author of many books. His most recent is See You in Court: How the Right Made America a Lawsuit Nation. His Harper’s article is called “Infinite Debt: How Unlimited Interest Rates Destroyed the Economy.” Thomas Geoghegan joins us from Chicago.
We welcome you to Democracy Now!
THOMAS GEOGHEGAN: Hi, Amy.
AMY GOODMAN: It’s good to have you with us. OK, how did we get here? Or how did they get us in this mess?
THOMAS GEOGHEGAN: In the article, I talk—that appeared in Harper’s, I’ve talked about the fact that we’ve not focused enough on the big deregulation that precedes all other deregulations, and that’s the ceiling that has existed on the financial sector since time immemorial on the amount of interest that banks can get from their clients, their customers, their depositors. Historically, and even up through movies like It’s a Wonderful Life with Frank Capra and Mr. Potter and George Bailey, the interest rates in this country were capped at eight percent, nine percent. In the 1970s, we began to deregulate this, and then we had a massive big bang with a Supreme Court case that effectively knocked out all the interest rate caps. And we have today, taken as common, that banks can charge 17, 18, 19, 30, 35 percent, not to mention payday lenders charging 200, 300, 400 percent in states like Illinois, California [inaudible]—
AMY GOODMAN: Tom Geoghegan, let’s go back to that 1978 case, Marquette National Bank v. First of Omaha Service Corp. Explain the significance of it. What was it?
THOMAS GEOGHEGAN: Sure, that’s the Brown versus Board of Deregulation for the financial sector. The case—Justice Brennan, of all people, opinion said that banks that operate—out-of-state banks that were subject to the National Banking Act of 1864, signed by President Lincoln in the middle of the Wilderness Campaign, effectively preempted any state regulation capping the interest rates of those banks when they sent their credit cards in from out of state. Now, back in 1864, banks in Delaware weren’t operating out in Nebraska or handing out credit cards across the country, and there was no such thing as Visa or MasterCard.
The effect of this was that the big national banks were not subject to any state usury law, because the Banking Act of 1864 had no interest rate cap on it, not contemplating the kind of situation that we’re in today. And in effect, this sealed what had been a trend throughout the country, which is lifting these interest rate caps for banks and giving consumers easy credit on the premise that they would just pay tons and tons of interest so that the banks were protected if the loan weren’t repaid. In fact, the banks had incentive to hand out credit cards and hope that the loans would not be repaid, because the interest rates on these credit cards were so high.
You know, if you are Mr. Potter in It’s a Wonderful Life and can only get six percent, seven percent on your loan, you want the loan to be repaid. Moral character is important. You want to scrutinize everybody very carefully. But if you’re able to charge 30 percent or, in a payday lender case, 200 or 300 percent, you don’t care so much if the loan—in fact, you actually want the loan not to be repaid. You want people to go into debt. You want to accumulate this interest. And this addicted the financial sector to very, very, very high rates of return compared to what investors were used to getting in the real economy, the manufacturing sector, General Motors, which would give piddling five, six, seven percent returns.
So the capital in this country began to shift in the financial sector. That’s why the financial sector began to bloat up. That’s why we ended up, by 2006, having a third of all profits going into the banks and the financial firms and not into the real economy.
AMY GOODMAN: Thomas Geoghegan is our guest. His piece in the latest issue of Harper’s Magazine, “Infinite Debt: How Unlimited Interest Rates Destroyed the Economy." We’ll be back with him in a minute.
You can watch or read the entire interview at Democracy Now's site.
h/t Kathy for bringing this to my attention.