freeing the country from the credit trap


Freddie deBoer used to blog at, and may again someday. Now he blogs here.

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28 Responses

  1. Francis says:

    Excellent post. It dovetails nicely with a new article in the Atlantic by a former IMF economist. (Link here; hat tip to K. Drum.)

    As best I can tell, as long as finance is promising rates of return greater than the increase in GDP, we’re in an unsustainable situation of ever-increasing debt. A few people can beat the market, because their gains are offset by others’ losses. But the sector as a whole simply cannot outperform the economy as a whole.Report

  2. E.D. Kain says:

    Sort of ponzi-like, no?

    Really great post, Freddie. I’ve long been of the opinion that usury laws need to be tightened up. Similarly, interest rate manipulation by the Federal Reserve can cause those at the top who get the money first to pay a lot less for it, and then by the time it reaches normal consumers with credit cards and payday loans the rates are much, much higher. It furthers disparity and devalues money.

    Have you read at all about Islamic finance which prohibits usury?Report

  3. Antiquated Tory says:

    It’s true that Islamic finance prohibits usury. It’s also true that Islamic restrictions on finance have helped keep economic growth in Moslem countries to rates far below that of population growth. See the archives at, particularly the posts by The Lounsbury, for the joy of actually having to deal with Islamic finance.
    Anyway, Freddie, it’s an interesting post indeed. My main quibble regards your points on globalization. Partly this is because I’m working in Prague for half the money my position pays in America but for a comparable and in some ways superior standard of living. There are a lot of small countries out here that, barring foreign direct investment, would be poor forever. I don’t think it’s a good idea to go blaming other countries’ comparative advantages for the problems of one’s own country, and I think that stacking the deck to eliminate another country’s comparative advantage too often only leads to stagnation in one’s own country and poverty in the other. See UK in the 70s or India under the Indian Way. I also think that “globalization” has by now so thoroughly escaped from Pandora’s Box that no gov’t really has the power to stuff it back in.
    At the same time, I think the Free Trade mantra of the developed countries is more than a bit hypocritical and amnesiac. No country supports free trade while it is developing its own industries. It’s only when its economy is a world-beater that suddenly “free trade” becomes a mantra. Note the 19th cent. “conversion” to free trade by formerly mercantilist Britain.
    Other than this quibble, which is more something I’d like to talk about with you over some pints than an actual disagreement, this is a most interesting point. Have you noted that the other major basket case of this crisis, the UK, also has no usury laws?Report

  4. cwk says:

    I agree with most of this, but you lose me a bit in the paragraph on globalization. While I bow to no one in mocking the globalization-as-cure-all pollyannaism of Tom Friedman, I think you overstate things too far the other direction. You claim “…we produce very little of actual value”, but that seems drastically overstated. I’ll grant you the lack of value in the sort of Wall Street chicanery that got us into this mess, but the financial sector is only a small part of GDP. What other industries are valueless I wonder, and why?

    Then you finish up saying “we need to have policies and laws that benefit our manufacturing sectors”, which also makes me wonder why. What is the justification for privileging manufacturing over any other sector of the economy? Are people in health care, software, architecture, construction, media, etc, not doing “real work”, not producing real value? Why are the products of their labor any less important than manufactured goods? And what does it even mean to benefit the manufacturing sector anyway? We already are the world’s largest manufacturer, so how much more assistance do you want?

    Now it’s true that manufacturing jobs are down, and I think that’s what worries you. But the reasons for this are based in technology; I’m not sure what sort of government policy would make manufacturing work more labor-intensive, or why it would be a good idea. Of course, once upon a time people were incredibly worried that the number of agricultural jobs were going down dramatically, but this didn’t destroy the country. I may be off-base, but it seems to me you’re romanticizing manufacturing work a bit. I want there to be plenty of middle-class jobs too, but I hold no particular attachment to what sector of the economy they come from. Just as a New Yorker is just as much of a “real American” as a Hoosier such as myself, a nurse is just as much of a value-creating worker as someone on an assembly line.Report

  5. Bruce Smith says:

    Really Good Article! Well Done! The fact that Judge Brennan’s decision was not over-turned by any subsequent Federal administration tends to suggest that over the last thirty years there has been a pretty good “capture” by the “Natural Economy” idea of Friedrich Hayek and Milton Friedman that interference by government in business dealings was a bad idea. Not convinced about the beefing up of unionism though as a long term thing. As a former union shop steward it was hard work keeping people’s interest in a permanent revolution of maintaining real wage levels. I much prefer the Distributivist approach as the long term answer to maintaining demand in the economy.Report

  6. Antiquated Tory:

    I can’t comment on the substance of this post (thought-provoking though it is) for conflict of interest reasons. But….you’re in Prague? My wife and I are visiting there for a few days in May – any advice on things to do, places to go that are away from the tourist traps? If you’d prefer, you can e-mail me: publiusendures@yahoo.comReport

  7. Bruce Smith says:

    Linking up with Thomas Geoghegan’s interview is Simon Johnson’s article “The Quiet Coup” in the latest Atlantic Monthly May 2009.Report

  8. Rortybomb says:

    Fantastic post – thanks for bringing this to light.Report

  9. Nob Akimoto says:

    Excellent post, and it’s always nice to see Geoghegan get some more exposure. (All’s the greater pity that he didn’t win the 5th district seat.)

    He also discussed his Harper’s piece on Eight-Forty-Eight yesterday morning, though in a much shorter format than in the Democracy Now piece. (Which you can find: here if you say for some bizarre reason you can’t watch the DN piece.)Report

  10. Antiquated Tory says:

    I forwarded this post to a friend of mine in the business, and he answered:

    "I don't buy it. The returns people care about are returns on equity. If the financial sector grows, competing banks will lead to greater competition for lending business, leading margins to fall to the point where their return on equity is something closer to normal (the amount of equity large banks had on their books prior to the current huge losses was quite large in absolute terms – even if it was levered 30:1). Returns on assets in manufacturing may be 5 or 6%, but if the manufacturing company is levered 1:1 then the return on equity could be double that – matching up with banks.

    "Usury laws could be of benefit by reducing the ability to invest in overly risky ventures (where you need the planned return to be high in order to offset higher risks of default). Forced risk aversion would be good if banks were more easily swayed by the return than they were worried about the risk of default.

    "Also, note that the housing bubble explosion was when people stopped being able to afford to continue to pay loans where the introductory rate was something like 1 or 2%. No usury law is ever going to block that – that's overly cheap lending, not overly expensive lending." Report

  11. Steve Sailer says:

    Dear Freddie:

    Thanks for such a generous summary of an important article.

    A couple of points that Geoghegan missed on what caused the anti-anti-usury movement of the 1970s onward:

    First, the inflation of the 1970s made the old anti-usury laws impractical. If interest rates were capped at, say, 9% and prices were expected to rise 10% over the next year, then nobody would lend. So, getting rid of the old interest rate cap laws was justified as simply a practical expedient for adapting to an era of high inflation. (Of course, they weren't put back in place when inflation came back down.)

    Second, opposition to usury was widely seen as anti-Semitic (e.g., Henry Ford's war on New York banks), so it became politically untenable after about 1967. Report

    • Indeed, it would be useful to review how often the Wall Street Journal editorial page implied that critics of Mike Milken, the key figure in eliminating traditional limits on interest rates on corporate bonds, were in some way anti-Semitic. Report

  12. malcolm says:

    i can just hear the 'free market' morons now:

    " it will lead to more black market behavior'
    translation: we have no respect for the law unless its convenient.

    "it is anti'freemarket'
    Translation: We get special privileges from the government and the quasi private fed, but any attempt to attach regulation to those priveldges is 'restricting the free market' in other words, we want federal money lent at a set below market rate, we want that ability to be limited to us, but we want to charge whatever interest rate we want.
    Why can't I, as a consumer, just borrow money from the fed directly, Why do I have ot got o a bank? Report

  13. donald williams says:

    Great article- I have long been against globalism, despite being educated globally.
    I have only met a few economists who "get" this.

    The other problem is the privileged position that real estate occupies in our lending/tax codes.
    Banks lend on assets, they are not venture capitalists. A failed widget compamy has very little value,
    and requires specialised knowledge to exploit. Real estate can be sold to anyone via a simple auction.
    This alone creates a bias toward real estate investing, as capital is more easily available for this type
    of investment.

    But why do we allow interest on real estate loans to be deductible? And why do we allow maintenance expenses
    to be deductible? The purpose of maintenance is to stop the depreciation of a property. We allow maintenance
    expenses to be written off, whose sole purpose is to stop depreciation from occuring, as well as allow (phantom)
    depreciation to offset income!(And every real estate investor believes his property will appreciate,
    or he would rent, rather than buy, if given a choice. We know depreciation (in the tax code) was designed for
    manufacturing assets (assets used in manufacturing- the true basis of wealth)
    that really do depreciate- it is a tax dodge to apply it to real estate- a legal tax dodge, but a dodge.
    This creates enormous tax advantages which favor real estate investors.

    In a "fair" economy, the number of people who are "rich" would be distributed
    fairly evenly across the various ways of getting rich- manufacturing, real estate investing, lending, etc.
    The disproportionate number of real estate billionaires show that the game is "unfair". This is because our tax
    codes allow and encourage real estate as a tax dodge. The wealthy had it set up this way to get around the tax laws.

    This creates an asset class- real estate- which attracts an inordinate amount of investment capital,
    without adding much in the way of "real" (as opposed to paper) wealth.This starves the rest of the
    economy of investment capital, which means that they have to show much higher returns, and we're back
    to your usury argument.

  14. Whig says:

    IMHO, this article is pretty much nonsense. Your thesis rests on a supposed crowding out effect whereby finance took the productive captial of the country at the expense of manufacturing. That thesis is unequivocally incorrect. Until last year there was so much captial available that the threshold to get debt or equity financing was lower than at any point over the last century. A good idea in manufacturing or finance could get find debt or equity financing more readily than at any point in our history.


  15. Whig says:

    Why do you think unionism is the answer? Most manufacturing jobs left this country because its cheaper to pay Chinese labourers a fraction of US union scale wages. GM and Chrysler are going into bankruptcy because they overpaid and overpromised to the UAW for years. What a great idea, more the same for the rest of the US manufacturers!

    Innovation drives profit. New ideas for new products create profit. Innovation in manufacturing techniques drive profit. IDEAS drive profit. Picket lines and union demands do not. If you want prosperity for the middle class, then invest in education and lower the barriers of entry for new businesses. You won't get jobs/wage growth because you are good at marching in a picket line.

  16. Freddie says:

    Innovation drives profit. New ideas for new products create profit. Innovation in manufacturing techniques drive profit. IDEAS drive profit. Picket lines and union demands do not. If you want prosperity for the middle class, then invest in education and lower the barriers of entry for new businesses. You won't get jobs/wage growth because you are good at marching in a picket line.

    I'd say that the claim that "Ideas drive profit" is a good summation of the thinking that drove us to this crisis. What drives profit is the production and marketing of valuable goods and services that produces real growth. What destroyed our economy is more and more clever ideas about how to say "I'll pay you back later." Report

    • whig in reply to Freddie says:

      I'm sorry, I beg to differ. The source of real wealth is innovation. Maunfacturing or financial makes little difference. Wall st. and investors lost trillions on bad debt. Amazing but true, markets self regulate. Report

  17. malcolm says:

    Mr. Whig:: manufacturing has been left of fend for itself AND be forced into relationships with destructive unions by the government. On the other hand WALL STREET , courtesy of the government got acess to special interest rates, 'free money', exclusive licenesens and of course, bail out after bailout every time they became too big to fail. Before I hear another wall street type advocate free markets FOR US, I'd like to see you guys practice it a little yourselves.


  18. malcolm says:

    …and I would add, the only 'victors' of free trade are those countries which practiced stealth or overt restriction – like China – and yet every time they complain about any measure to protect our industry, the WJS et all prints their complaints verbatim as if they were legitimate. Report

  19. malclm says:

    ""Ideas drive profit" is a good summation of the thinking that drove us to this crisis. What drives profit is the production and marketing of valuable goods and services that produces real growth"
    What! haven't you heard of the 'creative class' and " whole new mind" it's a whole new paradigm, the old rules don't apply! Report

  20. Whig says:

    Wall St. has been dismantled. Govt ife support is bad for the country and bad for the street. The proper course would be an orderly unwind of firms deemed too large to fail and regulations that prohibit firms from growing too large to threaten the economy going forward. The option to fail must be implicit to avoid moral hazard. Our system has failed. Report

  21. whig says:

    China's price was to buy trillions in US govt debt. How long until the US tells them they can't or won't pay? Who wins then? Report

    • nativist in reply to whig says:

      Quite right. The recent questioning of the role of the dollar by the Chinese premier was prompted solely by the fear that in inflating it's money supply
      at double digit rates, the U.S. is effectiviely repudiating it's debt. If 10 year
      Treasuries bought today by China buy only 1/2 the goods in 2019 that they
      buy today, China and all other creditors of the U.S. are losers. Report