Need money fast? Well, in Idaho, Ohio and Texas, chances are you’ll be paying more than 600-percent annual interest to the company that lends it to you. Across the United States, regulations vary widely as to the amount a payday lender can charge. Apart from a few states where caps on interest rates aim to prevent the debt trap, the cost of borrowing can often top 300 percent.
To understand why ― and why 12 million Americans are relying on short-term, high-interest borrowing to put food on the table ― you have to go back to Sept. 15, 2008.
On that day I stood on New York’s Fifth Avenue and watched a whole era of capitalism end. Lehman Brothers had just gone bust, but on the giant screens that covered its headquarters, the bank’s promo video was still running, showing helicopter shots of canyons, lakes and tropical islands. The subtext of the video was clear: Financial capital gives you the power to soar above ordinary things.
What few people understood was that it also gives you the power to destroy the world economy. All over the world, governments were forced to bail out the banks. Growth collapsed. Those who paid the price were ordinary people: seniors, shareholders, laid-off workers and those whose health care and education suffered as fees and premiums rose.
What did we learn? Ten years on, we have tougher regulations, enforced by central bankers who understand the system is more fragile than we thought back in 2008.
But instead of borrowing less and reducing complexity, we have borrowed more. The global debts of governments, companies and households stood at $97 trillion on the eve of Lehman Brothers’ collapse. It stands at $233 trillion now.
Because central banks saved the real economy, by flooding it with $20 trillion of money they simply invented on their spreadsheets, things feel OK. But the fundamental problem remains: We are using the confected money to work around a deeper problem we have refused to fix. Economists call this problem financialization.
Think of it like this. In my father’s era, the ’60s and ’70s, you went to work, got paid wages in cash, spent most of it in local stores, saved what was left in a bank, and used your bank account to make big purchases, like a fridge or a new car. Today, anyone who behaved like this would be regarded as crazy.
Today, we go to work and get paid wages straight into our bank accounts. But our wages are just a top-up to an ever-expanding portfolio of debt and interest payments. You’re paying bank charges, credit card charges, and interest on borrowing, including your mortgage, your student loan and your car loan.
In my dad’s era, his work helped generate profits for a privately owned factory, which borrowed from a bank to invest. Let’s say, on average, the factory owner made a profit of around 12 percent of sales.
Today, your credit card, student loan, overdraft, mortgage and car loan all generate profits for financial institutions. And, if you are poor, and therefore risky, you will be paying much more than 12-percent interest. Real businesses, from automakers to gym and hotel chains, are there to service the profits of banks. In the 1970s, banks were there to service and supply real businesses.
If we think of capital as “money that generates more money” then, in the space of a lifetime, the global structure of capital has shifted ― from the making of things to the charging of interest. And if you look at the social outcomes ― leaving aside the risk of sudden collapse as in 2008 ― the winners and losers become clear.
Since 1970, in the world’s most advanced economies, the share of income received as wages has fallen from 55 percent to 39 percent, according to a 2017 International Monetary Fund report, while income inequalities within each country have increased.
In my dad’s era, capitalism was a machine for making everybody better off. Financialized capitalism does the opposite: It creates vast wealth at the top, stagnating real wages and, well, just look around Main Street for the rest of the story. Closed-down storefronts mixed with businesses that thrive on poverty: the pawnshop, the payday lender, and the rent-to-buy shops full of overpriced fridges and microwaves.
There is a solution, and 10 years on from Lehman Brothers, people are starting to listen to it. We need to de-financialize our economy ― not so harshly that we have to go back to saving for every major purchase, but enough that we remove the opportunity for people to make money through speculation and sitting on scarce assets and charging exorbitant interest rates to the poorest people.
What we need, throughout the Western world, is a smart reindustrialization program that brings such high-wage jobs and high-value industries back onshore ― allied to social welfare programs paid for by taxing the rich.
And we need to do it not just for sound economic reasons, but to rekindle hope. People in servitude to rising debts, on stagnating wages, can easily lose hope. People who can see the benefits of hard work and rising productivity in the form of rising wages and affordable homes tend to look to the future, not the past.
Paul Mason is a British commentator, radio personality and former economics editor for BBC Two’s “Newsnight” and Channel 4 news.
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