February 26, 2009
My previous posts on the credit crisis have been getting so many hits I’ll weigh in on that topic again with a brief observation and a very simple proposal. First, the observation:
Most of the talking heads attribute the current credit crisis to the housing bubble, the sub-prime loan mess and the securitization of debt of dubious value. But those are effects, not causes. I keep waiting for someone to point out that all three are symptoms of something else: the 1980 repeal of the federal law that restrained usury. The repeal of federal protections against usury created the economically poisonous illusion that investors can readily and reliably obtain high double-digit annual returns, legally, simply by purchasing commoditized debt obligations. Over the next 20 years, the financial services industry chased that illusion like a junkie after a fix, coming up with financial instruments that grew increasingly deranged. But what started it all was the repeal of the usury laws. That lit the fuse. It also dampened interest in more economically productive investment opportunities such as small businesses. Why invest in a small business if you think you can just sit back and collect double digit returns from those wizards on Wall Street? I’m astonished that I am yet to hear a single T.V commentator connect those dots, which are practically sitting on top of one another.
A related observation: legal or illegal, usury does not work, at least not as a practical economic theory. It just doesn’t work. Not over time. It’s like making a horse carry 1000 pounds. The horse dies. And dead horses don’t pay their bills. There we are.
So what happened is that usury was made legal, and then it got securitized.
My modest proposal:
Make usury illegal again.
Reinstate federal protections against usury or develop new protections that set practical and fair limits on the amount of interest banks and other lenders can charge on items like mortgages and credit cards. If investors know the most they can legally make on securities tied to mortgage and consumer debt obligations is in the single-digit neighborhood, there would be no incentive to create toxic pools of debt like those that have clogged up our consumer and small business banking system.
Bringing back the usury laws for mortgages and consumer debt is a critical part of the regulatory medicine required to restore stability and sanity to our banking and financial services sector.