Thursday, September 27, 2012

Antidiscrimination + Deregulation Unleashed the Usury Beast

Living through the 2008 Financial Crisis and its lingering effects, I've read up on other panics, depressions, crashes and systems meant for maximum stability that create instability. One thing that is missing in the analysis of the current economic mess is the addition of post-68 liberalism, full of good intentions but bad results, to the common theme through time of human greed. There have been bubbles in the past. There were panics and crashes, but most of them centered on schemes for making money. Few ever had a social touch to them because socialism itself was a 19th century invention and bankers had minimal regulations. The centralization of power in the USA during FDR's reign combined with post-68 social justice allowed the banks an opportunity to shake off the chains of regulation and tradition of usury laws to plunder the nation under the guise of the 'democratization of credit'.

America has always had a strong anti-centralization streak, as well as a distrust of banks. Even when the Federal Reserve was created in 1913 it had regional banks with some autonomy. Over time, the FED gained more and more power through different crisis points, and the federal government became more intertwined with the FED. Durign the crash of 1929, power + responsibility shifted to the FED chairman rather than allow the NY Fed handle the panic. Truman sold out the chairman of the FED when he wouldn't play along with bankster wishes. The final consolidation happened in 1980. After decades of Glass-Steagall + heavy regulation, how did the FED and banksters get their way with repealing anti-usury laws?

The first step in the long march was the Civil Rights Commission in the Kennedy Admin finding that blacks had to make higher down payments or pay on quicker schedules. This was considered discriminatory. No attention was paid to borrower history or the financial history of black borrowers. FICO scores weren't even formulated until 1970, so there was no easy, impartial scoring system for banks to use. This injustice had to be addressed. In 1974, the US passed the Equal Credit Opportunity Act, which made the act of discriminating on basis fo gender, race, etc subject to a fine. The Home Mortgage Disclosure Act followed in 1975 that allowed the FED to track mortgage lending. The problem of redlining districts, where banks discriminated against poor blacks was out in the open, which created the need for the Community Reinvestment Act. Social justice would find a way and now banks HAD to lend to poor blacks (in 1977 blacks were the only oppressed minority of any size if you look at the US census). The good and righteous had triumphed for the poor to now have access to loans that they would easily pay back just as well as whites in their blank slatist minds.

Banks had a completely reasonable economic defense for not lending to poor risk: anti-usury laws by the states that dated back to a law from the Civil War. With states setting anti-usury limits for lending, they couldn't charge a rate higher than say 12%. Banks would have lent to blacks at the same payment schedules or down payments as whites if they could have charged 15-20%. The banks were legally capped at what they could charge and since interest rate implies the risk of the borrower, the banks were handcuffed. The banks would not take this sudden legal requirement to lend to blacks, who were poorer on average, without special rules to protect their lending. The banks worked this in two ways. First was the court case where the US Supreme Court unanimously sided with the banks that said nationally chartered banks were not subject to state anti-usury laws. Second came the push for deregulation which kicked off with the Depository Institutions Deregulation Act in 1980.

Banks were going to serve the gods of social justice only if they got their proper interest. The DID act of 1980 was pitched to the public as a way for banks to pay savers more money for savings accounts. Please see President Carter's words when signing it into law. All about savers. No words about the sudden repeal of usury laws. Talk about a whitewash of a law. This law repealed the usury statutes, made all banks suddenly subject to the FED and only allowed compliant banks to merge or perform acquisitions. States followed shortly by repealing individual usury laws or raising caps. This allowed for loans to 'discriminated' groups to flow at ridiculous rates previously considered loan shark levels. This also kicked off the credit card industry. By raising the interest rates allowed, credit card companies could not only lend to minorities, but they could target young people, college kids, the unemployed, whatever, it didn't matter because now you could charge the rate you felt was right for the risk. This also forced banks to merge as scale could create greater pools for deposits, which meant lending at more competitive rates. Bank consolidation has been raging for decades since to the point where the top 10 banks in the US control 77% of all financial assets.

The most remarkable thing about this change, is the power of antidiscrimination to radically change a concept that had existed for centuries. Anti-usury law and feelings are widespread around the globe. Most religions had codes against it, and even when money lending became widespread in the English speaking world, there were still caps to the rate of interest a lender could charge. A deep seated anti-usury feeling in our culture was overturned because the banks were forced to make bad loans on riskier clients. These clients were protected by antidiscrimination crusades that in other fields like education, crime, school discipline, cognitive tests, illegitimacy, deny the results of the observable world. In the financial world, there are two schools of thought: 1. there is a rate for every risk and 2. some risks are immeasurable. Because of usury limits, the banks couldn't charge the appropriate rate for a risk so they did not lend. Forced to lend, the banks would demand the freedom to charge the appropriate interest rate. The democratization of credit that started in the 1980s peaked 25 years later with vegetable pickers getting $700,000 mortgages. Must lend; we can't even be construed as discriminating against blacks! That doesn't make as much sense as the banks saying, "Thank God we can charge higher rates now and we'll use this new fangled FICO score to charge blacks more anyway!"

The entire deregulation avalanche can't be blamed on the CRA and the moral crusade for lending to blacks. The repeal of anti-usury laws cannot solely be blamed on the CRA as the 70s inflation monster had to be killed. The 70s inflation was simultaneously hurting consumers with raw material cost increases and crushing producers through input costs as well as labor cost increases. The federal government would not reduce expenditures as rates jumped as it might cause a recession, so Volcker had to raise rates to force a recession. Many experts have written on that, but no one has mentioned how banks were forced to lend more to risky clients than they could not charge the appropriate rate of interest, forcing the courts + governments in the US to repeal anti-usury laws. The liberals fighting for social justice had no clue how this would open the front door to banks running everyone up at interest rates long considered excessive and criminal. It is just another failure on their part to see their fight and intentions carried to their conclusions.

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