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The Consequences of (Yet Again) Failing to Stand Up to the Banks

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The Senate just stopped limits on credit card rates. Sometimes it takes a socialist to say the obvious:

"When banks are charging 30 percent interest rates, they are not making credit available," said Mr. Sanders, who noted credit unions are limited to 15 percent. "They are engaged in loan-sharking."

The banks have been given, loaned and guaranteed trillions. They are given access to money at very close to zero percent. They then lend it out at much much higher rates. As Sanders notes, 1/3 of credit card holders are being charged more than 20%, some as high as 40%.

That's usury. More to the point, it means that for all intents and purposes they aren't making credit available.

Does anyone wonder why consumer spending dropped again? Would you borrow at 20% to 40% to buy anything other than food or pay for housing, when jobs are still being lost at over half a million a month? No one with any sense would.

Months ago I noted that the simplest way to get banks lending again would be to either have the Fed lend directly to consumers, or have the FDIC take over a major bank like Citigroup or Bank of America and use that bank to lend at decent rates.

Instead of doing that, the Bush and then Obama administrations decided to give money, guarantees, loans and nearly free money to banks which were impaired and which needed to gouge their customers as hard as they could to make a profit. The result is that treasury secretary Timothy Geithner keeps saying the financial sector is fine, while more Americans lose jobs, consumer spending drops, banks won't allow homeowners to get out from under bad mortgages even when it would save the bank money, and a new round of foreclosures is on its way.

On top of that, the mark to market rule was changed to allow banks to keep assets on their books at mark to model (ie. mark to fantasy) values.

All of this money will have to be paid back eventually. The strategy is simple enough.

1) Give the banks money.

2) Let them not acknowledge as much of their losses as possible.

3) Allow them to gouge taxpayers for as much as possible, to dig themselves out of the hole over a number of years.

The end result of this is going to be Japanification--at best. Not a "lost decade" as many folks have said, but a semi-permanent wavering between slight job gains and job losses, where a good economy never, ever, comes back. And because the US, unlike Japan, is not a net exporter, it's questionable how long Japanification can work in the US, in any case.

The banks took trillions of dollars of losses. The refusal to make them take their losses; the refusal to wind up any of the big banks; the refusal to recognize that what is important isn't the banking system but what the banking system does, and thus the unwillingness to cut past the big banks and lend directly means that those trillions of dollars of losses are going to have to be paid back by consumers and taxpayers. You will pay. You will pay not just in high interest rates, but in lower wages, and for many of you, a lack of jobs. The economy will not, before the next recession after this downturn, return to the same level of employment the US had before this crisis.

All of this because neither party, and neither President, had what it took to stand up to the banks.

(What a good policy would have looked like.)