The role of the US Supreme Court in sowing the seeds for last year’s banking collapse has been largely ignored, writes Joseph Poprzeczny.
Since the near total collapse of America’s banking sector last October, the search for culprits has gathered pace. All the obvious suspects have so far been named – corporate capitalism, greed and failure to regulate.
However, the role of the US Supreme Court has been largely ignored. But we can be certain that when the definitive histories of the global financial crisis 2008 are written, the court will in all likelihood be severely blamed.
The seeds of last year’s banking collapse, according to Harvard University law school Professor Elizabeth Warren, can be traced back to 1978, the year the Supreme Court ruled on the largely forgotten Marquette Bank of Minneapolis v. First of Omaha Service Corp., case.
To grasp the significance of this case, it is important to realise that for centuries Europe and colonial America protected borrowers by setting limits to what lenders could charge. Usury laws, more recently referred to as usury caps, were part and parcel of commercial life in both medieval European and colonial America.
However, this commenced to change on October 31, 1978, the day a particular group of bank-financed lawyers appeared before the Supreme Court. On December 18, the court ruled that American national banks could charge the highest interest rate allowed in a particular bank’s home state to customers living anywhere in America.
Michael Donovan, a Philadelphia-based consumer affairs lawyer, said: “They [national banks] can export rates to other states and override state law limits.”
In other words, credit card interest rates applying in a bank’s home state would prevail on borrowers living in states where stringent usury caps existed.
Florida-based finance writer Lucy Lazarony reported that, after the Supreme Court ruling, major credit card companies “began relocating to states with liberal or no usury laws”.
She said: “New York-based powerhouse Citibank moved its credit card business to South Dakota in 1981…. To hang on to the credit card business, many other states loosened state usury limits.”
Professor Elizabeth Warren, author of The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke (Basic Books, 2003), has long been critical of the idea that household indebtedness somehow helps kick along the economy.
She says that each of America’s 117 million families is a small economic unit. If these were safeguarded, then Wall Street would itself be less vulnerable to upheavals and crises.
She highlighted these problems years before the onset of the global financial crisis, in an interview with American PBS television’s Frontline program on September 20, 2004.
She said that 70 per cent of American families in 2003 said that they were “carrying so much debt” that it was “making their family lives unhappy”.
She continued: “Middle-class Americans, hard working, play-by-the-rules Americans, Americans who lost a job, who don’t have health insurance, who are in the middle of a divorce – those are the Americans who are carrying enormous credit card debts.”
This, she said, was historically out of character for Americans because their ancestors had tended to shun indebtedness.
“Why do you think people left Europe to come to the United States?” she asked. “They left because they were in debt.
“We like to describe it as – ‘Oh, it was about religious freedom’. No, it was about debt. They were looking for a way to escape their debts.”
Last year, Professor Warren testified before the pre-Christmas session of the Congressional Oversight Panel, created under the Emergency Economy Stabilization Act (2008).
She said that, 30 years ago, the average American saved 10 per cent of net earnings, whereas today a comparable family – even with both husband and wife in the paid workforce – carries debt.
Furthermore, the typical credit card contract in 1971 had only one-and-a-half pages of terms and conditions she said. Today’s standard American contracts have 31 pages of tiny print.
These extra pages carry what Warren dubs “tricks and traps”, all sorts of extra costs, penalties and charges.
According to Warren, American borrowers are denied the type of stringent protection they take for granted as consumers of processed food, electrical goods, and other goods and services.
In her 2004 interview, she said that after credit was deregulated in the early 1980s, a credit card company would lend to someone at 9.9 per cent interest, but only until the borrower’s circumstances changed, after which the company would feel free to double or treble the interest charged.
Says Warren: “Well, you know… nobody signs contracts to buy things that say, ‘I’m going to pay you $1200 for the big-screen TV unless you decide, in another month or two months, that it should really be $3600 or $4200 or $4800.’ But that’s precisely how credit card contracts are written today.”
– Joseph Poprzeczny is a Perth-based historical researcher and journalist.