Steve Waldman: First, Let’s Shoot All the Lenders

Steve Waldman offers a radical and unconventional cure to our financial mess.

Stop lending.

Waldman is deadly serious and thinks our attachment to lending is based on dangerously flawed premises:

I am glad that the banks, for all the hundreds of billions of dollars we are giving them, are not lending. That is not because I want banks to improve the quality of their balance sheets. On the contrary, I don’t want banks at all, at least not banks anything like what we’ve had….

But credit is the lifeblood of a capitalist economy, right? I keep hearing that line. It’s a dumb line.

Credit, also known as debt, is one of several arrangements by which a party with the power to command resources but lacking aptitude or interest in managing a productive enterprise delegates wealth to another party who is capable of creating value but unable to command sufficient resources. You would be forgiven for not noticing, given how habitually we misuse credit, but supplying credit is really just a subspecies of the practice that used to be called “investing”. There are a variety of other arrangements that serve the same economic function. Perhaps you have heard the terms like “common stock” and “cumulative preferred equity”?

In fact, credit is to investing what heroin is to painkillers: Unusually appealing, in a certain way. Hard to kick once you’re on it. Almost certain to, um, cause problems, eventually. Our overall goal ought not be to kickstart the credit economy, but to kick the habit and move towards financing arrangements that are more equity-like than debt-like. That’s going to be hard to do, because historically, we’ve subsidized the hell out of debt financing, especially bank credit, and alternatives are underdeveloped.

But with the exception of war, no still-practiced human institution provokes catastrophe as regularly or as grandly as the misuse of debt. We ought to phase out banks as we’ve known them since before Bagehot’s time, and move to a regime of what are lately referred to as “narrow banks” (banks that lend only to the government that issues the currency of their deposits). We should encourage the development fine-grained equity markets and local-market investment funds to replace bank financing.

The rush to ramp up “consumer credit” is particularly dumb. Usually, financial investing involves funding wealth generating projects in exchange for a share of the anticipated wealth. Consumer credit funds current consumption in exchange for a share of, um, what exactly?

In theory, there’s a good answer: consumer credit funds current consumption in exchange for a share of anticipated future wealth that is believed to be endowed already. Economists talk about consumption smoothing, how it may be optimal for a consumer whose income is volatile to borrow during periods of low income and repay (or save) during periods of high income in order to maintain a constant standard of living. That’s very well in models where consumers know the true distribution of their future income, where the spread between borrowing and lending interest rates is not very large, and where consumer preferences are time-consistent. In practice, none of these conditions hold even approximately…

There are obvious wrinkles and objections — What about credit for cars, or home mortgages, or education? The analysis changes when the borrowing is exchanging one pre-existing long-term liability for another. (We are born short basic shelter, and, in much of America at least, short a cheap car as well.) Education can be viewed as an ordinary, wealth generating investment project that in theory could be equity rather than debt financed, but that might be too tricky in practice. It’s not my intention to suggest that consumer credit is always bad, only to defend the commonplace notion that for many people and under many circumstances, even loans that will be never be defaulted can be positively harmful, and as a matter of policy we should not be exhorting banks to issue or consumers to accept credit.

Note that in this deliberately provocative post, Waldman does not mention business borrowing. Presumably, business borrowing is to fund investment in profitable activities, be it financing inventory or the purchase of new equipment. But that may be more than a bit of a shibboleth. Consider this analysis from the New York Times’ Floyd Norris:

It is now becoming clear that the great news on the dividend front from 2004 through 2006 was not an indication of solid corporate performance; it was just another sign of lax lending standards. Lenders who willingly handed out money to homeowners with bad credit were even more generous to corporate borrowers….

From the fourth quarter of 2004 through the third quarter of 2008, the companies in the S.& P. 500 — generally the largest companies in the country — reported net earnings of $2.4 trillion. They paid $900 billion in dividends, but they also repurchased $1.7 trillion in shares.

As a group, shareholders were paid about $200 billion more than their companies earned over that four-year period. Suffering investors who held onto their shares during the 2008 plunge may want to reflect on the fact that investors who were dumping shares got roughly twice as much of the money as the loyal holders did.

In case you think this view is overstated, I heard repeatedly from people advising big corporations (lawyers, consultants) during the supposed good years that their clients were very reluctant to make investments of any kind, even expenditures that one would deem to be necessary to maintain brands and revenues, such as advertising. So while money is fungible, there is a lot of anecdotal evidence to suggest that big companies were non only not investing (in aggregate), they might have even been dis-investing.

Waldman does not elaborate on the need for more equity-like arrangements. One can argue that that comes from the fact that lenders take too much comfort from their status at the top of the capital structure, that it things come a cropper, they have the first crack at the carcass. But given the regularity with which banks rack up credit losses big enough to impair their survival, the due diligence is (over time) wanting. And to justify the cost and effort of more scrutiny, an investor would need more potential upside. But the flip side is a lot of businesses would be loath to give up equity (some of my lawyer buddies advise strongly against taking in angel investors if there is any way to borrow instead. If you have to go to the well too often, it is very easy for the founder group to wind up minority shareholders, and in every situation I have been close to save one, they have been forced out not long after that happens).

Now, the alert reading is thinking, if we let private borrowing shrink, we’ll have a horrid deflationary collapse! But Waldman has another remedy:

But if we let consumer credit contract, and if investment demand is derived from consumption demand, doesn’t that spell macroeconomic disaster? There is an alternative. It is called “transfers”…..The world is full of human want, which we should strive to meet by working to increase our capacity to produce. Problems arise when want and purchasing power are misaligned. We can improve that by redistributing some of the purchasing power from those with lesser to those with greater use for current consumption. If that sounds Commie to you, note that is precisely the function that consumer credit traditionally serves, just without all the residual claims, a large fraction of which will prove to be illusory (at least in real terms). That is, transfers are just a more honest way of doing precisely what a credit expansion does, except without the trauma that comes from learning that much of the money lent to fund current consumption will never be repaid.

I’m trying to come up with a reasonable opposing view, a case for pushing consumer credit but opposing transfers. Perhaps you can help, because I just can’t do it. One might argue on philosophical grounds against coercive transfers, but coercive transfers are a precondition of restarting bank lending, and we’ve already made transfers to banks on such a scale that banning them now would be like robbing a jewelry store, then piously arguing future looters should be shot. One might argue that bank lending is “smarter” than public transfers would be, that the patterns of consumption and investment that result from private sector credit allocation will lead to superior productive capacity and more sustainable patterns of consumption than direct transfers. Given the awful quality of aggregate investment this decade and the volatility now faced by consumers who were recently credit flush but who under any reasonable lending standard must now be credit constrained, it is hard to be enthusiastic about the special wisdom of bank-mediated credit allocation.

Of course, once we start redistributing purchasing power, there’s the thorny question of who gets what. I have an answer to that, it is my new mantra. Transfer flat. Cut checks to every adult in the economy of interest, regardless of whether they pay taxes or have a job. Flat transfers are easy to understand and they pass the smell test for “fair”….

Yves here. I have no doubt some readers are patting themselves on the back. They have argued it would have been better to take the TARP money and just hand it out on a per capita basis (it come out to over $2000 per person). Unfortunately, it couldn’t quite be that tidy, since some money would have to be spent to clean up the dead banks.

We want an economy that serves some people dramatically more than others, in order to preserve incentives to produce and excel. But we also want an economy that meets every person’s basic needs, even those of people who are unable or unwilling to offer marketable goods or services. We won’t let people starve, so why not fund a basic income, however miserly, rather than relying on an inefficient social services bureaucracy or taxing the virtuous by relying on charity?

Tax Pigou and progressive. Transfer flat. Encourage equity. Contain the banks.

Recall that Milton Friedman and Richard Nixon advocated a negative income tax, which is pretty close to this construct.

Unfortunately, there is a completely different set of reasons that we have (and are likely to continue to have) an overly large financial sector. As Niall Ferguson discussed in his book The Cash Nexus, access to credit has long been important to war-making ability. The reason that England was able to punch above its weight in the 1700s and 1800s was that it was able to borrow more cheaply than France, even though France was the bigger economy. The English had professional tax collectors, who were far more effective in gathering revenue than the often corrupt French tax “farmers”. Thus there are reasons apart from the health of the economy to have an oversized credit machine at hand (although it isn’t clear to me how the securitized mortgage apparatus could be repurposed for war finance…..). At a minimum, financiers will inevitably have the ear of the government, which gives them considerable advantage in pressing their agenda.

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  1. Anonymous

    > One might argue that bank lending is "smarter" than public transfers

    Realistically bank lending is about profit maximization. Lending is a form of parasitism. The parasite does not want the host to die, but wants to extract as much nutrients as possible from the host. Actually this is not entirely directed, but happens through a sort of Darwinian evolution. The banks which are able to best maximize profits from borrowers are more successful and are able to expand. Credit card rules are an example of an elaborate structure which has evolved over time in a way to maximize profits.

  2. Anonymous


    ….We want an economy that serves some people dramatically more than others, in order to preserve incentives to produce and excel.

    Could you define this statement a bit more please, “dramatically’ can mean many things. I don’t wish to comment before I fully understand its gist.

    ….As Niall Ferguson discussed in his book The Cash Nexus, access to credit has long been important to war-making ability….

    Well, that would be the best fix in human history. If the horror of war in it self will not stop Governments, lets take away their pocket money.


  3. Yves Smith


    I honestly don’t know what Waldman meant there (your query) and he is usually a careful writer.

  4. Marlowe

    Steve’s right. Prior to the easy credit bubble, it was an accepted first principle of corporate finance that new products and expansion projects were financed out of retained earnings.

    Sigh. Being right isn’t enough these days, is it? Scares the heck out of me that Team Obama was quoted by Bloomie saying that “they need to do something dramatic.”

  5. bg

    come on. This is a lot like banning fireplaces after the great london fire.

    It is a lot better to build a safer city than a cold city.

    A friend of mine is going to do jingle mail on a $2M 5500 SQFT inland empirt house after her husband was laid off (a car sales manager) and her business in mortgages crashed. This was never a loan that should have been made. So lets stop mortgages? whats the alternative: renting? bank ownership?

  6. lewy14


    Waldman clearly means he’s OK with people who rock at doing valuable stuff walking off with a ton more money than people who suck at doing valuable stuff. He’s trying to avoid the “Commie” label. He should try something catchy, like “socialism in one transfer”.

    Love the idea of an equity approach for student loans. Harvard could offer to educate you for a cut of all your future earnings. “You, we need 20%. You, you look lazy, we want 35%”. Then in the “fine grained equity market”, people could buy and sell the present discounted value of your future earnings on an exchange! Then you could save up, mouth off to the boss, get fired, drive your stock down, and buy it back cheap! Hilarity ensues!

    Back to the real world…

  7. Anonymous


    Thanks any way just thought some one here might now his mind set better than me.


    Yes, it has that colour about it. Important point left vague by design it seems.

    Looks like market will have to slow burn till some one opens a window and explodes or it consumes it self. I guess the Phoenix does not rise, till after its reduced to ashes. This is not the Great Depression or recession, its the Spanish Flu after WWI and the body’s will drop till it has run its coarse.

    Like doc holiday said Barf and if this is the best we can do (human activity’s) stick a fork in us, were done.


  8. Cindy

    Hear! Hear!

    I’ve always thought the concept of consumer credit strange to the nth degree. If you can’t afford a TV unless it’s on installment, you don’t need one. Credit card should be banned, like in Germany and most of China. The only exception that I can think of is mortgage where there should be at least 30% down. Education and health care should be public with perhaps 20% contribution from the individual as equity.

    And what’s wrong with dumb and lazy people starving? The world is overpopulated as it is.

  9. HoosierDaddy

    I’ve always wondered about replacing food stamps, AFDC, the EITC, and all the other aid programs with a flat cash payment. Get Universal health care and the social services bureaucracy pretty much doesn’t have a reason for being.

  10. Anonymous

    “Yves here. I have no doubt some readers are patting themselves on the back. They have argued it would have been better to take the TARP money and just hand it out on a per capita basis (it come out to over $2000 per person). Unfortunately, it couldn’t quite be that tidy, since some money would have to be spent to clean up the dead banks.”

    We could have required the banks to fully mark to market then plug hole raise funds via a massive rights offer backstopped by the govt(similar to what happened with UK bailouts)….The gov’t would have then owned, say, 90% of Citibank, Bank of America, etc. The US government then spins-off the shares received to the US public pro-rata ie if Citi has 6 billion shares we all get 20 shares (alternatively you could also put all the shares in a mutual fund then spin off the mutual fund rather than the individual banks to the taxpayers). Spin off is tax-free income. The US public then ultimately holds the shares and I can hold (helps my balance sheet) or sell (and use money to pay debt or buy flat panel TV). No issues of government run banks.

  11. Irene

    Rebalancing equity with credit would certainly be part of the solution. Nowadays, both the tax code and the regulatory environment disproportionately favor debt over equity. Interst payments are tax deductible while dividends are doubly taxed. Capital charges on loans are far less of those on equity positions.

    However, there would definitely be room for debt type instruments. The key there is to make them flexible enough. For instance, mortgages can have adjustable notionals depending on some aggregate measure of collateral value. This would be possible if money was created explicitly by the monetary authority as opposed to being created implicitly through the fractional reserve system.

    I would agree that consumer credit is a bad idea. Before we get to rain checks on people, it would be better to cut taxes.

  12. charles

    It would be interesting to see a follow-up on what Waldman thinks of “islamic finance”, which is the way bank-like institutions operate in countries that strictly follow the Muslim prohibition on lending at interest.

    Typically, what they do instead for, say, a commercial loan is for the bank to buy an equity stake in the business, on terms that allow the owner to buy it back piecemeal. Similarly, for a mortgage, the bank takes title to the house, and allows the “real” buyer to take title to it piecemeal, as they pay off the not-a-loan. If it all works out, the payments wind up looking roughly the same as a loan at interest, but proponents argue that when things go wrong, it’s less prone to cascading disasters than Western fractional reserve arrangements.

    (BTW, the original post is on Waldman’s blog at, in case anyone else is having trouble finding a direct link; Googling for “islamic finance” will turn up several write-ups.)

  13. Anonymous

    Shoot the bankers yes! But you must also shoot all of their politicians and rip up the selectively enforced scam ‘rule of law’ that gives them all their power.

    Sadly the context of aggregate generational corruption and selective enforcement of the scam ‘rule of law’ by the rich is always missing from these ‘discussions’. Its like listening in to the conversations in a dysfunctional family …yes, Scamerica now functions as the planet’s premiere dysfunctional family populated by brainwashed vidiots …

    All of life in Scamerica is now an illusionary reflection of 24/7, coast to coast, head fornicating infomercials in ALL media. God what a yuk-fest!!!! Being born into the dysfunctional family makes one tolerant of the abusive behavior as it is all one knows. Scamericans think nothing of paying a fat ass do nothing Mr. Greedy Banker twice again the amount their homes cost so that Mr. Greedy Banker can live a lavish lifestyle and afford to purchase the sell out politicians that craft the ‘laws’ that further tilt the playing field in Mr. Greedy Bankers favor. Rinse and repeat, its all so neat!

    Interest IS parasitic slavery, but most people don’t know that because that is not allowed in their knowledge base and so they are more concerned about the things that they have been made expert in, and so they constantly gaze at themselves in mirrors, and they worry about the break down of collagen in their faces.

    Deception is the strongest political force on the planet.

    i on the ball patriot

  14. Independent Accountant

    I’ve been saying things like Steve for years.

    You are correct. As I see it, most of Islamic finance is a sham. It consists of elevating form over substance. Islam prohibts taking interest. So Islamic finance largely consists of designing products which aren’t called interest bearing, but in substance are. Like say, leases.

  15. Anonymous

    Someone needs to inform Steve Waldman that our corrupt government said he could take his idea down the hall and tell someone who give a rat.

  16. Dan Duncan

    In these trying times, it is so comforting to know how close we are to the cusp of world peace devoid of suffering.

    Waldman writes—“But with the exception of war, no still-practiced human institution provokes catastrophe as regularly or as grandly as the misuse of debt.”

    Wow…what a pentrating insight!

    But of course—the “analysis” isn’t so insightful once it dawns on the alert reader that…misuse of not only of debt—but of every single resource/institution/innovation etc., etc. that is known to man “provokes catastrophe”.

    And how about this nugget:

    “As Niall Ferguson discussed in his book The Cash Nexus, access to credit has long been important to war-making ability.”

    Yes…and so has access to natural sea harbors, rivers, coastlines, fertile valleys, gold, horses, slaves, opium,….these have also proven to be rather important to war making ability.

    This is supposed to be thought provoking insightful analysis? Are you kidding me??

    Damn…why not just save us all the trouble and simply post the lyrics to John “Lenin” Lennon’s “Imagine”?

    It’s only fitting, then, that I conclude by invoking the timeless wisdom of another iconic figure who belongs front and center in this riveting debate….Casey Kasem:

    “Ponderous…fucking ponderous!”

  17. Anonymous

    Having grown up affluent and taking a major in philosophy, I really did get the basics of the economy until I had to make it on my own. It was then that I realized that people who sell generally make more than those who produce.

    The basic fact of life for them is that few can afford what they’re selling. Cars, real estate, consumer electronics, motorsports equipment, boats, etc. all depend on the seller figuring out how the buyer can “pay” to buy what they have.

    At some point, it became clear that affordability was not the criterion to be used, but whether the buyer could “make a payment.” And thus we got here.

    I was told that banks were making a killing, and for a while, they were. I could tell every day, it seemed, that they were making less, “buyers” were getting more, and that all the action was between the showroom and the parking lot. I also saw how many widgets needed to be repo-ed. I also saw how many times the banks were taking near total losses.

    I was told it was a “numbers game” – the banks couldn’t NOT make money.

    The question is whether this is what those folks had in mind. I don’t think it was.

  18. Adina

    Education as equity is an interesting idea but has some pretty big holes. It surely couldn’t be the only method of education financing, unless we wanted a society that had no physicists and geologists. There are fields that require a high level of education but don’t have high pay. Even where it might be sensible (MD and MBA students), it seems fatally illiquid. If public shareholders dislike a business, they sell its stock, drive down the price, force the company to sell. In a private equity setting, if major shareholders aren’t happy, they force out the management. These strategies don’t work when the object of investment is a person.

  19. Anonymous

    One’s bank’s misfortune is another shark’s opportunity. I say it’s time we set up a network of neighborhood Family-owned payday loan franchises (where “Family” may be substituted by the phrase “Cosa Nostra”).

    The country needs us now more than ever. We can’t leave all those returning Iraq vets panhandling in the streets of NY, Chicago, and, DC. Their families need a 350% interest loan. Just think of their children. It’s the new American way.

    It’s also the patriotic way.
    And it’s a matter of honor. Join today!

    For all those interested in saving the American Dream and “lending” a helping hand to those in need, please see:

    Vinny Goldberg, WzK.M.
    (where WzK.M stands for “Wiz Kid and Maverick” of economic theory, research, and practice)

  20. doc holiday

    What if there were no banks, but just a credit card issued to everyone from Treasury — which could be used to buy anything, including a home or car. Your government card would simply be linked to IRS records, which would be linked to your place of social employment, where you would be compensated on a scale related to your productivity and annual performance. If your work has social productivity reality, you have more credit than the person who fails to produce results. People that currently rely on nepotism would simply not survive and they would be placed in special work camps, where training and motivation would be used to influence modified behavior.

    The banks would not need to exist, because they provide no service beyond stealing capital, thus costs for goods would decrease because there would be fewer middle men and women in position to add hidden costs and contribute to unproductive inflationary add-ons. The bankers would be given simple accounting jobs at government labor camps, where these people would have chances to show value,in helping society become more efficient. Those unwilling to play ball would be placed on pikes, as examples to people pondering taking breaks.

  21. bondinvestor

    waldeman has some intertesting ideas – the one i like most is his implicit proposal to eliminate the tax subsidies provided to debt finance – but in general i think there is a much more elegant way to arrive at the same place. rather than setting up a system of complicated rules and transfers, we ought to just repeal deposit insurance.

    in a free market economy, investors and borrowers ought to be free to choose how they wish to conduct their affairs. the playing field ought to be level among debt & equity (which it isn't in the current tax code) and the government probably ought to take as small a role as possible in determining which activities receive credit and which don't. the market may not be perfect, but it certainly over time has proven to be a better allocator of credit than non-market mechanisms.

    but banning banks and relying wholly on equity finance is a ridiculous idea. if there are people out there who are willing to accept a lower return for a senior claim on the cash flows and assets of an enterprise or asset, then they and the borrowers ought to be allowed to transact. furthermore, if that senior lender in turn wishes to finance a part of their loan through borrowers (so as to enjoy the benefits of leverage themselves) then they too ought to be able to do this as well.

    the problem for society arises when the government subsidizes the spiral of risk taking by guaranteeing the liabilities of some of these leveraged lenders. when that happens, all market discipline disappears (ie, C still has $400B today despite its insolvency) and the intermediaries eventually leverage themselves at ratios that a purely private market never, ever would allow (eg, 40x vs 10x).

    there are plenty of bank-like structures that have held up much better than the banks through this credit crisis. closed end bonds funds would be a great example. these are entities with $500-1B of assets that have 30-50% equity and portfolios of loans with an average credit rating of B or BB. the prices of the funds have gone done anywhere from 30-95% depending on what the funds held. however, they don't pose system risk to the system and none of them are vulnerable to a forced unwinding. they have proven to be much more resilient than the banks despite their dis-advantages in funding, origination and risk evaluation.

    the only reason the government is getting involved with the banks is because the politicians are terrified that they have allowed the banks to wipe out the collective savings of average americans. if you think the social mood is bad now, just imagine what it would be like if deposit accounts effectively broke the buck. this is what happened in the 1930's, and it is why the bank runs started en masse and why the bank holiday, FDIC, etc was put in place.

    the govt has a completely different attitude towards small banks and non-banks than they do towards the mega-banks that are too big to fail. these institutions are just as important to providing capital to the economy as the mega banks. in fact, they could be more important because usually the problems are narrower, easier to understand, simpler to diagnose and easier to solve. the attitude of the regulators towards small vs mega banks is so strikingly different (this is based on conversations with all the parties involved in recaps) that my only conclusion is that the regulators are so desperate about the state of the big banks that they will do anything to delay the ultimate day of reckoning.

    and in my view, that has NOTHING to do with the provision of credit to the broader economy and EVERYTHING to do with the dawning realization that they have put the demand and time deposits of millions of US households and businesses at risk by allowing these problems to build and fester for so long.

    the government cannot – no matter how big or powerful it is – effectively guarantee all senior lending that takes place in an economy the size of the US. rather than maintaining the fiction that it can, it would be much better off getting out of the deposit-guarantee business.

    that alone would go a long way towards creating the world that waldman proposes creating via government fiat. in a world without deposit guarantees, the cost of debt will explode, demand will decline, banks will gradually wind down and the human capital in the financial system will gradually move to other fields. what we will be left with is a financial system that is smaller, doesn't pose systemic risks to national savings or the economy and relies much more heavily on equity, mezz and subordinated debt finance.

  22. cap vandal

    And to think that we are aggressively using our NGO, etc. to push micro credit schemes.

    Isn’t that a little like teaching kids to smoke?

  23. Stephen

    He hits a couple of good points, amped up rhetoric to make the point notwithstanding.

    1) Consumer Credit is a out of hand

    2) Consumer Credit as the “solution” is a questionable enterprise.

    When this all began it seemed to be about ensuring the system didnt collapse so it could work through whatever problems there were. The options at the time were

    a) Buying the toxic assets
    b) recapitalization

    a) was initially Paulson’s approach till it became clear that you run into “implementation problems”, i.e. pricing of the assets. So now they moved onto b)

    Well this is now being abandoned to provide homeower relief, green jobs etc etc. I fear we are off strategy now, unless the problem has morphed.

    Whatever happened to the Swedish solution, grab the banks, clean em up, stripped of bad assets and mgt, all the capital providers take major cuts and then the banks are spun out again clean with the IPO funds being used to cloat the bad bank till it can be wound down.

    Seemed reasonable to me…which cuts to my real concern. The capital providers will keep providing capital, credit and equity until they see that some people and companies waste their capital and they dont get it back.

    Drove me crazy that the airline industry kept getting money even though it was clear that it always ends in tears. buffet admits his one big error was putting money into US Air in the 80’s or 90’s.

    Point is so much capital with no fear means mistakes get made, and apparently if they are big enough there are bailouts and none of the directors or senior execs ever has to address the “timing issue” of bonuses paid on losses that havent happened yet.

    I think the discussion has lost its focus and now it is all about social programs. US taxes are goign WAY up in a few years.

  24. Anonymous

    We need to revamp The American Liberty League!!

    According to Butler’s congressional testimony, the League was founded intentionally as a para-military coup vehicle, an ‘American version’ of the 1930s French Croix de Feu. Butler said that he was approached to lead a group of 500,000 veterans to take over the functions of government.

  25. donna

    “whats the alternative: renting? bank ownership?”

    How about don’t buy a house you can’t afford? That’s what people used to do.

    Still living in our 1300 sq ft “starter” home we bought 24 years ago, here in SoCal…

  26. David

    I think banning credit cards is going too far. What should be done is limiting credit card interest rates to say 10% (or mortgage rates plus X% or something). Then banks will only offer cards and credit to people who have decent credit.

    High interest credit card lending is a scam anyway. It works like this. The bank lends money at say 29% interest and the borrower runs up all kinds of debt. Even if a large fraction, say 30%, of the borrowers default the bank makes money. For one, the other 70% continues to pay huge interest payments. The other 30% may result in 100% loss but usually this doesn’t happen until the balance has ballooned up to maybe three times the original principal. Then this bank gets to write-off the entire amount. So if the borrower makes out fine and the bank makes out fine, then who is losing out? The government obviously since they are losing tax revenue.

    But if the government cuts off credit card lending to the poor (or any other group) there will be howls of discrimination. The fact that the government doesn’t see excessive debt as the problem means there is not going to be any improvement any time soon. They simply don’t get it. They don’t appreciate that the consumer doesn’t want more credit or more debt. They are focused only on blowing up the bubble again and that is doomed to failure.

  27. Doctor Memory

    Perhaps somewhat tangential to the actual points here (but then again, perhaps not), but it’s worth at least mentioning in passing that Waldman’s lede metaphor:

    In fact, credit is to investing what heroin is to painkillers: Unusually appealing, in a certain way. Hard to kick once you’re on it. Almost certain to, um, cause problems, eventually.

    …is complete horseshit. Opioid analgesics as strong as or stronger than heroin (and every bit as habituating) are routinely used in surgical aftercare in every developed nation, and are just as routinely successfully tapered off when the need for them has passed, with no “um, problems” of any particular note.

  28. Acrimonious

    “…..The world is full of human want, which we should strive to meet by working to increase our capacity to produce. Problems arise when want and purchasing power are misaligned.”
    Waldman has missed the REAL culprits – those that just want and are unable to distinguish need.
    Shouldn’t he be shooting all those that used their house ATM’s to buy that backyard full of crap like RV’s, boats, big screeen TV’s etc.
    Whatever happened to personal responsibility??? He needs to read Stephen Moore in WSJ and how Atlas is finally shrugging 52 years after Rand’s insight.

  29. Anonymous


    Amazing how fealty to libertarianism reduces reading comprehension. Waldman is clearly talking about the poor. You are ranting about middle/upper middle class abuse of credit. Two different issues.

  30. Anonymous

    “Whats the alternative…bank ownership?”

    Yes, isn’t that called a mortgage?

    There is no such animal as a “homeowner in foreclosure,” despite common (mis)parlance.

  31. Acrimonious

    ” I have an answer to that, it is my new mantra. Transfer flat. Cut checks to every adult in the economy of interest, regardless of whether they pay taxes or have a job.”
    ie.poor people do not qualify for credit rendering your observation specious.

  32. River

    If ‘old fashioned’ liberal education had not gone out of vogue many posters would realize that Muslim banking is no different than Jewish and Christian banking. All three religions take a dim view of loaning money at interest, although these religious rules have been relaxed they have not gone away. The only documented time that Jesus lost his temper was when he ‘threw out the tables of the money changers from the temple’. The rules for each religion remain the same today as they were in the time when Venice was a great power. The character ‘Shylock’ in Shakespears ‘Merchant of Venice’ was confronted with the same problems when loaning money at interest back then as Muslims are today. For Shylock, a Jew, to loan money at interest to a Christian, was punishable and sometimes by death by the Christian church. For Shylock to loan money at interest to another Jew was forbidden by the Jewish religion.

    People in general do not understand the close relationship between banks and governments. In days of yore when a secular ruler refused to repay a loan to a Medici (or most other) bank the bank simply closed up shop in that country and then the king would have a tough time raising money for any purpose, even a war to assuage his ego. It was much more desireable for the king to turn the screws on the peasants and raise taxes to repay the banks so the banks would be around in case of a challenge to the kings throne. Does this sound different from what is happening today?

    The Medicis used a mechanisim of currency arbitrage to get around the usuery laws of religions. Instead of charging interest the early Medici banks charged a fee for capital exchange rate. The longer period of time that passed prior to currency exchange settlement the higher the fee charged by the Medici banks. Voila! no interest was charged, so a technicality was used to circumvent the religious interest prohibitions. Once again the regulators were behind the curve. Not only did the Medici banks use cunning in their banking practices they also provided several Catholic Popes over time. To say the Medicis had a close relationship to government, which was the Catholic Church, would be a vast understatement.

    So, what difference is there today than in the time of the Medicis? Wall St provides bankers to fill government positions and government provides individuals to manage Wall St. The close relationship between bankers and government still exists. I see little change from the thirteenth century.

  33. Anonymous

    A USofA Treasury fee based bank with no interest loans, I’d vote for that. Use the remaining TARP money to fund it.

  34. Anders

    Doctor Memory – the painkillers that are compared to heroin are most likely the over the counter (hey, not everything OTC is bad, y’know) head-ache pills.

    Most people do not refer to opiate-level painkillers as merely “painkillers” (heavy drugs are used instead) – at least, not in my environment (Scandinavian).

    Having had a family member who voluntarily dialed down the dosage of opiate painkillers, I can assure you that there are, in fact, “um, problems” in stopping to use them – particularly when one does so abruptly.

  35. Anonymous

    (Perhaps mentioned in an earlier post didn’t read them all)

    Simple minded solution. Take those parts of banks the people own and hive off those parts directly involved directly with personal and smallish business loans.
    Nationalize them and back them with TARP.
    Let the rest of the banking business twist and turn in the wind.
    Couldn’t be any worse then it is now.

    Separately, I wonder if there isn’t some provision of the Patriot Act which would jail those bankers which took TARP money to benefit themselves. Weakening the US economy seems a treasonable act in this time of war

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