Loan sharks

A recently developed Marxist hypothesis says the current crisis can be explained by a large-scale attack on the American working class that began in the 1970s. Presumably, at that time our labor market got saturated. Malthusian population increase, immigration, outsourcing---all contributed to the weaker bargaining power of the American "proletariat." Wages stopped rising for the next 30 years or so while profits (stolen "surplus" value) went through the roof.

Capitalists were stuck with too much money and too much output (the orthodox Marxist theory of "overproduction") since stagnating wages could no longer buy what their "labor power" produced. This is when giant global corporations and financial institutions conspired against the "productive" workers. Abusing the pathological stupidity of the masses raised in a consumerist culture (created through advertising), a pack of loan sharks "pushed" a staggering debt on the American poor.

Such explanation conveniently ignores the high degree of social mobility in the United States and the fact that the very few among us who get stuck in poverty for more than a few years are still among the richest people in the world. Unfortunately, it also contains the potential to resurrect through the Consumer Financial Protection Agency, a bankrupt idea on how to "help" the borrowers. During the mercantile era, the British Parliament imposed price ceilings on interest rates---supposedly to vivify trade. This is when John Locke argued that such policies are counterproductive. Lower interest rates benefit the borrower but such gains are offset by the loss to the lender. Usury laws also restrict the supply of credit thus slowing the rate of economic growth.

We may not like a market outcome such as high rates of interest on particular loans but those are simply proportionate to the risks of default, not a result of exploitation. As economist Richard Cantillon pointed out in early 18th century, only lenders and borrowers are capable of determining their fears and needs. Trying to dictate price levels never solves anything. The free formation of market prices (including those in international trade and interest rates) is the only mechanism for the transmission of information between market agents that leads to efficient allocation of resources and economic prosperity.