Study: U.S. Financial System Imposes ‘Overcharge’ of at Least $40,000 on Every Citizen
Monday, July 18, 2016
JESSICA DESVARIEUX, TRNN: Welcome to the Real News Network. I’m Jessica Desvarieux in Washington. And welcome to this edition of the Epstein Report.
Now joining us is Jerry Epstein. He’s the co-director of the Political Economy Research Institute at the University of Massachusetts Amherst, and he’s the co-author of a new report titled Overcharged: The High Cost of High Finance. Thank you so much for being with us, Jerry.
GERALD EPSTEIN: Thanks for having me, Jessica.
DESVARIEUX: So, Jerry, essentially at the heart of your argument you’re looking at how the deregulation of the financial industry has cost everyday Americans dollars and cents. And we’re not just talking about what happened to their stock portfolios or pensions. What were some of the most alarming findings that you found while doing your research, and how did American families really get overcharged as a result of the questionable financial activities?
EPSTEIN: Well, this report that Juan Montecino and I did for the Roosevelt Institute came up with some conservative but astonishing numbers about how much the financial system that we have now, the speculative system that’s too big, and speculates too much, how much it costs the American people.
What we found in kind of our bottom line numbers is that between 1990 and 2005, and then adding on the cost of the financial crisis, it cost somewhere between $13 trillion and $23 trillion, which comes up to about $40,000-$70,000 per American. Which is a huge cost. And we thought this bottom line number was pretty astonishing.
DESVARIEUX: Okay, so those are huge numbers and folks are not going to make sense of that. How did it actually affect them? What are we talking about, higher prices in rent? Exactly how were they overcharged?
EPSTEIN: So the people are overcharged in multiple ways. One is just kind of everyday interactions with the financial system. Credit card fees, for example, which normally are high, but if they miss a payment, you know, you get $35 credit card fees. Interest rates on credit card balances, over 20 percent. If you’re poor and don’t have a credit card, or can’t even use a normal bank, then you have to go to predatory lenders or fringe lenders, payday lenders. There the interest rates get up to over 400 percent. If you missed a payment on a debt, then debt companies come after you and pile fees on, late payments and so forth.
So in everyday interactions that Americans have with the financial system, they get overcharged. And what overcharged also means is that the banks are getting overpaid. They’re getting huge rents, that is, excess wages. The financial companies are getting excess profits. All of this is a way in which Americans pay on a daily basis. But there are more subtle ways, as well. For example, economic growth is lower than it would be otherwise. And this affects all Americans.
DESVARIEUX: Jerry, I’m just going to push back a little bit, because some folks are going to say if you miss a payment, that’s really on you. You should be accountable, and you know the fine print. It is written there in the contract that you will be charged these fees. So what do you say to those folks?
EPSTEIN: Well, a lot of people, a lot of the ways in which banks are able to overcharge is that they hide these kinds of [plots]. They hide these kinds of fees. Now, the Consumer Financial Protection Bureau, which the Dodd-Frank law implemented, and Senator Elizabeth Warren was the person who really got this thing going, is supposed to make sure that these credit card companies and banks and so forth reveal these fees, clearly. But they often don’t do that.
But the bigger point is, people can’t escape the financial system. They depend on it, just for making daily payments. If you’re poor, you can’t get through the week with your low wages and your low wages and your low welfare payments, or whatever it is that you have, you have to go to a payday lender just to survive. So oftentimes people don’t have any choice. If you have a 401k and you work for an employer, you don’t get to choose who manages that 401k. The employee will pick the manager, and oftentimes the manager of your 401k has a conflict of interest. They’re trying to put you into the highest cost kinds of investments that you can possibly get, because they get higher rents that way. So you don’t really have a choice. So a lot of these areas are areas where people really do not have much choice.
DESVARIEUX: All right. There are going to be people, too, that are going to question how you are able to draw such conclusions, Jerry. Can you just talk a little bit about your process, and how can you prove causation through your data?
EPSTEIN: Right, good questions. So what we did is we divided the overcharging, or the cost of the financial system into three components. The first is we call rents and excess profits. That is, how much do people pay the asset managers, the banks and so forth, over and above what they really deserve? That is, over and above what these same companies and the same employees, wage employees would get, say if they were working in other, similarly-placed industries. So we looked at data put together by two economists, [inaud.], who carefully measured the rents that these employees get in the banks. And we just added it up. And we added up the excess profits, as well, and found that it came to somewhere between $3.6 trillion-$4.2 trillion between 1990 and 2005.
The next thing we looked at is what is the impact of our financial system on economic growth? And there we looked at some research from the IMF, and from the international settlements, which suggest that if you have a financial system that has debt to GDP over 90 percent, that the economic growth is going to be well worth it if you have a more normally-sized financial system. So in the U.S. it’s about 135 percent. So what we did was use their numbers to calculate how much slower is the economic growth as a result of our bloated financial system, and what does that cost the American people?
The third component we added was what was the cost of the financial crisis to the American people? And then we used numbers from the reserve system. So we just did the math. We added up these analyses from other economists, and that’s where we came up with the figure somewhere between $13 trillion and $23 trillion.
DESVARIEUX: So if we have these numbers, between $13 trillion to [$23 trillion], is it just a matter of reinstating the laws that were on the books before this increased deregulation of the financial industry, like reinstating Glass-Steagall? Is it just a matter of doing that, or do we have to think differently about how we’re going to address this issue? Because, let’s be frank, this is a very different reality that we’re talking about than when the Clintons were in power in the ’90s. You know, the banks, the big banks, are now even bigger. And if they were too big to fail back in the last financial crash, what kind of they have now–I mean, some people would say they’re, they’re like deities, you know, they’re untouchable.
So essentially, what do we really do to prevent Americans from being overcharged? Give us some concrete proposals.
EPSTEIN: Yes, so you’re right. The power of the banks, surprisingly in some ways, has gotten greater following the crisis. After the 1930s crisis the bankers were put back in their cages. But after the crisis of 2007-2008, the banks came up smelling like roses and are now more powerful now than ever, because they were bailed out by the Bush administration, by [inaud.] and others working for Barack Obama.
So what do we do? Well one thing is yes, there was this Dodd-Frank law that was passed, and now the Republicans and friendly Democrats are trying to completely gut it. So the first thing that has to be done is to protect the Dodd-Frank law. Americans for Financial Reform and other groups are out there trying to do it. But as you suggested, that’s not enough. The second thing is to impose stronger regulations, like what Bernie Sanders and Elizabeth Warren have called for. A new Glass-Steagall Act to separate out speculative banking from banking that helps Main Street, and not let the speculative banking have access to the support of the taxpayer. So that’s another thing. But I don’t think either of those things are going to be enough, but they’re both important.
In addition, what we have to do is have alternative financial institutions. A couple of options. Financial institutions that are publicly-oriented, that are not profit-oriented, that do, that invest in the community, that provide loans to the community on reasonable interest rates, that provides places for people to earn retirement income, and so forth. So for example, we used to have a postal savings bank system in the 1930s, ’40s, and ’50s, which was destroyed. There’s some people who are [calling] for the return of a postal savings bank system. A low-cost, low-risk, just the facts, simple, boring banking. How about a public option in expanding Social Security for all, so that people don’t have to go to Wall Street to save for their retirement?
Every place down the line, they need a public option to compete against the private banks, and provide a safer, cheaper set of financial services. And I think that we have to have in order to end this overcharging.
DESVARIEUX: And the public option will protect Americans from being overcharged. And the public option will protect Americans from being overcharged, and can you just quickly explain how that is?
EPSTEIN: Well, because instead of going to JP Morgan or Bank of America or Citibank, you can get cheaper options, more reliable options, by going to the postal savings bank, by going to the public retirement system, to getting mortgages from [inaud.] mortgage bank, et cetera.
DESVARIEUX: And the people will have more say in regulating how much [inaud.].
EPSTEIN: That’s right. So a democratic board is controlled by people in the community, rather than by the bankers. And so we’re going to–we need to democratize our financial system. Just regulating it is not enough.
DESVARIEUX: All right. Jerry Epstein, joining us from Amherst, Massachusetts. Thank you so much for being with us.
EPSTEIN: Thanks for having me.
DESVARIEUX: And thank you for joining us on the Real News Network.
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