Hy Minsky, Low Finance: Modern Money, Civil Rights, and Consumer Debt

By Raúl Carrillo

I delivered the remarks published below at the First International Conference on MMT on September 22nd, 2017. The panel, entitled “Modern Money, Courts, and Civil Rights — Against Legal Predation”, explored the interplay between the cycle of crisis, austerity, and privatization, and the concomitant loss of rights for the public. I was joined by two esteemed law professors and friends of MMT: Angela P. Harris, formerly of UC Davis School of Law, and Martha McCluskey, of the University at Buffalo School of Law. The panel was moderated by Danny Sufranski, MMN Harvard Chapter President.

These remarks were delivered solely in my capacity as a director of the Modern Money Network and do not reflect the views of any past or present employers.

Good morning, everyone. My name is Raúl Carrillo and I’m a director of the Modern Money Network (MMN), a student-driven interdisciplinary organization promoting public understanding of money, law, finance, and the economy (obviously embracing MMT as a foundation). By day, I’m an attorney specifically focused on consumer financial protection or as one notorious predator, Capital One, would say, “What’s in your wallet?” Perhaps a better way to put it is that, in the Minskian sense, I help people manage their “survival constraints.” 

I’ve been digging in this space for about ten years now. As a college student, I bailed on orthodox macro after Lehman fell, as many of us did, and sought intellectual refuge in the law. After graduation, I worked for then-Attorney-General, now-Senator Kamala Harris during the multi-state mortgage fraud settlement. After meeting Rohan Grey, and helping get MMN up and running at Columbia Law, along with many of our other colleagues who are here this weekend, I served at the Consumer Financial Protection Bureau as Special Counsel to the Enforcement Director, mostly focused on litigation strategy and policy for a range of issues…from debt collection itself, to the rules of payday lending, student loans, auto loans, medical debt, you name it…all the way to payments access, credit reporting, and the broader surveillance system that circumscribes everyday lending in this country. While I was at the Bureau we started to take on Wells Fargo, Navient, Equifax, all the companies it’s cool to hate now.

Currently, I’m a Staff Attorney at New Economy Project, an economic justice non-profit in New York City. In terms of practice, my major role there is monitoring something called the “Financial Justice Hotline”, where any low-income New Yorker can call for free legal assistance. Policywise, I’m especially focused on helping immigrants navigate the financial system, helping build generative rather than extractive sources of credit, and keeping an eye on how technology is changing the debtor’s rights landscape. I’m not here representing New Economy Project, but I mention these issues because I’m going to touch on some of them as we move along. But first let me provide a map of where I’m going.

Today, I have the unusual luxury of leaving descriptions of MMT and arguments concerning Fed rates, transmission mechanisms, and monetary policy impact on consumer lending in the hands of experts. In fact, there’s another panel at 3:50 today on “Modern Money, Interest Rates, and Credit” and another on Sunday: “MMT, Finance, and Interest Rate Policy.”

So, I have two personally refreshing goals this morning:

(1) First, I’d like to impress upon folks a theme that I’ll be stressing throughout the conference: when it comes to the economy, law is not merely a governing force (as many on the right would have economists believe) nor a reflective force (as many on the left are inclined to think). It is also a constitutive force. What I mean by that is that the law doesn’t just intervene into the economy on the back end, and it doesn’t merely reflect deeper forces in the economy either. Rather, a lot of the economic concepts we talk about not only have a particular meaning in the context of specific legal parameters, but they only exist given the deeper architecture of legal regimes, in the sense of systems design. I’m going to do my best to articulate what that means and what that looks like when it comes to consumer finance. 

(2) Second, I’m going to talk about how people actually experience the government’s failure to sufficiently spend money for public purpose. People don’t experience the absence of MMT-insights as policy failures in a grand sense. They experience it as personal pain. Over time, that pain can become chronic, but at first, it’s acute. For some of us, it’s devalued assets, houses, cars, etc., but most people in this country live paycheck-to-paycheck — or no-paycheck-to-no-paycheck — and thus experience the survival constraint pain on the liability side, where their debt is expounded, compounded, and sometimes straight-up fabricated. And within this group…there is what we call “disparate impact” in the legal world. As Sandy Darity, Darrick Hamilton, and other fellow travelers consistently point out, for many folks on the periphery, especially people of color who lack intergenerational wealth, the lack of MMT informed-policy means permanent austerity and perpetual depression. 

With that in mind, we must cultivate a way to talk about Modern Money from the bottom-up and from the outside-in. We have to draw maps from people’s suffering to the macro failures. I personally think we can do this best by talking about (1) consumer debt, (2) criminal justice debt (which Prof. Harris is going to cover), and (3) taxes (which Prof. McCluskey will discuss).

So, first, MMT, and consumer finance systems design. MMTers like to tell a very important story about how public debt is not a problem, but private debt might very well be. We often do this by talking about the Clinton Administration, sometimes about Japanese experiences, but usually about the Clinton Administration. We say the Clinton budget surpluses and the trade deficit meant that private consumption (decreased household savings and increased household debt) had to compensate for the drag. Because the private sector cannot survive in negative territory in the way the public sector can…we got a crisis.

This is not the full story of course, and how could it be? I don’t think any of us pretend it is and oftentimes we can’t afford to go that deep into detail. But we’re at a point as a group where we have to grapple with further granularity frequently. We have to remember that people don’t experience private debt in the aggregate or in a vacuum, so we shouldn’t consistently talk about accounting identities without accounting for identities, that is, people’s specific experiences, as social groups and classes and as individuals. Underneath the sectoral balances, people experience austerity and crisis through very detailed, sharp legal machinery that’s often built to exploit them: not only at the level of bad legislation and bad regulation, but through the courts themselves.

For example, the Clinton surpluses ultimately led to the mortgage crisis. But the mortgage crisis was, of course, just as much a legal phenomenon as a macroeconomic phenomenon. There’s a lot to say about how what Legal Realists like Robert Lee Hale would call the “background rules” that allows for something like the mortgage crisis to occur. But even more directly, this particular private debt crisis manifested first via the manipulation of law….obviously on the “high finance” side with respect to securities and derivatives, but necessarily also on the “low finance” side, principally through the use financial technology, like MERS, which was used to circumvent centuries of precedent concerning titling and recording, from both Anglo-American and Hispano-American traditions of property law (which were problematic to begin with). (If I can recommend two great books on this whole mess: Vermont Law Professor Jennifer Taub’s Other People’s Houses & David Dayen’s Chain of Title). 

Second, as my MMN colleague, Nathan Tankus, has stressed consistently, the aftermath manifested in what was essentially a slap on the wrist in response to a grand fraud perpetrated upon the American public. Having been there in the moment, I’m quick to note that this was a situation of titanic complexity and a good number of good people tried to do the right thing. That being said, what ultimately manifested under the Obama Administration’s banner, with a stamp from the courts and a slew of administrative agencies, was utterly insufficient and unjust, and compounded many of our broader macroeconomic and social problems.

I think we all know at least parts of this story and many MMTers have occasionally written about it. So why am I repeating it here? Because again, we have to stress the systems design aspect and the rules that filter how people deal with sectoral-balance issues, because that’s what people see in front of their faces. People experience austerity and crisis through the legal grinder: through foreclosure, garnishment, forced arbitration, tax interception, imprisonment, etc.. And some people filter all that through additional layers of oppression.

The crisis aftermath demonstrated in spades that law is elastic at the apex and rigid at the periphery, as Katharina Pistor at Columbia Law has argued. Understanding this is a necessary complement to understanding Minsky’s Financial Instability Hypothesis. As the saying goes, “poor people are constantly bumping into sharp legal things,” but the skewers cut extra deep during a bust and fully entrap poor people of color in the Hedge stage. Orthodox economists and regulators absolutely fail to see this or willfully ignore it. As Professor Harris’ co-author Georgetown Law Professor Emma Coleman Jordan highlighted in her recent article, The Hidden Structures of Inequality, a search of the Federal Open Market Committee (FOMC) transcripts from 2007-2008 fails to reveal a single mention of race – not one within the entire 1,800 pages. That’s not merely a monetary policy oddity, that’s a cognitive and ideological failure that ultimately caused unprecedented disparate impact. The Fed did not understand how much Black and Latino wealth was tied to housing value and this in turn exacerbated how badly they underestimated the severity of a potential crisis. As a result of this specific failure, from 2005 to 2009, white household median wealth fell by 16%, but Black median wealth fell by 53% and Hispanic median wealth fell by 66%. From 2010 to 2013, white household median wealth increased by 2.4%, Hispanic median wealth fell by 14.3%, and Black median wealth fell 33.7%.

This has to be part of our MMT story. Many of these folks were reaching for, essentially a middle class life, and a legal-economic design problem that could have been rectified by MMT insights pushed them back down. We have to connect those dots for people. I’d argue most people understand the status quo is unjust on a visceral level, but it’s up to us to supply macro analysis in narrative form. People are trying to manage their survival constraints, mostly on their own, against forces far more powerful than themselves. We have to demonstrate how in lieu of an “MMT world” we live within consumer credit markets, designed and governed by corporate creditors that reflect their political and legal interests rather than anything “natural” in the economic world.

As economic thinkers who claim to be hardheaded about operations and coercion, we should assert this is true at the most basic level. For example, let’s consider interest rates on small-dollar loans. Again, other folks throughout the conference will discuss the strained, delayed, and slow relationship between Fed rates and the rates consumers ultimately see. But whatever that relationship is, actual lending also occurs within qualitative legal parameters, in the context of power. I like to say I belong to the Frederick Douglass School of interest rate theory. Douglass said, “Find out just what any people will quietly submit to and you have found out the exact measure of injustice and wrong which will be imposed upon them.” In this vein…”Find out just what [rates] [debtors] will quietly submit to and you have found out the exact measure of what will be deemed a [“natural”] or [“reasonable” interest rate]…” and that is what will be imposed upon them. May seem a bit silly, but when you consider the white supremacist history of predatory lending in this country, maybe not such a stretch. 

The point is, the Fed can do whatever it wants, but when it comes to transmission of credit terms to the public, on the financial periphery, at least, we’re not just talking about what markets will bear in relation to monetary policy changes. We’re also talking about what the public and the state will allow and what we will not. People on the peripheries, get credit on whatever terms pawn shops, check cashers, payday lenders, or whomever happens to have financial power on their block happens to dictate. Big banks aren’t much better, especially since banking supervisors aren’t always wielding the Community Reinvestment Act and other fair lending laws aggressively. It’s so bad right now, low-income consumer advocates can usually predict the APR on clients’ loans before we even see a contract: it’s .01% under the state usury cap, simply because that’s how high we let them go. That’s all that’s preventing a race to the bottom.

Right now is a particularly important time to talk about all this and connect these dots. Consumer finance, in general, is becoming increasingly complex and moving faster and faster, meaning it’s becoming harder for people to see the forest through the trees. Today, in the current environment of federal deregulation, the American Bankers Association is trying to get banks back into balloon-payment payday loan. Subprime mortgages are coming back, auto finance is a total racket, healthcare woes will churn medical debt until we fix that system, and student debt is just going to get more abusive under Betsy. Additionally, there’s a debt crisis for living expenses in many major cities. I’ve encountered mattress debt, sewing machine debt, and puppy dog debt. Then, on top of all this, and this is for other folks on the panels, people are taking out loans so they can pay their debts to courts, municipalities, prisons, and other entities other folks on the panel will talk about.

And that’s only half of this whole process. Debt collection itself has become such an abusive industry that Human Rights Watch is covering it. In the United States. Since the crisis, we’ve seen an explosion of “debt buyers” — companies that purchase allegedly delinquent accounts for pennies on the dollar and then go after low-income folks for all that they’re worth. The claims are often false and there is frequently no evidence that defendants owe anything at all. But courts consistently enter judgments in favor of debt buyers, many of them default judgements because debt buyers engage in something called “sewer service” — they falsely claim to have notified defendants of lawsuits but instead essentially throw the summons in the sewer. People are being defrauded and fleeced in new and “innovative” ways. In her empirical work, UConn Law Professor Dalié Jiménez has found that “in many contracts, sellers disclaim all warranties about the underlying debts sold or the information transferred.” They’re not even trying. The originate-to-distribute-to-collect business model relies on fraud. Moreover, it relies upon violations of our constitutional rights to due process and our right to have our day in court. 

This is not the world we want to live in and it’s a world MMTers should fight tooth and nail. Many orthodox economists and financiers argue this is not only necessary, but desirable. They like this world and some are starting to disguise what they’re doing, as usual, with new technology. In a keynote lecture at a Post-Keynesian Conference in Denmark in 2011, Jamie Galbraith asserted that high finance has “nothing to do with the real world of things, of exchange. It is a world of technology, of factory-produced contracts, of uncontrolled legal complexity.” This is becoming more and more true for the world of “low finance,” as well. Technology, in particular, threatens to turn consumer finance into a predatory lending hellscape. In his recent testimony before the U.S. Senate Banking Committee, MMN Friend and Maryland Law Professor Frank Pasquale argued we’re moving toward a world of artificial-intelligence-based underwriting and regulators can’t keep up. We’re in the dark about how new algorithms are judging us and what they’re doing with our data, which is principally financial data. As the Equifax breach showed, we have no idea if corporations can protect our privacy and civil rights.

“Innovation” can very well just be a cloak for not only usury and redlining, but profitable violation of our civil rights. Some might say that’s ultimately the point. As Bob Hockett & Saule Omarova argue in The Finance Franchise, the online lending models aren’t even that “disruptive” to begin with: for example, the “peer-to-peer revolution” is actually just a reactionary return to the orthodox “one-to-one” intermediation model of finance. The “innovation” part is nonsense. Yet many bad regulators, including economists, are ready to give the fintech firms everything they want. For example, The Office of the Comptroller of the Currency wants to give Special Purpose National Bank Charters to online lenders. Although they say this is to level the playing field and take lending into the 21^st Century, a national charter’s chief function isn’t promoting competition, it’s allowing non-bank predatory lenders to circumvent state usury caps simply by moving their business online and getting approval from…the Trump Administration.

These new threats aren’t merely promoted as “innovative,” but beneficial. They’re cast as services because they offer the neoliberal holy grail: “ACCESS TO CREDIT” or “FINANCIAL INCLUSION.” It’s considered “woke” and “socially responsible” to leverage technology to “bank the underbanked.” These principles sometimes arise from good intentions. Credit is important. It’s crucial. But I don’t think have to tell this audience that bank credit and small-dollar loans are not solutions to structural problems in our economy. Exploitative credit can just make things worse, again, especially for immigrants and communities of color that don’t have intergenerational assets. More importantly, we shouldn’t live in a world where people have to survive on private credit. And if people do need credit, they should be able to get it from a trusted source, like a postal bank or a municipal bank, or a neighborhood institution like a Community Development Credit Union (CDCU).

MMTers need to differentiate ourselves from the orthodox folks here and push back against the shallow “Access to Credit” rhetoric. It’s especially important for us to do this because many of the people who push this stuff, happen to also be fiscal hawks at both the state and federal levels. In the Administrative Law world, there is something called the Bootlegger-Baptist strategy. Silicon Valley and Wall Street have paid a lot of fiery preachers to say government spending is bad, wasteful, etc.. Who knows if they truly believe this? Their actual aim is to make room in the temple for the money changers. They are opening up space for the “bootleggers,” for predators to come in and do the profitable dirty work in the absence of economic security.

So what do we about all this? MMTers already have the answer: we spend money for public purpose on things that actually make people’s lives better as whole people. We can’t just throw money at people. (I mean this in the context of lending, obviously, but if you’ll indulge me a minute, I’m also talking about some approaches to Basic Income here. If you’re just receiving a check, but you don’t have any increased, structural power over other aspects of your life, the money is just going to go down the drain. Forget income, people are in debt up to their eyeballs, and they’re being plundered. The way things are going now, if we get UBI without transforming the underlying structure of the economy, people are going to get their UBI money on prepaid Chase debit cards loaded with fees, their financial data is still going to surveilled by anyone who can check a consumer reporting system, and they’re going to lose their checks on the back-end to abusive, fraudulent debt collectors.)

MMT’s ultimate contribution to Consumer Finance is showing a world beyond the “Let Them Eat Debt or Let Them Eat Cash” approaches by actually spending public money not only for public purpose but for public power. If you subscribe to MMT and believe in some form of social justice, we don’t have a choice. Without sufficient federal financing, people aren’t just left without certain goods and services; they’re going to left at the mercy of predators without their biggest defense, the public purse-strings, which by Article I, Section 8 of the Constitution belongs to them by right. We need a Black Lives Matter budget. We need Fiscal Feminism. We need to stop balancing budgets on the backs of people who break their own backs, regardless of where they’re from. We have to give people jobs, healthcare, education, due process, safe streets, safe water, safe air, etc., — all the good stuff. I hear people say this will be messy, complicated, and difficult. I tell those people to get a load of the status quo. We have an economy that eats people’s fundamental rights for breakfast. MMT can show how to change this and in doing so, we can give people a real say in the broader forces that pull at all our survival constraints incessantly. In short, I see MMT as enabling real, deep economic democracy, across the board, and I’m excited to be here to talk about that with you all for the next three days.