While trawling the endless sea of information known as the internet you occasionally stumble upon a piece of work that 'jumps out' at you. Now, this isn't always in a good way: more and more often, especially in the midst of one of the largest global crisis's we have experienced, the socialists tend to show their true colours. You know the type, the one's who would never fully endorse free markets or capitalism, the ones who would always support additional regulation and 'favours' for interest groups no matter how ridiculous, while simultaneously claiming to be 'conservatives' or 'believers' in the free market. They see this as the perfect opportunity, the self-professed 'failure of capitalism' (when we all know that's not true), to spread the misery of socialism to us all. That's the true difference between advocates of laissez faire and big government: the former refuses to use, and fights against, the use of coercion on markets and individual liberties while the latter encourages it and actively seeks it.

The essay in question is a mammoth piece by Thomas Geoghegan, a Labour Lawyer, entitled "Infinite Debt - How unlimited interest rates destroyed the economy", published in Harper's Magazine (April 2009). The essay itself is far too long to reference or refute line-by-line here, but rest assured it's packed to the brim with a mix of fallacies, confusion, misunderstanding, emotional pleas and just plain old socialist drivel. In this article I will address just the final part of his essay, his 'five point plan' (no doubt a subtle reference to the five year plans of the communist countries?) for the United States.

"First, we have to pass a new type of law against usury that accepts the world in which we all live now. The saintly Illinois Senator Dick Durbin has proposed an amendment to the National Banking Act, to put a cap on interest at 35 percent. But that would let too many banks go on as before. Here's an alternative: let's cap interest at nine percent, then let a federal agency give exemptions to applicants - banks - that want to raise rates up to Durbin's limit (I would stop at twenty percent)."

"To get the right to this higher rate of twenty percent, however, the bank would have to demonstrate each year, to a federal agency, that it has a reputation for honesty and fairness and that it had not been found guilty of any fraudulent or bad-faith practices, such as the use of hidden fees or charges, or the unfair garnishment of someone's pension. I'm aware that this standard is vague. I suppose few licenses would be denied. But the very existence of this procedure - and the right of you and me to email our gripes to a federal agency with the power to exert extreme pressure - would have a chilling effect on banks and keep them from getting too near unconscionable conduct or charging the highest possible rates."

This first plan is particularly easy to refute, but first lets touch on the issue of usury, for the author attacks this concept throughout the entire essay. The definition of usury is interest on a loan. It’s perfectly natural and lawful and is as mutually beneficial to the borrower as it is to the lender. To assert that someone who has produced capital should then lend it out for free, without compensation (or at a rate of compensation lower than they deem fair), is preposterous.

Mutual, beneficial, voluntary exchange between two consenting individuals is perfectly fine. If they were coerced into accepting the contract then the contract is void, that’s called fraud. If not, then who is the author to decide what people should and shouldn’t be allowed to do? The owners of the capital are free to charge whatever they please: it’s their property you’re trying to borrow. If the author has a problem with it, he’s free to open up another payday stand next door and charge a lower rate of interest. This will do far more damage to the currently operating businesses than any amount of legislation, while simultaneously benefiting the customers, much more completely and efficiently than any amount of legislation. It would also be much cheaper than having the state enforce the regulations, with inspections, arrests and prosecutions. The only reason no one is opening competing loan businesses is because it's highly likely that they would lose their capital: they're not being compensated sufficiently for the risks they're taking with their property.If the government prevents someone from competing, well then there’s the problem! Legislative mandates on interest rates will simply result in the closure shops and leave customers without the service they want at a price they are willing to pay.

Back to the proposal, if this was put into law capital accumulation would fall to disastrous levels as there would be no interest in keeping it, slowing growth and progress significantly. If I have a dollar and someone wants to borrow it, I should be compensated for it. In the time you’re using that dollar, I can no longer use it. If someone forces me to loan it to you interest free, or at a rate below what I feel is fair, it represents a loss to me and a gain for you. When someone asks for a loan, they’re requesting a service. The lender has a right to refuse, or to require, as compensation, an equivalent service.

If the interest rate was forced downward by the recommended law above, the result would simply be a cap on the interest rate below its market-clearing level. What would happen? There would be an obvious and immediate shortage of credit. Not only is this inconsistent with intertemporal consumption preferences but it prevents the freedom of choice and destroys individual liberty. The banks don’t prey on the poor. They offer them a service; no one is forcing them to agree to it. The price is right for them at the time they took the money, that’s perfectly legal. By putting a cap on interest rates, they deprive the poor of this service, because no one would lend them a cent (see above). "If a man drinks wine and not water I cannot say he is acting irrationally. At most I can say that in his place I would not do so. But his pursuit of happiness is his own business, not mine." – Ludwig von Mises

"Second, we should have state-owned banks like the German banks known as the Sparkasse. Maybe each of the fifty states could charter its own bank. Each would issue credit cards at a rate much lower than what the private banks charge. Also: no fees at cash machines, no oppressive collection cases, no gratuitous destruction of people's credit ratings. The catch is that, as in Germany, the US Sparkasse would lend only to the most creditworthy people. That is, the state banks would set benchmarks not only for how the private banks should behave but how the people should behave as well."

Absolutely not. I gather he wants to appoint the boards of this “bank” and provide them with their funds by direct subsidies and by guaranteeing their investments with state bonds. This would, undoubtedly, lead to state-favoured businesses getting the majority of the “loans”. The burgeoning state control of business would swell the state bureaucracy and lead to widespread centralisation and corruption. Small businesses would fail and have their assets swallowed up by big businesses and big banks. No one would have to cater to consumers, just to bureaucrats (that’s how you would be one of the “creditworthy people”). Eventually socialism would ensue. Don’t believe me? This is almost, to the word, what the Italians did as they became enveloped in socialism before the second World War. I believe they call it Fascism.

"Third, we should have at least one or two "public guardians" as directors at the banks and other financial firms we have bailed out with $700 billion in taxes and all the money the Fed has printed. Every financial company into which we have "injected equity" should be required to have government-appointed directors, up to a third of the board. We can use these directors to nudge (if not dictate) what the banks and firms should do. For example, the directors should work to bring down credit-card rates. Through guardians, we can lower rates, bank by bank, by moral suasion and a certain built-in pressure rather than by external decree. The guardians should also demand of us good character if they bring down the rates. "Our directors" should help push capital into manufacturing. Of course, there has to be a reasonable profit, but sometimes a reasonable profit can be three percent instead of thirty percent."

I believe I covered this in the above paragraph. Welcome to communism! Enjoy your journey into poverty and the removal of human liberties! These policies will do wonders at making rich people poor, but they will do nothing towards make poor people rich. Indeed, most of these 'plans' would likely send us back several decades at least. On the issue of "public guardians", I believe Mises summed this up appropriately, "...if one rejects laissez faire on account of man’s fallibility and moral weakness, one must for the same reason also reject every kind of government action".

"Fourth, we should require the banks we bail out to cancel an appropriate amount of consumer debt - especially in instances where people would have paid back the principal by now had the interest rate been more reasonable. My retired schoolteacher, the one with the husband who is deep into Alzheimer's and who has already paid $3,000 on a $1,700 loan, should be let off the hook. The banks we have bailed out should follow the Golden Rule: just as their own debts have been written down or paid off, so they in turn should do unto others."

Here the author tugs on the heartstrings in an attempt to get someone out of a legitimate, binding, mutually voluntary and beneficial contract. People who produce goods can display them for the inspection of the buyer who is, at all times, free not to buy. The right to buy or not to buy is vital to economic well-being and, of course, to personal liberty. He is trying to turn this around, as if some authority, claiming to know what the people want, issuing orders for supply without being able to know the requirements of the buyers! This is how all the mess starts and is why no one saves – individuals need to be responsible for themselves and try to avoid the loss that results from mistakes. If people are constantly bailed out, the loss comes out of the public purse, and they are relieved of personal responsibility. They can then waste and lose just as much as their inherent laziness may dictate!

Don’t bail out the banks and don’t bail out the debtors. Bankruptcy exists for a reason. It’s the most effective way to reallocate resources in line with preferences, thereby reducing waste and hastening the recovery process.

"Finally, we should think about ways to "inject equity" directly into the accounts of working people rather than into banks. The best way to do this is to announce a plan to raise the gross replacement rate of Social Security from 44 percent to something closer to 65 percent, which is still short of the rate in many European social democracies. We can afford this as much as or more than they can."

"We could aim to reach that goal gradually, over the next twenty years, but even announcing the goal encourages future-oriented thinking. It would encourage people to believe that they could invest in real things again, instead of pinning their hopes on the false and predatory promise of a big, Vegas-style payout. The promise of a real public pension that people can live on would lead fewer of us to chase bubbles in good times, even as it gave all of us the confidence to keep spending when times were bad."

How? By printing more money? There's a huge disincentive to save in our society with the constant debasing of the dollar, debtor bailouts, heavy taxes and so on. Rather than forcing people to save (super) or providing them with a pension and other benefits (social security), a return to sound money so that savings aren't forever eroded (indeed their purchasing power would increase over time) would be a good start.

"Schumpeter feared that this kind of countercyclical thinking by people on the left would lead to a stagnating form of socialism, or even the end of capitalism, But socialism, in the state-run form he anticipated, is not inevitable, or even desirable. Social democracy, European-style, which Schumpeter did not expect, is desirable. Sure, I'd like the European governments to run up a bit of public debt to pump up demand over there - I don't think that's so immoral. What's immoral is to pump up demand, as we have, by handing out easy money at high interest and driving people into debt."

"Even in Babylon they spared people that kind of captivity. We now have to ensure our own country does the same."

This final section is full of fallacious arguments. He’s just dropped them everywhere. The problem is that to 'refute' all them (e.g. disprove socialism) requires far more time than I’m willing to give to this guy, especially as he hasn't justified any of his ideas with even an ounce of economic sense or theory, so I’m going to simply respond in kind: no, public debt is immoral; and yes, your policies WILL lead to socialism, wealth destruction and impoverishment. While it’s not inevitable, if people in positions of power are at all influenced by you, I fear for the worst. I’ll end with this: "As soon as we surrender the principle that the state should not interfere in any questions touching on the individuals’ mode of life, we end by regulating and restricting the latter down to the smallest details," – Ludwig von Mises.

Have a good weekend, and while you're out enjoying the many benefits that capitalism has enabled, be thankful that people such as Thomas don't yet have the necessary power to impose their will on others. While we have definitely moved further towards his dream of a socialist state in the past year, it's still early days and we can reverse the damage already done.