The Rise of the Credit Industrial Complex: How Deregulation Fueled the Debt Crisis
The banking industry is much different today than it was three decades ago. The rules for borrowing and lending have changed. Today, we have a whole debit and credit industrial complex that is taking money from the public and giving it to the already absorbingly wealthy.
Credit card trouble is all too common and is at an all-time high. In 1968, credit card debt was less than $10 billion; in three decades, it became more than $600 billion, a 6,000% increase. 1 In 2007, American citizens had more than $937 billion in credit card debt. 2 According to The Federal Reserve’s G-19 Consumer Credit Report, the amount of revolving credit (credit carried over from month to month) is increasing at an annual rate of 8%. 3 This is an increase from 2006’s growth rate of 6.3% and 2005’s rate of 3.1%. This has nothing to do with the more than $1.5 trillion in non-revolving credit that is used for things like auto loans.
How did this transformation take place? It all started back in the late 1970’s. In 1980, South Dakota’s economy was in shambles. At the same time, Citibank, which was stationed in New York, was having financial problems of its own. New York usury laws capped the interest rate at 12 percent, and the inflation rate was 20 percent, which would lose any bank money. Citibank tried to convince New York to change its laws, but it wouldn’t, so Citibank turned to South Dakota. Citibank and the state struck a deal.
Federal banking rules require that the state issue a formal invitation issued by the legislature for a bank to be able to “set up shop” in their state. This was done to protect local bankers. Citibank agreed to bring “a limited” bank and supply 400 white-collar jobs if the state would allow them to move there. An “emergency” bill was drafted and passed through the South Dakota legislature in one day.
Other banks caught on but didn’t choose the same state. Delaware passed similar legislation, and big banking interests were eager to move their business. Banks such as Chase, Manufacturers’ Hanover, and Chemical quickly took advantage of Delaware’s unregulated interest rates.
In 1978, the Supreme Court ruled that banks could export their interest rates to any state. This is why major banks quickly moved their places of business to states that had recently removed banking interest caps. Now, banking interests could use whatever interest rates they wanted and could export them all over America, even if the other states didn’t want them to.
Soon, there was a boom in credit cards. Banks would mail credit cards directly to customers. The major credit card companies (Visa, MasterCard, Discover, and American Express) currently spend $1 billion on advertising. This pales in comparison to the $4 billion they spend on direct mail marketing.
1. Warren, Elizabeth and Tyagi, Amelia Warren. “’The Cement Life Raft’ (Chapter Six)” Chapter Six from the book “The Two Income Trap: Why Middle Class Mothers and Fathers are Going Broke” written in 2003 is available at PBS’s website. November 24, 2004. <http:>
2. Woodcraft, Zoe. “Update: Credit Cards, Consumer Debt and Bankruptcy.” PBS Frontline. March 2008.
3. Federal Reserve Statistical Release. “Consumer Credit.” April 7, 2008.
How did this transformation take place? It all started back in the late 1970’s. In 1980, South Dakota’s economy was in shambles. At the same time, Citibank, which was stationed in New York, was having financial problems of its own. New York usury laws capped the interest rate at 12 percent, and the inflation rate was 20 percent, which would lose any bank money. Citibank tried to convince New York to change its laws, but it wouldn’t, so Citibank turned to South Dakota. Citibank and the state struck a deal.
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| (Source) |
Federal banking rules require that the state issue a formal invitation issued by the legislature for a bank to be able to “set up shop” in their state. This was done to protect local bankers. Citibank agreed to bring “a limited” bank and supply 400 white-collar jobs if the state would allow them to move there. An “emergency” bill was drafted and passed through the South Dakota legislature in one day.
 |
| (Source) |
Other banks caught on but didn’t choose the same state. Delaware passed similar legislation, and big banking interests were eager to move their business. Banks such as Chase, Manufacturers’ Hanover, and Chemical quickly took advantage of Delaware’s unregulated interest rates.
In 1978, the Supreme Court ruled that banks could export their interest rates to any state. This is why major banks quickly moved their places of business to states that had recently removed banking interest caps. Now, banking interests could use whatever interest rates they wanted and could export them all over America, even if the other states didn’t want them to.
Soon, there was a boom in credit cards. Banks would mail credit cards directly to customers. The major credit card companies (Visa, MasterCard, Discover, and American Express) currently spend $1 billion on advertising. This pales in comparison to the $4 billion they spend on direct mail marketing.
2. Woodcraft, Zoe. “Update: Credit Cards, Consumer Debt and Bankruptcy.” PBS Frontline. March 2008.
3. Federal Reserve Statistical Release. “Consumer Credit.” April 7, 2008.
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