Put a human face on the outrageous practices of credit card companies, urges MIT economist Simon Johnson. (AP photo)
A need to 'dig beneath the corporate surface'
COMMENTARY | November 10, 2009
Simon Johnson of MIT says reporting like Ida Tarbell's of 100 years ago is badly needed today. One suggestion: the press should take on the financial institutions that helped cause the financial collapse, and are even benefiting from it.
By John Hanrahan
Economist Simon Johnson wants to see modern-day muckrakers take on the nation’s economic collapse and the financial institutions that helped precipitate -- and are even benefiting from -- the collapse.
In an interview with Nieman Watchdog, Johnson, professor of global economics and management at MIT’s Sloan School of Management, emphasized that he believes there are many fine journalists doing a good job of covering the economic news on a day-to-day basis. What’s largely missing from the mainstream press coverage of the last year, though, is “the long, in-depth, comprehensive dissection of a financial institution, going through all the nuances and details of how the institution is run, taking a skeptical look at the people who run it, and investigating how we got to where we are today.”
“I would like to see serious journalism, blow-by-blow exposes of these [financial institutions], in the manner of Ida Tarbell,” he said of one of the most prominent of the early 20th-century muckraking journalists, a group that also included Lincoln Steffens, Ray Stannard Baker, and Jacob Riis.
Tarbell, writing for McClure’s Magazine, published between November 1902 and October 1904 a 19-part series exposing the monopoly powers and collusive practices of John D. Rockefeller’s Standard Oil Company. With the help of an assistant, she began in 1900 to research the series that formed the basis for her book, “The History of the Standard Oil Company.” Her investigation was credited as the main underpinning of the federal antitrust action that led to the 1911 Supreme Court decision ordering the breakup of Standard Oil.
In 1999 a 36-person panel of prominent journalists, under the aegis of New York University’s journalism department, selected Tarbell’s investigation of Standard Oil as fifth in a list of the top 100 works of American journalism in the 20th century.
Tarbell’s methodology remains as valid for investigative reporters today as it was 100 years ago when there were no computers, no Internet, no shortcuts to obtaining information. As described in Columbia Journalism Review, Tarbell investigated Rockefeller and Standard Oil “by using documents – hundreds of thousands of pages scattered throughout the nation – then fleshing out her findings through well-informed interviews with the company's current and former executives, competitors, government regulators, antitrust lawyers, and academic experts." The dramatic story of Tarbell’s historic expose is vividly recounted by longtime investigative journalist and author Steve Weinberg in his book “Taking on the Trust: The Epic Battle of Ida Tarbell and John D. Rockefeller.”
Unlike Tarbell who was given so much time by McClure’s to do her monumental, in-depth research, most of today’s good financial journalists, Johnson said, are under daily pressures to produce stories. He said these reporters should be given the time and resources to step back and investigate the major financial institutions involved in the economic crisis. Johnson urged reporters to approach their task with a skepticism that was often lacking in the run-up to the financial collapse. Too often before the collapse, Johnson said, some financial journalists became enamored of the heads of financial institutions they were covering and didn’t dig beneath the corporate surface.
In addition to the lack in the daily news media of in-depth investigations of the major financial institutions, Johnson said that this economic crisis thus far has not produced books equivalent to those from the “greed-is-good” era of the 1980s – books such as “Barbarians at the Gate: The Fall of RJR Nabisco” and “Liar’s Poker: Rising Through the Wreckage on Wall Street.”
“Barbarians at the Gate,” by Bryan Burrough and John Helyar, was characterized by Jon Friedman of MarketWatch in October 2008 – as the economy was collapsing – as “the best business book ever published.” Friedman said the book chronicled “the wild and crazy 1988 takeover battle for RJR Nabisco” – the biggest in U.S. history. He commented that it was “especially relevant today” as the nation suffers the consequences of economic excesses such as the 1980s signified
“Liar's Poker,” by Michael Lewis, was described by one reviewer as a partly autobiographical account that traces “the rise and fall of Salomon Brothers, mainly focusing on the mortgage bond department whose fortune closely traced the speculative bubble in various mortgage backed securities in the 80s.” The reviewer deemed the book as relevant today because the “current subprime crisis indeed echoes some of the themes in that book.”
As one prime example among many that would be worthy of the Tarbell treatment, Johnson cited the banks’ credit card companies. How, he asked, did we get to the point “where these companies can take such advantage of their customers? Where are the detailed stories that put a human face on this? Who are the people who run these companies? How can they justify what they do?” And who are the customers who suffer “because of the credit card industry’s practices.”
And, we would add, who are the credit card lobbyists and how do they operate? Which politicians protect the industry and benefit most from its largesse?
Johnson is not the only economist we talked to recently who raised the credit card issue. Harvard School of Government Professor Linda J. Bilmes told Nieman Watchdog that she would also like to see the mainstream press pursue in-depth investigations of credit card companies. In an interview, Bilmes said that her students, as well as other citizens who phone in when she appears on television or radio call-in programs, all ask the same thing, namely:
Why are credit card rates so high? At a time when banks can borrow money from the U.S. Treasury at the lowest rate possible -- zero percent as set by the Federal Reserve -- how can credit card companies charge their customers interest rates of 30 percent and possibly even more? Why are we, the consumers, not getting any advantage from those low interest rates that benefit the banks?
Students and callers to the call-in shows likewise flag another issue that Bilmes said merits more investigation by the press: What benefits are we consumers getting from the TARP (troubled asset relief program) funds? The implication of the questions is that the answer is none.
“This is a subject that requires the press to connect the dots -- how did consumers benefit from the bank bailouts?” Bilmes said. Also, “what was the effect of the decision not to nationalize the banks? These are questions I get all the time.”
Earlier this year, Congress passed and President Obama signed into law the Credit Card Accountability, Responsibility and Disclosure Act (or Credit CARD Act) that imposed new restrictions on credit card companies. These included prohibitions on raising rates on outstanding card balances (still allowing rate changes for new purchases); prohibitions on rate increases in the first year an individual has a new credit card; limits on when rate increases can occur; requirements of fuller disclosures of card terms and conditions; and a requirement of 45 days’ notice to cardholders of interest rate, fee and finance charge increases. Most of these consumer protection provisions of the new law -- which was signed by President Obama in May -- will not take effect until February 22. Some provisions will not be phased in until late next year.
Although the Credit CARD Act does afford greater protections for consumers, an industry-oriented web site creditcard.com noted: “The new law does not cap how high interest rates can go. Nor does it limit when APRs [annual percentage rates] can be hiked on future purchases.” Additionally, the new law applies only to consumer credit cards, so “People with business or corporate credit cards will not have the same protections as people with personal credit cards...”
Separate from the Credit CARD Act, Senator Bernie Sanders (Independent-Vermont) has proposed legislation to cap credit card interest rates at 15 percent to halt what he calls “loan-sharking.” Senator Dick Durbin (D-Illinois) has proposed legislation with a much higher cap -- 36 percent -- on credit card interest rates. Although some states have usury laws, a 1978 U.S. Supreme Court decision defanged those laws by allowing the law that applied in the state where the credit card company is headquartered to apply to all of the other states where the company does business. Consequently, most credit card issuers base their operations in those states -- Delaware and South Dakota -- with no (or lenient) usury laws.
Given a nine-month grace period from the date the new law was signed, the credit card companies immediately began “rushing to raise rates and tack on extra fees ahead” of the February 22 effective date, according to a recent Associated Press article. “In some cases,” the article continued, “rates are doubling to as high as 30 percent or more, even for people who pay their bills on time.”
Although the mainstream press has reported these rate increases, it has not delved deeply into how the credit card companies can justify such usurious rates. Perhaps profits are their ultimate justification. Banks generated $19 billion in 2008 from credit card interest charges and late fees and penalties. An industry analyst estimated that figure will climb to $20.5 billion for this year.
Recently introduced legislation to move the effective date for the credit card law from February to December 1 is pending in the House Financial Services Committee. But as the Associated Press reported recently, Federal Reserve Chairman Ben Bernanke, “while acknowledging that change would benefit consumers, rejected the idea. He said it would force the Fed to implement provisions of the new law without adequate public comment and could lead to ‘unintended consequences’.”
All of this and more make the credit card industry ripe for investigative journalists, said Johnson and Bilmes.
We’ll let Ida Tarbell have the last word on the philosophy of business ethics that reporters should apply in investigating financial institutions today:
“There is no man more dangerous, in a position of power, than he who refuses to accept as a working truth that all a man does should make for rightness and soundness, that even the fixing of a tariff rate must be moral.”
One does not have to wonder what Tarbell and other muckrakers of the progressive and trust-busting era would have made of our modern-day, would-be financial titans.
Next: The costs of war, studiously ignored by the press.
01/24/2010, 02:21 AM
Judging from the lack of comments on this post, it looks like the present age press does not understand industrial production. That is because journalists generally do not have the education to understand the complex nature of production. That knowledge is not available to them. Therefore when a Lawyer does the Liver Transplant, everyone thinks, the Lawyer knows what he is doing.
There was this episode in StarTrek where only the children left in this advanced civilization and all the machines while the adults were perished. We are in that world now where too many people lack the critical knowledge to run our advanced society that was inherited after WWII. Oh. we produced a lot since then but lost a lot in the process - the glue that holds the society together.
We lack the knowledge to "connect the dots".