Red Is Beautifulrnby Michael WashburnrnThe Indebted Societyrnby James Medoffand Andrew HarlessrnBoston: Little, Brown;rn241 pp., $24.95rnAccording to Harvard professorrnJames Medoff and financial analystrnAndrew Harless, one of the most balefulrninfluences on America’s economicrnhealth—and a reason for the decliningrnstandard of living of both blue- andrnwhite-collar workers—is the moneylendingrnsector, which includes manyrncommercial and investment banks andrnindividual investors. In the authors’rnview, the lenders have for the past fewrndecades pursued interests radically differentrnfrom those of most Americans,rnwith the connivance of a Federal ReservernSystem run by men who are themselvesrnformer investors and bankers. While it isrnwell known that private firms have hadrnan exploitative and impersonal relationshiprnwith their workers, few peoplernunderstand how the lenders exploit thernexploiters and make things even worsernfor the workers at the bottom of thernhierarchy.rnFor many people, corporate debt is arnmore distant problem than personalrndebt, which has spiraled to ever greaterrnheights as revolving credit has become arnnorm of American life. The emergencernof a class of people living in perpetualrndebt is not at all a bad thing for bankersrnwho oversee the use of credit cards. Fullyrnaware of the profits to be made off customersrnwho do not pay the full balancerndue each month, bankers now offer creditrncards to those who in past years wouldrnhave been considered unacceptable risks.rnThe upshot today is that 90 percent ofrncredit card revenue stems directly fromrnuse of the revolving-credit policy. Encouragingrnthis trend has been the changernin the federal funds rate which in the 12rnyears up to 1992 fell from 13.4 percent torn3.5, while the average credit card interestrnrate rose from 17.3 percent to 17.8.rnBanks are now able to borrow money at arnlow rate and relend it at a very high rate.rnWhile there is a high rate of defaultrnamong those who never should havernbeen issued credit cards in the first place,rnthe losses pale in comparison with thernprofits made off those in debt. Accustomedrnto a certain standard of living,rnmany Americans refuse to change theirrnspending habits even if interest rates gornup. What the authors call “upwardlyrnmobile interest rates” have resulted in arn900 percent jump in receivables for therncredit card industry between 1983 andrn1993.rnParalleling the rise of personal debt isrnthe growth of corporate debt, whose effectsrnmay not be as visible to the averagernworker—until he gets his pink slip. AsrnMedoff and Harless put it, “Americanrncapitalism has taken on a new look. Atrnone time, it was a system based on owning.rnIt is now a system based on owing.”rnIn 1958, when debt was at a higher levelrnthan in any other year of the I950’s, onlyrn4.6 percent of the cash flow came fromrninterest payments (excluding firms in thernbusiness of borrowing and lending money).rnIn 1985, the figure had already gonernup to 15.9 percent—in what was the lowest-rndebt year of the 1980’s. In some sectorsrnof the economy, the figure is muchrnhigher—in manufacturing, for example,rnit had climbed to 36 percent by 1992.rnContributing to the rise in corporaterndebt are tax-deductible interest paymentsrnand leveraged buyouts of financiallyrnunhealthy conglomerates. Anotherrnreason is the dwindling number of toprnexecutives who were alive during thernGreat Depression, when massive debtrnwas usually a sign of certain financialrndoom. Younger executives have fewerrnqualms about owing large sums ofrnmoney.rnwhatever the reason for a company’srnslide into debt, the upshot is almost alwaysrnthe same—efforts to “downsize”rnand cut costs by dumping workers andrnrelying on temporary help. Job security isrna thing of the past, as is the notion thatrnhard work will lead to a promotion orrnhigher wages. Houri)’ earnings have fallenrnsteadily in both the service and manufacturingrnsectors since 1973, and healthrninsurance and pensions are harder andrnharder to come by. For young blue-collarrnworkers, things are particulady bad, withrnthe goods-producing sector experiencingrnthe biggest decline in real wages. Thingsrnaren’t much better for white-collar workers.rnIn fact, a 1994 Bureau of Labor reportrnfound that the biggest jump in thernnumber of “displaced” workers wasrnamong “managers and professionals andrntechnical, sales, and administrative supportrnworkers.” The victims are largelyrnmiddle-aged white men. Women arerninsulated by their relatively lower wagesrnand, one suspects, by affirmative action,rnthough the authors do not discuss this.rnIn our time, Medoff and Harless write,rn”the needs of lenders have acquired anrnalmost sacrosanct status.” While thernFederal Reserve System does much of itsrnbusiness in secrecy—until 1994, it didrnnot even announce its decisions untilrnmonths after they were made—it doesrnnot enjoy the immunity to partisanshiprnthat one might imagine. In the authors’rnview, the Federal Reserve System is inrnthrall to the lenders, which is not surprisingrnin view of the backgrounds of manyrntop officials at the Fed—former bankersrnand investors who may hope someday tornreenter the lending sector. “A high inflationrnrate, even if only temporary,” writernMedoff and Harless, “looks particularlyrnbad on the resume of a former Fed governor,rnespecially if he or she is looking forrna job in private-sector banking.” It isrntherefore in their personal interest tornkeep interest rates and the value of therndollar high.rnWhen appointing a top Fed official,rnthe President often tries to placate thernlending class, for if he does not, the appointmentrnmay be derailed. FormerrnVice Chairman Alan Blinder, a Clintonrnappointee, learned the price of questioningrnpro-lender policies when manyrn”anonymous sources” within the Fed vilifiedrnhim so savagely that he left his postrnshortly after taking it. When Clintonrnappointed Felix Rohatyn to succeedrnBlinder, a campaign to derail his appointmentrnwas begun by Florida senatorrnConnie Mack. Which isn’t surprising—rnfor percentage of total income representedrnby direct interest income, Floridarnranks third out of all 50 states.rnThe erosion of living standards can bernreversed, but not while the Fed keeps itsrnstatus as a semisecret body immune torndemocratic pressures but wielding enormousrnpower (a power recognized byrnRichard Nixon, who put heavy pressuresrnon his appointee Arthur Burns to keeprninterest rates down and thus insure plentifulrnjobs, which would reflect well onrnNixon when election day rolled around).rnThe entire subculture of the Fed needsrnto change, so that the interests of lendersrnwill no longer be the sole concern. Fedrnofficials could receive bonuses for helpingrnto keep employment up, and lendersrncould be issued inflation-adjustedrnbonds. But past efforts at reform havernfaced fierce opposition from a powerfulrnfinancial elite which milks the middlern30/CHRONICLESrnrnrn