Mike the Mad Biologist

Admittedly, you won’t hear credit card companies call Congress’ failure to cap credit card interest at 15% annually (which is what credit unions are forced to do) that, but, as Ian Welsh notes, that is exactly what Congress’ inability to enact a cap means:

The Senate just stopped limits on credit card rates. Sometimes it takes a socialist to say the obvious:

“When banks are charging 30 percent interest rates, they are not making credit available,” said Mr. Sanders, who noted credit unions are limited to 15 percent. “They are engaged in loan-sharking.”

The banks have been given, loaned and guaranteed trillions. They are given access to money at very close to zero percent. They then lend it out at much much higher rates. As Sanders notes, 1/3 of credit card holders are being charged more than 20%, some as high as 40%.

That’s usury. More to the point, it means that for all intents and purposes they aren’t making credit available.

Does anyone wonder why consumer spending dropped again? Would you borrow at 20% to 40% to buy anything other than food or pay for housing, when jobs are still being lost at over half a million a month? No one with any sense would.

Any bank that needs to charge such high interest rates has a fundamentally unsustainable business model and needs to be unwound. One of the things that hasn’t been talked about much, but, which is looming in the background, is the disintegration of credit lines for businesses. I know four business owners in Boston, who are currently profitable, but have had their credit lines slashed or eliminated (two and two each). For a small business, not having a credit line available to pick up the slack due to a temporary downturn, such as a couple of clients who need an extra month or two to pay, can be disastrous. For most small businesses, having the ability to borrow so they themselves don’t fall behind (due to no fault of their own) is critical to maintaining solvency, never mind employment rolls. And these four business owners are now looking over their shoulders.

Instead, it seems, as was predicted by many, that the various funds liberated by Treasury have not made it out to borrowers–and why shouldn’t have this happened? Insolvent banks don’t lend money, they keep it because they are trying to become solvent.

I hope things turn around, but I think it could get really ugly without getting credit to individuals and small businesses. And that’s before a lot of adjustable rate mortgages are recast in late 2009–and more in 2010….

Comments

#1 anon
May 19, 2009

“Would you borrow at 20% to 40% to buy anything other than food or pay for housing, when jobs are still being lost at over half a million a month? No one with any sense would.”

That’s the problem – the vast majority of credit card users have no sense. You can blame the banks all you want, but stupid borrowers are half of the problem. And by the way, borrowing at 20 – 40% to pay for food or housing is incredibly stupid too. You clearly need to cut your monthly expenses if you can’t sustains your lifestyle without borrowing at punitive rates (if you can’t afford the housing, move).
#2 JohnV
May 19, 2009

I second moving. With the record low unemployment, finding a new job should be a piece of cake!
#3 humorix
May 19, 2009

Why they cannot be 100 % of his wage (check)?
#4 Moopheus
May 19, 2009

Of course, capping rates may make the credit less usurious, but it won’t make it more available. In order to expand credit, you need financially sound lenders and financially sound borrowers. What we have now is zombie banks and overleveraged borrowers.

Look, the credit card business is not run for your benefit. It is run for the banks’ benefit. People should cut up their credit cards and use cash.
#5 Chris H.
May 19, 2009

I think the interest rate issue is a red herring. If you cap interest rates, the banks will just get you with fees. What’s needed is true competition in financial services, and you won’t get that until there is upfront transparency on fees and interest, combined with much lower switching costs.
#6 Joshua
May 19, 2009

As somebody who’s about to do it, I can tell you that moving costs money, too. Just sayin’.

Most of the people who are forced to borrow to pay for food and housing are so poor that it’s not a matter of maintaining a “lifestyle” so much as maintaining a life, full stop.

But, hey, let’s pretend we live in magical libertarian fairyland where all problems can be solved by shopping around for a better deal.
#7 jay
May 19, 2009

Most of the people who are forced to borrow to pay for food and housing are so poor that it’s not a matter of maintaining a “lifestyle” so much as maintaining a life, full stop.

They also sound like people who are in no condition to be credible credit risks. They may need some help, but credit is the worst help they can get
#8 Brett Dunbar
May 20, 2009

Credit is a competitive industry, if you don’t like the rate on offer from one lender then go somewhere else, if no one will lend to you at a decent rate maybe you shouldn’t be borrowing. If the consumer is price sensitive then the price will fall. All that legislating maximum rates does is either restrict the availability of legal credit or induces the lender to increase other charges and fees (price controls restrict availability of the good subject to price controls).
#9 Eric Lund
May 20, 2009

They also sound like people who are in no condition to be credible credit risks.

In principle I would agree with this statement. The problem is that for most of the last ten years the banks did not agree. They were eager to get people signed up for the debt treadmill precisely because the interest rates and fees were so profitable for the banks. They never considered what would happen when a large fraction of their borrowers became unable to roll over their debt (the ability of so many borrowers to temporarily cover the credit card bills from the HELOC ATM helped postpone this day of reckoning).

If the consumer is price sensitive then the price will fall.

In a transparent market, yes. Credit in this country is anything but transparent: there are certain disclosures required by law, but the banks that offer credit cards tend to lay on so much obfuscatory small print that it is not always straightforward to calculate just what the price is, and the banks also have the right to change the terms unilaterally. Likewise in the mortgage business, where at least the contract can’t change but mortgage lenders often laid on excessive fees and took steps to disguise the toxic nature of the loans they were offering.

Also, while many of the people who have serious credit card debt problems were stupid about it, some were merely unfortunate. Things like severe medical problems (for which their insurance, if they even could obtain some, would not pay) and divorce put a lot of people over the edge who otherwise would have been nowhere near the edge.
#10 Paul Murray
May 21, 2009

That’s the problem – the vast majority of credit card users have no sense. You can blame the banks all you want, but stupid borrowers are half of the problem.
True. People that borrow at 40% have no sense. People that leave their cars unlocked have no sense. People that walk down the bad part of town with money hanging out of their pants have no sense.

But it still should be (and is, in the second two cases) illegal to take advantage of such people.

Why is it ok for government to regulate all sorts of behaviour for the common goiod, but not commercial behaviour? Why is that sacrosanct?
#11 kontör
May 21, 2009

Sam, the question is how do you know that any one commenter is a certain nationality? With the double “aa” in his name tumaat could just as well be Dutch. Declaring all the persons in the third largest country by population with one single attribute is not very bright either.
#12 Brett Dunbar
May 21, 2009

Interest limits are a bad idea. Britain effectively abolished them with the Consumer Credit Act 1974 (replacing an effective 50% limit). In order to enhance marketplace transparency we have a requirement that the APR be clearly and accurately stated, recently the courts have taken to invalidating loans where fees were charged or insurance required that was not stated in the documentation on the grounds that the interest was misstated. Regulation to increase transparency can reduce transaction costs and makes the market more competitive, if you want to actually improve things that is what you should not do is limit rates charged which simply makes legal credit unavailable.

A 40% rate is far lower than what illegal moneylenders (Loan Sharks) charge they often charge 1000% or more.
#13 Edward
May 21, 2009

I agree that credit card companies are evil. The basic problem is that they give too much credit to people who don’t know who to use it. Then, in order to make a profit, they charge lots of fees and interest on everyone, so we all suffer.

One problem I’ve seen is that the credit card companies give lots of credit to college students and recent college grads. Such people are good risks for the companies, since they generally earn decent wages (eventually in the case of college students). However, people in their early 20′s and late teens are not always the most financially responsible people.

When I was a student, I had a roommate who was carrying a balance close to his limit (around $1000). He was generally making just slightly more than the minimum monthly payments. The card company raised his limit, so he went out and bought an expensive TV. I seem to recall making the comment to him that it would cost a lot less in the long run if he paid off the credit card and saved up for things instead. His response was “Yeah, but I want the TV now.” I didn’t say more because I wanted to watch TV too.