Capping Interest Rates and Ceteris Paribus

Two of Congress’ most curious economics mavens teamed up to introduce a bill to cap credit card interest rates at 15%. Their argument in favor of this legislation was straightforward.

Ocasio-Cortez (D-N.Y.) will introduce the House version of the bill. “There is no reason a person should pay more than 15% interest in the United States,” she said on Twitter. “It’s a debt trap for working people + it has to end.”

So “no reason” isn’t exactly a strong argument, but it’s more than sufficient to appeal to the base. And, in a vacuum, it’s hard to argue that interest rates of 15%, no less the maximum below usury, 25%, are fair when banks are paying a pittance, if anything, on deposits. But then, that’s not the criterion for unsecured credit.

Whether credit is a “debt trap for working people” is the typical silly argument AOC makes. There’s no requirement that people spend beyond their ability to repay credit, and if they pay off their credit monthly, then the interest rate is irrelevant. But there is an assumption built into her cry, that working people cannot survive on what they earn, and so they have no choice but to amass credit debt.

This, of course, may or may not be true, based upon the individual circumstances of any working person, but since she and Bernie are the voices of the marginalized, and have no qualms about creating “rights” to the things people want without regard to whether any such right exists, it’s unsurprising. Even assuming their vision of the working poor is legitimate, that they are buying on credit food and possessions necessary for survival, rather than iPhones and Starbucks, and that the interest charged for unpaid amounts is so high as to cause a debt they are unable to pay off, does this proposed bill help or hurt?

The median interest rate was 21.36 percent last week, compared with 20.24 percent about a year ago and 12.62 percent about a decade ago, according to the website.

For borrowers with high credit scores, the average rate was 17.73 percent last week, compared with 16.71 percent a year ago. For those with poor credit scores, the average is now about 24.99 percent, compared with 23.77 percent a year ago.

Standing alone, these interest rates are shockingly high. Given the approach preferred by Sanders and AOC, that government can regulate and engineer fairness into people’s lives, their approach seems to be the answer. Wouldn’t it be better for poor working people to pay less interest than more? Of course it would. But their grasp of the problem is based on unwarranted corporate greed, and their solution is based on limiting that greed. What it is not based on is Newton’s Third Law, that for every action, there is an equal and opposite reaction. What it is based on is ceteris paribus, all things being equal.

“This specific proposal will only harm consumers by restricting access to credit for those who need it the most and driving them toward less regulated, more costly alternatives,” Jeff Sigmund, a spokesman for the American Bankers Association, said in a statement.

But this guy is a shill for bankers, so what he says doesn’t count, right? I quipped that the name of this bill was the “Sorry, but your application for a credit card is rejected” Act. Someone else quipped it was the “Full Employment for Loan Sharks” Act. We’re all so very funny, except there is nothing funny about the problem, the solution and the consequences that these beloved voices for the overworked and underwashed would impose upon the very people they believe they’re helping.

Credit isn’t extended to the poor because the poor need credit. They don’t get plastic because they can’t survive without it. Banks extend credit to make money on it, both by their not insignificant slice of the sale and the interest charged for amounts unpaid. You can hate banks for being greedy scum, and they are, but they’re the folks extending credit. Without these greedy scum, the poor can’t be charged ridiculously high rates of interest because there is no credit to be extended to them. At least not by banks, and not at 24.99%.

The bank doesn’t make any money on a deadbeat. They lose money when someone spends and doesn’t repay, so there is no sound business reason to extend credit to people who, based upon their credit history, appear highly unlikely to pay it back. It doesn’t matter why they don’t pay it back, how sad their stories are, how good their reasons. It’s a bank. It wants its money, plus its interest and fees. It’s heartless, despite the television commercials about how much they love you. You can wish it wouldn’t be heartless, and that would be wonderful, except they have the money because they are heartless and you don’t.

The interest rate charged to a person is relative to their creditworthiness. It’s not a precise match, but reflects the risk of extending credit to someone who is marginally likely to pay it back. The price of this greater risk is a higher interest rate, which compensates for those who fail to repay the credit. Lower the interest and the risk is no longer worth it. This obvious analysis eludes those who assume they can cap rates and nothing else will change. Ceteris paribus.

Whether the consequence will be that the working poor will be denied credit needed for survival, or the new iPhone, isn’t clear. Whether this will leave them no other option than payday lenders or loan sharks, charging usurious rates, is unclear. Whether this will mean that banks, realizing that sitting on piles of money isn’t a good business option either, will concede that they have been milking the poor with their greedy ways all these years, charging unjustifiably high interest rates to those with the fewest options and little political clout, and continue to extend credit at a mere 15% because it turns out to be more than enough to justify the risk of nonpayment and still turn a healthy profit, is unclear. Sounds business practices are one thing, but that doesn’t preclude the possibility that these rates reflect nothing more than greed because they can get away with it.

The problem, however, is that re-engineering economic society without knowing whether the outcome is going to help or hurt based on the one belief that is inherently unreliable, ceteris paribus, is as ruinous as it is appealing. Tweak one thing and another will change. The one thing you can count on is that all things will not remain equal, but that every action will cause a reaction.

Is it better to shut one’s eyes, pull the trigger, and pray that your bullet strikes the greedy bad banks rather than the hardworking poor? Is it better to figure out who the bullet will strike before pulling the trigger? At the very least, advocates should realize that they are shooting blind.

32 thoughts on “Capping Interest Rates and Ceteris Paribus

  1. MIKE GUENTHER

    It stands to reason that after this bill, they will have to introduce one that says no one may be turned down for a credit card for any reason. After all, it worked so good for the home mortgage industry, right?

    Reply
    1. SHG Post author

      Ultimately, the government would be the lender of last resort if banks pull out of the working poor market. Would Sanders and AOC have a problem with Fannie and Freddie providing credit cards and taxing their way out of the hole?

      Reply
      1. Guitardave

        I think AOC’s and Mike G’s ideas would work, with a small tweak…the revival of private, bank owned work camp debtor prisons. Problem solved.

        Reply
      2. Neil

        AOC already answered that – she refers to it as public & postal banking.
        https://twitter.com/AOC/status/1085380063112105984

        Much of the criticism of AOC assumes that she was a poor student of economics. Instead, I think she was an astute student of Lenin.

        ‘The big banks are the state apparatus which we need to bring about socialism, and which we take ready made from capitalism; our task is merely to lop off what characteristically mutilates this excellent apparatus, to make it even bigger, even more democratic, even more comprehensive.’ [Ed. Note: Link deleted per rules.]

        Also:
        ‘The establishment of a central bank is 90% of communizing a nation.’
        [Ed. Note: Also this one.]

        Reply
        1. SHG Post author

          To be honest, Neil, your ability to communicate is piss poor, and you’ve got little to offer to make the effort worthwhile. Either try harder to say something that isn’t mostly incomprehensible or your comments just get trashed from now on. You’re just not worth the effort.

          I’m really not trying to be mean to you, but if you have a point to make, just fucking make it in plain, comprehensible words.

          Reply
  2. wilbur

    What should alarm us is that Rep. Ocasio-Cortez graduated cum laude from Boston University’s College of Arts and Sciences in 2011, majoring in international relations and economics.

    This is akin to someone getting a degree in biology and believing in spontaneous generation.

    Reply
  3. Rojas

    There is a data set to refer to. It’s my understanding that state usury laws prevailed prior to the Marquette case in 78. A quick search shows the amount of households with at least one credit card was 38% in 77 and at 56% twelve years later. The prime rate went on a roller coaster ride during this period as well.

    Reply
          1. Rojas

            Not in my time. She does have an opportunity to get wiser however.

            Saw her tweet where she refers to 70s usury laws. Left out or missed completely the prime rate swings that made them impractical. Dad was in the construction business back in those days. Texas had strict usury rates on mortgages. There was only one choice. Pad the job to pay down the discount rate or quit eating and feeding the kids. The banks were taking more profit off the top than he did those years around 1980.

            Reply
  4. Pedantic Grammar Police

    I’m confident that the lobbyists who write the bill will do it with the best interest of the American people at heart, and that unicorns will prance across rainbows after it passes. How can you be so pessimistic after seeing the amazing success of Obama’s “hope and change?”

    Reply
  5. Pedantic Grammar Police

    I still haven’t figured out how to tell whether you will love or hate my thoughts, so I throw them out there. It is up to you to post or trash.

    It’s not that I don’t try, but the rules are obscure. I hope to figure it out eventually.

    Reply
    1. SHG Post author

      Whether I love or hate your thoughts (and I love you, but that’s got nothing to do with it) isn’t the point. As an ornery old Nebraskan once said, fucking focus.

      Reply
    2. Miles

      Not that I get any more say in the rules than you do, but when you went to your “example,” you dove down a democrat-hate rabbit hole, when this post wasn’t about Dems, but two individuals and some dubious notion of how economics works. In other words, it covered a lot of ground, but none of it included Obama.

      Then again, SHG will probably spank me hard for saying this, so what do I know?

      Reply
          1. Howl

            Oh wow . . . I had hoped that flashback 10 years ago would be the last . . . then I start hallucinating Lawrence Welk . . . introducing a “modern spiritual with Dale and Gail” . . . and it’s “One Toke Over The Line” . . . O Sweet Jesus! . . . here come the bats . . .

            Reply
  6. Marc

    Dumping all the high-credit risk borrowers into a single government pool run by the Postal Service is the best plan I’ve heard yet to more than double USPS’s multi-billion dollar annual losses. And boy will the advocates be surprised to learn the government uses the same mean collection agencies as the evil banks.

    Reply
  7. B. McLeod

    AOC is thinking way too small. There is no reason any people in America should have to be poor. She needs to use her mighty, legislative powers to fix that, and then people can afford to pay the 25% interest.

    Reply
  8. losingtrader

    Credit Unions get along just fine with an 18% legal maximum rate.
    Of course, they have shitty rewards credit cards.

    I’m certainly not paying full price for international first class.
    Let the poor and stupid subsidize my $200 tins of caviar in ANA first class.

    Reply
    1. SHG Post author

      Credit unions work with a more homogeneous population, permitting them greater control over risk. That’s why no credit union will have you.

      Reply

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