So ... you're explicitly asking us to tell you why this would encounter problems. I can take a swing at that, if you'd like, with the caveat that I am making no claims that the problems encountered would be worse than the current problems that would be solved. Useful?
Jonathan Beverley UBI, sure, but folks will still need to borrow money. Folk'll always run into times when they need to borrow money, so long as we use money.
Tony Lower-Basch I know some of the problems: If you are lending money as a business, different rates based on risk makes a lot of sense. But, I've a feel that your notions here'd be unexpected, so go ahead.
William Nichols: Well, it's largely what you were just saying, except taken to a somewhat more vehement extreme: I would suggest that somebody who most needs a loan is likely to never pay it back. It seems like that problem of poverty creating a systemic shortfall of income vs. inelastic expenses is sort of what you're looking to address here.
William Nichols but one doesn't cover for the many many others out there. He's the representational fall guy so the rest know that they have to grease the political machine to stay in business.
I think Tony Lower-Basch is right, people who need payday/short term emergency loans, even in a perfect world where every single borrower seeks to pay back to the best of their abilities, will frequently default.
I suggest that if it were possible, it would be better to regulate profit on the loan, not the interest rate. The equation is something like...
I = D+P
Where I is the interest rate that is charged, D is the default rate and P is the profit rate. D is likely outside the control of the lender, and would vary by location, the specific nature of the loan, the borrower, etc. P, on the other hand, is determined by the lender.
I think right now for many payday/emergency lending situations P is unethically large compared to D. But I also would not be surprised if D is actually larger than 10% even in a perfect world for some kinds of payday/emergency loans.
Practically speaking, if you think this is a good idea an effective way to do it is to capitalize a public bank with a mandate to do such lending. There are some pitfalls (see backstopped institutions such as Sallie Mae and Freddie Mac).
Legislating that private banks do it is a recipe for a mess though, and if you design and capitalize the public bank well that will compete with private institutions. If the private actors can do it better at a profit, great; if they can't, that's okay too, they will just cede that particular market to the public institution (see the Fed with discount rate policy and also the world bank for examples of public institutions with particular mandates).
"Congress imposed a federal criminal penalty for unlawful interest rates through the Racketeer Influenced and Corrupt Organizations Act (RICO Statute), and its definition of "unlawful debt", which makes it a potential federal felony to lend money at an interest rate more than twice the local state usury rate and then try to collect that debt.
It is a federal offense to use violence or threats to collect usurious interest (or any other sort).
Separate federal rules apply to most banks. The U.S. Supreme Court held unanimously in the 1978 case, Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp., that the National Banking Act of 1863 allowed nationally chartered banks to charge the legal rate of interest in their state regardless of the borrower's state of residence.
In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act. Among the Act's provisions, it exempted federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. Combined with the Marquette decision that applied to National Banks, this effectively overrode all state and local usury laws.[43][49] The 1968 Truth in Lending Act does not regulate rates, except for some mortgages, but requires uniform or standardized disclosure of costs and charges.[50]
In the 1996 Smiley v. Citibank case, the Supreme Court further limited states' power to regulate credit card fees and extended the reach of the Marquette decision. The court held that the word "interest" used in the 1863 banking law included fees and, therefore, states could not regulate fees.
Some members of Congress have tried to create a federal usury statute that would limit the maximum allowable interest rate, but the measures have not progressed. In July 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act, was signed into law by President Obama. The act provides for a Consumer Financial Protection Bureau to regulate some credit practices but has no interest rate limit."
The Upper class lives off the blood, sweat and tears of the lower classes and give little in return as their wealth is gained primarily on the loss and exploitation of others.
Those in the upper middle class often are blind to this, unless they interact with the upper most tier of the system regularly.
I was born into the lower classes, had my family rise up into the comfortable level of the middle class and then watched them and then myself fall back down into the lower struggling class etc.
It's easier to understand what the rich are doing if you've been up and down the scale a few times. Natural Disasters, Accidents, Shifts of Health and whims of the Rich and the government can make you very vulnerable.
Always remember you are likely one home fire, one regional flood or earthquake or serious auto accident from losing everything you've gained in the past 20 years. Even the passing of a family member or a job loss under the wrong circumstances or timing can crash everything under many circumstances. We all live fragile lives thanks to the rich profiting off of all of it,
Sure there are the lucky rich, those who didn't get their money from the exploitation of the lower classes, but that is a tiny percentage of the uppermost tier. No self made billionaire (unless they are an entertainer or an inventor) is likely to have failed to be standing on the ruins of other lives.
We can if we organize to get it!
ReplyDeletePutting a ceiling on interest rates just limits who creditors are willing to lend to.
ReplyDeleteMandating loans is a dumb idea. If you want to give money to people who need it, just give it, government->person, UBI style.
So ... you're explicitly asking us to tell you why this would encounter problems. I can take a swing at that, if you'd like, with the caveat that I am making no claims that the problems encountered would be worse than the current problems that would be solved. Useful?
ReplyDeleteSorry, I was thinking if you were asking if there are any obstacles, not whether it would be a good idea.
ReplyDeleteBecause predatory lenders have a lot of political clout.
ReplyDeleteUsury is a problem, and no mistake.
ReplyDeleteJonathan Beverley UBI, sure, but folks will still need to borrow money. Folk'll always run into times when they need to borrow money, so long as we use money.
ReplyDeleteJason Corley A little from column A .... I think this is the sort of thing Senator Warren is working on now....
ReplyDeleteTony Lower-Basch I know some of the problems: If you are lending money as a business, different rates based on risk makes a lot of sense. But, I've a feel that your notions here'd be unexpected, so go ahead.
ReplyDeleteJoseph Teller At least one is in prison for racketeering, so there's that.
ReplyDeleteRabbit Stoddard Agreed.
ReplyDeleteCapitalism?
ReplyDeleteWilliam Nichols: Well, it's largely what you were just saying, except taken to a somewhat more vehement extreme: I would suggest that somebody who most needs a loan is likely to never pay it back. It seems like that problem of poverty creating a systemic shortfall of income vs. inelastic expenses is sort of what you're looking to address here.
ReplyDeleteIs that in accord with what you were imagining?
William Nichols but one doesn't cover for the many many others out there. He's the representational fall guy so the rest know that they have to grease the political machine to stay in business.
ReplyDeletethehill.com - Soft-pedaling on payday debt collectors tramples consumer rights
I think Tony Lower-Basch is right, people who need payday/short term emergency loans, even in a perfect world where every single borrower seeks to pay back to the best of their abilities, will frequently default.
ReplyDeleteI suggest that if it were possible, it would be better to regulate profit on the loan, not the interest rate. The equation is something like...
I = D+P
Where I is the interest rate that is charged, D is the default rate and P is the profit rate. D is likely outside the control of the lender, and would vary by location, the specific nature of the loan, the borrower, etc. P, on the other hand, is determined by the lender.
I think right now for many payday/emergency lending situations P is unethically large compared to D. But I also would not be surprised if D is actually larger than 10% even in a perfect world for some kinds of payday/emergency loans.
Practically speaking, if you think this is a good idea an effective way to do it is to capitalize a public bank with a mandate to do such lending. There are some pitfalls (see backstopped institutions such as Sallie Mae and Freddie Mac).
ReplyDeleteLegislating that private banks do it is a recipe for a mess though, and if you design and capitalize the public bank well that will compete with private institutions. If the private actors can do it better at a profit, great; if they can't, that's okay too, they will just cede that particular market to the public institution (see the Fed with discount rate policy and also the world bank for examples of public institutions with particular mandates).
Note, most of this is moot, by Federal Law:
ReplyDelete"Congress imposed a federal criminal penalty for unlawful interest rates through the Racketeer Influenced and Corrupt Organizations Act (RICO Statute), and its definition of "unlawful debt", which makes it a potential federal felony to lend money at an interest rate more than twice the local state usury rate and then try to collect that debt.
It is a federal offense to use violence or threats to collect usurious interest (or any other sort).
Separate federal rules apply to most banks. The U.S. Supreme Court held unanimously in the 1978 case, Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp., that the National Banking Act of 1863 allowed nationally chartered banks to charge the legal rate of interest in their state regardless of the borrower's state of residence.
In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act. Among the Act's provisions, it exempted federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. Combined with the Marquette decision that applied to National Banks, this effectively overrode all state and local usury laws.[43][49] The 1968 Truth in Lending Act does not regulate rates, except for some mortgages, but requires uniform or standardized disclosure of costs and charges.[50]
In the 1996 Smiley v. Citibank case, the Supreme Court further limited states' power to regulate credit card fees and extended the reach of the Marquette decision. The court held that the word "interest" used in the 1863 banking law included fees and, therefore, states could not regulate fees.
Some members of Congress have tried to create a federal usury statute that would limit the maximum allowable interest rate, but the measures have not progressed. In July 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act, was signed into law by President Obama. The act provides for a Consumer Financial Protection Bureau to regulate some credit practices but has no interest rate limit."
(Wikipedia citing summary of about a half dozen different Federal Statutes, court decisions etc.)
en.wikipedia.org - Usury - Wikipedia
The problem I frequently make is a class of egocentricism -- I assume other people are like me, ie will (and can!) pay their debts.
ReplyDeleteI also assume people don't want to earn billions off the backs of the poor, which is also (largely) mistaken.
The Upper class lives off the blood, sweat and tears of the lower classes and give little in return as their wealth is gained primarily on the loss and exploitation of others.
ReplyDeleteThose in the upper middle class often are blind to this, unless they interact with the upper most tier of the system regularly.
I was born into the lower classes, had my family rise up into the comfortable level of the middle class and then watched them and then myself fall back down into the lower struggling class etc.
It's easier to understand what the rich are doing if you've been up and down the scale a few times. Natural Disasters, Accidents, Shifts of Health and whims of the Rich and the government can make you very vulnerable.
Always remember you are likely one home fire, one regional flood or earthquake or serious auto accident from losing everything you've gained in the past 20 years. Even the passing of a family member or a job loss under the wrong circumstances or timing can crash everything under many circumstances. We all live fragile lives thanks to the rich profiting off of all of it,
Sure there are the lucky rich, those who didn't get their money from the exploitation of the lower classes, but that is a tiny percentage of the uppermost tier. No self made billionaire (unless they are an entertainer or an inventor) is likely to have failed to be standing on the ruins of other lives.