Because Wednesday was a particularly bad day for me, this post will be brief. Bernie Sanders and Alexandria Ocascio-Cortez introduced The Loan Shark Prevention Act. Its main features:
Capping credit card interest rates at 15%, which the Fed may increase if needed for a period of 18 months to preserve the safety and soundness of banks
Relaunching the Post Office Bank, which would offer basic services, such as checking and savings accounts as well as loans
The title of the bill is a well-deserved poke in the eye to the financial services industry. While a Post Office Bank has been presented as a solution both to payday lenders as well as the high level of “unbanked” individuals, it can also be taken as a criticism of the credit card industry.
And it’s hardly radical to propose a credit card interest rate cap. None other than that great American socialist, Republican senator Al D’Amato, did so in 1990. D’Amato’s proposal was even more aggressive than the Sanders/AOC loan shark bill. He called for 14%, the logic being that that represented a 10 point spread over the prime rate. Sanders and AOC pointed out that banks now charge 17% on average when their cost of funding is 2.5%.
Credit cards had been subject to state usury ceilings until in 1980 Citibank took advantage of a Supreme Court decision that allowed for cards to be marketed out of state, then persuaded South Dakota, which was already set to eliminate its usury laws, to “invite” Citi into the state.
Banks had also implemented annual fees as a way to cope with the super-high short-term interest rates of early 1980s. This new way of skinning the cat produced healthy incentives. With an annual fee, banks profited from every type of customer: ones that paid off their card every month, ones that ran occasional balances, like after a Christmas buying spree, and ones that were chronically in debt.
But limits on credit card interest rates, which even in the deregulating 1980s were generally an awfully rich 19.8%, produced an even more important salutary effect: it encouraged lenders to take some care in extending credit. The Classical economists were forceful advocates of usury ceilings, because otherwise lenders would seek out the most desperate or reckless borrowers, such as aristocratic gamblers, since they’d be willing to pay rapacious interest rates. The Classicals saw this lender preference as bad for the economy, since lenders would prefer lucrative but often bad risks to lending to businessmen who understandably would not be willing to pay super high interest rates.
The incentives in the credit card industry got worse in 1990s, when AT&T introduced a fee-free credit card. It was soon widely emulated, making it harder for credit card issuer to levy annual charges. That change pushed the industry even more strongly in the direction of seeking to land customer who’d be running balances all the time. In the topsy-turvy world of credit card economics, customers who paid off their charges in full every month were called “deadbeats”.
Critics of the Sanders/AOC credit card plan whine that it would restrict credit issuance to the poor. That’s a feature, not a bug. As New York Magazine noted:
The bill’s broader aim is to protect low-income people from predatory financial practices. It’s often difficult for low-income people to access credit at all, and when they do, they’re more likely to have poor credit and to take out subprime credit cards with high interest rates. Struggling families often bear higher-than-average debt burdens, too, as they take on more debt to keep up with costs of living that have far outpaced wage growth. “About 1 in 5 American families who make $41,200 or less have what’s considered a hefty debt burden — defined as more than 40% debt-to-income load,” CNN reported in 2015, drawing from a Morgan Stanley Institute study. And while wealthier households can afford to pay down credit cards quickly, lower-income households struggle to do so and can trap themselves further and further into debt. As Gary Rivlin noted in a 2014 piece for the Daily Beast, it’s expensive to be poor.
The bigger picture is that starting in the early 1980s, easier access to consumer credit served as a way for middle and lower class households to increase their standard of living in the face of stagnant real incomes. That’s obviously a self-limiting solution in the long run. With corporate profits at a record-high share of GDP, most businesses have plenty of room to pay workers more. And if consumers are maxed out, or will have more limited access to borrowing due to the long-overdue imposition of standards, they won’t be able to spend all that much. Maybe enterprises that serve those customers will work out that higher wages helps growth.
As for the Post Office Bank, it’s a testament to the power of the banking lobby that this idea is almost never discussed in polite company. It’s not only not radical, it’s a part of American history. From Slate in 2014:
Every other developed country in the world has postal banking, and we actually did too. It is important to remember this forgotten history as we begin to talk seriously about reviving postal banking because the system worked and it worked well. Postal banking, which existed in the United States from 1911 to 1966, was in fact so central to our banking system that it was almost the alternative to federal deposit insurance, and served as such from 1911 until 1933. The system prevented many bank runs during a turbulent time in the nation’s banking history—essentially performing central banking functions before the Federal Reserve was up to the task. Postal banking helped fund two world wars and reduced a massive government deficit after the Great Depression.
The entire article is very much worth reading. It describes how bankers succeeded in placing enough limits on the Postal Saving Bank, like a low level of interest on savings accounts and maximum account sizes, so as to make it difficult for it to succeed.
Post Office Banks would have a great foundation by virtue of their extensive locations and long hours. And they would considerably curtail the ability of banks to prey on customers who are now un or under banked.
But the idea that it’s only the poor or unsophisticated who use payday lenders is false. From a 2018 post:
Enter Lisa Servon, a professor and chair in the Department of City and Regional Planning at the University of Pennsylvania. She’s also the author of The Unbanking of America, an at-times startling look at the way Middle America is surviving in an increasingly tumultuous U.S. economy.
Servon started her research on specifically how the middle class is using check cashing and payday loans when she started reading about how low-income people didn’t know any better. The theory—which you are probably familiar with—says that the poor and people of color don’t use mainstream banks because they aren’t financially savvy. They are, the insinuation goes, stupid about money….
So, Servon started looking at how, and why, people use check cashing and payday loans.
In a nutshell: Most people are using them because they’re not making a high enough minimum wage, and the economy is unstable—the perfect environment for the “alternative financial services” industry to flourish in….
“The job of policymakers,” she says, “is to get them to be banked and to stay there.”…
“People who are taking payday loans are people who make $50,000, $60,000, $70,000 a year, own their homes and have a college education. That’s the fastest-growing group. It’s not people who ‘don’t know better.’”
Banks have become more expensive, says Servon, making more of their money from fees, and that automatically excludes people who can’t afford it.
Mind you, this discussion doesn’t even consider the legitimate-looking forms of preying on the poor, like government benefit cards provided by banks like Chase that have high fees and other gotcha features.
The Postal Service Inspector General issued a report in 2014 making a case for a Post Office Bank. The trust of its arguments are just as true now. From our write-up:
One of the stunning parts in reading the document is to see how wildly successful this program could be, precisely because traditional banks are withdrawing from many of the neighborhoods in which moderate and lower-income people live, and non-banks offer targeted, richly priced services, too often designed to take advantage of desperation or simple lack of alternatives. Even though most of us are aware of this general picture, the USPS IG, dimensions the scale of this problem and the costs to the affected households
The average underserved household has an annual income of about $25,500 and spends about $2,412 of that just on alternative financial services fees and interest. That amounts to 9.5 percent of their income. To put that into perspective, that is about the same portion of income that the average American household spends on food in one year.5 In 2012 alone, the underserved paid some $89 billion in fees and interest.
And this level of charges plays directly into financial distress:
For the most vulnerable Americans — including many of the underserved — the difference between making it and not is a small amount of money. Among the 1.1 million people who filed for personal bankruptcy in 2012, their median average income of $2,743 a month was just $26 less than their median average monthly expenses. Put another way, these people were just $26 a month away from making ends meet.
Of course, another benefit of a Post Office Bank is that it would strengthen the Post Office against attacks by conservatives intent on dismantling it and handing the pickings over to Fedex, UPS, and Amazon. Post offices are often the anchors of rural communities, and the ongoing pruning of Post Office branches has increased stress in small towns in flyover. .
And please, spare me “What about bank profits?” As we have discussed at nauseating length, banks get such extensive explicit and implicit subsidies from government that they cannot properly be considered to be private enterprises. We’ve argued that they need to be regulated like utilities. But if that looks too hard to do in a direct manner, the end-run is to force them to compete with a utility.