Jerri-Lynn here. Alexandria Ocasio-Cortez and Bernie Sanders earlier this month introduced legislation to cap credit card interest at 15%, and create a Postal Savings Bank. See this earlier post by Yves on the topic: Why You Should Back the Sanders/AOC Plan to Cap Credit Card Interest Rates at 15%, Re-Launch the Postal Savings Bank for more history and context.
I thought readers might enjoy this recent Real News Network interview with Bill Black, on the reasons such legislation is necessary. Bill is a white collar criminologist, frequent Naked Capitalism contributor, author of The Best Way to Rob a Bank is to Own One, and teaches economics and law at the University of Missouri Kansas City (UMKC).
Don’t expect any positive action on this issue from the Trump administration. Instead, the Consumer Financial Protection Bureau is currently engaged in an exercise to gut its payday lending rule, which imposes limited restraints on predatory lending. The AOC-Sanders proposal would merely reinstate a framework similar to one that existed in the US until 1978 – when credit card companies were effectively given carte blanche to establish operations in congenial jurisdictions that eschewed interest rates limitations. It would also establish a Postal Savings Book, to provide low-cost basic banking services to the considerable number of Americans who are un or underbanked.
Whether or not the legislation is enacted, it is just one of several progressive policy initiatives that will be front and center in the 2020 presidential debate – including free college, Medicare for All, and student loan relief.
MARC STEINER Welcome to The Real News Network. I’m Marc Steiner. Great to have you all with us. There’s something most of us all have in common, it’s something called debt— our house, student loans, or more specifically, our credit cards and credit card debt. It can swamp any one of us. How do you buy what you need in this country without it? Try this on for size— 450 million credit cards owe banks over $1 trillion. That’s right, a trillion dollars. Now, Alexandria Ocasio-Cortez and Bernie Sanders have proposed a fifteen percent cap on all credit interest. Earlier, Elizabeth Warren and some others in the Senate also sponsored a bill that’s slightly less aggressive— and I said aggressive not, progressive— bill around credit to attach interest rates to the maximum allowed by individual states. Even right-wingers like Tucker Carlson are getting into the act, which we’ll talk about a little bit later.
Let’s focus on the fact that also that 10 million poor, working-class American families in this country who have no access to capital or even a bank, are being strapped with payday loans that can have a 400 percent interest rate— 400 percent. So, what about these proposals? What can actually work and what is the truth behind the politics of all of this? We turn once again to Associate Professor of Economics and Law at the University of Missouri-Kansas City, a former financial regulator and lawyer for the federal government, and author of the book The Best Way To Rob A Bank Is To Own One— Bill Black. Bill Black, welcome back. Good to have you with us. How are you doing?
BILL BLACK I’m well. Thanks.
MARC STEINER Good, good, good. Let’s talk a bit about this. Before we start, let me do this. Let me play this clip. This is Ocasio-Cortez and Sanders announcing their idea.
CONGRESSWOMAN ALEXANDRIA OCASIO-CORTEZ When everyday banks start to charge higher and higher interest rates, essentially your credit card becomes a payday loan. This is not anything radical because we had these laws for a very long time in red states. We had them in blue states. We had them in half of the United States, had usury laws until 1978 when they were repealed. Ever since then, it’s given a blank check for credit card companies and for big banks to charge extortion-level interest rates to the poor. The reason this is a moral issue is because we should not be using people’s misfortune and using people’s income status as a basis for extortion, and as a basis for predatory lending.
SENATOR BERNIE SANDERS But let’s be clear about what we’re talking about. We’re talking about economic brutality. We’re talking about some of the most powerful people in the world, people who make millions and millions of dollars a year, and banks that make billions of dollars a year profit, and they see a real profit center in going after desperate people who, because wages have been stagnant for 40 years, cannot afford the basic necessities of life.
MARC STEINER Bill, So this is clearly going to heighten, kind of, the tensions in this presidential election. What do you think about their proposal? How workable is it? What does it really mean it?
BILL BLACK Okay, so there’s also a proposal too, that goes along with all this to allow the US Postal Service to serve as a public bank—
MARC STEINER Which I was going to ask you out about next but go ahead. Yeah.
BILL BLACK But all of these things fit together, and from the economic perspective, this is an area where the market isn’t working at all the way it’s supposed to. Banks these days can borrow for under 2.5 percent and they’re loaning ballpark at seventeen percent. [laughs] You can see that that’s just staggering profit margins.
MARC STEINER I’m in the wrong business. [laughs]
BILL BLACK Well, we all are, and we have been for some time. I’m glad you raised that, and full disclosure— I am assisting people in Kansas City, where I am much of the year, who are trying to start a credit union to try to basically put payday lenders out of business in Kansas City. I’m not paid anything for that, but I am doing that.
MARC STEINER Okay. That’s good.
BILL BLACK So you will perhaps need to know that to evaluate my comments. Okay, so the fundamental thing you’re supposed to do in lending is this thing called underwriting. People have heard me talk about this a lot about the financial crisis because it was an enormous part of the story, where they deliberately trashed the underwriting system. When you do that, you create something in economics that’s called adverse selection. Adverse selection means you’re going to get a whole lot of ultra, ultra-high-risk folks with a lot of defaults. And so, what you got is a big cross subsidy between people with better credit approaches. They don’t borrow too much. You know, yes, some people get in trouble because they get sick, they lose their job, and such. But we all know there are lots of other people who get in trouble because they borrow on credit cards, not for things they need, but for things that they want.
MARC STEINER Right.
BILL BLACK And we cross-subsidize them. So, the sucker bet that we do in life as consumers is have credit cards, where we pay massively more. And the curve of interest rates we’re paying on these over the last five years or so, is brutally upwards. There, as you may have noticed, are only a few entities that actually offer credit cards. Many different names go on the cards, but the systems, there are only a few of them. And so, they have a lot of market power. And so, the response to adverse selection is not to carefully underwrite, but to have this huge cross subsidy where all of us are paying for folks with much, much higher credit risk. So a) that’s not supposed to happen. Competitors are supposed to arise that actually underwrite, and we should be borrowing at, like, literally six percent, instead of closer to eighteen percent. That’s a massive failure of the markets.
MARC STEINER So, a couple of questions here. One, you just said— there’s just about three or four things I really want to get through here. One of things you just said, though, I’ve not thought about. When you said that the credit card industry basically are fewer companies than we imagine because we think there’s a lot of companies out doing this, could you just briefly describe what you just meant by that? I think most people are not aware of what you just said.
BILL BLACK Right. I mean, the name on the card has to do with who gets that small cut of the fees from the big credit card companies, like Visa, MasterCard, and such. As you know, there are only a few of those and therefore they tend to have very great market power, which is the reason they’re able to charge to use a much, much higher interest rate. Now, that’s the first step. The second step is similar but not the same for payday lending. Payday lending, the magic, where you get the money, the profits, as a payday lender is not in your initial loan. It’s for the group of people— the sweet spot for them, is the group of people that have to take out a new loan to pay it back, and a new loan to pay that back, and a new loan to pay that back, but often pay back substantial chunks. To make a friendly modification of what you said, actually, you can charge often well over 500 percent. In the state of Missouri, again, where I spent much of my time, that’s one of the states you can charge over 500 percent.
Part of the story, which we haven’t talked about yet is the CFPB. That’s Elizabeth Warren’s brilliant new agency to protect consumers. That’s one of the reasons Trump has sought so hard to destroy the agency— to protect payday lenders who are the sleaziest of the sleazy, often criminal. The CFPB was doing the investigations that were leading not just to regulatory relief, but to the imprisonment often by the states. That brings us to the other thing you talked about. It’s quite true what Bernie and AOC were saying, that until about 78’— it actually occurred over about a five-year period. It was a weird thing. Interest rates were essentially deregulated, and they were deregulated nationwide by federal action. By the way, they showed the bipartisan nature that, of course, in 78′ that’s occurring under a Democrat. Then it’s continued, honored under Ronald Reagan. So this is a bipartisan effort. It was a response to the Federal Reserve massively increasing interest rates and then that super long word that you can use in Scrabble if you put it together with others, disintermediation, which just means you take money out of the banks and savings and loans, and put it in money market mutual funds, which were not subject to those interest rate caps.
So lots of money was flowing out of the savings and loans, and that was the excuse not for just bumping the limit up to say, eighteen percent which would have solved the problem, but to be unlimited. Now that allowed two enormous problems. One is the one we’ve been discussing— predation— but the second is at least as big. It causes a different kind of catastrophe, often bigger, and that is unlimited growth. So the lousiest, most fraudulent little bank can now grow at thousands of percent a year by just increasing the interest rate. In the old days with the cap, you couldn’t go above the cap. You couldn’t bring in, literally, billions of dollars overnight in additional funds to grow. And so, the big fraud schemes that brought us the great financial crisis, they’re dependent on this as well. So as a friendly amendment to AOC and Bernie and Senator Warren, I would add this to the mix, which is at least as important in terms of macroeconomic stability and reducing the fraud schemes.
MARC STEINER So a couple of quick things here before we run out of time. I’m curious. When Bernie Sanders and Ocasio-Cortez talk about using post offices as banks, especially for the working-poor who don’t have access to banks, talk about it. Is there a history to that? Is there precedent to that? How would that work, as briefly as you can?
BILL BLACK Yeah. So a) it’s been used in the United States for decades; b) it’s been used in many countries around the world for decades. How does it work? It’s a no frills, plain vanilla, you bring your money here, and we give you your interest rate, and we’re not like Wells Fargo constantly pushing you to buy crap through cross-selling. Can public banks do bad things? Yes, they can become political. They can invest— You know, the Democrats are in power, so they invest in a bunch of things pro-Democrat or they do stupid things in an election year. Those kinds of things can happen in public banking. It’s not nirvana, but if you keep them plain vanilla, they have an excellent track record not just in the United States, but globally providing good services to just regular folks like us.
MARC STEINER So let me play this piece for you. I want to ask you what you make of this. This is our friend Tucker Carlson.
TUCKER CARLSON [FOX NEWS] No doubt many Republicans in the Congress will oppose this bill if only because of who sponsored it. Bernie Sanders and Ocasio-Cortez are obviously demagogues. They don’t mean half of what they say. The other half, they don’t really understand. They’re not impressive, but on this one issue, they are absolutely, indisputably right. So the real question is, why did it fall to a couple of childish socialists to point this out?
MARC STEINER [laughs] So, what do you make of this, Bill? I mean, we have somebody on the right here agreeing with, in some sense, what Sanders and Ocasio-Cortez just did.
BILL BLACK Yeah. Just because Tucker Carlson supports something, it isn’t 100 percent certain to be wrong.
MARC STEINER [laughs] I just had to play that. I mean, it’s because I think this is something, because in many ways this affects so many Americans so deeply at one level or another. Let me just close with this question—
BILL BLACK He’s got it exactly reversed, right. Who is asking these questions? You know, where are the supposedly responsible moderates that are saying the system really is broken, here’s specific ways it’s broken, here’s how we’re going to fix it. The people that are actually doing those things are people like Bernie, Senator Warren, AOC. They’re just perfectly reasonable folks on these issues and people need to stop being scared off by whether this is left, right, or something. This is something that works and what we’re doing now, demonstrably does not work.
MARC STEINER But one very last quick question here before we have to roll. There are people in the banking industry and the credit card industry that push the idea— and they’ve done this with Warren’s bill after she introduced her bill to the other senators— that your FICO score, if it’s not a certain amount, you will never get credit. If people can’t get credit, they can’t buy. If they can’t buy, that means our economy falters, and that people are stuck. So, respond to that.
BILL BLACK Yeah. It’s no benefit to poorer people to get them loans they can’t repay. That makes them worse off. So yes, this is not something that solves poverty. This is not an elixir that’s going to get everybody cheap loans. Lots of people can’t repay big loans. They shouldn’t get big loans. You should have job guarantee programs and such, to work on those kinds of things. Also, there’s never a win like in a war, where you win, and you go home, and it’s all over. The banking and finance industry will always be pushing against us. And so, eternal vigilance and eternal work is what’s required and hey, you know, that’s life in a democracy— work. We have these shards of a democracy.
MARC STEINER [laughs] We have to rebuild the shards into a shiny glass tower or something. Bill Black, thank you so much. Once again, it’s always great to talk with you. I deeply appreciate it.
BILL BLACK Thank you.
MARC STEINER And I’m Marc Steiner here for The Real News Network. Thank you all for joining us. Take care.
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Expect this to come up in the primaries, because it is inconceivable that Biden would support this, with his history of carrying water for the credit card companies headquartered in Delaware.
This line of thinking is part of the reason we’re in this situation with staggering levels of private debt.
People buy stuff every day without credit – they spend their income.
Beyond that they can borrow to buy stuff they can’t immediately afford but it puts them in a hole, where their future consumption is reduced until the debt is repaid. The more you borrow the deeper the hole and the harder it is to climb out.
The interest you pay is functionally equivalent to a tax.
There are things it’s tough to save for, like a house or a car, but you don’t need a new car every other year, and you don’t have to have a monster house, a drywall castle.
For most people, credit is a reverse discount, you’re buying at a premium. It isn’t going to make you net money over the long term, there’s only a few winners.
Credit, for everyday consumption reduces your buying power.
And the idea that credit drives the economy is laughable – on the average it accounts for less than 10% of origination spending (along with G and I). Credit creates bubbles. Use with extreme caution – on balance you will be much better off if you can avoid it completely.
If people get credit, they’ll buy things that they can’t afford.
When they buy things they can’t afford, they’ll ask for more credit.
When they get more credit, they’ll buy more things they can’t afford.
When they buy more things they can’t afford, they’ll find they can’t pay.
When they find out that they can’t pay, they’ll file bankruptcy.
When they file bankruptcy, they won’t get credit.
When they won’t get credit, they’ll be unable to buy things they can’t afford.
Filing BK doesnt mean you wont get credit. It clears the slate so you can and if you know how to work the system you can have well in excess of 100K in less than a year after BK.
This is good, very good at points, but a bit unsure of where Black gets some of his input:
“Lots of people can’t repay big loans. They shouldn’t get big loans.”
Payday lenders are not, at least to this upper-middle classer, making “big” loans. $1000 bucks isn’t a big loan. If you drop the odd “big” part I am 100% with what he said. We once had an economy where you would try to “bridge” bad times, but now we have an economy that never gets better for the precariat.
And this threw me off:
“You know, yes, some people get in trouble because they get sick, they lose their job, and such. But we all know there are lots of other people who get in trouble because they borrow on credit cards, not for things they need, but for things that they want.”
The “some” and “lots of other” bit??? I thought that the majority were what he referred to as the “some” and the “lots” were, well the minority. Liz Warren on line 2….
Anyway, yes we shouldn’t give money to people who can’t pay it back as a general principle. In reality, though, when a 4K monster TV costs less than 2 months rent, I’m not sure how pointing at the 4K TV on the sidewalk next to the evicted family really tells us what we think it tells us. What about the car that didn’t run so they couldn’t get to work and thus got fired?
adc: I would be interested in knowing what you thought was worth remembering in the article instead of just nitpicking what you don’t like. We get all the nitpicking we need and could use a little more supportive talk. You even go off topic in the last paragraph.
Did you read the part in Black’s comments where he said this legislation won’t solve poverty? It will attack predatory lending and that’s a good thing.
Truth-in-Lending laws have been around for years. How about a Truth-in-Banking law to cut through the Fear, Uncertainty and Doubt spin by their trade associations and fellow travelers, and display what is really going on in those institutions?
One example is that credit card spread:
Poor sods pay 24.99% or whatever and
banks pay 2.99% or whatever on those funds.
Then factor in some G&A say at 2.99%
and some reserves say at 5.01%
so pretax profit is 24.99 – 2.99 – 3.01 – 5.01 = 14%
for those risky under-banked, under-serfed and such.
Troll prophylactic, made-up numbers to demonstrate a concept. YMMV
Do that for the different products being pushed, like car loans, home loans and others. Banks already do that with risk-adjusted returns and similar measures so why don’t you?
Imagine if radical transparency in lending existed, then really get creative and extend that to pharma. Pierce those veils.
Likely music to the ears of the 100 million who didn’t vote in ’16, but getting someone who supports it through the primaries won’t be easy
And ISTR reading that “Did Not Vote” won the 2016 election in a landslide.
One more angle: critics of Bernie being in the 1% due to his best-selling books would link him with the banks. Here’s why it is not logically the same: voluntary and involuntary spending. It is voluntary to pay for a ticket to a pro-football game, and the management and players get rich. It is voluntary to pay a scalper for a ticket to “Hamilton, the musical” and the producers get rich. It is voluntary to buy a book and the publisher and author get rich. No extorted spending.
On the other hand, it is involuntary to get into debt through payday loans when there is no other access to money when you have a need. It is involuntary to trade your personal labor for low wages when you need a job and there is no choice. It is involuntary to owe high credit card debt when you do not have choices. It is involuntary to be incarcerated for petty transgression when you do not have access to experienced counsel and then to emerge with the need for immediate employment that returns to the low wage, high cost of borrowing. Good for Sanders and Ocasio-Cortez.
If this is implemented poor people with bad credit can kiss buying major items (like cars) goodbye. They won’t be able to get ANY credit. It WILL probably be very good for “rent to own” outfits, since those outrageous monthly payments are not considered “interest”.
I’m not so sure. A car serves as a collateral, and while it surely costs extra to pay people to track down and repossess plus depreciation, 15% is a lot of extra. And ideally, banks are appropriately underwriting these things to limit the risk someone does default in the first place