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
There are 34 million un and underbanked American households, which translates into 28% of the population. And consider what this second-class status translated into in fees and other charges:
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.
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A good first step. The endgame, hopefully by the end of this century, is that private debt becomes only something involuntary, and even then, pay no interest and be forgivable. It is a necessary condition for a sustainable zero-growth world.
You think I am extreme ? I am in good company though It is just the Overton window slowly moving…
I think cash has been with us for to long for creditors to just forgive even a minor debit, 80 years from now. Although I can see them going from dictating terms of payment, to saying “what can you afford to pay”.
For the card issuers, credit cards are insanely profitable. I won’t go into all the technicalities here why they are, say, compared to auto loans far less a credit default risk (and better asset quality as a result) nor why they are so much more amenable to product holders being squeezed out of more margin due to space limitations (it’s an interesting topic (woeful pun alert); interesting to me anyway). But they are a prime candidate among retail financial products for fee and rate caps.
And for any misguided “oh, no, one can’t intervene in the Great Free Market lest the sky fall in, in the form of reduced credit availability” there is still a plenty good enough profit to be made, even with the price caps proposition. And as for “the card issuers might hollow out customer service” well, that’s mission accomplished already.
Really appreciate this Clive. I saw this news on Twitter yesterday and thought: (1) this is going to help more people think more broadly about how money works, and also (2) if the banks can’t make a profit at 15%, WTF are they doing?!
And anything that boosts the Post Office in *every* community, including rural communities, is a good thing.
I banked at my local PO when I lived in Australia, and it was a treat: banking always included a nice chat with the postmaster, who always caught me up on the neighborhood news. He was like the proverbial ‘village well’ of information, which IMVHO contributed to the safety of the community. I never once worried about walking around alone, even carrying money. And when I needed to wire money, he walked me through all the necessary forms. It was simply a delightful experience: post office banking as a mix of social hub, public safety functions, and ‘sound money’ practices in the sense that there was never any exploitive fee on a single service.
That’s back when banking was kind of fun ;-)
I remember that kind of banking with tremendous fondness… the world was so much richer with those small civil interactions — and the postmaster never, ever tried to sell me a single service. He had a perfectly comfortable income, and he seemed more interested in actually serving the community than in extracting profits out of it.
My local credit union is the closest that I’ve come to that wonderful, genuinely pleasant kind of banking.
The post office truly was an asset to the entire community, and everyone used it without being fleeced or having to read any ‘fine print’. Ah, it now seems like a little slice of heaven, but at the time I simply took it for granted.
i will vote for anyone proposing a post office bank. it will save the post office. it will benefit a (family blog) load of poor people, and more than almost anything else, this could actually make a few things change. perhaps for the collective good, although i won’t be holding my breath on that one…
Gosh, yes. And, as Lambert remarked yesterday, put antennas (antennae?) on the main post office building in every community to provide municipal, low cost internet services.
@Eclair
May 10, 2019 at 7:03 am
——-
Not only the main post office, but the branch offices also.
It will never pass Congress, but it would be good to get the critters on the record before the elections.
Fascinating. China is targeted its 200 million unbanked people and hopes to get them online by mid-2021
One used to be able to get money orders from the post office. I wonder if one can do that today? I feel that the undocumented without bank accounts are getting ripped off by American Express which issues money orders for these people. You can see them lined up at yourl grocery chain.
As far as I know postal money orders are still available, I used the service not that long ago.
Interest rates “…which the Fed may increase if needed for a period of 18 months to preserve the safety and soundness of banks…”
If banks can’t be “safe and sound” with a 15% vig, they deserve to fail, but hey, let’s continue to help those who need it the least.
Even these bills to help the public are twisted into helping the TBTF banksters. Such a deal!
bills to help the public?
you should seriously consider quitting your day job. you have a future in standup.
I would also like to see limits on what cards can charge merchants (why do they get to make money from both ends of each transaction) and the addition of a government credit card available from the postal banking service that has a restricted interest rate (say) 1% below the limit set for private card issuers.
The term “Post Office” is a dog whistle for the right wing that symbolizes lazy, irritable government workers so unfortunately the name “Post Office Bank” will give critics an easy way attack vector.
If they want to reveal themselves as insulting perfectly hard working postal employees, they just expose themselves as a pack of fools.
Bring it on!
The sooner their looney notions are exposed as ridiculous, the better off we’ll all be ;-)
Diane Feinstein would tell you that those whistlees don’t think big enough. They are overlooking the opportunities for graft and corruption being made available with each new round of playing Post Office. Her family (see: Blum, Richard) made a bundle on a prior postal legislative program, so why not try again!
I had come across comments elsewhere that states have actually capped interest rates, but the loophole is that you have to accept the higher rates in writing. Essentially, you see the variable range and you accept it by signing on the dotted line to receive the card. A good trick if this is actually true. I haven’t had time to look into it since I am not in search of credit cards right now.
We may read through the fine print, but how often do we strike-out clauses that we don’t agree with to negotiate?
Use them and abuse them.
Never pay a fee to use a credit card. When they try to spring this on us, call them and tell them the competition’s free and ask them to waive the fee. They do every time.
Pay your bill on time each month if you can.
Always pay cash in small businesses.
If you have bad or average credit good luck getting a credit card. They don’t realize this will only hurt poor Americans. Lol idiots.
The Loan Shark Prevention Act, and I really love the title, is facing not only the rapacious buzzsaw of Big Finance and their minions like Joe Biden but also this.
Too many people seem to believe that Americans not having access to banks is a myth just like, to them, food deserts, and the $2.13 minimum wage for tipped workers in many states. Facts, news stories, interviews, telling personal experiences, all run into this determined disbelief. I used to believe that mendacious greed was the most important obstacle, but now I believe it is the terrified refusal to see anything that might make them change their perceptions of reality; it is better to die believing fantasy than live seeing reality.
The yahoo comments on the article were 5 to one defending the banks and bashing on deadbeats.
It’s fine if they just die out of old age. The newer generations which have grown up in the information age are not so willfully blind. They’ve not just seen things they can’t unseen, they’ve learned things they can’t unlearn, no matter how much they may want to.
“How the other half banks” (Harvard UP 2015) by Mehrsa Baradaran is both a history of banking for the people that banks in the US don’t want and, ultimately, an explicit argument for the restarting of Postal banking as the only way to provide banking for those people. I recommend it.
http://www.hup.harvard.edu/catalog.php?isbn=9780674286061&content=bios
–RC
But Yves, what about bank profits?- Just kidding. How about capping the rates at some multiple of the lowest rate that particular bank pays on savings accounts? So while JPM sells brokered CDs paying 2.4%
they are paying “captive” existing accounts .02% Ie. zero. And their cost of funds in those cases are nowhere near 2.5%. That might force the banks to pay higher rates to those they are currently fleecing.
If the multiple were 10, then the bank would have to pay a minimum of 2% on savings in order to charge 20% on the credit cards. And, there can still be some immovable Cap as well, say 25%.
The concern of the well-off for the under-banked poor not being able to avail themselves of 45% interest rates is moving, just like their concern that having a minimum wage prevents less skilled workers from being hired and gaining experience by starting out at 4 cents per hour. Such compassion.
One caveat is that the Post Office now tries to push me into more expensive services without mentioning less costly options unless asked. I guess they have had to become more rapacious to survive, or more likely they have MBAs running things.
You must have w bad post office. Mine just saved me $12 when i tried to send something express but not in the envelope. They put it in the envelope which is actually bigger than the one I was using and saved me the money.
I don’t think your anecdote is any more reflective of reality that mine.
Perhaps the marketing aggressiveness varies by region. I am in New York state.
It has occurred in at least 3 different branches.
After 2008 crash and bankruptcy in 2010 I paid all my bills on time like religion. I am deemed as Good on my credit score. But all I get is intro offers of 5% then after nine months 22%. Kiss off, I would rather live in a van.
Not that I do but if I need to I would rather live the life of a gypsy than be on the debt treadmill. Of course government solution to that is direct enslavement. Yet again, if your society has reached that point the end is very close.
Given the timing, I want to see this as great policy AND a huge poison pill for Biden to choke on. Will he pretend to bite the hands that have fed him for decades, or will he straight up side with the usury industry against his putative voters?
I hadn’t yet gotten to the poison pill aspect, but that increases my enthusiasm for the plan. One of the childhood conversations I remember having with my mother (in the 70’s maybe?) was the definition of usury and where loan sharks fit into the picture. And I think at that time interest rates of about 10% were considered usurious.
Seems like an odd conversation to have with a child now that I think on it. Maybe that’s why it has stuck with me.
Oh, and I believe he will straight upside with the usury industry.
I just know something has to change, somehow.
I’ve have a savings accnt. at a local CU for three months now.
I opened w/$500 and earned $.02 each month. My balance is now $500.06.
I’m on schedule for a $.24 annual earnings.
I wonder if I’ll get a 1099 from them?
For the record, the postal bank never shut down…I repeat never shut down…it was defunded and the postmaster general in the 1960’s just stopped accepting deposit without complying with the Congressional mandate… There was never a final board meeting nor a final report to Congress… It still legally exists and some of its instruments are still valid and redeemable…
A perfect example of if you repeat a lie often and loud enough, the narrative is accepted as chiseled in stone…well the chiseled part is correct…
Technically someone could attempt a writ of mandamus and demand a deposit be accepted
Congress did pass legislation to close down the postal banking system even if not all the formal steps were completed although it would nice to see the Post Master General try to expand the financial services still offered.