Tag: credit cards

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All right, let’s get this out of the way: It’s better than the status quo.

But most credit card interest rates are about 20 percent or so, so this is about a five percent decrease.

Twenty percent is already insane. Given that banks have access to money, right now, at a little over 2.5 percent or so and have had it at less than one percent for most of the last ten years, it’s crazy low and would still leave them with a profit of 12.5 percent or so (minus administrative expenses).

That’s way more profit than anyone should earn for just lending money. Heck, it’s way more profit than almost anyone should earn for anything. Healthy economies have profit rates at no more than 5 percent or so, with profits for lending money less than those for actually doing things, a lot less.

So the interest rate cap for credit cards should be linked to the cost of the bank’s borrowing. Feeling generous to banks? Put it at four percent more than the Fed Funds rate. Remember that credit cards also charge merchant fees, which is how they make money off people who always pay their bills in free.

And any legislative act must count fees as part of the interest. Fees + interest charges are the actual interest rate of a card.

Lending money is the best business in the world to be in. Banks and other lenders, as the MMT people like to point out, don’t actually borrow money then lend it out, they create it out of thin air.

Any fool who can’t make a profit with the ability to create money out of thin air and lend it at four percent more than Fed Funds, shouldn’t be in the business–especially when they’re getting a fee for every purchase on the card.

When it’s easier to make money by lending than by doing, as well (which it is now, and has been for about 40 years) you don’t get as much actual new work, companies and innovation, because it’s safer and easier to just lend.

So being generous to banks and shadow banks is a recipe for economic stagnation. It also tends to push money towards the rich, because they are, after all, the people who can lend money (and borrow it cheap).

So, good first step on the part of AOC and Sanders, and it may be all they think it is possible to pass (much like the $15 minimum wage is inadequate and should have automatic yearly increases, but is still a good start), but it’s not enough. Not even close to enough.

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The consequences of (yet again) failing to stand up to the banks

By Ian Welsh

On May 14, 2009

Comments

sunset-by-vj-fliks The Senate just stopped limits on credit card rates. Sometimes it takes a socialist to say the obvious:

“When banks are charging 30 percent interest rates, they are not making credit available,” said Mr. Sanders, who noted credit unions are limited to 15 percent. “They are engaged in loan-sharking.”

The banks have been given, loaned and guaranteed trillions. They are given access to money at very close to zero percent. They then lend it out at much much higher rates. As Sanders notes, 1/3 of credit card holders are being charged more than 20%, some as high as 40%.

That’s usury. More to the point, it means that for all intents and purposes they aren’t making credit available.

Does anyone wonder why consumer spending dropped again? Would you borrow at 20% to 40% to buy anything other than food or pay for housing, when jobs are still being lost at over half a million a month? No one with any sense would.

Months ago I noted that the simplest way to get banks lending again would be to either have the Fed lend directly to consumers, or have the FDIC take over a major bank like Citigroup or Bank of America and use that bank to lend at decent rates.

Instead of doing that, the Bush and then Obama administrations decided to give money, guarantees, loans and nearly free money to banks which were impaired and which needed to gouge their customers as hard as they could to make a profit. The result is that treasury secretary Timothy Geithner keeps saying the financial sector is fine, while more Americans lose jobs, consumer spending drops, banks won’t allow homeowners to get out from under bad mortgages even when it would save the bank money, and a new round of foreclosures is on its way.

On top of that, the mark to market rule was changed to allow banks to keep assets on their books at mark to model (ie. mark to fantasy) values.

All of this money will have to be paid back eventually. The strategy is simple enough.

1) Give the banks money.

2) Let them not acknowledge as much of their losses as possible.

3) Allow them to gouge taxpayers for as much as possible, to dig themselves out of the hole over a number of years.

The end result of this is going to be Japanification—at best. Not a “lost decade” as many folks have said, but a semi-permanent wavering between slight job gains and job losses, where a good economy never, ever, comes back. And because the US, unlike Japan, is not a net exporter, it’s questionable how long Japanification can work in the US, in any case.

The banks took trillions of dollars of losses. The refusal to make them take their losses; the refusal to wind up any of the big banks; the refusal to recognize that what is important isn’t the banking system but what the banking system does, and thus the unwillingness to cut past the big banks and lend directly means that those trillions of dollars of losses are going to have to be paid back by consumers and taxpayers. You will pay. You will pay not just in high interest rates, but in lower wages, and for many of you, a lack of jobs. The economy will not, before the next recession after this downturn, return to the same level of employment the US had before this crisis.

All of this because neither party, and neither President, had what it took to stand up to the banks.

(What a good policy would have looked like.)

The horizon is not so far as we can see, but as far as we can imagine

Tag: credit cards

The Sanders-AOC Bill to Cap Interest Rates At 15% Is Too High

The consequences of (yet again) failing to stand up to the banks