Bernie Sanders and Alexandria Ocasio-Cortez want to use the police power of the federal government to ban a legitimate business activity because the socialist senator from Vermont finds “it is really disgusting.” To the callow representative from New York, it’s “economic brutality.”
This is the deep thinking that goes into the Democrats’ legislating process. Outlaw something because some subjectively find it repulsive. Or something seems scary. Or appears to be unfair. Or because someone decides for the rest of us “this isn’t who we are.” It’s the sort of lawmaking that should frighten us all.
The menacing scourge that Sanders and Ocasio-Cortez want to save the country from? Credit card interest rates that exceed 15 percent.
“Every major religion on Earth,” says Sanders, “has condemned usury.”
Usury is defined by Investopedia as “the act of lending money at an interest rate that is considered unreasonably high or that is higher than the rate permitted by law.” Merriam-Webster says it is “the lending of money at exorbitant interest rates” or “an unconscionable or exorbitant rate or amount of interest.”
In other words, what constitutes usury is subjective and can be quite capricious. Yet Sanders and Ocasio-Cortez know just what the right number is.
Like all legislation that is concocted from some feel-good point of view, capping credit card interest rates at 15 percent will carry unintended consequences. For instance, it will block access to credit to large group of Americans.
Researchers at the Mercatus Center in Arlington, Virginia, say new laws and regulations on consumer credit “frequently harm the very people they are meant to help by making credit more expensive and harder to obtain.” Lenders price credit at higher rates for consumers with lower credit scores due to the risk involved. If they are not allowed to set rates that will allow them to make a profit, they will stop lending to those customers.
What, then, do these consumers do when they are confronted with “temporary budget shocks,” such as a loss of income, a necessary home or car repair, a medical emergency, or simply an inability to make it to the next payday? Credit can help families and individuals avoid having their utilities shut off, insurance canceled, and even eviction.
Interest rate caps also “force consumers to substitute less-preferred types of credit.” Not everyone can borrow or receive gifts from friends and family. Some have no choice but to incur overdraft fees, which are typically about $35 for each incident and cost consumers more than $34 billion a year. In some cases, overdraft fees are more costly than high-interest credit cards.
In some cases, borrowers will have no choice but to take out black-market loans. At one time, this type of credit was widely used. In the days before financial-market deregulation in the 1960s, “lending was the second-most profitable activity for organized crime,” says the Mercatus study.
Furthermore, restrictions on credit interest rates harm not only those who would lose access to credit but also “individuals and families that don’t use any form of consumer credit by inducing banks to increase fees on bank accounts, ATM transactions, and other services.” They can expect added or increased fees on basic checking accounts, higher minimum-balance requirements, and growing fees on low balances, says the study, as well as more costly checks, and raised charges for in-person and ATM services.
Finally, there is the reality that under a 15 percent cap, banks will trim staff and even close branches in response. But apparently job losses as well as a lack of access to credit are small prices to pay in return for legislating away a practice that one cranky socialist thinks is disgusting.
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