”By a ‘silly’ theory I mean one which may be held at the time when one is talking or writing professionally, but which only an inmate of a lunatic asylum would think of carrying into daily life….It must not be supposed that the men who maintain these theories and beliefs are ‘silly’ people. Only very acute and learned men could have thought of anything so odd or defended anything so preposterous against the continual protests of common sense.” C.D. Broad
I woke up fresh today, grabbed the early morning newspaper, started sipping my orange juice and nibbling my lightly buttered toast, when I was startled, not by a knock on the door, but by a story about Senator Richard Durbin’s news conference yesterday. The article in the Senator’s hometown newspaper, The State Journal Register in Springfield, Illinois, stunned me. In it,
Senator Durbin said that he has introduced language into an amendment on a financial reform bill that would put a ceiling on interest rates. He is quoted as saying, “I tried to take a number I considered to be so high that even the biggest banks couldn’t argue with it. I said we couldn’t have an interest rate over 36 percent. . . . I think we ought to have an absolute limit.”
Please tell me that I’m dreaming.
After I caught my breath, I sat down to think about interest rates a bit. That’s not a fun thing to do on an early Monday morning. For starters, any discussion of interest rates leads directly into the abyss of laws covering the subject. And, of course, laws covering interest rates can be complicated state or federal ones, depending. Suffice it to say that I am not a lawyer and immediately disclaim anything here that might be construed as legal advice. I neither offer nor suggest any legal advice, and recommend that you consult with a licensed attorney if you need or want such services.
Now, back to just after my morning orange juice. On the face of it, I think it fair to say that, in the United States, interest rates can vary from ZERO to, say, (um, Senator Durbin) 36%. If you toss into the interest rate computations the rates of the pay-day loan outfits, pawn shops, and the title loan gang, you most assuredly have situations where the APY is higher than 36%. Whatever the Senator’s legislative intent, to offer interest rate ceiling legislation to which no bank would object is, to put it mildly, surely usurping the voices of his constituents. I mean, who in the world can conceive such a thing other than someone almost incomprehensibly out-of touch. To me, his premise is just staggering.
What if one begins the discussion of interest rates with the premise of “fairness” and not the premise that “no bank can to object to a ceiling of 36%”? How then does the dialogue proceed if reasonable people of all ilk can begin with an attempt to decide what a fair interest rate might mean? Might that be the place to start a discussion? Surely that is a better alternative than what the Senate Majority Whip has pulled from his hollow hat?
So, what is fair? I doubt that there is an answer to that. Maybe “fair” is a just place to start a discussion. Or maybe, it’s just a concept to keep in the background when discussing rate ceilings because, after all, aren’t loan arrangements entered into voluntarily? Well, of course, they are; but that spirit of volunteerism can lead to bad places.
When I was a much younger man, I picked up a copy of a personal financial management sort of book. I do not recall the author. I seriously doubt that it was a best-seller. I recall it being a patronizing thing – warning one away from the financial dangers-that-be out there in the cruel world. At the time, I imagined that this book was written by a very boring person with a very boring life – a classic nerd, if you will. However, there was one bit of advice he gave which jumped off the page and seemed directly aimed at me. He wrote, “Don’t ever buy a consumable item with anything other than cash. That way, you’ll never end up paying for something long after it has been used.” That made perfect sense to me. Maybe you, too?
Don’t we all wish that we all followed that advice? Well, no. Life wouldn’t have been nearly as much fun – or dreadful, at times. Let’s just move on here and admit that we are a consumer-driven society in a consumer-driven world and what makes the wheels of innovation and progress go round is the ability for the consumer to borrow. Take away credit, the wheels come off, the cart crashes, and we all are trapped under a big immoveable object with total loss of all mass and momentum. The United States has about 2.5 trillion in outstanding consumer debt. Consider, too, that Americans charge over 2 trillion dollars per year on the over 180,000,000 million credit cards out there. Whew! that’s a lot of plastic. Take that away and I don’t think anyone knows what would happen other than total economic collapse.
So, we’re all stuck with credit. Consumers are stuck with the lenders. The lenders are stuck with the legislators. And the legislators are stuck with the consumers. That is, the legislators are supposed to be stuck with the consumers. Unfortunately, Senator Durbin, it looks like we’re stuck with you instead of the other way around. Maybe something is amiss here.
Let’s discuss real interest rate ceilings for a bit. As a citizen of Illinois, if I were to loan money to a friend or a neighbor, or some other entity, I would be subject to my state’s usury laws. According to information provided at http://www.usurylaw.com/state/ the interest rate ceiling that I would be permitted to charge is 9%. If I were to charge more than that, I would be violating the State law. Further, if I engaged in practices in which I had established a pattern of charging more than twice my State’s limit of 9%, in other words 18%, I might be subject to Federal RICO statutes, and that might very well be a felony. In street vernacular, I would be considered a loan shark if I charged more than 18% to my neighbor or friend.
Ah, but Senator Durbin wants a Federal law for financial institutions, apparently of all types, to be subject to an interest rate ceiling of double what would be a Federal felony in his own state for a person or other entity regulated by his own State’s usury laws. I read that the Illinois usury laws also are applicable to amounts owed in civil judgments. But the Senator wants to legislate by Federal law an interest rate ceiling for financial institutions that is 4 times the amount permitted by his own state for civil judgments. Apples and oranges, the Senator might say. I say not.
I have my own hollow hat and my idea on what is a fair interest rate ceiling. I think the big banks might not like my number, and might want to argue with it.
My number is 12% APY
What do you think?