Mr. Perfect "36"

 “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? 

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14 CommentsLeave a comment

  1. hopefully this bill dies in committee!!

  2. I’m afraid that both sides of the aisle will want it to live.

  3. I wish he had been more ambitious so his efforts could be effective.

    I’ve noticed that credit card statements are starting to show that it will take xx years and $x++++ dollars to pay off your $x balance.

    I’d like to see that grid required for every financial transaction, including rent to own, payday, etc. If the grid is not provided, and the customer does not sign for it, the lender (in this case, predator) should have to waive the entire principal + interest balance (vs pay a fee to the gov’t…let the predatee experience the windfall).

    I hate deception in lending and I hate that lending predators circle around the less educated to rip them off.

    • I totally agree with your comments.

  4. Rates vary as credit risk varies. Limiting rates would limit access to credit. Traditional usury rate was 24%. Even with current limits mostly less than that, loans are plentiful for qualified borrowers at substantially less, so I say let the marketplace decide – NO LIMIT.

    • Thank you for you comments. I disagree, however, with most of what you assert.

      First, there is no such thing as a “traditional” usury rate. Historically, usury was any interest charged to someone outside of one’s social or religious group or clique. Currently, usury rates are established state by state by statute, as I am sure you know. They vary widely.

      I agree that the marketplace should decide what the interest rate should be on consumer loans; However, “no limit” is absurd on its face. The marketplace for a fair arms-length transaction does not exist when the lender has a balance sheet of $ 50 billion, and the borrower has negative net equity. What and where is the market there? Whatever and whereever it is, it is a tailor-made one for abuse of the weaker party. It is a pure instance where government must level the field. The states level the field do for personal loans, civil judgments, and entities other than banks. Why should limits not be set for banks and other lending agencies? There is no reason.

      12% is quite fair for the banks. I firmy stand by that number.

      • I think that with full disclosure, you should not limit any adult’s financial options.

        Let each person decide the deal for himself or herself, with a full disclosure of the facts, such as the new grids they’re putting on credit card statements.

        If there is a limit, to be effective it would have to be based on points over prime, or points over treasuries, or such.

        Setting a max rate of 12% will only limit financial options to those with pristine credit, as the lenders will limit who they will give credit to based on the flux of the indices. You will cut a lot of people or business off from credit they need.

        Even with the Fed assisted rates artificially at close to 0, unsecured commercial credit for A credit, well established institutions, is still running between 9% and 10% today.

        A lot of businesses who recently got credit may argue this, but that will go exactly to my point: there are many calcultion “methods” to make the quoted rate and even the APR (which was supposed to protect against calculator malfeasance) appear much lower than it actually is.

      • Mr. Funk,

        I respectfully disagree. Even our current American legal system, which is far from just, recognizes that unequal bargaining positions (procedural unconscionability) is not by itself enough to nullify a contract term such as interest rates. It takes far more than showing that one party has much greater wealth and market power, such as showing that the result itself is manifestly unfair (substantive unconscionability).

        Plus, you forget that even big banks must deal with more than one potential borrower – they must deal with millions! One client alone may not have much bargaining power, but when the interest rates offered by the big bank begin to exceed the next best alternative of growing numbers of clients, then the market power of those millions becomes more powerful than any government coercion! Further, if we freed up restrictions on capital and stopped bailing out the big banks (thereby (taxpayer) funding their acquisitions and industry consolidation), then we might see greater competition and therefore greater responsiveness to client demands.

        It just seems to me that you need to show more, to justify your arbitrary number being imposed with government force, than one party being bigger than the other. Any thoughts on this?

        No King But God

  5. I agree with george and Matilda. Letting the marketplace decide really just means letting each person decide on his or her own if the rate is too high. If it is, then all they have to do is walk away from the proposed transaction.

    You ask “Why should limits not be set for banks and other lending agencies? There is no reason.” Let’s turn that around – why should limits be set? What is your reason?

    And don’t forget, interest rates are not some arbitrary number, able to be set by government bureaucrats at whim. Interest rates are a fundamental economic indicator telling us vital information about the supply of and demand for credit, savings, and investment.

    Also, you get upset with Mr. Durbin for his arbitrary number. But your number is quite arbitrary too, is it not? That is the problem with letting government decide such things – they become, by definition, political and arbitrary! As an example, google how FDR set the gold price in 1933 – through a combination of lucky numbers! Is that how we want our economy run?

    Finally, you rightfully lament the fact that Americans are drowning in debt. Maybe a much higher, possibly illegal under current law, interest rate would help to discourage the drowning of future Americans in further debt! Don’t forget that this explosion in debt came in the decades where the government manipulation of interest rates pushed rates down to ever lower average lows.

    My vote is for getting the government out of the interest rate discussion altogether. What are your thoughts on this matter?

    No King But God

    • I believe that I answered most your questions in my reply to a comment made by someone name George, so i will not reiterate here what I already said there. Perhaps you may want to read that.

      You make a statement “No King But God.” May I remind you that charging any interest at all for any loan was, biblically, forbiddern. Judaic, Islamic, and Christian law forbid such a practice. Free markets did not fly in Judea, Samaria or, in fact, anywhere in the entire Levant.

      Free-market lending exists nowhere in the world other than in the subterranean world of the loan sharks. Free-market lending is a nonsensical, anachronistic buzz-phrase that means nothing historically – or currently. I don’t even believe a free-market fossil like Larry Kudlow believes in such a thing. That’s about all I have to say on the matter except that I stand by my arbitrary rate of 12% as being a fair consumer loan interest rate ceiling.

      • Mr. Funk,

        I definitely agree with you that free-market lending does not currently exist in the world’s credit markets as we know them. I even agree with you that there are many lenders who are unscrupulous enough to be termed “loan sharks.”

        But I am not sure what this has to do with arguing against such a concept as free-market lending. And the term does mean something to me (and to many others) – it means being able to voluntarily lend and voluntarily borrow free of government coercion. It means that if someone wishes to lend at 13%, or any other rate higher than your arbitrary number, and someone else finds it acceptable to borrow at that rate, they may do so without being labeled as criminals.

        Also, don’t forget that your 12% may seem reasonable to you now, but back in the 80’s even the fed funds rate reached 19% or so. So at your number, even the Federal Reserve would have been a criminal (a statement with which I agree, although on other grounds). Plus, given what we know about government speed of response, it’s not like your number could be legislatively, executively, or even administratively changed with any sufficient speed.

        By the way, in my humble opinion, I don’t consider Larry Kudlow, or others such as Arthur Laffer, to be actual free-market guys, and profess no knowledge of their exact state of ossification.

        No King But God

  6. Mr. Funk,

    Thank you for your reply. I must admit I am impressed with your promptness! I know it probably cannot be easy to monitor and thoughtfully reply to every comment on a blog.

    As a Christian, I am fully aware of what God’s Word says about usury. But please note several things. One, the admonitions against usury (any charging of interest, not just excessive interest) were moral matters, not legal ones. Under God’s law, the punishments for such a sin were to be handled by God alone, not by man’s civil or criminal law (see Deuteronomy 23:20). There is a vast difference between a sin and a crime, a distinction that too few in the religious right seem to grasp. In a truly just system, all crimes would be sins, but not all sins would be crimes (or even lead to civil damages).

    Two, this command did not apply to all lending (e.g., ok to lend at interest to foreigners, i.e., increased risk), and it most definitely did not set a certain number as the cap on interest rates for the lending at interest that was permitted. If God Himself did not set such a number, I would caution against man trying to do so.

    Three, lending at interest in an inflationary fiat money system is very different from lending at interest in a hard money system. With modern fiat inflation, the interest received is often nothing more than a partial return of your original capital, which is inexorably eaten away by inflationary theft. In biblical times, money was gold and silver, and inflation was virtually nonexistent, obviating much of the need for interest as a return of capital.

    However, I do not write this to justify usury, but merely in an attempt to do as God did – leave interest rates to the compassion of the lender and the judgment of the borrower, rather than the criminal or civil courts.

    I will break up my responses here for ease of reading and replying.

  7. Just want to say what a great blog you got here!
    I’ve been around for quite a lot of time, but finally decided to show my appreciation of your work!

    Thumbs up, and keep it going!

    Christian,Earn Free Vouchers / Cash

  8. Mr. Funk,

    I know you are probably very busy and that it is hard to reply to each and every comment, but if you get the time I would really enjoy continuing this discussion with you.

    By the way, really enjoyed the pictures of the Frank Lloyd Wright house. Have always admired his work.

    No King But God

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