I’m forever indebted to my long-lost Toronto friend Gwen who saved me from my destiny with spiraling credit card debt. I treated Gwen to drinks at what was then known as The Keg ’N Cleaver on Jarvis Street after receiving my first Chargex credit card from the Royal Bank of Canada. Chargex, later rebranded as Visa, was for many Canadians, including me, their first exposure to a credit card, and the challenge for the country’s issuing banks was educating consumers about the convenience of using plastic to pay for goods and services.
“Will that be cash or Chargex?” was the brilliant advertising tag line explaining to Canadian consumers how plastic spared them the need to carry wads of cash. Of course, the Canadian banks didn’t educate consumers about the hazards of compound interest and that if something sounds too good to be true, it probably is.
When my bar bill came, I marveled to Gwen how great it was that Royal Bank paid for my drinks and I didn’t fork out a penny.
“Uh oh,” I recall Gwen saying something to that effect. “That’s a very dangerous mindset.”
Gwen was a wizard with numbers, and she walked me through what our Keg drinks would cost me if I didn’t pay back Royal Bank within 29 days, and what I would owe the institution in 58 days if I didn’t make a minimum payment. She explained what my seemingly inexpensive drinks would approximately cost me after one year of accrued interest, assuming I only made the required minimum payments.
Aversion to credit card debt
I may be a screwup when it comes to taking care of critical bills like medical insurance and utilities, but thanks to Gwen never once in my life have I racked up even a penny of credit card debt. I regard the credit industry as being rife with mamzers, an especially descriptive Yiddish word for contemptible people, and I’ve taken a vow to ensure they don’t enrich themselves at my expense.
Despite my disdain, I’m aghast at a proposed bill by Bernie Sanders, the Vermont independent, and Josh Hawley, Republican of Missouri, to cap credit card interest rates at 10%. The 10% figure was first proposed by Donald Trump when he was campaigning for president, and he seemingly pulled the number out of thin air with nary a thought let alone a supporting study.
Before I get into the weeds about the dangers of telling an industry that measures risk what it can charge to take risks, allow me to point out the ironies of Trump dictating to banks his preferred business practices.
The Senator from MBNA
The modern-day credit card industry owes its existence to Joe Biden, who in his Senate days was such an unabashed whore for the business even Democrats derided him as “The Senator from MBNA,” a reference to the credit card company subsequently acquired by Bank of America. Biden cast key votes that deregulated the banking industry, made it harder for individuals to escape their credit card debts and student loans, and ferociously protected his home state of Delaware’s status as a corporate bankruptcy hub.
Biden’s son, Hunter, once worked at MBNA and an executive from the company acquired Biden’s Delaware home, at a fair market price Americans were assured. Mother Jones published this damning story in 2019 about Joe Biden’s relationship with the credit card industry, one that was very much at odds with the corporate media’s preferred portrayal of Biden as a union loving champion of the working class who remained true to his modest Scranton, PA, roots.
Meanwhile, Donald Trump provides a compelling case study about the banking industry not attracting the brightest bulbs in finance.
Trump plays the banking victim
Major U.S. banks repeatedly provided financing for the Trump Taj Mahal Casino and Resort in New Jersey, which The Donald billed as the eighth wonder of the world. Within months, the casino was in default, but the banks continued to provide funding for the property and Trump’s other New Jersey casinos, which made four trips to bankruptcy court. The New York Times estimated that stock and bondholders lost more than $1.5 billion loaning money to Trump.
Tellingly, Trump declared himself the victim.
“I turned it back on the banks and let them accept some of the blame,” Trump said in his book, Think Big and Kick Ass in Business and Life. “I figured it was the banks’ problem, not mine. What the hell did I care? I actually told one bank, ‘I told you you shouldn’t have loaned me that money. I told you that goddamn deal was no good.’”
It’s disappointing to see Hawley co-sponsoring a bill with Sanders. Hawley has a distinguished career championing consumer causes and the Stanford law graduate and constitutional law authority could make substantially more money in the private sector. Sanders, who holds an undergraduate degree in political science from the University of Chicago, has become a multimillionaire from his entire career in “public service” and never worked a real job in his life.
Sanders and AOC
Sanders, who fashions himself as a “democratic socialist”, likely was orgasmic when he heard that Trump had proposed a 10% cap on credit card interest rates. That’s because in 2019, Sanders teamed up with another financial guru named Alexandria Ocasio-Cortez to propose limiting credit card interest rates to 15%, the same cap that credit unions must adhere to. I wrote this commentary about how mistaken the Sanders/AOC proposal was then, and it’s even more asinine now.
AOC holds an undergraduate degree in economics from Boston University, and her other only other credit card expertise is processing payments from customers at the New York City Mexican restaurant where she previously worked and allegedly misappropriated tips from her server colleagues.
Interest rates have gone up since 2019, so if Sanders thought a 15% cap was fair and reasonable six years ago, logic dictates that banks should be allowed to charge even higher rates today because their costs of borrowing money have also increased.
Trump believes that countries, businesses, world leaders, and chief executives must bend to his will and genuflect to his dictates. Trump likely imagines that if he mandates a 10% cap on interest rates the credit card industry will dutifully comply, resulting in more money for consumers who will buy more goods and services from companies, which in turn will boost corporate revenues and drive up stock prices, allowing CEOs to pay themselves more and orchestrate more stock buybacks, thereby further boosting share prices and sending the stock market to new highs.
Trump lovers might not like that portrayal, but the corporate tax cuts he orchestrated in his first term didn’t “trickle down” and enrich consumers and result in more corporate investments as he promised. Instead, U.S. companies used their tax savings windfalls to splurge on more stock buybacks, which Goldman Sachs estimates will exceed $1 trillion this year. Stock buybacks are a once illegal form of stock manipulation, which typically causes a short-term boost in a company’s stock price because it reduces the number of shares outstanding.
Unfortunately for Trump, he doesn’t enjoy the absolute powers of a dictator, at least not yet. If credit card companies are forced to cap their interest rates at 10%, they will only issue cards to the 1% who most likely won’t default on their debt payments. Many Americans, including those who have maintained good credit until now, will have their cards cancelled or not renewed because the credit card models that banks use will be modified to further mitigate risk exposure.
A big swath of consumers could be driven to take payday and subprime installment loans, which carry punishing interest rates and drive borrowers into a cycle of debt from which they can never recover. Payday and subprime lending is a business for the cruel and heartless, which is why private equity firms have come to dominate the industry.
Soaring credit card debt
This is hardly an opportune time to tinker with the credit card industry’s risk models. Americans’ total credit card balance was $1.166 trillion in the third quarter of 2024, according to consumer debt data from the Federal Reserve Bank of New York. That’s up from $1.142 trillion in the second quarter of 2024 and is the highest balance since the New York Fed began tracking in 1999.
Not surprisingly, alarming fissures have begun to form. Delinquency rates for credit cards picked up in 2024 in the U.S. leading to the highest rates observed since 2008.
One need only look to California to appreciate the dangers of dictating to risk-taking companies what they can charge to take on risk. California’s regulators thought it a swell idea to limit the premiums insurance companies could charge in communities that posed significant wildfire risks of destruction. Instead, many insurance companies abandoned the California market, forcing even millionaires like Gov. Gavin Newsom to utilize the Fair Access to Insurance Requirements (FAIR) plan, the property insurer of last resort, to issue policies on their sprawling estates.
FAIR Plan policies typically cost thousands of dollars more a year than traditional insurance policies and only cover damage from fire, smoke, and lightning. To get supplemental coverage for damages, liability, and other elements included with traditional property insurance, homeowners must buy a supplemental policy.
With the recent spate of wildfires in Los Angeles, it’s doubtful the FAIR plan can make good on all its insurance obligations.
CFPB: The bestie of consumers
The Consumer Financial Protection Bureau has taken measures to combat the avarice of the credit card industry without impairing the credit card industry’s risk models. The CFPB last March finalized a rule to limit credit card payment late fees to $8 from the typical $32, a move the agency said would result in an average annual savings of $220 for the more than 45 million people who are charged late fees.
“For over a decade, credit card giants have been exploiting a loophole to harvest billions of dollars in junk fees from American consumers,” said CFPB Director Rohit Chopra. “Today’s rule ends the era of big credit card companies hiding behind the excuse of inflation when they hike fees on borrowers and boost their own bottom lines.”
Other initiatives by Chopra included the removal of medical debt from credit reports and limits on overdrafts penalties. In 2022, CFPB under Chopra’s watch ordered Wells Fargo Bank to pay more than $2 billion in redress to consumers and a $1.7 billion civil penalty for legal violations across several of its largest product lines.
Trump apparently wasn’t appreciative of Chopra’s consumer protection efforts. He fired Chopra this past weekend and if Elon Musk has his way, the CFPB will be disbanded.
In another alarming Trump initiative that’s escaped scrutiny, the president wants to launch a government-sponsored investment fund to capitalize and hopefully profit from government spending initiatives. The president said Treasury Secretary Scott Bessent and Howard Lutnick, the nominee for Commerce secretary, would spearhead the effort.
Lutnick said the US government could leverage its size and scale given the business it does with companies, citing drug makers as an example.
“If we are going to buy two billion Covid vaccines, maybe we should have some warrants and some equity in these companies,” Lutnick said.
I’m certain that most Americans wouldn’t want the federal government making decisions about their health and welfare that could be influenced by stock portfolio considerations.