My fantasy job would be to oversee the Consumer Financial Protection Bureau serving under a president who supported the agency’s mandate. While I’m a free markets guy, the markets aren’t free if they aren’t fair. Technology and deregulation have allowed companies to screw consumers in unprecedented ways. The playing field needs to be leveled.
So, I’m a natural to hop on the media bandwagons of Bernie Sanders and Alexandria Ocasio-Cortez and applaud their “socialist” efforts to take on the rich and powerful and tax them and corporations to the hilt. But financial services are something I know a bit about, and I’m alarmed by how little, if any, thought they put into their initiatives. The socialist duo’s proposal to cap all credit card interest rates at 15 percent would harm the downtrodden constituencies they purport to champion and possibly enrich the bankers they so viciously malign. Bernie and AOC aren’t socialists.
One doesn’t need a Harvard MBA to understand the credit card business. Banks have developed predictive algorithms that can determine with reasonable accuracy the optimum amount of credit to extend to consumers and the likelihood they can pay back the principal and the interest. Banks charge higher rates to riskier consumers statistically more likely to default to offset what they know will be higher loan losses.
If banks can’t manage and charge for their risk, they won’t take any. That means only people with the best credit scores will get credit cards, and only about 60 percent of consumers would qualify. A big swath of consumers could be driven to take payday and subprime installment loans, which carry loan rates 300 percent or higher 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 are increasingly dominating the industry.
This is a very inopportune time to hinder the banking industry’s ability to manage risk. Credit card delinquency rates hit a seven-year high in the first quarter, an increase the Federal Reserve Bank of New York attributed to borrowers in their 20s struggling to keep up with minimum payments. Millennials could be the most harmed by Bernie and AOC’s cap, so it would be interesting to know AOC’s credit score.
Bernie and AOC didn’t explain why 15 percent is an acceptable rate of interest, though likely it’s because credit unions are already subject to that cap. But it’s easy to find credit unions offering card rates considerably lower; Lake Michigan Credit Union offers an APR rate of 8.5 percent with no annual fee.
I don’t know about Bernie, but it’s a safe bet that AOC doesn’t know how or why a Michigan credit union can offer such a low rate or whether it’s a profitable operation. It’s been reported that AOC declined offers to meet with senior banking executives despite sitting on the House Committee on Financial Services.
Notably, Bernie and AOC didn’t address the issue of tens of millions of credit-worthy Americans who are disadvantaged by some dated credit models that can’t score them because their income is cash based. Blacks, Latinos and immigrants comprise a big component of this group. The duo also didn’t address how the banking industry can meet the needs of America’s growing Muslim population. Some interpretations of Islam outlaw charging interest. There are creative ways around the restriction, but few financial institutions offer them.
Bernie and AOC peddled their initiative with their typical invective. “Today’s modern-day loan sharks are no longer lurking on street corners breaking kneecaps to collect their payments,” Bernie thundered. “They wear three-piece suits and work on Wall Street.”
Bernie neglected to mention that the credit card industry has some of the best political kneecap breakers money can buy. One of them is a certain good ol’ boy long known as Senator MBNA because of his successful efforts to defeat credit card reform that even some Republicans were willing to enact. (For what it’s worth, most bankers today don’t wear suits, let alone three-piece ensembles.)
What’s most telling about Bernie and AOC is that they only want to tinker with capitalism, not replace it. If they were true socialists, they’d be advancing some very bold initiatives like nationalizing Wells Fargo and running the bank with the same government efficiency as the post office and the Veterans Administration. Maxine Waters, the chair of the Financial Services Committee, already has some noteworthy banking experience to run the operation in true socialist fashion.
Snake oil salesmen used to advertise their wares on the back pages of newspapers. Now their pitches are uncritically promoted on the home pages of America’s leading and supposedly credible news outlets. If reporters were doing their jobs, they’d put less emphasis on Twitter rhetoric and focus on policy analysis. Then consumers would be aware of the one Congresswoman with the experience, smarts, and focus to take on the banking industry and already has bankers and their lawyers quaking in their designer loafers.