Interest Rate Control
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To the uneducated the first solution in price control is putting a cap on interest rates. This attack on a market regulated interest rate has bee tried for over four thousand years with dire results on the poor and the economy in general. Anyone looking top try this thinking that they are the first ones has not done any research into the history of controlling the interest rate. The high interest rates on those who have not established a credit history are high for a reason. The risk of loaning money to those who have a poor credit history or no credit history at all is a risk and should not be put on the ones who have shown responsibility in handling their credit so the interest charged to those with good credit is less that the interest charged to the higher risk groups. It is the high interest the credit card industrry charges that is most noticable to the public vecause they are the ones who use the card as an income supliment when there is something they want when they should havce done without the thing wanted until they saved up the cash to avoid the interest all together. The thing that should be avoided n all cases is the pay day loan. There is the place where eveyone who uses the pay day loan company is walking in with a sign tha t says really bad credit written accross their forhead. s are much higher as the risk is higher. When I looked at the pay day loans adertised on the TV I was shocked at what they charged. It was in the four digit range. So the result of letting the market control the price of borroweing money is that the silly, can’t w wait one pay period to save the money pays for the lesson of not being a practical person .

So if the government says the market is our of control and we need to control the rate of interest on loanslet the market set the rate what happens:

Pros

  1. No one has to pay interest if they use credit responsibly and build their credit history. Most credit cards offer cash back for using their card as an incentie for people to borrow their money. I hae been using credit cards for business and personal use for many years and always pay the full balance when it is due. Many times when I was out of work decisions had to be made to limit expendatures to what was absolutely necesssary not pay the high interest rates on the cards I used. The result was I had credit after a while Socialist Lawmakers’ Proposed Cap on Credit Card Interest Is a Tax on Poor People -May 30th, 2019 6 min read cOMMENTARY BY Joel Griffith Sen. Bernie Sanders (I–Vt.) and Rep. Ocasio-Cortez (D–N.Y.) Loan Shark Prevention Act 1 capping interest rates, the bill also allows states to impose lower limits on national banks operating within their state. 2 enables the U.S. Post Office to provide an expansive array of banking services, including checking accounts and loans. 3 price controls just do not work and hurt low-income borrowers, making it costlier to both borrow and lend. Historical Failures: King Hammurabi 3,800 years ago led to long-term economic problems for the Babylonians. Ancient Egypt endured economic mayhem 2,100 years ago after being subjected to price and wage controls. Likewise, detailed controls China under the Chou dynasty (spanning nearly 1,000 years, ending in 221 BC), price controls failed to manage supply and demand. Chinese scholar Dr. Huan-chang Chen notes, “Whenever the government adopted any minute measure, it failed, with few exceptions.” Ancient Greece, rulers sought to enforce controls on the grain market. Violators faced capital punishment. Yet prices continued to fluctuate in response to supply. Romans banned usury by 342 BC. But hundreds of years later, circumvention of the ban was commonplace. France in 1793 imposes price controls on grain, flour, and meat led to shortages and riots. Venezuela today, shoppers often face empty shelves five years after the Fair Price Law set price controls and prohibited hoarding. Also in V. rent control creates a shortage of affordable, well-maintained supply of housing in many cities. Attempting to control the price of credit is also hardly a novel concept. As an example, the Romans banned usury by 342 BC. But hundreds of years later, circumvention of the ban was commonplace. The government of Rome Julius Caesar tried to rein this in with a 12 percent cap on usury. Official bans on usury imposed by the Roman Catholic Church were shrewdly evaded by financiers of the Middle Ages. In the late 17th century, a debate raged in England over whether to lower usury limits. With an eye towards history, philosopher John Locke warned, “Tis in vain therefore to go about effectually to reduce the price of Interest by a Law; and you may as rationally hope to set a fixt Rate upon the Hire of Houses, or Ships, as of Money.” Not until 1854, did England at least heed his advice by repealing usury limitations. These restrictions denied resources to those in most dire need while spurring the creation of black markets. Higher Interest Rates Reflect Risk As it turns out, the laws of economics work in financial markets just as they do in others. Suppliers of credit base the price of their product—the interest rate of the loan—in large part on the risk of the borrower. Lenders issue loans with the understanding that the principal and interest payment term will not be honored in all instances. In some years, more than one million individuals file for bankruptcy protection. Simple defaults occur as well. A higher interest rate reflects the varied nature of the costs of these risks. A government-mandated interest rate cap presents a dilemma to lenders: either extend credit at a rate that doesn’t include all the default risk, or deny credit to a large swath of potential borrowers. Neglecting to appropriately price risk—undercharging the product—may lead to fiscal insolvency of lenders, harming investors while threatening the economy. Interest rate caps on home mortgages led to the savings and loan (S&L) crisis in the 1980s. To avoid a similar disaster, lenders will withhold credit from those with relatively worse credit histories and fewer assets. In defiance of the lessons of history, Ocasio-Cortez confidently insists, “There is no reason a person should pay more than 15 percent interest in the United States.” The fact is, many good reasons exist why someone might pay more than 15 percent interest. Neither Ocasio-Cortez nor anyone else can possibly know the proper rate to impose on everyone. Oftentimes, access to credit is needed to maintain short-term liquidity. Without a credit lifeline, a temporary loss of income, health problem, or other unexpected expense may force an individual into a default on pre-existing obligations. An impounded vehicle, a bankruptcy, or even foreclosure could result from the inability to obtain credit in a time of severe need. The government-caused shortage of credit will also deny families a chance to establish or re-establish credit. Due to increased risk of nonpayment, those establishing a credit record or emerging from financial turmoil typically pay higher rates. Obtaining a credit card at a higher rate gives them a chance to demonstrate financial solvency and responsibility. Denying Credit Access Is Just a Tax on Poor People Individuals not qualifying for credit within government-imposed interest rate limits may pursue illicit lending alternatives at unlawfully high interest rates out of sheer desperation. Far more serious repercussions than a lien could result from defaulting on such a loan. Unfortunately, the people who need higher-priced loans in the first place—those with the least amount of wealth and income—will be the ones denied access to the credit market by the 15 percent cap. If the price of credit (the interest rate) is lowered artificially, a shortage will follow. Denying credit by imposing these limits acts as a tax on poor people. What of the proposal to have the government provide banking services through U.S. Postal Services offices? This is unnecessary and ill-advised. Sen. Sanders claimed, “Many poor people don’t have access to banking services because the big banks are not worried about somebody who makes 10 bucks an hour … so we’ve got to move towards universal banking through the postal system.” However, no widespread shortage of banking services exists. A Federal Reserve report shows 95 percent of adults “have a bank or credit union account,” including 90 percent of blacks and Hispanics. Choices for low-cost banking abound for the small fraction of adults with no such accounts, even those with small account balances. For instance, Wells Fargo waives the $10 monthly service fees with just 10 debit card transactions in one month or at least $500 in direct deposits. The congresswoman complained about the lack of banks in densely populated urban areas such as Brooklyn. Yet a simple search shows more than 300 bank branches in Brooklyn—nearly five per square mile. Government Warps Incentives Through Foolish Mandates Furthermore, when the government caps rates associated with a service through a government monopoly, they lose money and end up providing a subsidy financed by taxpayers because of the political pressure to keep rates artificially low. In fact, that’s exactly what happens now at the Post Office with direct mail. Congressionally mandated services, compensation levels, and rates all contributed to last year’s $3.9 billion net loss on revenue of $70.6 billion. This was hardly an anomaly. The Postal Service last turned a profit in 2006. When permitted to compete with the USPS, private delivery services have bested their counterpart in customer satisfaction and profitability. Why should a money-losing government monopoly with lackluster performance attempt to compete with a banking sector already demonstrably servicing individuals of all income levels nationwide? Government restrictions in the form of an interest rate cap will inadvertently harm the poor by denying them access to credit and exacerbating the financial challenges of those in need of this credit. Nor will subsidized credit through the Postal Service yield the intended results. Instead, eliminating barriers to innovation and competition in the lending market place will best benefit consumers.