Lordy, Lordy, what an idiot

Jonathan Freedland that is.

Yes, let\’s bring back the anti-usury laws.

In the US last year, 1.2 million people filed for bankruptcy, hardly a surprise in a society where consumer debt has increased by 733% since 1980.That year is significant. Until then, anti-usury laws were still on the US statute book, as they had been since 1776, capping the amount lenders could charge.

Might have been worth mentioning that inflation had meant that real interest rates were negative, driving the entire US Savings and Loan industry (the Building Societies, essentially) into bankruptcy, no?

Now, nearly 300 years later, it\’s surely time to put the cap back on. It can\’t be too much to ask that banks which currently borrow from the Bank of England at a rate of 0.5% lend it out at no more than 8%: they\’d still be charging customers 16 times more for money than they had paid for it.

Err, there\’s a few things that need to be added into that calculation. The overheads of the banks of course, all those lovely buildings and people have to be paid for somehow. Plus the costs of making the decision to lend: and the costs of getting the money back. Plus we need to add the default rate into it and of course inflation.

Erm, no, fixing the maximum interest rate at 8% is an extremely silly idea indeed. Barking mad in fact.

13 thoughts on “Lordy, Lordy, what an idiot”

  1. Jonathan Freedland has spotted a business opportunity. He just needs to open a bank and people will flock to his market beating lower interest rates. I can’t believe he shared his business plan with Guardian readers – they might steal his idea.

  2. “What on earth makes him think that there was a US in 1776, never mind its having statutes?”

    An excellent point.

    Usury is regulated by state law, not federal, and still exists in many states. For example, California still has them for consumer loans and mortgages (currently set at the higher of 10% or 5% above the federal funds rate).

    The Supreme Court ruled in 1978 that inter-state trade permitted a nationally chartered bank to offer loans at its home state rates, resulting in South Dakota being the first to eliminate rate caps. This was the death knell for a the federal usury laws, and so in 1980 all nationally-chartered banks were exempted from usury laws. Interestingly, the federal funds rate was itself usurious by the definition of many states (inflation in 1980 was about 14%, and consequently the federal rate was around 13.5%).

    These are all subtleties lost on the typical Guardianista journalist for whom facts are merely opinions (C. P. Snow’s quote on the Guardian masthead notwithstanding).

  3. I wonder what the effects of an anti-Usury law would be, at a minimum I’d guess the following would be true:

    – A massive increase in organised crime on a par with the prohibition era as loan sharking makes a comeback..

    – The closure of vulnerable businesses unable to raise capital.

    – Poorer people without a credit history or much in the way of assets would find it very difficult to get loans.

  4. “A massive increase in organised crime on a par with the prohibition era as loan sharking makes a comeback..”

    I think the first visible effect would be to hasten denouement of the credit binge: widespread default and bankruptcy.

    “The closure of vulnerable businesses unable to raise capital.”

    The usury laws as they are in the US don’t apply to businesses: they apply to consumer loans (and exempt mortgages). A hypothetical British usury law could do something similar, or something different. In any case, the effect of such a law would be to virtually ban credit of the regulated type to classes of people, or in other words:

    “Poorer people without a credit history or much in the way of assets would find it very difficult to get loans.”

    Quite. To answer to this point, the Fruitloop Brigade will propose that we nationalise the banks and then have them make non-viable loans. Which will require endless taxpayer support for the consequently ever-failing banks. Or, in other words, taxpayers should indirectly give money to the poor Labour voter. Plus ça change.

  5. “C P Snow? Some confusion there.”

    Err, yeah. Confusion is my second most common reaction to reading The Guardian.

  6. Kay Tie wrote:

    ‘To answer to this point, the Fruitloop Brigade will propose that we nationalise the banks and then have them make non-viable loans. ‘

    You mean, like FNMA and FHLMC in the US, goaded by lawmakers into creating ever-more-risky home loans for ever-less-credit-worthy borrowers . . . ? You mean, like that?

    The interest rate is simply the price of money. It is the single, best and most reliable mechanism by which a borrower determines whether to borrow and a lender determines whether to lend. If the state decides to set controls on the price of money, the effect will be the same as it is whenever the state decides to set controls on the price of – anything.

    llater,

    llamas

  7. “You mean, like FNMA and FHLMC in the US, goaded by lawmakers into creating ever-more-risky home loans for ever-less-credit-worthy borrowers . . . ? You mean, like that?”

    Yeah. Exactly like that.

    And when it all ends in horror, the Fruitloop Brigade will point and say “See! See! Capitalism has failed!”

  8. Freedland is also missing the point, when he relates, disparagingly, that “In the US last year, 1.2 million people filed for bankruptcy”, that US law allows people filing for bankruptcy to write off credit card debts but keep a house and car.

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