What does a TRUMP presidency look like?

[alfred russel]

Couldn't think of a better thread for this:

The plan proposed today by Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez would cap credit card interest rates at 15%,

What, on Earth, would that accomplish, exactly? It would entice stupid people to spend more on credit which in turn would make banks lower credit card limits. I guess that might serve people's interest, but I am sure Cortez and Sanders would be along demanind the raising of card limits to fight evil banks and reckless capitalism.

I don't get your animosity to it, actually. I assume you agree there should be a cap. Debating whether the cap should be 15%, 25%, or 35% seems kind of technocratic.

[derspiess]

But 15% is ridiculous and will shut out a lot of people.  Then we'd hear how these evil credit card banks don't want to help certain people establish credit.

[alfred russel]

But 15% is ridiculous and will shut out a lot of people.  Then we'd hear how these evil credit card banks don't want to help certain people establish credit.

The rate on 30 year US treasuries (roughly a risk free long term rate) is less than 3%. If banks can't make a profit lending to people at 15%, maybe they shouldn't be lending to those people.

[Berkut]

The banking deregulation that took place that allowed interest rates on consumer credit to skyrocket hasn't served anyone except that banks.

I am pretty hsotile to regulation in general, but in a practical sense. I think regulations need to serve a positive purpose that outweighs their inherent friction.

But the right, as in all right issues these days, has turned this into an article of faith. Regulation is just plain bad, and getting rid of regulation is a good, regardless of the regulation.

[The Minsky Moment]

AR has a good point.  When interbank lending rates are in the 6-8% range, a 15% interest rate is not that extreme; but when benchmark rates are 2-3 percent, 15 percent is extremely high.  It's hard to see a strategy that requires higher rates for profitability, other than deliberately lending to people on the assumption they will default on principal, but not before paying off such large amounts of interest as to make it profitable even assuming a principal write-off.  That doesn't seem like a transaction with high social value.

[crazy canuck]

AR has a good point.  When interbank lending rates are in the 6-8% range, a 15% interest rate is not that extreme; but when benchmark rates are 2-3 percent, 15 percent is extremely high.  It's hard to see a strategy that requires higher rates for profitability, other than deliberately lending to people on the assumption they will default on principal, but not before paying off such large amounts of interest as to make it profitable even assuming a principal write-off.  That doesn't seem like a transaction with high social value.

Add to the analysis the money made from the transaction fees charged to merchants and the argument for needing a rate higher than 15% becomes very difficult to make.

There have been attempt to regulate the industry in Canada over the years - all without success. 

[dps]

The banking deregulation that took place that allowed interest rates on consumer credit to skyrocket hasn't served anyone except that banks.

I am pretty hsotile to regulation in general, but in a practical sense. I think regulations need to serve a positive purpose that outweighs their inherent friction.

But the right, as in all right issues these days, has turned this into an article of faith. Regulation is just plain bad, and getting rid of regulation is a good, regardless of the regulation.

FWIW, I'm not opposed to all regulation.  I would agree with your position that regulations need to serve a positive purpose that outweigh their cost, though we might well agree in many cases on whether or not a particular regulation meets that standard.

[viper37]

But 15% is ridiculous and will shut out a lot of people.  Then we'd hear how these evil credit card banks don't want to help certain people establish credit.

The rate on 30 year US treasuries (roughly a risk free long term rate) is less than 3%. If banks can't make a profit lending to people at 15%, maybe they shouldn't be lending to those people.

that's the thing.  Credit card defaults and late payments are common.  The banks have to take these losses into account.  If the rate is capped at 15%, it means a lot of people won't get credit cards, or would require a guarantor.  Since credit cards are used to build a credit history and many lending institutions would simply refuse a loan if the borrower has no credit history.

Lots of things would have to changed, and it is likely that regular bank loans would have increased interest rates to offset these losses.

[Malthus]

But 15% is ridiculous and will shut out a lot of people.  Then we'd hear how these evil credit card banks don't want to help certain people establish credit.

The rate on 30 year US treasuries (roughly a risk free long term rate) is less than 3%. If banks can't make a profit lending to people at 15%, maybe they shouldn't be lending to those people.

that's the thing.  Credit card defaults and late payments are common.  The banks have to take these losses into account.  If the rate is capped at 15%, it means a lot of people won't get credit cards, or would require a guarantor.  Since credit cards are used to build a credit history and many lending institutions would simply refuse a loan if the borrower has no credit history.

Lots of things would have to changed, and it is likely that regular bank loans would have increased interest rates to offset these losses.

Do we know at what rate these problems will happen, or are we just assuming here?

Could the same arguments be made if the cap was set as 30%? Or at anything?

[crazy canuck]

But 15% is ridiculous and will shut out a lot of people.  Then we'd hear how these evil credit card banks don't want to help certain people establish credit.

The rate on 30 year US treasuries (roughly a risk free long term rate) is less than 3%. If banks can't make a profit lending to people at 15%, maybe they shouldn't be lending to those people.

that's the thing.  Credit card defaults and late payments are common.  The banks have to take these losses into account.  If the rate is capped at 15%, it means a lot of people won't get credit cards, or would require a guarantor.  Since credit cards are used to build a credit history and many lending institutions would simply refuse a loan if the borrower has no credit history.

Lots of things would have to changed, and it is likely that regular bank loans would have increased interest rates to offset these losses.

Do we know at what rate these problems will happen, or are we just assuming here?

Could the same arguments be made if the cap was set as 30%? Or at anything?

Banking financial statements lump credit card income with all other banking services so it is hard to tease out the data but iirc from the last round of hearings regarding attempted regulation, it is highly profitable.

[Admiral Yi]

In addition to what viper said, a fixed nominal cap doesn't account for the possiblity of inflation.

[The Minsky Moment]

Cap = 5 X federal discount rate.

Problem solved.

[Valmy]

Cap = 5 X federal discount rate.

Problem solved.

I approve of this technocratic approach

Though there is no legal limit I think you almost never see one higher than 29.99% so a limit in the 20s somewhere could probably be done without seriously limiting credit while potentially benefiting consumers. So maybe 7x or 8x would be better...I mean so long as we have a limit.

[Admiral Yi]

Cap = 5 X federal discount rate.

Problem solved.

A problem potentially solved, though you would have some interesting results when the discount rate approaches zero.

[derspiess]

If banks can't make a profit lending to people at 15%, maybe they shouldn't be lending to those people.

They won't lend to those people, don't worry.  Those people will have a much tougher time getting credit.