The Loan Shark Prevention Act would socialize credit markets, and force the Post Office to cash bad checks.
Here’s a good rule of thumb: If you find yourself agreeing with Bernie Sanders and Alexandria Ocasio-Cortez on any matter of economics, you should probably rethink your position, wonder where you went wrong, and withdraw from commenting on such matters until you’ve addressed the root cause of your deficiencies. In fact, one could probably pass for a fairly capable economist just by forever denouncing every idea from either one of them, and taking the opposite position.
This bears mentioning because this past week, the dystopian duo teamed up to propose their latest financial clusterfuss, proving, once again, that two people with half a brain do not equal one smart person. If anything, just as multiplying a fraction by another fraction actually results in a smaller fraction, so too an idiot squared just produces a dumber idiot.
Yet, an alarming number of otherwise sober, level-headed people rushed to praise Team Genius and their ominously named “Loan Shark Prevention Act,” which is basically just socialism applied to credit cards, converting them all into yet another welfare program. Under their plan, banks would be prohibited from charging more than 15% interest on credit cards because, after all, banks can borrow money at 2.5% interest from the Federal Reserve, so, they tell us, “there is no justifiable reason that a person — no matter their background – should be charged with an interest rate higher than fifteen percent.” And apparently, this just kind of sounds instinctively right to a lot of regular folks across party lines, who know nothing about credit markets or how rates are established, but who do not let that interfere with their new and strongly held belief that this is a reasonable solution to a wanton abuse, and we should all rally behind it.
Keep in mind, by the way, that this is the same “Breadline” Bernie who forever complains about a “rigged economy.” But now, he wants to rig the credit markets!
How Bernie and his ventriloquist dummy arrived at that arbitrary fifteen percent number is anybody’s guess, but how banks arrive at their rates is anything but arbitrary. An interest rate is a price; more specifically, it is the price of money. And people with bad credit have to pay a higher price for money because they represent a greater risk that the money will not be paid back in full, if at all. Credit card companies do not demand collateral, and the borrower always has the option of declaring bankruptcy and wiping away the debt, or simply not making their payments and letting the banks chase them down for what little money they can recover, which is usually a fraction of what is owed. And yes, the banks borrow money from the Federal Reserve to make these loans (so what?), but this won’t happen for very long if that money is being used to extend bad credit. The reason the Federal Reserve has lower rates is that the risk of lending to its own member institutions is much lower than lending to somebody with bad credit, a history of poor repayment, and limited to no income information. And the Fed has to be paid back as well, and when it isn’t, interest rates rise for everyone (which slows the economy), and money has to be printed out of thin air to cover the losses (which lessens the value of our money).
But good economics makes for bad politics, so pay no attention to any of that. Just do as Breadline Bernie does and ignore this reality, and join his complaints that people on Wall Street “wear three piece suits” and “make hundreds of millions” of dollars (as though that should form the basis of government policy), while these “extortionists” charge people “outrageously high interest rates when they are desperate and need money to survive.”
First of all, a credit card is not supposed to be a form of income, it’s supposed to be an advance on expected income. The last people who should be taking out a loan of any kind are the ones with no means to pay it back, even on a temporary basis. Solve the income problem first, then take out the loan.
But forgetting that for a moment, if these people are so “desperate” for, and in “need” of this money, why is Bernie preventing them from getting it? Placing a limit on interest rates is the same as limiting who the banks can lend to, because it effectively tells banks that they cannot lend to people whose risk profile exceeds the interest rate necessary to cover the expected losses. Banks aren’t going to lend money to lose it, they’ll simply stop lending to those persons who are legally prohibited from paying an interest rate that sufficiently factors in the risk of default.
So the people who are so “desperate and in need of this money to survive” would be hurt because they would not be able to get that money. And maybe that’s not the worst thing in the world.
But we know what will follow: when these people can’t get credit, the Left will insist we force banks to lend to those people anyway, meaning that the cost of the loss the banks will suffer is going to be socialized to the rest of us in the form of higher interest rates to borrow, lower interest rates to save, and/or other bank fees. Maybe Breadline Bernie will start taking on credit scores as well, which we’re already being told are “racist.” Maybe they’ll come under new regulations, limiting the extent to which they can be used, and what can and cannot affect them, so that people with bad credit can get the credit cards they “desperately need” — because anything that is a “need” is automatically an entitlement! — and the rest of us will pay for their defaults.
Hey, here’s an idea: maybe credit scores should have an adversity rating like our new SATs, so people with bad credit can get loans on the basis that their neighborhood was overrun with drugs and their high school had a low graduation rate!
All kidding aside (though, with alarming frequency, today’s satire has a way of becoming a Democrat’s newest policy proposal tomorrow, so perhaps it’s best not to give them any ideas), socializing credit markets isn’t just misguided, it’s dangerous. Extending credit to people who are likely to default, at rates that do not adequately take that into account, is what causes credit markets to dry up, and recessions, depressions, and bank panics occur.
Almost every financial panic in history has started with an overexpansion of credit to people who could not pay it back, resulting in a debt spiral. The higher rate of defaults cause higher interest rates for everyone else, which in turn causes fewer people to apply for credit, which in turn causes the credit markets to slow, and the economy along with it.  The slowing economy then causes more defaults, which cause interest rates to rise, which causes fewer people to borrow, which slows the economy further, and so on and so forth, into recession and collapse. (And then the Fed artificially lowers interest rates by printing up fake money and inflating away our currency).
This happened with the health insurance industry when states tried to force insurance companies to take on high cost and/or low-income consumers and charge them below market rates. Other people buying insurance therefore had to pay higher rates to make up for the losses on the sub-prime insured, and many of them simply chose not to buy insurance due to the higher price, leaving fewer people in the insurance pool to pay more to cover everyone else. Which, of course, caused more people to drop their insurance, and the cycle continued. Obamacare solved this by simply forcing everyone to buy insurance, like it or not, so none of us could leave the risk pool and we’re forced to subsidize the subprime insured, like it or not.
But what do Bernie and AOC propose to do, force everyone to have a credit card?
No, they’ve not even thought that far, if they’ve even thought at all. They never do, which is why they don’t bother to address it in their self-congratulatory press release or anywhere else. All they care about is redistributing money to their voters because, as Ocasio-Cortez said, she’d rather be morally right than factually right, because facts can be troublesome, and who has time to learn them anyway?
And in furtherance of that vacuous rectitude, the Land Shark… er… Loan Shark Prevention Act would also end “payday loans,” which cost too much, because twenty percent of borrowers just don’t pay the money back. To get a payday loan, a borrower writes a post-dated personal check from his own account and gives it to the lender in order to borrow money against it. If the borrower repays the loan, the check gets destroyed, and if not, it gets cashed. There is no collateral other than that. And because one in five people just don’t pay it back, and there is no security other than a check that will probably bounce, interest rates have to be high.
So Breadline Bernie’s solution — instead of just letting people make their own choices like adults — is to have the Post Office (!) cash their payday checks, and then bear the loss of the bad checks themselves, even though the Post Office already loses billions every year, and forever requires Congressional appropriations to bail it out.
In other words, this is just a backdoor welfare program, to turn the Post Office into a welfare office, and hide that fact from the taxpayer.
This, incidentally, is one of Breadline Bernie’s many internal contradictions: He tells us that our democracy depends on as many people voting as possible, so sign up all the prisoners, sixteen year-olds, non-citizens, and even force lazy people to the polls, but his policy arguments are rooted in the idea that millions of Americans can’t be expected to assume adult responsibilities.
Look, nobody forces anybody to take out a credit card or payday loan. If you don’t like the rates, don’t take the loan, and no, they are not a substitute for actual income. Please, everybody, stop rigging the economy, and for the love of God, stop turning to the government for everything! “Facebook censored me, credit card rates are too high, silence that person, place taxes on fattening foods so I don’t eat them, pay off my student loans for the degree I got in a useless pursuit, make my boss pay me more money and give me more time off, because I’m helpless and everything is someone else’s fault, now somebody do something!”
Good heavens what happened?
 As with any price, government manipulation produces unintended consequences. When the government establishes a minimum price above market value, it always produces a surplus (for example, minimum wage laws increase the price of workers, resulting in fewer of them being hired). But when the government, as here, imposes a maximum price that can be charged, it produces a shortage of that product, because the producer cannot earn sufficient money to justify producing at the level commensurate with the increased demand that comes with lower prices. This is how Venezuela managed to create a shortage of food, by just declaring that food was too expensive, and imposing price controls on farmers, who then stopped producing because it was no longer profitable.