The Sanders-AOC Protection for Loan Sharks Act
June 2, 2019 in Economics
By Todd Zywicki
Todd Zywicki
Last month, Sen. Bernie Sanders and Rep. Alexandria
Ocasio-Cortez debuted the Loan Shark Prevention Act, whose chief
provision amounts to a national interest rate ceiling of 15%. In
a video accompanying the announcement, Sanders
invoked Hollywood’s version of loan sharks to illustrate his
point: “You’ve got all these guys in their three-piece
suits who are now the new loan shark hoodlums that we used to see
in the movies. You know, in the movies, they say, ‘I’ll
break your kneecaps if you don’t pay back.’ Well, I
don’t know that they break kneecaps …”
Sanders’s invocation of yesterday’s leg-breakers is
obviously intended to conjure the colorful figures of American
imagination, from Don Corleone to Tony Soprano. But the terror that
real loan sharks inflicted on immigrant and working-class families
is not merely the stuff of Hollywood; it was a brutal reality for
much of American history. And the ubiquity of loan sharks in
American history is directly attributable to forerunners of the
interest-rate ceilings proposed by Sanders and Ocasio-Cortez.
“Usury ceilings,” as interest-rate price controls
were traditionally labeled, began as a paternalistic effort to
protect low-income and supposedly vulnerable consumers from
exploitation by greedy bankers. Yet, as well-intentioned
regulations so often do, usury ceilings backfired spectacularly,
primarily harming those they were intended to help. And far from
shutting down loan sharks, history shows that usury ceilings have
been the primary catalyst for the loan sharks that have preyed on
low-income and vulnerable Americans throughout history.
Comparing today’s
financial markets to Hollywood villains diminishes the real terror
that loan sharks inflicted on generations of immigrant and
working-class families and ignores the pivotal role of usury
ceilings in creating the conditions for loan sharks to
operate.
The advent of industrialization saw thousands of prewar
immigrants and farmers flood into American cities in search of
work. The challenges of city living created unprecedented demand
for small-dollar, short-term loans. Yet making small loans to wage
earners was an expensive business. First, it was risky — the
same factors that necessitated borrowing in the first place (low
wages, periodic unemployment, and unexpected expenses such as
medical bills and home repairs) translated into high loss rates.
Second, the costs of small loans is high relative to the amount
borrowed -operating expenses such as rent, employee wages, and
utilities are very similar regardless of whether the customer
borrows $50, $500, or $5,000. In order to cover losses and those
operating expenses, therefore, the effective interest rate on a
small loan will have to be higher.
As a result, prohibitively low usury ceilings made it impossible
for working families to borrow the money they needed from
legitimate lenders. …read more
Source: OP-EDS
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