Thursday, April 29, 2010

10 percent is "enough"

Hmmm, this is interesting:

The group, called People Acting Together in Howard, or PATH, has also won a promise from County Executive Ken Ulman to push for lower bank interest borrowing rates for consumers by moving public monies out of banks that charge high rates.

Maryland's ceiling for credit card interest is 24 percent, Ulman said, but the group said banks often raise interest to 30 percent, even on people who have never been late with a payment. PATH is aiming for a 10 percent maximum rate in a campaign called "10 percent is enough." The non-partisan group, made up of 16 congregations, is an affiliate of the Industrial Areas Foundation, the nation's oldest community organizing group founded by the late Saul Alinsky, and has been operating in the county for several years.

With all due respect to the folks promoting this well-intentioned campaign to lower consumer interest rates, I think that banks are far better equipped to determine what the market interest rates should be based on the supply and demand of capital and the credit worthiness of borrowers. If the folks at PATH think that 10% is "enough" of an interest rate, then I encourage them to put their money where their mouth is and start lending at a 10% rate to folks that real banks want to charge 30%.

If this campaign succeeds, and I can't imagine it will without a mandate from gov't, then the obvious result will be that high risk borrowers will not be able to get loans at all. So are those folks better off having access to capital at a high rate or not having access to capital at all?

I suppose another alternative is that banks will agree to cap interest rates to risky borrowers, but reduce the rate at which the county is paid on monies deposited with banks. In which case, taxpayers have essentially subsidized loans to high risk individuals. But I don't think any bad things will happen if we encourage folks with poor credit to borrow money. That seems perfectly normal to me.


PZGURU said...

The fact that this group was founded by Saul Alinsky says it all. The govt ought to run the other direction, as fast as they can (except that unfortunately too many govt officials cater to the Alinsky mindset).

Your idea is perfect, but I bet they would balk at that. They don't want to risk their money, they want to risk everybody else's money! That's the socialist way.

HoCoRising said...

Great analysis as always, FM. I love how people with absolutely no economic sense think they can just put a finger on the scale and make it "fair." Barney Frank wanted to "roll the dice" on Fannie and Freddie by making them lend to unfit borrowers. Now we have groups that want to tell banks, who make a profession on determining proper market value for interest rates, how to run their shop.

That's like me telling them how to make catchy acronyms or cool looking t-shirts.

Jen said...

I understand that it is difficult for some to build credit after a life event, etc., causes financial wreckdom, but there are banks that offer credit cards that require you to deposit money into your account so that you use your own money to rebuild/build your credit.

I know this is kind of beside the point, but if you're going to organize to promote an idea, how about consumer financial responsibility?

Cable ain't a necessity said...

The only people this benefits are those that do not exercise good financial management practices. This not only penalizes banks, but also those people that do exercise good financial management practices, as they will most likely be charged annual fees or other costs to make up the difference for the banks.

Make no mistake, people who are dopes in managing their budgets are a windfall for banks. But that's not the fault of the banks, it's the fault of people who fail to properly prioritize expenses.

DIY Investor said...

If their credit card debt is out of control at 30% interest can you imagine it at 10%. Super Nanny back in action!