Usury Laws – Social Justice?
September 9, 2009
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Posted by Michael S. Langston
For those who don’t know, usury laws are used by governments around the world to prevent lenders from charging others “excessive” interest. These laws are in use in most countries around the world including the United States. They are usually sold, as they are today, as vehicles to promote social well being by restricting predatory practices against the poor.
& when you have a champion of the poor such as President Obama, this is right up his alley (here):
Last Thursday executives of the nation’s leading credit card companies were summonsed to the principal’s office and told to clean up their act….
From the President’s post-meeting remarks:
“…we want to preserve the credit card market. But we also want to do so in a way that eliminates some of the abuses and some of the problems that a lot of people are familiar with — people finding themselves starting off with a low rate and the next thing they know their interest rates have doubled; fees that they didn’t know about that are suddenly tacked on to their bills; a whole lack of clarity and transparency in terms of the terms and conditions of their credit cards.
And so there’s going to be action in Congress. Our administration is going to be pushing for reform in this area.”…
Of course we should all be for transparency as obfuscation by lenders is just another word for fraud, however the idea that the government will know what makes a risk and be able to set ceilings or adjustments of interest rates is crazy.
You may ask, “But if it’s for the poor?”
And therein lies the problem – a recent paper published by the Harvard University Economics Department tries to answer the question (here):
…Understanding the economic motivation and impact of financial regulation in this setting may aid understanding of regulation and development today.
…Our investigation into the causes and consequences of financial regulation entails answering who and what determines regulation and who benefits and loses from it….
They note in their research:
…The evidence we uncover appears most consistent with financial regulation being used by incumbents with political power for their own private interests—controlling entry and competition while lowering their own cost of capital. By limiting the maximum legal interest rate, usury laws cause credit rationing that increases the cost of entry in the market. Since wealthy incumbents already have access to capital via their reputation, relationships, creditworthiness, and collateral, they are relatively immune to such restrictions…
As with other such government attempts to control the market, it not only fails to do what was expected, but it in fact moves to the opposite corner.
Don’t think that business leaders don’t already know this however. Knowing that motives aren’t completely discernible, the research certainly suggests the wealthy fully understand these laws and their impact to their interests:
…As further corroboration of private interests, we find a positive relation between wealth-based suffrage restrictions and other forms of economic regulation designed to exclude certain groups, such as general incorporation laws that permit free entry of firms. Usury laws are tighter when incorporation restrictions are also tight. The combination of these two policies restricts free entry further and implies financial regulation is adopted in conjunction with other exclusionary policies designed to limit access to outsiders. This evidence seems to conflict with the public-interest motivation, which is supposed to include or help underserved or disadvantaged groups rather than limit access….
Meaning only that IF these laws were used as social support to the poor, then it would stand to reason that they would not be used in conjunction with other barriers to entry such as licensing, incorporation statutes, and other regulations.
But in fact, this is what we find. We find that businesses know all too well how to protect their interests even as our leaders tell us how much they are protecting ours.
The true irony of this is that liberals who push this type of legislation routinely do so in the name of economic/social justice. Fairness for the poor. Help for our downtrodden brethren…
All the while the legislation they implement continues to hurt the poor more and more each day by limiting their chances and protecting already entrenched interests.
Categories: Economics, Politics
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Tags: Business, Class Warfare, Credit Market, Economics, Financial Regulations, Harvard University Economics Department, Legislation, Obama Administration, Politics, Usury Laws
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