At first blush, capping the permissible interest rate on Credit Card debt at 15% and allowing the States the right to make the permissible rate lower sounds like a good thing. This is the genesis of the Loan Shark Prevention Act introduced by Rep. Alexandria Ocasio-Cortez and Sen. Bernie Sanders last week. I often harp on the outrageous interest rates the credit card industry charges – which all began with a Supreme Court decision in 1978 which eliminated the ability of states to limit interest rates with state Usury laws. There are, however, major drawbacks to this legislation. Like it or not, our economy is based on Consumer Spending – which is universally attributed for driving two-thirds of GNP – the measure of the economy’s growth. Economic growth is what creates and continues jobs. Consumer Spending can occur only if consumer’s have access to money to spend. Unfortunately, the spending that drives our economy is not based on consumers having excess disposable income or savings. The spending comes from consumers using their credit cards – and charging the goods purchased. Year after year, we see reports in the news media that nearly ½ of Americans lack $400 of cash available to cover an emergency. This report – is the same report that I’ve seen, year after year – for the last ten years. We have not changed. We are an economy that is leveraged on debt – at both the consumer level and the national level. It is what is.
If this legislation is passed – the credit card industry will react by dramatically cutting back available credit on accounts that are carrying debt, as well as on accounts that have zero or small balances if the customer does not fit a profile indicating a stellar credit history. I have written many times on the conundrum of our economy. Growth is what prevents a recession. Consumer Spending is the key to growth. Unfortunately, our Consumer Spending is fueled on the backs of middle class Americans whose spending occurs from the availability of having credit. If you take away the available credit, Consumer Spending will plummet (which occurred during the Great Recession). Once spending plummets – we are in a recession and jobs disappear. The jobs that disappear are those of middle class America - leaving them with no income, no savings and no available credit. My point – this legislation – though good with intentions and certainly attractive for voter appeal – is NOT a solution. If passed, it will make matters worse for middle class Americans. It will cause a recession (if we have not reached that point) and it will make for another horrendously long recession.
The conundrum created is a monster – but it needs to be “managed” to our benefit – and not as a bully pulpit issue for candidates craving for air time. In a Washington Post article about the proposal, Representative Alexandria-Cortez is quoted as indicating the legislation is necessary because 2005 changes in the bankruptcy law made it far more difficult to seek relief from debt. While the banking industry’s intention in 2005 was to achieve that goal – it is widely recognized by anyone who know anything about the bankruptcy laws – that the 2005 changes did not have a negative impact on the availability for consumers to file bankruptcy. Beyond that, as we often emphasize and have demonstrated for thousands of clients – credit card debt can be resolved outside of bankruptcy at tremendous savings.
In the end – our national economy needs the available credit to perpetuate itself – at the high interest cost. As to our individual economies – i.e. our finances – each of us needs to take the readily available steps that exist to eliminate the debt at the least possible cost and in the quickest manner. That applies to those of us who end up with carrying to much debt - $10,000 - $20,000 + - when that happens, we get rid of the debt, let the bank take the loss and move on. It may not be pretty – but it works and it is far better than passing legislation that will slam the door on economic growth for years to come. Senator Sanders and Representative Cortez would better serve us by endorsing the Student Borrower Bankruptcy Relief Act of 2019, introduced last week, which would allow student loans to be discharged in bankruptcy – and grabbing the pulpit to advance that cause. This bill would cause those banks who have preyed on Americans by enticing parents and grandparents to sign onto non-dischargeable student loans – to eat the loss – an end result that is appropriate and well deserved when the debt is too extensive to be repaid.
Have a great week. Also – check out our upcoming free seminars - one on Estate Planning and the other on Debt Elimination – your invite is below.