Back to deregulation: Let the good times roll

Montana Viewpoint
Thursday, June 14, 2018
Article Image Alt Text

Remember that quaint little notion called usury? If you’ve ever borrowed money or used a credit card you might want to refresh your memory. Basically, usury is the practice of charging interest on a loan, but over the centuries the meaning morphed to charging excessive interest on a loan. People actually used to worry about stuff like that. Of course, the concept of “excessive” might vary, but originally excessive was defined as anything above zero. That’s going back a while, maybe 3000 years. Today loan sharks can legally charge over 200 percent interest on a” payday loan”.

Religions and governments have from time to time put upper limits on the amount of interest a lender could charge. In the United States, after the Bank Act of 1863, that amount was left to the individual states to determine according, I guess, to the collective conscious as delegated to state legislatures.

In 1958 Bank of America introduced their credit card, now known as Visa, which became the model for the credit cards that followed. It allowed card holders to borrow money when making purchases and pay it off on time, with interest. By the 1970s credit cards were huge moneymakers for the banks that issued them, but still, the national banks were limited to charging the maximum amount allowed in the state where they were chartered. This became complicated when, due to the high inflation of the 1970s, banks were having to borrow money at rates higher than state usury laws allowed them to charge for interest. As a result, some states were encouraged, successfully, to raise the usury rate although efforts to abolish the usury rate failed.

The issue was further complicated when credit cards issued by banks in states with high usury rates began soliciting business in states with low usury rates, thereby charging customers in those states a higher interest rate than their state allowed. The issue was settled in 1977 in a case known as Marquette Bank

v. First Bank of Omaha in which the Supreme Court ruled unanimously that the usury rate in the state where a national bank was chartered was the legal rate for that bank’s credit cards nationwide. Banks then began to pressure state legislatures to again raise the usury rate.

Think, though, how much money a bank could make on interest if there was NO usury law in a state. This certainly occurred to Citibank of New York which approached the Governor of South Dakota and said that Citibank would move their entire credit card operation to South Dakota if the limit on the amount of interest in that state was abolished. In almost as little time as it takes to make a credit card purchase the usury rate was abolished by the representatives of the people of South Dakota, and the credit card industry quickly relocated there.

So what’s the point that I am struggling to get to with all that background? Why it’s simple, big banks have the ability to buy state legislatures and cause them to pass laws of dubious benefit to their constituents but of immense benefit to the bank. And, by golly, they have the power to buy Congress, too.

Think back only 10 years to the second biggest economic crisis in American history, and you will remember that it was caused by the banking industry, Citibank foremost among them. Remember that millions of Americans lost their homes, life savings, and retirement. Recall that not one banking official lost any of those things, and that not one banking official went to prison for ruining the lives of their customers through shoddy business practices.

The reaction by Congress to that debacle was to pass laws that imposed regulations on banking practices in the hopes of preventing future crises. Those banks that were “too big to fail” were also bailed out by Congress and therefore paid off (in a round about way) by the very taxpayers that the banks had just ruined.

Last month Congress repealed those regulations and the Federal Reserve lifted whatever restrictions they had imposed, and we are back to the “deregulated” times of pre-2008. Let the good times roll.

Finally, a note on the perceived evils of government regulation of industry. It is sometimes recommended to legislators that they should budget spending just like a “family” has to. Let’s take that “family” metaphor one step further. Imagine a family with a kid who has gone out and wrecked the car or been drinking and as a result has been “grounded” by its parents. That’s regulation. It is the common-sense response to bad behavior whether by a kid or a bank.

Jim Elliott served sixteen years in the Montana Legislature as a state representative and state senator and four years as chairman of the Montana Democratic Party. He lives on his ranch in Trout Creek.

Category: