Sunday, October 17, 2010

It all comes back to usury

For over three decades, I have had a minor interest in trying to remember what the various large religions have to say about usury.  These days, I am reduced to remembering the teachings of my sliver of Protestantism (Swedish-American Lutheran with an elementary education by Mennonites) and hoping Google will bail me out on the rest.

But one thing is overwhelmingly clear--none of the religions that address the subject of usury likes it one little bit.  The only large exception concerns the Calvinist (Protestant Christian) embrace of usury--and that exception would prove extremely important because the English-speaking world is so culturally Calvinist.

Interestingly, when religions address the subject of usury, they tend to cite a higher authority or consciousness to validate their positions.  Religion, it turns out, is a poor place to turn for understanding about why usury is a bad idea even if there is no God.  That's OK!  Good old pragmatism and sixth-grade arithmetic tells us that usury is a bad idea because it makes economic calamities mathematically certain.

Usury also provides some "well DUH!" moments.  Here's an FDIC paper from 1998 that tracks the rise in credit-card-related personal bankruptcies following the decriminalization of usury in 1978.  Imagine if the same paper were written today!
Bank Trends, March 1998
Number 98-05 Diane Ellis 
(202) 898 - 8978 
The Effect of Consumer Interest Rate Deregulation on Credit Card Volumes, Charge-Offs, and the Personal Bankruptcy Rate
The rising level of credit card debt is often cited as one of the factors in the rising U.S. personal bankruptcy rate. Numerous theories have been advanced to explain the increases, including aggressive marketing by credit card issuers and a lack of discipline on the part of consumers. This paper argues that a 1978 Supreme Court decision ("Marquette") fundamentally altered the market for credit card loans in a way that significantly expanded the availability of credit and increased the average risk profile of borrowers. Marquette ushered in deregulation of usury ceilings on consumer interest rates by allowing lenders in a state with liberal usury ceilings to export those rates to consumers residing in states with more restrictive usury ceilings. The result was a substantial expansion in credit card availability, a reduction in average credit quality, and a secular increase in personal bankruptcies. The Canadian experience with bankruptcies supports this argument. This paper contends that a tightly regulated world, marked by restricted access to consumer credit and a low level of personal bankruptcies was exchanged for a deregulated world, marked by expanded access to consumer credit and a higher lever of personal bankruptcies. This argument implies that a return to the bankruptcy rates and charge-off levels that prevailed in the early 1980s or before may be unlikely.
The Effect of Consumer Interest Rate Deregulation on Credit Card Volumes, Charge-Offs, and the Personal Bankruptcy Rate
The U.S. personal bankruptcy rate has risen to a historically high level, from less than one per thousand population annually in the early 1970s to almost five per thousand population for the year ending September 30, 1997. An increase in outstanding consumer debt, particularly credit card debt, has been cited as a significant contributor to the increased rate of filing. One financial planner was recently quoted as saying, "I've never seen anyone come in with a financial problem that wasn't related to credit cards."1
Aggressive marketing by credit card lenders or a lack of discipline on the part of consumers often are blamed for the increase in credit card debt outstanding. These explanations in essence argue that behavior has changed: that lenders have become more aggressive or borrowers less prudent. Whatever the merit of these explanations, they leave unanswered questions as to when and why behavior changed.
Some industry experts have attributed the increases in credit card debt outstanding and personal bank-ruptcies to changes in marketplace rules rather than changes in lender or borrower behavior. One type of change to the marketplace rules occurred in both 1978 and 1994 when federal bankruptcy law was modified, in part, to increase the level of assets that could be protected in a bankruptcy filing.2
These legal changes, which made bankruptcy a more attractive option for debtors, sometimes are cited as reasons for the rising level of personal bankruptcies. Despite the intuitive appeal of this argument, there is some evidence that changes in bankruptcy laws may not be a primary driver of increases in personal bankruptcy rates. For example, Ellis (1998) provides evidence on the lack of correlation between state homestead exemption rates and state personal bankruptcy rates. Zandi (1997) points out that a similar increase in personal bankruptcies has occurred in Canada without any significant recent changes in the bankruptcy law.
Another significant change to the marketplace rules occurred in the late 1970s with deregulation of consumer interest rates. Both Ausubel (1997) and Rougeau (1996) focus on interest rate deregulation as the event that set the United States on a course of rising credit card volumes. Chart 1 illustrates that the dramatic rise in personal bankruptcies did indeed begin shortly after the Supreme Court's Marquette decision, which initiated interest rate deregulation. This chart suggests a relationship between interest rate deregulation and the increase in personal bankruptcies. The evidence alone is not sufficient to establish a causal relationship; this paper argues that such a relationship exists.
The argument advanced in this paper for the importance of interest rate deregulation as a driver of expanded credit availability and higher personal bankruptcy rates differs from those offered by Ausubel and Rougeau. Ausubel (1997) maintains that borrowers underestimate their use of credit cards and, therefore, the importance of credit card interest rates, which enables lenders to earn an extranormal profit on every good customer. He argues that the extraordinary profits made by credit card lenders have caused them to relax their standards and make credit available to poorer credit risks. Rougeau (1996) suggests that the absence of interest rate regulation allows credit card lenders to pursue unlimited profits by taking advantage of borrowers' weakness and desire to consume, which often reaches an irrational level. more
I am working on the idea of a video that explains why usury wrecks things and should be carefully regulated even IF you don't believe in sky gods and their definitions of sin.  An early attempt can be found at this link.  Yep, that's me in the movie.

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