The Two-Income Trap - Elizabeth Warren [74]
A Problem That Can Be Solved
The problems posed by families deep in debt may seem intractable, or at least so deeply embedded that only a complex, expensive array of regulations and laws could turn things around. But this is one problem that isn’t so hard to solve. The consumer-credit monster could be beaten back if Congress would enact a simple provision into law—a provision that wouldn’t require the creation of vast new oversight committees or contentious battles in the Supreme Court. Congress could simply revive the usury laws that served this country since the American Revolution. Federal law could be amended to close the loopholes that let one state override the lending rules of another.71 Alternatively, Congress could impose a uniform rate to apply across the country. Such a provision would enable the states or the federal government to reimpose meaningful limits on interest rates.
Consumer lenders balk at the notion of reregulation, immediately claiming that tighter limits on interest rates would put America at risk for another banking disaster like the Savings and Loan (S&L) crisis of the late 1970s. Hemmed in by high inflation rates and low limits on interest rates, the S&Ls (which issued most home mortgages) found themselves hemorrhaging money.72 But the real problem was inflation, not usury rates per se, which had worked reasonably well for centuries. At the time, usury limits in most states were fixed at a specific number, and they hadn’t been written with double-digit inflation in mind. But that would be an easy problem to solve. To avoid a repeat of the S&L crisis, all that is needed is to tie the limit on interest rates to the inflation rate or the prime rate (which changes with inflation) so that the two never get too far out of sync. (To keep a check on fees, points, and all the other hidden charges, these costs should be included in the interest calculations up front.) That way, mortgage and credit card interest rates would be higher when inflation is rampant, but they would come right back down when the inflation monster is tamed. The ceiling on interest rates would float up and down, but it would always be tethered to the lender’s cost of funds. That way, banks would always be able to lend profitably, and consumers would always be protected from unreasonable rates.
The beauty of this approach is that it would help families get out of debt without costing taxpayers a dime. How would it work? By harnessing the energy of the marketplace. Lenders themselves would transform mortgage and credit card practices just by acting in their own best interest. Since they would no longer be allowed to charge exorbitant interest rates to families with marginal credit records, it would become unprofitable for lenders to pursue families in financial trouble. Instead, banks would once again have a reason to screen potential borrowers carefully, making loans only to those who really can afford to repay.
We hear the antiregulation camp clear their throats, ready to explain why regulating the credit industry (or any other industry, for that matter) is a bad idea. On the surface, their logic sounds convincing. A deregulated market reduces costs and provides more choices for home buyers and credit card holders, so consumers should win out—eventually. Besides, as federal judge Edith Jones wrote, “Nobody is holding a gun