The Two-Income Trap - Elizabeth Warren [76]
Families would also be far less likely to get into trouble with their credit cards. With appropriate limits on interest rates, banks would still be able to issue credit cards profitably, and consumers would still have access to those convenient plastic cards. But banks would have far greater incentive to screen cardholders, offering only as much credit as each family could repay. Moreover, there would be no incentive to single out families in financial trouble, tempting them at the moment when they are most vulnerable with special offers of extra credit at exorbitant rates. Banks would have no reason to scour credit records looking for homeowners in trouble, offering to “solve” their credit problems by putting their homes at risk through second or third mortgages.
Limits on interest rates would reverse another disturbing trend—the transfer of wealth away from lower- and middle-income families. Since 1970, banking profits (inflation-adjusted) have more than tripled, growing by more than $50 billion.74 Those profits weren’t the rewards for important innovations. Lenders didn’t invent a faster computer, design a better car, or make a great new movie that everyone wanted to see. (Indeed, many would argue that the quality of banking service actually declined during this period.) No, they sold pretty much the same thing they always had—debt. The difference was that they sold more of it, and they charged higher prices.
A modest example illustrates what is happening to American families. Credit card companies basically have three costs: marketing costs, collection costs, and the cost to borrow the money they will re-lend to consumers. The Federal Reserve lowered interest rates nine times in 2001, which meant that credit card companies’ cost of borrowing fell considerably. Even so, they held steady the rates they charged most of their cardholders. The result? A $10 billion windfall for credit card companies.75 Nothing had changed in the way these companies did business; their marketing costs stayed the same, their collection costs stayed the same, and their products stayed the same. The only difference was that their already-high profits jumped by an additional $10 billion. That $10 billion was paid by families across the country—$10 billion that might have paid for medical bills or college tuition, school shoes or car repairs—or even paid down the balances on outstanding loans. In a single year, 10 billion extra dollars disappeared from families’ wallets and reappeared on the balance sheets of a handful of corporate lenders. Families got nothing in return; they paid out dollars that, if interest rates had been regulated, would have belonged to them.
Regulation would also eliminate the worst abuses of a lending industry run amok. Payday lenders would no longer target minority neighborhoods with short-term loans at interest rates of 100, 500, and even 1,000 percent—rates that would make any mobster drool.76 The more subtle forms of loan sharking would also disappear, so that when families managed to get into trouble with credit card debt, lenders would no longer be able to prey on their desperation by doubling the interest rates and piling on the late fees that turn their debts into financial quicksand.
What about families’ access to credit? Deregulation of the mortgage lending industry was not a right-wing conspiracy; it was actually supported by most Democrats as well.77 Many liberals got behind the move for traditionally liberal