Freedom Line Blog

We’ve often highlighted how federal and state regulators who target short-term lenders only end up hurting the struggling Americans they claim to be helping.

That dynamic is even more pronounced in times of increasing economic uncertainty like today.

According to a 2018 study from the federal government itself, nearly 40% of American families don’t possess sufficient savings to cover even a $400 emergency expense, including 51% of military service members living paycheck-to-paycheck.   For such people, credit cards aren’t always a viable option and traditional bank loans aren’t feasible because of the small amounts involved.

They can, however, access desperately-needed money for the short-term via consumer finance loans.   Unfortunately, the Biden Administration, the Pelosi-Schumer Congress, federal bureaucrats who think they know better and government officials at the state and local levels constantly pursue legislation and regulation to make consumer finance lending less available.  As a consequence, vulnerable Americans are forced to seek illegal loansharks, suffer overdrafts or simply fail to pay their pressing bills.

Our friends at National Taxpayers Union (NTU) commendably highlight the latest dangerous Biden Administration effort in a piece entitled “The Consumer Financial Protection Bureau Continues to Attack the Financial Industry”:

While taxpayers look for relief from out-of-control inflation, the Consumer Financial Protection Bureau (CFPB) continues to attack the financial industry, tipping our already unstable economy further over the edge…

As recently as April CFPB announced they would be invoking a long dormant authority to examine nonbank financial companies or ‘fintech’ companies.  CFPB inaccurately posits that these nonbank entities are harmful to consumers, however these companies often represent some of the only credit available to struggling Americans who have been continuously left behind by traditional institutions.  At a time when the economy is faltering and everyday Americans’ financial futures are so uncertain, the CFPB’s action seems misplaced.”

As NTU rightly concludes, “in many cases these institutions are doing the exact opposite of what CFPB claims, they are providing a lifeline to their users and breaking barriers to traditional institutions.” 

As our economy weakens due to the Biden Administration’s own counterproductive economic policies, the least it could do is avoid making matters even worse for struggling Americans increasingly desperate for a workable lifeline, non-traditional lenders.

A good source reports this to me, in his own words which I have shamelessly appropriated:

Here’s the skinny, a part of TARP was the so called TAG program.  What it did was remove the cap on insured deposits without limit as long as there was no interest being paid on the account.  Now tell me who is paying interest bearing checking anymore?  So in other words, TAG now makes the federal taxpayers liable for another 1.4 trillion dollars in deposits.  Like TARP, it was supposed to be a temporary measure to calm bank depositors, but it was extended in Dodd Frank and now the bankers (who love it of course) are racing to get it extended.  The scary part is that a number of Republicans may help the Dems jam it through the Senate next week on a party line vote without amendment.  Pretty ironic that Reid and Schumer think taxes need to go up on people making 250k per year, but they are willing to lift the insurance cap on deposits of a similar size for their buddies in the banking industry and dump the liability of the Treasury.  It stinks.

See this WSJ editorial from August.  It was assumed this thing was dead but it looks very live according to sources in the GOP Senate leadership and Banking Committee.  BTW, worth noting as usual Shelby, who opposed TARP and is Ranking on Banking is opposing it.

Reid may file cloture and move to a vote as early next week.  Republicans, as if is possible, should be ashamed to let this happen and bless it in the midst of the beating they are taking on the Cliff issues and  all their moaning about spending and federal liabilities.

Over at the Wall Street Journal, James Grant, editor of Grant’s Interest Rate Observer has a perceptive review of the new book, “White House Burning: The Founding Fathers, our National Debt, and Why it Matters to You,” by former IMF Chief Economist Simon Johnson and University of Connecticut law professor James Kwak. Two passages deserve special attention.

On the banking system, Grant writes:

Here’s an idea: Let’s try capitalism for a change.

Rather than the bureaucratic monstrosity called the Dodd-Frank Act, for instance, why not hold the bankers personally accountable for the solvency of the institutions that employ them? Until 1935, bank stockholders would get a capital call if the company in which they had invested became impaired or insolvent. It was their problem, not the government’s. In the same spirit, suggests the New York investor Paul J. Isaac, let the bankers forfeit a portion of their past compensation—say, that in excess of 10 times the average manufacturing wage—if they steer their employer on the rocks. And let them surrender not just one year’s worth but rather seven year’s worth—after all, big banks don’t go broke all at once. Proceeds would be distributed to the creditors, as in days of yore. Bankers should not only take risks. They should also bear them.

And on the endless invocation of the Great Depression as the sole object lesson in how to respond to a severe economic downturn:

Messrs. Johnson and Kwak, who draw the usual conclusions from 1929-33, fail to mention the depression of 1920-21. Yet this cyclical downturn was as instructively brief as it was ugly. Peak to trough, nominal GDP plunged by 23.9%, wholesale prices by 40.8% and the CPI by 8.3%. Unemployment, as it was then inexactly measured, soared to 14% from a boomtime low of 2%. And how did the successive administrations of Woodrow Wilson and Warren G. Harding, along with the Federal Reserve, meet this national disaster? Why, they balanced the budget and raised interest rates. Yet for reasons never examined in the pages of this book, that depression promptly ended and the 1920s roared.

Grant’s theme? Responsibility, both personal and collective. That has the great virtue of being the right thing to do. It also has one even greater virtue: it works.