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Posts Tagged ‘Finance’
January 10th, 2023 at 11:50 am
New Study: Government Restrictions Targeting Short-Term Lenders Only Bring More Pain to Working Americans
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As the global economy slows, inflation remains elevated and wages fail to keep pace, we continue to emphasize how government regulators targeting short-term lenders only end up hurting the people they claim to be helping.

Now, a stark new study just released by Gregory Elliehausen of the Federal Reserve among other authors hammers home that point.  Namely, new laws artificially capping interest rates resulted in surveyed borrowers themselves saying that borrowing money when they needed it only became more difficult.  “Disapprobation of high interest rates,” the study begins, “reflects a longstanding and widely held belief that lenders take advantage of needy individuals by charging high interest and imposing harsh terms.”  Their work clearly found, however, that government mandates manifesting that disapprobation inflicted even greater pain:

[W]e find that the interest-rate cap decreased the number of loans to subprime borrowers by 44 percent and increased the average loan size to subprime borrowers by 40 percent.  We examine the welfare effects of the loss of credit access using an online survey of short-term, small-dollar-credit borrowers in Illinois.  Most borrowers answer that they have been unable to borrow money when they needed it following the imposition of the interest rate cap.  Further, only 11 percent of the respondents answered that their financial well-being increased following the interest-rate cap, and 79 percent answered that they wanted the option to return to their previous lender.  Thus, the Illinois interest-rate cap of 36 percent significantly decreased the ability of small-dollar credit, particularly to subprime borrowers, and worsened the financial well-being of many consumers.”  (Emphasis added.)

Rather than harming the very working Americans they claim to be helping, government officials at the federal, state and local levels need to increase access to small-dollar credit by first doing no harm.

 

 

January 31st, 2022 at 5:17 pm
NM House Bill Targeting Consumer Lending Would Harm Vulnerable Consumers It Falsely Claims to Protect
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Whenever governments at any level artificially cap interest rates on consumer installment loans, they claim to be acting on behalf of vulnerable and lower-income Americans.

For straightforward reasons according to the laws of economics, however, such efforts only end up counterproductively harming the very people they allegedly help.

Sadly, we’re witnessing yet another effort tempting that destructive spiral in New Mexico, where the House of Representatives Consumer and Public Affairs Committee has approved by a narrow 3-2 margin H.B. 132, a proposal that would cap interest rates on consumer loans.

Making matters worse, the Committee even gutted funding for financial education in New Mexico, thereby evading reference to the House Appropriations Committee, in deceptive fashion to rush the bill through.

At a simplistic level, government laws regulating lending services and capping repayment rates may seem helpful to Americans struggling paycheck-to-paycheck.  But the real-world impact only eliminates a source of reliable, legal short-term loans to get them through temporary emergencies.

According to a 2018 Federal Reserve System Board of Governors study on the economic wellbeing of U.S. households, nearly 40% of American families don’t possess sufficient savings to cover even a $400 emergency expense.  Alarmingly, that same study noted that 51% of military service members live paycheck-to-paycheck.

Because of their credit profiles, credit cards aren’t always a viable option for such people, and traditional bank loans aren’t an option due to the small amounts at issue.  Whereas higher-income Americans with stronger credit history can borrow from banks, use assets they possess as leverage or access savings amounts, American consumers with lower credit scores and insufficient savings cannot.  In fact, according to the Fair Isaac Corporation, some 46% of consumers possess credit scores below 700, meaning that traditional bank loans aren’t possible for them.

That’s where consumer finance loans come in, providing a critical life preserver for lower-income Americans and New Mexicans.

In such circumstances, struggling Americans can access the money they need for short-term emergencies via consumer finance loans.  But under H.B. 132 as contemplated by the New Mexico House, consumer finance lending will only become economically unsustainable and therefore less available.

In turn, the unintended consequence will be more people seeking out illegal loansharks, suffering overdrafts, or simply being unable to cover their temporary costs.  As the World Bank aptly summarized, regulatory and legislative proposals like H.B. 132 lead to “increases in non-interest fees and commissions; reduced price transparency; lower number of institutions and reduced branch density; and adverse impacts on bank profitability, in addition to the lack of access for smaller and riskier borrowers.”

Obviously, that quickly ends up punishing the very people that legislation like H.B. 132 claims to protect.  It only threatens to make consumer finance lending more difficult, more expensive and less available.

 

February 19th, 2013 at 12:31 pm
More Local Govt. Corruption in California

An investigative report from the Orange County Register deserves to be read in its entirety, but here’s my executive summary.

Hundreds of schools in California enlisted the services of a bank to underwrite school construction bonds, known on Wall Street as “capital appreciation” bonds.  The key attraction: no payments on principal or interest for 35 years.

Of course, that kind of delay isn’t free.  One school district in Orange County is estimated to owe $13 for every $1 borrowed when the bills come due.  This means that for one $22 million bond issue in 2011, the Placentia-Yorba Linda school district will eventually owe $280 million – 13 times the original amount.

It gets worse.  In 2008, thanks to arguably illegal politicking by the bank underwriter, district voters approved up to $200 million in bond issuances.  But while not all of the total are capital appreciation bonds, those that are could very well bankrupt the district for a generation or more.

The failures on display here are all too familiar.  Public officials opting to mortgage the future to look like a hero in the present saddle taxpayers with huge financial burdens.  Financial whizzes with no ethical scruples abuse the system for big profits.  And money wasted on concrete eye-candy – a football stadium and 600 seat performing arts center – while funding for classroom instruction gets reduced.

While there is no silver lining to the Register piece, it’s worth reading as a reminder of how much American government at all levels needs a deep renewal of ethics, thrift, and a commitment to the common good.

January 29th, 2013 at 2:30 pm
Dodd-Frank Missing Deadlines, Hurting Businesses

A new GAO report says that Dodd-Frank, the 2010 law that enormously expands the federal government’s regulatory role in the financial markets, is being implemented at a snail’s pace:

Overall, GAO identified 236 provisions of the act that require regulators to issue rulemakings across nine key areas. As of December 2012, regulators had issued final rules for about 48 percent of these provisions; however, in some cases the dates by which affected entities had to comply with the rules had yet to be reached. Of the remaining provisions, regulators had proposed rules for about 29 percent, and rulemakings had not occurred for about 23 percent.

At first blush, limited government conservatives might cheer the slow growth in regulation.  But limited government is only good if it’s for the right reasons; for instance, relying on the current legal (fraud) and market (bankruptcy) framework to police financial bad actors.  Here, however, the delays are due to Dodd-Frank’s perpetuation of flawed regulatory methods.

For example, the report lists obstacles such as regulators with overlapping jurisdictions and inconsistent rules, impossible-to-meet statutory deadlines, and lack of consumer confidence in the regulators’ ability to produce fair and reasonable guidelines.  To cope with these realities, bureaucrats are opting to miss deadlines in favor of more collaborative rules.  But while the benefit may be more buy-in from stakeholders inside and outside the government, the costs are huge to the businessman on the street.

The two biggest casualties are the rule of law and regulatory transparency.  The first is undermined because bureaucrats allowed to ignore statutory mandates are bureaucrats allowed to operate outside the law.  Think a private business could just decide to miss a deadline because compliance is too hard?

Moreover, part of the difficulty complying comes from the lack of transparency.  Businesspeople need certainty in regulations to plan for the future, but that can’t be done when deadlines are waived at the discretion of the regulator.  So instead of being able to act on distasteful yet concrete information, businesses are left wondering how to position themselves as the regulatory elites “collaborate.”

In this type of environment, the safest bet is not to take risks like hiring or expanding.  With government like this, is it any wonder the job market is so lousy?

H/T: The Hill’s RegWatch blog

July 22nd, 2011 at 1:24 pm
The NRSC’s Hush Money Angers Tea Party

The fight between the Tea Party and the National Republican Senatorial Committee (NRSC) is heating up again.  The Daily Caller says that the group quietly gave money to Senators Orrin Hatch (R-UT), Dick Lugar (R-IN), and Olympia Snowe (R-ME), among other incumbents.

Tea Party activists are claiming the NRSC is once again trying to influence GOP primaries that are likely to be contested between establishment types and newer blood fiscal conservatives.  But although Lugar has an official Tea Party opponent (Indiana Treasurer Richard Mourdock), no official challenger has filed paperwork against Hatch and Snowe.  (Though Rep. Jason Chaffetz is widely expected to compete against Hatch.)

The complaints of NRSC favoritism have more sway in Lugar’s case since Mourdock is actively campaigning against him.  If the Tea Party wants to make its point heard in the other cases, it better get challengers like Chaffetz to get off the fence and into the race.

May 20th, 2011 at 1:12 pm
Why a European “Must” Run the IMF

In an email regarding yesterday’s post, reader Eric Coykendall sent this helpful article from Foreign Policy explaining why a European traditionally heads the International Monetary Fund (IMF): a so-called “gentlemen’s agreement” brokered by economist John Maynard Keynes.

The origins of the gentlemen’s agreement date back to shortly after the Bretton Woods conference in 1944, which established both the IMF and World Bank. According to Miles Kahler’s history, Leadership Selection in the Major Multilaterals, Bretton Woods architect John Maynard Keynes had assumed that his main collaborator at the conference, Treasury Department official Harry Dexter White, would run the IMF. U.S. President Harry Truman also supported White’s choice. However, Treasury Secretary Frederick Vinson, with strong backing from Wall Street, argued that an American should run the World Bank — Washington Post publisher Eugene Meyer got that job in 1946 — and that it wouldn’t be proper for the United States to run both of the world’s major financial institutions. White’s possible communist sympathies — he’s widely suspected today of having been a Soviet agent — may also have played a role in the decision. In the end, Belgium’s Camille Gutt was eventually appointed to run the IMF.

In the wake of scandal engulfing the recently resigned Dominique Strauss-Kahn from France, developing nations like Brazil and South Africa are pushing for a non-European to manage the world’s leading investment/bailout bank.  In the article sent by Coykendall,  FP makes this keen observation about the European double-standard likely to decide the outcome.

The question of nationality is sure to come up again if Strauss-Kahn steps down, but Europeans will not be eager to part with the position. Some, such as German government spokesman Christoph Steegmans, argue that owing to the IMF’s critical role in stemming Europe’s current financial crisis, the managing director should be someone who is familiar with “Europe’s particularities, the currency questions and also the political circumstances here.” Strangely, when the IMF was primarily giving loans to countries in Africa and Latin America, local knowledge didn’t seem to be quite as much of a factor.

November 6th, 2010 at 4:42 pm
Economics & Finances Might Be Sciences, If It Weren’t for People

Alex Pollock’s contribution in The American, a publication for the American Enterprise Institute (AEI), is much needed medicine for the regulatory fever about to be unleashed when the Dodd-Frank “financial reform” bill is implemented.

The key to understanding boom-and-bust cycles, according to Pollock, is realizing the limits of a mathematical model’s ability to predict the future.  To quote Pollock quoting a colleague, “The model works until it doesn’t.”  That is, until someone falsifies the model by acting in a way contrary to the model’s assumptions.  Then everybody who uses the model is out a lot of money.

So, if profit-hungry businesses can’t figure out a way to avoid losing money, what in the world makes the denizens on Capitol Hill think they can create a federal agency with such powers?

Hubris and stupidity.  Political cultivation of those qualities is a science unto itself.

Weekend Bonus Link: For another theory of the business cycle, click here.

October 22nd, 2010 at 7:51 am
So Which Group Actually Spends the Most on the 2010 Election? Public Employee Union AFSCME
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Barack Obama has consistently failed to gain political traction with unseemly attacks against everyone from former President Bush to Fox News to John Boehner’s tan.  So Obama redirected his aim using illogical and baseless attacks against business groups whom he accuses of attempting to “sway elections” through sinister election spending.”  David Axelrod, Obama’s top political guru, has labeled election spending a “threat to our democracy,” and when pressed to identify a shred of evidence supporting Obama’s allegation of illegal foreign campaign spending benefiting Republican candidates could only reply, “do you have any evidence that it’s not?”

So which group has actually spent the most to influence this year’s Congressional elections?  The American Federation of State, County and Municipal Employees (AFSCME), a 1.6 million member union of public employees.  According to The Wall Street Journal, AFSCME has now spent $87.5 million, which outdistances the demonized Chamber of Commerce by a cool $12.5 million.  Of the top five spenders, in fact, three of them are big labor unions (the other two being the Service Employees International Union (SEIU) and National Education Association (NEA)).

One would hope for more ethical behavior from a President who based his entire 2008 campaign on bringing “change” to our toxic political discourse.  What will be his campaign theme in 2012?  Instead of “hope and change,” he’s building a legacy of “hypocrisy and impropriety.”