We at CFIF have consistently highlighted the peril of federal, state and local government efforts targeting…
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New Study Shows How Overregulating Short-Term Lenders Harms Consumers

We at CFIF have consistently highlighted the peril of federal, state and local government efforts targeting the short-term consumer lending sector.

Less than two years ago, we specifically sounded the alarm on a New Mexico law artificially restricting interest rates on short-term consumer loans.

Well, a new study entitled "A New Mexico Consumer Survey:  Understanding the Impact of the 2023 Rate Cap on Consumers" that surveyed actual borrowers confirms our earlier warnings:

Key findings include:

•Short-term,small-dollar loans help borrowers manage their financial situations, irrespective of the borrower’s income.

•The rate cap has failed to improve the financial wellbeing of New Mexicans, specifically those who had previously relied on short-term, small-dollar loans.


November 27, 2023 • 03:57 PM

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The Cult of 'Forever Low' Interest Rates Had to End Sometime Print
By Veronique de Rugy
Thursday, October 12 2023
The inflation problem has been stubborn, and if the rising interest payments are paid with more borrowing as opposed to fiscal restraint, inflation will only worsen, triggering more interest hikes and more interest payments.

Countless financial soothsayers and Wall Street wizards were once members of a curious cult. Their doctrine? The unshakable belief that interest rates had managed to find something resembling the fabled Fountain of Youth, leaving their numbers eternally low and never rising. The "Forever Low" brigade dismissed those of us who argued that high government debt was unsustainable and, partly because low repayment rates would not last forever, we should control spending.

Now, let's be clear. Predicting the economic future isn't like reading the morning weather forecast. Nevertheless, the certainty of the Forever Low cult felt a bit like confidently asserting that winter would never come to Alaska because June was particularly warm. Interest rates have historically fluctuated due to various economic factors. Somehow, many believed that the unprecedented period of declining and low rates over the past few decades had become the new normal, never to change much.

Every time someone would suggest that rates might increase in the future, and thus recommend a turn toward more fiscal discipline today, the Forever Low club would raise their eyebrows, smirk, and summarily dismiss such heresy. "That's quaint," they might imply before proceeding to tell us how wrong we were to have predicted inflation and higher rates after the 2008 financial crisis.

True enough, I was one of those who didn't understand that new Federal Reserve policy at the time meant that inflation would not, in fact, break out. I also didn't see coming the next 15 years of super-low rates alongside growing government indebtedness and a money supply steadily inflated through what seemed like permanent quantitative easing.

Yet I never felt it was wise to bet on rates remaining low as a justification for going further into debt. After all, even low rates on a growing amount of debt mean larger and larger interest payments. That in turn would mean that more of our revenue would have to be devoted to interest rather than spending on government programs that people value.

In a way, the curious cult's certainty was impressive. It's not every day we witness such unwavering confidence in the face of rising red ink. It was even more stunning during the pandemic, when we saw the national debt rise by $5 trillion over a mere two years. That included $2 trillion in March 2021 with no call for future austerity, a time when the economy was already recovering and inflation was thus significant.

When inflation warnings became hard to ignore, the Forever Low gang retorted that it was silly to worry because, in the worst-case scenario, "the Fed has the tool to bring inflation down." That tool amounts to hiking interest rates to slow down the economy  which seems in direct contradiction to the belief that debt accumulation was OK because, you know, interest rates would remain forever low.

But then, as fate (and economics) arranged matters, the winds shifted. Whispers started circulating about tangible changes on the horizon. The first signs were subtle, but soon the murmurs became louder. The once-dismissed possibility of rising rates is now a reality. With the yield on a 10-year Treasury yield above 4.5%, the new refrain is that we could ignore deficits in the past, but we can't anymore.

Of course, this too is wrong. We should have never ignored deficits, which, along with spending and debt projections, were on an uphill trajectory that made us susceptible to a crisis if interest rates rose suddenly  especially since half of our debt has a maturing time of three years or less.

Faced with higher rates, the Forever Low caucus has weakened. Yet it seems to have been replaced with a sense that these high rates are transitory and will inevitably fall back down. I predict they'll be as transitory as inflation was supposed to be, which is to say longer than one thinks.

The inflation problem has been stubborn, and if the rising interest payments are paid with more borrowing as opposed to fiscal restraint, inflation will only worsen, triggering more interest hikes and more interest payments. That's a vicious cycle that, short of some economic growth miracle driven by a wonderful innovation, can only be stopped with fiscal contraction.

In the end, the Forever Low believers were correct in their own transitory way. After all, interest rates did remain low for an extended period, catching many by surprise. Their main mistake, though, was tragic: concluding that there was no cost to trillions of dollars in additional debt.

Veronique de Rugy is the George Gibbs Chair in Political Economy and a senior research fellow at the Mercatus Center at George Mason University. 


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