Pearl River President Trump is flailing as he tries to convince Americans that he is finally doing something about the economy and the issue of “affordability” that has become huge for Democrats. As he grabs at different straws, like suspending garnishments for student loan defaulters or blocking Wall Street’s avaricious pursuit of tens of thousands of single family homes, he took a shot at his banking buddies suggesting a 10% cap on interest rates for credit cards. I don’t hate that. I’ve also been there before, so can report what it feels like to have a 10% cap on credit.
In prehistoric times, which is to say, Arkansas in the 1970s, there was an interest cap of 10% as part of the state law restricting usury. Usury itself is a prehistoric term labelling interest rates as exorbitant and even immoral. Having a usury cap at that level made Arkansas stand out compared to the rest of the United States. Let me tell you, the banks and credit card companies, many of which are the same thing, didn’t like anything about the usury limit. On the other hand, consumers, count me as one, thought it was dandy. Interest rates elsewhere around the country were in the teens then. Now the average credit card rate is around 22%, more than twice as high as Trump mentioned on his platform.
The Arkansas usury limit didn’t make having or holding a credit card easy of course. If you had been able to score a card while living in some other state and moved to Arkansas, as I did from Massachusetts and Louisiana, when you changed the address to receive your bill, odds were excellent that it was only a matter of time before the card was canceled or more likely just not renewed. If you applied for a card from American Express, Visa, Mastercard or the like from Arkansas, you were pretty much wasting your time. All of them were funding various lobbying and political efforts to repeal the usury law, so the easiest way for them to send a message to consumers and voters was to create as many barriers to credit as they could.
Sears, the great mass retailer of the early and mid-20th century, now closing its last stores in the US, was an outlier. I was lucky enough to get a card there. An extra benefit, if you were young and trying to establish credit, was the fact that Sears would share your credit information with other private businesses and banking institutions, so it became a gold standard of sorts. No matter what bills you weren’t paying or were letting age, you paid your Sears card regularly and on time.
Nothing but the good times, but it didn’t last. Banks were water on a rock. They were always whining about the limit, claiming it was a reason for the state’s poor economic standing, and marshalling any other arguments they could. Every couple of years ballot propositions were proposed on two things. The usury law was one and the other Arkansas holdout was repealing the the full crew law for railroads, which mandated a fully staffed caboose that detractors called featherbedding, denying the safety claims of unions and supporters.
In 1978, Arkansas voters finally relented and repealed the 10% usury law, which had been gradually weakened anyway. Another twenty years passed until the Gramm-Leach-Bliley law was passed in 1999 at the federal level preempting states, like Arkansas or any others, from putting a separate cap on interest rates. A 2011 amendment set a 17% ceiling for many non-bank lenders. In praise of Arkansans, the state courts have kept a 17% cap, while blocking payday lenders and acceding to the federal preemption on banks.
Trump is right that any cap now would have to come from the federal government, but that would not mean an executive order, but actual legislation through Congress. The Senate and House banking committees are so in the pocket of the industry, as we know from the history of a thousand cuts to the Community Reinvestment Act facilitating home ownership by blocking discrimination, that the chances of getting a 10% or any better interest rate cap is little or none.
Trump is just throwing a rock at their windows. He’s not trying to really knock on the door and get this done, which is too bad for consumers. Money and credit should not cost this much. Period.