08.11.08
Financial Companies’ Predatory Actions Threaten US Stability
In recent years, a range of businesses have made financing more readily available to even the riskiest of borrowers. Greater access to credit has put cars, computers, credit cards, and even homes within reach for many more of the working poor. But this remaking of the marketplace for low-income consumers has a dark side: Innovative and zealous firms have lured unsophisticated shoppers by the hundreds of thousands into a thicket of debt from which many never emerge.
Federal Reserve data show that in relative terms, that debt is getting more expensive. In 1989 households earning $30,000 or less a year paid an average annual interest rate on auto loans that was 16.8% higher than what households earning more than $90,000 a year paid. By 2004 the discrepancy had soared to 56.1%. Roughly the same thing happened with mortgage loans: a leap from a 6.4% gap to one of 25.5%. “It’s not only that the poor are paying more; the poor are paying a lot more,” says Sheila C. Bair, chairman of the Federal Deposit Insurance Corp.
In college classes on finance, we learned that reward follows risk. In one particular class, FIN 432: Financial Institutions and Capital Formation, we discussed in great depth the thrift crisis of the 1980s. One of the primary causes was the removal of the interest caps that limited the amount of interest that banks and other consumer finance institutions could charge and collect. Overnight, rates went up and most of their assets consisted of long-term fixed rate real estate loans.
In today’s economy, one of the chief problems is that those caps are not low enough and any enforcement is long after the fact. It does not take much looking around to realize that there is an imbalance. People, like the woman in the article, are placed at a disadvantage versus lending corporations, who control the contracts to prevent individual consumers from having any legal refuge or remedy. Even the extreme remedy, bankruptcy, has been stripped of some of its restorative power, as some debts may survive bankruptcy.
I call upon Congress and our regulatory agencies to immediately act to contain and restrain the actions of all consumer finance lenders. The next US Attorney General should set a goal of marching fifty financial industry CEOs into courtrooms in orange jumpsuits and leg irons in the first eighteen months of the next administration. Already, many people do not vote because they do not see their voices as being heard. They feel that their votes have no effect on the course of this nation or their day to day lives. But fifty no-bail arrest warrants, complete with heavy TV coverage, will do a lot to restore confidence in our system of governance. I suggest that the fifty CEOs be accompanied by 25 CFOs and 25 regulatory agency heads (or employees, where applicable) who stonewalled action against the misbehavior.
It would be too much to hope for public hangings. If that woman saw the person who arranged her exploitive auto loan hanged, she would begin to have hope that justice will prevail, and so would numerous others who have experienced similar situations. However, we will have to be content with prison sentences for the scumbags getting rich by targeting lower-income people with take-it-or-leave-it financing contracts. This, even though they risk turning us into one of those third world countries where they change leadership as often as we change our underpants.
I also want to take this opportunity to praise the honestly-run, small locally-owned businesses (SLOBs) in your community. There are plenty of scammers, large and small, but the honest SLOBs deserve your business. They deserve your support. They deserve your advocacy. They are the businesses that will hire your nephew, your brother-in-law, and the kid down the street. While the big guys lay off more people than they hire, smaller businesses are the ones that keep the economy going. Shop the local stores, buy the locally-produced products, hire locally-owned companies for your service needs, do at least some of your banking with a locally-owned bank. Celebrate your small, locally-owned businesses (SLOBs), for they are real American heroes.
