10 Percent Interest Is Plenty Enough! Why Usury Needs to Stop Now
The Democratic party brushed aside the question of usury last spring when Congress decided not to impose any limits on the ruinous interest rates charged by major banks and other lenders. But usury is now back on the table, put in play by Metro IAF, an alliance of two dozen faith-based community organizations affiliated nationwide with the Industrial Areas Foundation. These politically savvy community groups draw their members from diverse religions and across the usual divisions of race and class. They are staging face-to-face "actions" to confront bankers and politicians around the country with a blunt moral message. Usury is a sin, Judaism, Christianity and Islam agree, and must be stopped.
This demand is expressed in their slogan: "Ten Percent Is Enough." The campaign seeks a legal ceiling of ten percent imposed on the interest rates for credit cards and predatory practices like "payday loans." Ten percent approximates the old ceiling on interest rates before 1980, when deregulation repealed the federal law against usury. Ten percent is also the tithe religious adherents give to their churches. As one IAF campaigner put it, "If 10 percent is good enough for God, it should be enough for the bankers."
The anti-usury initiative was launched in mid-summer, from Boston to North Carolina, from New York City to the Midwest, and has already produced some startling results. In Massachusetts, the leading candidate for Ted Kennedy's old Senate seat, Attorney General Martha Coakley, answered "yes, yes, yes, yes" to the demands expressed by the Greater Boston Interfaith Organization, when 800 of its members turned out to address the candidates.
Rep. Louise Slaughter of New York heard about the anti-usury actions and contacted the organizers to say she is introducing a bill to cap interest rates at 16 percent. Slaughter evidently changed her mind about usury. Last spring, as chair of the powerful House Rules committee, Slaughter blocked similar measures and would not even allow a floor vote on the issue. Many Democrats want to avoid a roll call on usury because it will compel them choose between their constituents and the bankers.
The most startling development for the anti-usury campaign is the endorsement from the CEO of Citigroup, Vikram Pandit. Like other leading banks, Citi has been kicking up its credit-card rates as high as 30 percent, even as Citi is kept afloat with billions from the taxpayers. Nonetheless, Pandit told editorial writers at the Boston Globe he would support a legal ceiling on interest rates if it is applied industry-wide. "We're completely in support of having a rational rate structure." Pandit said.
The Citigroup executive did not endorse a specific ceiling, but cited the example of the 10 percent credit cards his bank introduced several years ago, believing other banks would follow and lower their rates too (when they didn't, Citi lost money in the venture). The Globe's exchange with Pandit was most likely inspired by news stories about the anti-usury actions in Boston.
Pandit made the telling observation that sky-high interest rates are among the impediments to ending the recession. If interest rates are curbed, he explained, banks would likely defend profitability by reducing the available credit and some high-risk borrowers would doubtless be cut off (the banking industry is already pursuing this strategy). However, Pandit added, a dramatic reduction in rates would help deeply indebted families recover their purchasing power. "I don't disagree," he said, "with the notion that having high rates in this environment is not conducive to driving economic recovery."
This insight could be important for transforming the debate on economic recovery. Instead of attending intensely to the profitability of banks, government should concentrate on helping consumers overcome the lack of sufficient demand. Democrats could argue that restoring prudent controls on the terms of credit is actually an an important way to stimulate growth. Usury is immoral, but it is also bad economics.
The anti-usury campaigners learned additional insights from Citigroup when they met with John P. Carey, chief administrative officer for the bank's credit-card business. Carey told them a cap on interest rates is plausible if it is designed to be flexible in adverse conditions. He suggested it could be indexed to inflation and other factors like unemployment levels so creditors could maintain an "appropriate rate of return" and not be compelled to shrink credit availability. Flexibility might have saved the old system of interest-rate controls from repeal. Inflation was rising in the 1970s and creditors rightly complained that their "real return" on lending was getting smaller, even turning negative when the rate of inflation exceeded the nominal interest rate. Instead of making sensible adjustments, Congress abolished all limits. The result today is an economy and financial system drenched in usurious practices--banks that profit by destroying the borrowers.
IAF organizations do politics very differently from Washington and are seen as quaintly old-fashioned alongside the modern politics of mass communications. These community activists still make "house calls." Their agenda is derived from the experiences of ordinary people, not policy experts, much as old-time political machines used to do. Players in Washington believe they are close to completing financial reform. IAF members believe the politics of financial reform is just getting started. It may take several years to build momentum from the ground up for what people would recognize as true reform. But the organizers are opening new fronts of influence, asking local governments, churches and foundations why they deposit their money with banks that practice usury. Metro IAF's campaign has one large advantage over established politics: ordinary people already understand the meaning of usury. They know it is wrong. They are eager to talk about their experiences with it. For contrast, ask any elected representative (or economist, for that matter) what they think about usury. If they agree is wrong, do they intend to do anything about it?