November 24, 2009

IQ Arbitrage

Buffalo News reports:

With the holidays nearly upon us, no documentary is more timely than tonight’s “Frontline” presentation, “The Card Game.”

Better yet, it should have run on Halloween week because it exposes many of the “tricks and traps” disguised as treats to credit card holders. ... The show airs at 9 tonight on WNED-TV. ...

But the interview subject who contributes the best perspective is a former banking executive, Shailesh Mehta, who made millions when he ran Providian Bank by using deceptive credit card practices that targeted financially stressed customers. Mehta tells how the game is played to entice lower-and middle-income people with low rates that can quickly rise to loan-shark levels if a payment is missed or if a bank just decides it wants to raise rates.

He made a fortune on the practices. Bergman explains that Mehta resigned from Providian after the company had to pay $300 million following an investigation by federal regulators.

Mehta tosses around terms like “stealth pricing” and “the unbanked” to illustrate how easy it is to destroy vulnerable Americans who are a job loss or a medical issue away from financial ruin. The stories of several credit card victims are told, serving as cautionary tales for viewers. ...

With Mehta’s help, Bergman’s report illustrates that practically every positive move to protect the vulnerable can be overcome by banks looking for easy marks.

“Because none of you are smart enough,” concludes Mehta. “You make the stupid laws and I’ll comply and I’ll make money. . . . There are always some desperate people who will take the product. Lending money to people is never a difficult exercise. OK? People will take money if you’re willing to give it to them.”

We used to have a variety of usury laws setting maximum interest rates, which meant that some people couldn't get credit , but when inflation came along, driving interest rates through the roof, the old limits became temporarily untenable. Usury laws were widely junked, although my impression, as an Economics major from 1976-80 and as a Finance major from 1980-82 was that the economics profession thought getting rid of anti-usury limits on interest rates was a feature, not a bug of high inflation. Why shouldn't everybody be able to borrow at whatever interest they freely agreed to?

Moreover, I have a general sense that anti-usury laws during these years were seen by reformers as relics of an anti-Semitic past. Once freed from benighted prejudice, how could anybody logically argue against unlimited interested rates? Legal limits on interest rates artificially restricted the number and diversity of people who could get loans. How could anybody be in favor of that? Liberty, diversity, profit ... how could anybody complain?

My published articles are archived at iSteve.com -- Steve Sailer

54 comments:

meat drapes said...

What were interest rates capped at when they had usury laws?

Prime said...

according to some biblical sources, a debt ought to be forgiven by the lender after seven years.

Anonymous said...

What I do not understand is how a bank makes money lending money it can never get back. If the customer has assets beyond a retirement plan he is a rare American and probably has more financial prudence than the majority. Belive me, I know people with a 700K income who lease their cars, have a mortgage at or over the value of their house, save nothing and could maybe get one cent on the doller on their vast holdings of consumer goods. If the person has no assets lending them a lot of unsecured credit card debt is not going to make your bank rich. I just don;t get it.

Anonymous said...

Steve, are you going to comment on the recent revelations re: global warming?

http://mangans.blogspot.com/2009/11/global-warming-exposed-as-greatest.html

Anonymous said...

Mehta tells how the game is played to entice lower-and middle-income people with low rates that can quickly rise to loan-shark levels if a payment is missed or if a bank just decides it wants to raise rates.




Sounds like the credit card industry.

David said...

> according to some biblical sources, a debt ought to be forgiven by the lender after seven years. <

I hear that if you don't pay a penny on a debt for five years, you can then write the creditor a drop-dead letter and forget it.

eh said...

I think Mehta is an anagram for scum.

Or maybe not.

The key takeaway here is that there's a lot of scum around, not a lack of laws.

It's going to be difficult if not impossible to protect people from their own stupidity. And that job is getting bigger all the time because we are importing a lot of stupid people. So actually now there's probably several born every minute.

Maybe it's just my wrong impression but it seems you get more of this kind of thing in a FIRE-based economy. People are more inclined to try making money by scamming it away from others.

Pat Shuff said...

Asymetric warfare is the financial sector's bread and butter, wielding
the superior one-sided information
savvy effectively in swindlings and embezzlements from the dusty crossroads of the Australian Outback to fishing villages in the icy fjords of Norway to pillaging fireman funds in Montana, sewer systems in Alabama to school districts in FL and all points between.
Often within or up to the letter of law while raping of intent. Private material that comes to light under investigations is rather telling of the predator mindset. As the sweet Norwegian lady mayor, straight out of central casting said, when asked what she'd learned after her town was drained of every fund. 'Next time not to trust sweet talking young men in Armani suits.'

stari_momak said...

I admit I had some credit card problems a few years back, and Providian was the worst. When I got my head above water they were the first ones I paid off. I called them and asked the 'payoff amount' , paid that online to them, and thought I was done -- I had gone paperless -- a big mistake in this context. Two months later I get a call -- late payment etc. Sure enough they hadn't quoted me the payoff amount and I owned something like 10 dollars in interest. Onto that they tacked a $35 late charge. I suppose I could have fought it, but at that point I just wanted to be rid of them and the other companies.

So they made $35 from $10 in a single month.

Fred said...

Steve,

Usury laws don't end high interest lending; they just end explicit legal high interest lending. If Joe Six Pack can't afford the utility bill this month, and he can't get a payday loan or credit card advance for it, he's not going to be getting a low-interest loan from his bank for it. What are his options? He can bounce a check to the power company and get dinged with a bounced check fee from the utility and his bank, which will be higher than the interest he would have paid the payday lender (but it's not usury -- just a fee!). Or he can not pay the utility, let the lights go out, and then pay them a fee to turn them back on.

In order to make money in any lending business, you need to cover your default rate and your overhead. Let's say you have a 20% default rate -- it's impossible to make money charging 10% interest on unsecured loans to that population.

MIddletown Girl said...

As with everything else, liberals want to have the cake and eat it too. On the one hand, liberals want EVERYONE to have access to the goodies of life--almost as a RIGHT. But, when the negative cost of this policy becomes obvious, liberals say we need more regulation to save poor people from predation.

RandyB said...

In another context, Steve suggested that our 85 IQ population needs "simple rules for a complex world."

The financial system thrived for years on giving people just enough rope to hang themselves. In Elizabeth Warren's Two Income Trap, she writes that Citigroup was collecting an average 15.6% on home mortgages at a time when the average 30-year rate was 6.5%.

Call me a liberal, but I don't believe in giving the poor & stupid bad financial options like exotic mortgages and state lotteries.

Melykin said...

Good Lord. Don't you have enough American-born dodgy bankers without importing them from India?

l said...

Banks make money by making loans to people with bad credit ratings by charging them higher interest rates. Or by getting bailed out. Whichever.

Anonymous said...

This "Sailesh Mehta" guy comes from a merchant caste from Western India, who are the Jews of the Hindus.

dearieme said...

To have a usury law is to admit that some adults are not grown up. On that argument you shouldn't have universal franchise either.

Anonymous said...

Dr. Elizabeth Warren of Harvard has been very helpful in congressional hearings on the decietful lending practices of credit card companies.

She, in the C-SPAN hearings I watched, was pure class and a real lady. Shockingly Chris Dodd of Conneticut came off on the right side (at least in a public hearing) of the issue. The big "booster" lobbyist for the card companies is a one Edward Yingling, an old waspy-type, kind of handsome in a diginified way. He was aggressive in the Frontline piece I seen on the subject in his defense of the credit-card companies very decietful practices.



How it works in nuts & bolts:

Credit card companies can "find" negative credit information on you (paid an electric or cable bill late.......left it on top of the fridge, etc), and thus justify sending your interest rate on your card through the roof.

ALSO...........get ready to be surpised, because they can find OLD debts from years before you had the card that were paid late, and use THAT to justify sending your rates through the roof. I don't know if this very sleazy practice has been outlawed yet, but it was legal just a few years back. Yingling, predictably, said it helped identify "credit risks" and attribute higher rates to those risks to help cover costs and keep rates low for everyone else. Its, of course, baloney.



Ive got two debit cards, and encourage everyone who doesn't have one to look into them. They are Visa debit cards and are accepted anywhere Visa is accepted, just like your credit card. M

Vernunft said...

Price controls, they always work.

Economics is not your strength.

FeministX said...

What's your schtick here? Right wing economics say we have deregulation. This means banks can loan as they please. Liberals say regulate to protect the poor. They might have different specifications about the regulations, but it's still liberals, not conservatives that are motivated to regulate the economy so that the "users" don't take advantage of the hapless.

Anonymous said...

I'm for usury laws. I'm also for the government paving the roads, etc. But, because a bunch of libertarian a-holes got rid of them I now have to read the mile of fine print on every business decision. Should I have to pave my own side walks too? Libertarians are such unthinking pricks. A Conservative.

Bob said...

State usury laws were never junked, rather they were overridden by federal laws during the heyday of deregulation in the late 70's early 80's.

From Wikipedia:

The U.S. Supreme Court held unanimously in the 1978 Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. case that the National Banking Act of 1863 allowed nationally chartered banks to charge the legal rate of interest in their state regardless of the borrower's state of residence.

In 1980, due to inflation, Congress passed the Depository Institutions Deregulation and Monetary Control Act exempting federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. This effectively overrode all state and local usury laws.

Anonymous said...

Prime said...
"according to some biblical sources, a debt ought to be forgiven by the lender after seven years."


Um, I think that is only indentured servitude. That is, a guy who couldn't repay a debt could just work for you to compensate you, but not for more than seven years. So whatever you wanted out of him, better get it in those years. After that you couldn't keep after him.

Rule of thumb, don't loan him more than you can extract from him in labor in seven years.

Anonymous said...

"If the person has no assets lending them a lot of unsecured credit card debt is not going to make your bank rich. I just don;t get it."

Large banks are "too big to fail." As long as a government is corrupt enough, it will always bail them out with taxpayer money. A few months ago I read Niall Ferguson's 2 volume history of the Rothschilds. The Rothschilds were so big in the 1815-1915 period that Ferguson's work feels like a financial history of that century. The book is full of financial crises and government bailouts, all of them facilitated by corrupt politicians. Crises and bailouts are permanent features of the financial industry. They're not exceptions, they're the norm. The system seems to be set up with them in mind.

One difference between then and now is that in the past major banks lent to governments and the aristocracy, not to the poor. I remember one example from the book especially vividly: the Rothschilds lent a ton of money to the ruler of Egypt. It is clearly spelled out in the book that they lent him much more money than he could ever pay back and that they must have known it. At some point the inevitable happened - word got out that he was going to default. The Rothschilds used their connections in the British government to orchestrate a British invasion of Egypt. Egypt became a British colony and the repayment of its debt to the Rothscilds became a responsibility of the British government.

It's all really quite simple. The kind of people who are most likely to repay loans are exactly the kind that are least likely to ever need any loans. Anyone who goes into the lending business will primarily be dealing with the least responsible half (or three quarters, or whatever) of the population. They will default. The banks will then buy enough politicians to get bailed out with taxpayer money and enough media people to describe the whole event to the public as an unexpected crisis.

Mr. Anon said...

Limiting interest rates effectively limited profits for banks. At some point in the past (was it the 60s?, the 70s), bankers decided they didn't just want to be comfortably rich burghers - they wanted to be as rich and powerful as medici princes.

daveg said...

Changing the "price" (i.e. the interest rate) after the "purchase" (when the card is obtained) is the problem.

If citibank want to charge 30% they should say so at time of application of the card.

Changing the interest rate should be prohibited except perhaps on purchases going forward.

That is not a price control, it is just making the price easier to understand.

Black Sea said...

"What I do not understand is how a bank makes money lending money it can never get back."


To ask the question is to answer it. You've just explained (more or less) the global financial crisis with a single question.

I'd just add one more point already made by another commenter. The banks with enough pull, clout, wasta, whatever you want to call it, simply raid the Federal Treasury. It's the New Economy.

Anonymous said...

i thought indians had an IQ of 81???? hmmmmmmmmmm...........

ben tillman said...

What were interest rates capped at when they had usury laws?

We still have usury laws, and rates are capped at 10% in Texas.

Jimmy Crackedcorn said...

Usury laws don't end high interest lending; they just end explicit legal high interest lending. If Joe Six Pack can't afford the utility bill this month, and he can't get a payday loan or credit card advance for it, he's not going to be getting a low-interest loan from his bank for it. What are his options?

The real option is to get a second job.

Or to stop spending so much money.

I remember working my first job in high school, when a sheriff's deputy came into my workplace - to pick up my manager. He had unpaid debts, bad checks or something. A few weeks later I ran into him at his newly acquired second job.

You might occasionally be doing the poor a temporary favor by lending them money at a high interest rate. But you're also enabling their behavior, and that will cost them more in the long run.

The Atlantic had an article several months ago on the cause of the financial collapse. One of the facts it mentioned was that prior to 1985 the financial industry never made more than 16% of gross domestic profits. By the 90s it was over 30% and by this decade it was over 40%. I'm not talking about a random year or two - I'm talking about a long-term trend.

Easy credit does not make life easier for most of the poor, or for most of any of us. In many cases, as with the real estate bubble, it just helps to drive up prices and material expectations - and the profits of the financial industry.

If citibank want to charge 30% they should say so at time of application of the card. Changing the interest rate should be prohibited except perhaps on purchases going forward.

I believe that's part of the new law.

What's your schtick here? Right wing economics say we have deregulation.

Who defined that particular piece of right-wing ideology - the same billionaires who fund Grover Norquist?

Conservative ideology says that he who takes the risk and/or exerts the effort should earn the wards, not "privatize profits, socialize losses."

Credit card companies can "find" negative credit information on you (paid an electric or cable bill late.......left it on top of the fridge, etc), and thus justify sending your interest rate on your card through the roof.

Remember that when they do that you often have the right to close the account and pay off any remaining balance at the current rate. If they try to raise your rate, do that.

Sure enough they hadn't quoted me the payoff amount and I owned something like 10 dollars in interest.

Unless you pay off your balance in full each month, you will always get billed for the interest another month. Paying off youf balance now does not mean you've paid off the accruing interest.

Anonymous said...

"What I do not understand is how a bank makes money lending money it can never get back."

Who cares if the banks make money? The executives of the S&L, fly-by-night credit shop, or Citi for that matter, book the profits on paper based on a model of likely default rates, take high salaries, and then take off for the next job while the taxpayers are left holding the bad debts. And it's all legal!!

Anonymous said...

The debtors who can't pay their debts should be the indentured servants of savers - instead, it's the savers working for the debotrs by bailing them out. Brilliant.

Michael said...

"Price controls, they always work.

Economics is not your strength."

This post isn't talking about price controls.

The problem with price controls is that they create shortages, anti-usury laws do not cause shortages.

See the difference?

Anonymous said...

If a bank lends you $100 which didnt exist (fractional reserve banking magic) before they made the loan, and you only pay back $10. Well so what - they are still $10 up on the deal.

Or am I missing something?

Anonymous said...

i thought indians had an IQ of 81???? hmmmmmmmmmm...........

Average IQ maybe, there are a lot of people in India.

Pat Shuff said...

Anonymous said...

A few months ago I read Niall Ferguson's 2 volume history of the Rothschilds. The book is full of financial crises and government bailouts, all of them facilitated by corrupt politicians.

~~~~~~~~~~~~~~~~~

Having wanted to tackle that work I envy you. I caught Ferguson narrating his multipart PBS series based on his Ascent of Money on the shelf here unstarted. Ferguson was on a panel of business journalists on Bloomberg TV last weekend all of whom have published a book on the meltdown and ensuing bailout. He said in an interesting thing in response to the question posed of each, 'how did you get into business journalism.' He said that in researching an earlier book exploring the roots of WWI in pre-war Germany, going through archives and press clippings that finance and the banking system had been given short shrift by historians. That "Finance and financial market history is as important, in some cases more important, than politics and political history in the shapings of the world into the present day" at which the other panelists nodded.

headache said...

Anti-usury laws stem from that America with a protestant tradition. Classical Protestantism is about developing a benign society where institutions and money should serve man, not the other way round. That's what Jesus said about the Sabbath, so this principle applies to all things. That these laws could be construed as anti-Semitic says more about the complainers than about the laws. Nobody can argue with a straight face that anti-usury laws are a bad thing. Islam prides itself on taking no interest. Whilst this stance is unrealistic, and Arab banks have ways and means to get the dough anyway, the principle that money should be a tool to better society and not to grab and lust after is what lies behind anti-usury and is a secondary ethic of the New Testament. Considering the current meltdown, there is valid reason for this wisdom.

headache said...

Prime sed:
according to some biblical sources, a debt ought to be forgiven by the lender after seven years.


I personally think this is a great principle, but it is Old Testament and applied to the Jewish people only. The Jewish people had/have social constructs rooted in the synagogue which ensure that this principle is not abused within their society. In modern democracy, with its lack of social control, this principle would throw open the barn doors to hucksters and swindlers. On the other hand, don’t bankruptcy laws stem from this principle?

jimbo said...

"Price controls, they always work.

Economics is not your strength."

The main problem with price controls is that they reduce the supply. in this case, that's a feature, not a bug. Read Smith's "The Wealth of Nations" sometime. He thought interest rates should be capped at 5%, to prevent speculative lending.

Anonymous said...

"The Atlantic had an article several months ago on the cause of the financial collapse. One of the facts it mentioned was that prior to 1985 the financial industry never made more than 16% of gross domestic profits. By the 90s it was over 30% and by this decade it was over 40%. I'm not talking about a random year or two - I'm talking about a long-term trend."

Economic growth in the financial sector is not growth.
It is just skimming the cream off the top.

Anonymous said...

FeministX said...

What's your schtick here? Right wing economics say we have deregulation. This means banks can loan as they please. Liberals say regulate to protect the poor.


How sweetly naive, conservatives vs liberals on the banksters take over of our economy. Someone even threw in libertarians as if they had any political power.

Ask yourself who is signing Chelsea Clinton's paychecks these days. Who were the top 10 donors to Obama's presidential campaign. How many Goldman Sachs men were in Clinton's and Obama's cabinet and staff vs Bush I & II. Who used the courts and similar threats to force bad lending to minorities?

Anonymous said...

Um, I think that is only indentured servitude. That is, a guy who couldn't repay a debt could just work for you to compensate you, but not for more than seven years. So whatever you wanted out of him, better get it in those years. After that you couldn't keep after him.

No, it also refers to debts owed.

Dutch Boy said...

Usury facilitates the transfer of wealth from usurers to usurees. The growing inequality of wealth in this country is partly due to the relaxation of anti-usury laws. Transferring the industrial economy to China et al didn't help either.

David said...

Anonymous said

> Anyone who goes into the lending business will primarily be dealing with the least responsible half (or three quarters, or whatever) of the population. They will default. The banks will then buy enough politicians to get bailed out with taxpayer money.[...] Crises and bailouts are permanent features of the financial industry. They're not exceptions, they're the norm. The system seems to be set up with them in mind.
<

I always assumed creditworthiness consisted in ability to repay. Now you're suggesting it consists in the opposite and always did. This seems to be an extraordinary inversion of what we're taught, and I want more proof, or at least a different credit score.

Anonymous said...

FeministX/Half Sigma,
Middletown Girl was right when she said:

"As with everything else, liberals want to have the cake and eat it too. On the one hand, liberals want EVERYONE to have access to the goodies of life--almost as a RIGHT. But, when the negative cost of this policy becomes obvious, liberals say we need more regulation to save poor people from predation."

You're also attacking a strawman by making Steve and his readers seem to be much more libertarian than is actually the case.

Middletown Girl said...

"I'm for usury laws. I'm also for the government paving the roads, etc. But, because a bunch of libertarian a-holes got rid of them I now have to read the mile of fine print on every business decision. Should I have to pave my own side walks too? Libertarians are such unthinking pricks. A Conservative."

Okay, but SOME people won't get credit, and they better not complain. But, they will!

How about no cap on interest rates BUT no trick marketing. Like packs of cigarettes have warning labels, how about all credit card applications come with a warning in BIG BOLD LETTERS: If you're dumb and ignorant, this shit's gonna land you on your ass.

Words ordinary people might understand.

David said...

> anti-usury laws do not cause shortages <

They cause a shortage of credit. Credit isn't a capital good but it's grease for the wheels.

I like headache's take on it though I'm unreligious.

Dutch Boy said...

Headache - take an aspirin!Opposition to usury was a teaching of the Catholic Church in line with biblical precepts. The nobility of medieval Europe allowed Jews to practice usury in return for a cut of the swag (Jewish law forbade interest on loans to Jews but not gentiles). The Reformation relaxed prohibitions on usury and it has become a universal (and deplorable) aspect of civilization since.

Vernunft said...

"This post isn't talking about price controls."

Yes it is. Capping the price of credit is controlling price. This is basic stuff here.

"The problem with price controls is that they create shortages, anti-usury laws do not cause shortages."

There's no shortage of credit when people can't charge the market interest rate? More basic stuff that seems to have soared over your head.


"See the difference?"

Nope! But then I have a brain.

Anonymous said...

Look up Solon at Plutarch Live's:

Athens at this time had three factions: the people of the hills, who favored democracy; the people of the plains, who favored oligarchy; and the people of the shore, who favored a mixed sort of government and prevented either of the other two factions from prevailing. The political turmoil had come to the point where it appeared that the only way any government at all could be established would be for some tyrant to take all power into his own hands.

Under Athenian law at that time, if a loan went into default, the creditor could seize the debtor and his family and sell them as slaves to get money to pay off the debt. The cruelty and arrogance of the rich caused the poor to form into gangs to save themselves and rescue those who had been made slaves through usury. The best men of the city saw Solon as someone who was partial to neither the rich nor the poor, and they asked him to lead. The rich consented because Solon was wealthy, and the poor consented because he was honest.

Solon's task was dangerous and difficult because of the greediness of one side and the arrogance of the other. To placate both sides, Solon said: "Fairness breeds no strife." To the poor, "fairness" meant equal wealth; and to the rich, "fairness" meant keeping what they owned. 2

Both rich and poor, therefore, believed for a while that Solon was on their side. But soon the poor people became disgusted that Solon would not use his power to seize the property of the rich. Solon's friends advised him that he would be a fool if he did not take advantage of the opportunity that fate had presented. Now that he had this power, they said, he should make himself a tyrant. Solon, who was a wise man, replied that tyranny is indeed a very pleasant peak, but there is no way down from it.

* * *

Unlike Lycurgus, Solon could not change the state from top to bottom, so he worked only on what it was possible to improve without a total revolution. He only attempted what he thought he could persuade the Athenians to accept, with a little compulsion. Wherever possible, Solon made use of euphemisms, such as calling taxes "contributions." With a judicious mixture of sweet with sour, justice with force, he managed to achieve some success. When afterwards Solon was asked whether he had made the best laws he could for the Athenians, he answered: "The best they were able to receive."

Solon's first reform was forbidding mortgages on bodies. Even with the consent of the debtor, the creditor could no longer legally enslave him and his family. Those who had already become slaves were liberated, and those who had been sold to foreigners returned to Athens as free men. Solon also ordered that all outstanding debts were forgiven, so all mortgages on land disappeared.

But here Solon was disappointed by his friends. Shortly before he published his law releasing all mortgages, he told some of his most trusted friends. They immediately went out and borrowed money to buy land, giving the purchased land as security for repayment of the loan. When the law was published, they had their land free and clear. For this, Solon was suspected, but when it came to be known that he himself had lost fifteen talents by his own law, he managed to escape serious damage to his reputation.

Neither the rich nor the poor got all they wanted from Solon's reforms. There was no complete redistribution of wealth as the poor had demanded, and the rich were angry about the loss of the money they were owed. Both the rich and the poor now hated Solon for not obeying their desires. Even those who had been friendly to him before now looked at him with grim faces, as an enemy. But with time and success came forgiveness. When the Athenians saw the good result of the release of debts, they appointed Solon general reformer of their law.

Michael said...

Vernunft,

Yeah, you are right.

That explains why Anti-Usury Laws caused that massive Credit Crunch in the 50’s.

How’s that? There wasn’t a massive Credit Crunch in the 50’s?

Well, at least we can be sure that now that we got rid of those no good Anti-Usury Laws we'll never have Credit Crunches any more.

How’s that? We just had a massive Credit Crunch in 2008? And this Credit Crunch was actually caused by Banks using the lack of Anti-Usury Laws to loan out money to people so poor that the only way you can loan to them is with really high interest rates?

That surely can’t be the case! It would go against a precept of Libertarian Economic Dogma!

Anonymous said...

"Average IQ maybe, there are a lot of people in India."

Lot of people in Latin America, Mid East, Africa, and SE Asia too.... How many African or Algerian or Turkish or (ethnic) Malaysian CEOs do you see?

BTW, Mehta isn't a Brahmin.

Eric said...

I used to play a lot of poker. In California pretty much every place that has poker also has a section for "Asian games", like Pai Gow, which are straight up gambling. High stakes gambling, in some cases - you can bet ten grand on a single deal in the card room I used to frequent.

Half the people in the Asian games section have gambled away all their assets and charged up credit cards at "usurious" rates. But the way I see it things could be worse - we could have usury laws.

You want to know what usury laws do? They drive people to that no-necked guy at the bar name of Vinny The Juice Man. Vinny will lend you money at 10% a week, and you don't even need collateral. But everybody knows Vinny gets paid first - before the rent, before the IRS, even before you feed your kids. There are a lot of people in these places with missing fingers.

Eric said...

If a bank lends you $100 which didnt exist (fractional reserve banking magic) before they made the loan, and you only pay back $10. Well so what - they are still $10 up on the deal.

Or am I missing something?


Yes. When the bank lends you $100 that doesn't exist the loan document becomes the counter-balancing asset on their books - they incur a $100 debt to your account at the same time they receive a document from you which is a legally binding promise to repay the loan. The document is listed as an asset valued at some percentage of the outstanding balance.

When you default on the loan the remaining balance on loan document is no longer worth anything, but the $100 they sent to your account is still in the debit column on their books. So yeah, they actually lose money.

But you know that, intuitively, since hundreds of banks have gone out of business this year. If it was really just a case of them creating money with no restriction that would never happen.

King of the Paupers said...

"Why shouldn't everybody be able to borrow at whatever interest they freely agreed to?"
Jct: Forget whether I should pay interest when I borrow your earned savings and concentrate on why I should pay interest when I borrow a bank's newly created credits that are not someone's savings.
Why shouldn't I be able to borrow new chips interest-free like at a casino bank so there's no inflation like on casino chips?