Deep Dive Episode 56 – Loan Shark Prevention Act

Operator:  Welcome to Free Lunch, the podcast of The Federalist Society’s Regulatory Transparency Project. All expressions of opinion are those of the speakers.

On May 22nd, The Federalist Society’s Financial Services Practice Group and RTP sponsored a teleforum to discuss the Loan Shark Prevention Act, which, among other things, proposes a nationwide 15 percent interest rate ceiling on all consumer credit products, from credit cards to payday loans. Wayne Abernathy, the Executive VP for Financial Institutions Policy and Regulatory Affairs for the American Bankers Association, and Todd Zywicki, Foundation Professor of Law for the Antonin Scalia Law School, joined us to discuss the bill. Please send us your feedback at [email protected].

Micah Wallen:  Welcome to The Federalist Society’s teleforum conference call. This afternoon’s topic is the Loan Shark Prevention Act. My name is Micah Wallen, and I am the Assistant Director of Practice Groups at The Federalist Society.

As always, please note that all expressions of opinion are those of the experts on today’s call.

Today we are fortunate to have with us Wayne Abernathy, who is the Executive VP for Financial Institutions Policy and Regulatory Affairs at the American Bankers Association. Wayne will be introducing our second speaker and will kick us off. After our speakers give their opening remarks, we will then go to audience Q&A. Thank you for sharing with us today. Wayne, the floor is yours.

Hon. Wayne Abernathy:  Thank you very much, Micah. I was thinking I would not spend the next hour going through the entire biographical sketch of our speaker, Todd Zywicki, but I’ll give some of the highlights. Todd Zywicki is George Mason University Foundation Professor of Law at the Antonin Scalia Law School, a Senior Scholar at the Mercatus Center at George Mason University, and Senior Fellow at the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics. And all three of those come together, as you’ll learn and hear from Todd as he speaks to us today.

From 2003 to 2004, Professor Zywicki served as the Director of the Office of Policy Planning at the Federal Trade Commission, so he has real-world experience in that very unreal world of government, but experience with how government affects the real world in which we all live. He has lectured and consulted with government officials around the world, including Iceland, Italy, Japan, Canada, and Guatemala. Professor Zywicki is the author of more than 70 articles and counting in leading law reviews and peer-reviewed economics journals. He has testified several times before Congress on issues of consumer bankruptcy law and consumer credit and is a frequent commentator on legal issues in the print and broadcast media.

I also want to mention—I guess it’s the last point I’ll have before I turn to Todd—this is a Federalist Society production, and both of us, Todd and I, are members of The Federalist Society’s Executive Committee for Financial Institutions & E-Commerce Practice Group. We chew on these sorts of issues all the time and share our views along with the rest of our colleagues. We’re happy to share with you some thoughts and ideas today. The floor is yours, Todd.

Prof. Todd Zywicki:  Thanks, Wayne. It’s great to be here, and it’s always fun to be able to discuss a topic. We could’ve done this same teleforum in 1979, 1949, or 1919. We would probably be talking about the same things because what we have here in the so-called Loan Shark Prevention Act is a very old idea, and an idea that has been painfully — lessons that have been painfully learned over, and over, and over again, which is the counterproductive effects of what are called usury ceilings, which is basically a price control on interest rates on consumer credit. What the so-called Loan Shark Prevention Act plans to do would be to impose a 15 percent national interest rate ceiling on all consumer credit products from credit cards to payday loans to car loans, if that were relevant, and the like. The legislation itself is only about three and a half or four pages long. It’s obviously intended as more of a symbolic sort of piece of legislation, but that’s the essence of it.

In their statement where they rolled out the Loan Shark Prevention Act, they also talk about and endorse the idea of the Post Office essentially becoming a provider of financial services for Americans. That also is relatively underdetermined. There is a provision out there that would have the Post Office provide basic financial services as well as small-dollar loans. They don’t talk about that in any detail, but that is obviously what they have in mind as a compliment to their proposal to impose a national usury ceiling.

Just one other word of background before we get into the substance of it is why is this? What is this all about? And why has the focus been predominantly on credit cards? As many listeners will know, in 1978, the Supreme Court handed down a case called Marquette National Bank of Minneapolis. In that case, what the Supreme Court held was that in determining which state’s laws apply to a credit card contract for a national bank, the contract would be governed by the state of the bank’s incorporation, not the state of the consumer.

So if you live in Virginia like I do, today, most of your credit cards are issued by a bank that’s based in South Dakota, or Delaware, or something like that. Why is that? Well, essentially, those were states that had very high or no usury ceilings at all, and so credit card operations tended to gravitate towards those states. And so that effectively deregulated credit card interest rates across the country by essentially allowing credit card issuers to base their credit card operations in those states. We’ll talk about the competition that unleashed and why it is that those states — credit card issuers based in those states have beaten out credit card issuers based in states that have usury ceilings and the like, but that’s basically what did it.

And so states now have very limited ability with respect to national banks to be able to regulate credit card interest rates. Of course, they can regulate things like payday loans and the like, which they traditionally have. And so this also sort of drills down all the way to that level, to the local payday lender or local pawn shop, presumably, that have traditionally been outside of the reach of the federal regulatory apparatus.

Hon. Wayne Abernathy:  Okay, very good. Shall we go into Q&A yet, Todd, or do you want to raise some more points here for us?

Prof. Todd Zywicki:  The next question would be is if this law goes through, what would be the effects of it? And that’s, as we said, something that has been well studied over time. And we know exactly how this story ends. Ironically, in their announcement, Senator Sanders refers to — he compares today’s banks to the leg breakers of Hollywood lore in the past. And I mean, it’s pretty interesting that he basically seems to only have familiarity with Hollywood’s loan sharks and not with the real loan sharks of the past because I think otherwise, he might have a less charitable view of how usury ceilings operated in the past. I mean, if you look at the proposal and you look back at — and so what we’ve seen, as I said, is sort of multiple sequels and remakes of this same movie, and so we know exactly how this story is going to end for consumers. I mean, the only real question is how will it end in the eyes of politicians?

So when we look at the historical impact of usury ceilings, what we see are three basic things have happened, if you look at history. So the first thing that happens is what’s called term repricing. And the way you can think of this is that there’s a supply and demand for consumer credit like there is for any other product. And the price is set by the riskiness of the borrower, the cost of operations, and the like. And so one of the points that they stressed in their announcement about the legislation is they are frustrated that the cost of funds, the underlying interest rates and economy, are something like 2.5 percent now while credit card interest rates remain much higher.

But what they don’t appreciate is that the cost of funds is a relatively small component of the cost of credit cards, maybe 30 percent, maybe 40 percent in contrast to, say, mortgage in which the cost of funds is about 90 percent of the cost of a mortgage. Why is that? Well, credit cards are very expensive for banks to issue and operate. You’ve got all the customer service, you’ve got the issuance of cards, you’ve got dealing with fraud, you’ve got dealing with merchants, you’ve got billing, you’ve got collection, you’ve got all these sorts of things that are very different from a mortgage where you basically originate it once. There’s some costs in originating it, but basically, after that, the mortgage more or less runs itself except in situations in which there’s a foreclosure.

And so what we’ve seen over time is that credit card interest rates are less responsive to the cost of funds whether cost of funds have fallen or increased. So if you look back at the ‘70s, for example, and the high interest rate periods of the ‘70s into the ‘80s, the responsiveness of, say, mortgage interest rates to the underlying interest rates in the economy went up much more dramatically than they did for credit cards. So that kind of dampens those fluctuations, which they don’t appreciate.

The second thing, of course, is that only about half of consumers actually revolve their balances. You can measure it in different ways, maybe 40 percent, maybe 60 percent, but roughly only half of consumers revolve their balances. I follow this stuff pretty closely. I eat, drink, and breathe this stuff. I have no idea what the interest rate is on any of my credit cards. Why? Because I don’t revolve balances. I don’t pay attention to my interest rate. I pay all my credit cards on time, and so I don’t choose my credit card based purely on what the interest rate is. So to say that — and so what we’ve seen over time is that credit card issuers, when their costs change, pass those costs through in a variety of different ways.

First thing they did was got rid of annual fees, which was the thing that consumers hated the most. They give rewards. They give 24-hour customer service. They give free dispute resolution. They give car rental insurance. They give all kind of benefits to people that they compete on. They don’t just compete on lowering interest rate. And so to just focus on that component is not an accurate way of measuring competition. And given that last I checked, there were about 6,000 institutions in America issuing credit cards, maybe it’s a few less now, that’s a pretty darn competitive market.

So when you look at history, what you see is that when interest rate ceilings were binding in the ‘70s, what did the credit card look like? It was a basic, plain, vanilla credit card. It had a high, fixed interest rate of maybe 17 percent, no rewards, very few benefits, and a $40 annual fee. And so you basically — the way that the credit card issuers made up for the fact that they couldn’t charge a market rate of interest was simply by assessing an annual fee. You had to pay the annual fee just to have a credit card.

And interestingly enough is one point of many that shows that the people that you want to help are the ones who end up getting hurt. An annual fee is regressive, which is you pay the same $40 annual fee, regardless of whether you charge $3,000 a year or $30,000 a year. To the extent that credit card issuers make up for the fact that they can’t charge a market rate of interest by assessing an annual fee, that simply ends up being a subsidy from people who pay their bills on time to people who revolve their balances, which is another peculiarity of this.

So that’s the first thing we see is term repricing. You could think of credit cards as being like a balloon. There’s air in the balloon. You can squeeze it at one point. The air doesn’t go out of the balloon, it just pops up somewhere else. Probably the first thing that most consumers will see is a return of annual fees, just as when they passed the Durbin amendment and capped debit card interchange fees, the first thing we saw was a disappearance of free checking and an increase in the size of monthly maintenance accounts that consumers had to pay.

The second thing we’ve always seen is something we could call product substitution. So Arkansas is a good example of this. Arkansas had some of the strictest usury ceilings in the country in the 1970s. Very few consumers in Arkansas prior to Marquette National Bank could actually get a credit card. I think the approval rate was about 20 percent. The average credit line was about $500. And so consumers in Arkansas were basically forced to do without credit cards. Arkansas was also the pawn shop capital of America. They had about three times as many pawn shops per capita as other similar states.

The other thing that we saw was if you look back at history, in 1970, only about 10 or 15 percent of American households had credit cards. That number went up to, by the financial crisis, over 70 percent. Why is that? Well, partly, it was—we’ll talk about it in a minute—the fact that they couldn’t make loans at a profit. But the second thing was what that did was it forced consumers to basically take credit from department stores. So Sears, JCPenney, Boscov’s, Roses, all these traditional — Macy’s, all these traditional department stores operated credit operations. And basically, why did they do that? It was basically because whereas banks could subsidize their losses on credit by imposing annual fees, department stores had an even slicker way of working around it, which is the department stores would just mark up the price of the goods that they sold.

So one study found, for example, in Arkansas, a refrigerator cost 8 percent more than the exact same refrigerator cost right across the border in Texas, which they attributed to the fact that Arkansas department people have always bought refrigerators on credit. Arkansas department stores couldn’t charge a market rate of interest, and so they marked up the price of the refrigerator. Again, you get this peculiar subsidy from people who don’t use credit to people who do because of that effect.

And we’ve seen that in recent years. My colleague — I mean, my coauthor, my book, Consumer Credit and the American Economy, Greg Elliehausen, had a fascinating article where he found that the Credit Card Act of 2009, which essentially interfered with the ability to be able to price risk on credit cards led to a large number of people losing access to credit cards. They instead substituted to traditional personal finance installment loans which cost more, are more expensive than credit cards.

And of course, the final factor we have is even after lenders started to engage in term repricing, even after they engage in product substitution, in the end, a certain number of people still can’t get access to credit or unsecured credit at the prices they’re allowed. So as we just said, Elliehausen’s research found that those who lost access to credit cards, who were primarily those who were the lowest income and have the lowest credit scores, shifted to installment loans. Many of them shifted to payday loans. So people who take payday loans, for example, say that the reason they take payday loans is they are the people who don’t have access to credit cards or are already up against their maximum — their credit limit max on their credit cards, and so they turn to payday loans.

Of course, the so-called Loan Shark Prevention Act would also wipe out installment loans and payday loans, basically, because there’s no way those products can survive at a 15 percent interest rate ceiling, given the cost and risk associated with making those loans. So traditionally when that has been the case, what has happened is that thousands, and thousands, and thousands of American families over time have fallen into the arms of loan sharks.

And we’re not talking about the metaphorical loan sharks that Sanders and AOC talk about. We’re talking about real loan sharks. We’re talking about people like Anthony “Fat Tony” Salerno, the head of the Genovese crime family in 1973, was indicted for 14 counts of loan sharking and 1 count of criminal solicitation to have somebody’s legs broken for collecting. Fat Tony was running $80 million a day on the streets in New York City in his territory at that time. That’s a little under half a billion dollars in today’s dollars. It’s estimated that by the 1970s, loan sharking was about a $10 billion a year industry in the United States, which is about $70 billion, $67 billion, in today’s dollars, to give you a sense of that. That’s about twice the size of the entire payday loan industry in America today.

According to a 1968 United States Senate committee report on organized crime, loan sharking was the second largest revenue source of the mafia at that period, trailing only illegal gambling. And so what we’ve seen time and time again — and that story has been told again and again, which is that in the early part of the 20th Century when Americans moved into the cities from the farms, immigrants came in, they needed access to credit. The Victorian lending laws at the time didn’t allow them access to it. They fell into the hands of the loan sharks. And in fact, Tom Dewey came to national prominence and eventually became the Republican nominee for President primarily on the back of some massive loan sharking prosecutions he brought in New York City, that these were like thugs sitting on park benches in Central Park handing out brown paper bags full of money in broad daylight because it was so conventional at the time and so accepted.

And if you look back, during their press conference, or their video, AOC compared — they said, “Well, yeah. Nowadays, these so-called loan sharks aren’t breaking legs, but they could repossess — they could foreclose on your house under state law.” I submit that really is a pretty irresponsible statement, to tell the truth, to compare what goes on today with what the loan sharks of the ‘60s and ‘70s did. “Blind Louie” Cavallaro, who was an enforcer for the Chicago mob, he was recorded, and it was published in the Chicago Tribune, telling a victim he was going to rib his eyeballs out, rip his tongue out, and take his teeth and wear it as a necklace.

As I said, Fat Tony was actually breaking people’s legs. This is not anything to joke about, to talk about the generations of Americans who have been forced into the hands of real loan sharks. And the violence, and the threats of violence, and the terror that these people inflicted on American cities is not something to be joked about and to compare it to what the situation is today.

But unfortunately, that’s what we’ve seen. That is what the experience has been is you can get rid of the supply of credit, but you can’t get rid of demand for credit. And so what’s happened in the past is whenever you bring in these laws, whenever it becomes the case that many people can’t get access to credit because of usury ceilings, what invariably ends up happening is desperate people resort to desperate measures to put food on the table, and to put their babies in diapers, and the like. And that has not ended very well very often in American history.

So that’s the overview of what we’re dealing with here. And what had happened in the past is rather than just sticking their head in the sand as this legislation does, that in the past, reformers, liberals, progressives, people who actually take the economics of this seriously rather than just sort of rhetoric, have eventually seen the light and have basically decided that it’s better off to allow consumers to get access to credit products on a competitive basis. And so I’ll just cite one example which is in 1964 when New York legislature investigative committee held hearings and an investigation into organized crime in New York. And among the people who weighed in was then brand-new Senator-elect Robert F. Kennedy, who sent a letter to the investigative committee and said, “I urge you to reconsider and raise New York State’s usury ceilings because that is a primary cause of loan sharking” and the kind of violence we were just talking about in the state.

Paul Samuelson, first Nobel Laureate in Economics and the favorite economist of the Kennedys, in 1969, testified before the Massachusetts state legislature and told them it’s time to repeal usury ceilings, that usury ceilings don’t do any good for anybody except for loan sharks. And people learned that lesson the hard way. And what is so depressing about what we’re seeing with this proposal right now is that, hopefully, we won’t have to learn the hard way again that price controls on credit, usury ceilings end up hurting the most vulnerable, and the people who already have the fewest choices, and the people who are already most desperate in society.

So with that, my opening remark, and I’m happy to open it up for questions. I’m happy to talk about the Post Office banking proposals or anything else about sort of what this new world might look like.

Hon. Wayne Abernathy:  So Micah, let’s go to questions from our callers.

Micah Wallen:  Absolutely. We’ll now go to our first question.

Jerry Loeser:  This Jerry Loeser, by the way, from Winston & Strawn. I wondered if you could comment on the prospects of the Loan Shark Prevention Act.

Prof. Todd Zywicki:  Hey, Jerry. I assume in the current environment, the current political environment, it doesn’t have much legs to it. But what’s depressing about it is it polls very well. And what we’ve seen across the country is first, this is an issue that — and this idea of usury ceilings is something that is quite popular, which is probably the reason why we’ve seen this mistake made so many times again, and again, and again in history.

And Republicans don’t hate it that much more than Democrats. And in fact, even Tucker Carlson, who I think used to be a libertarian, has come out in favor of the legislation. So it’s one of these things where it’s got a lot of popular support. And when you see these things put up and laws like it put up in the states, so for example, when states have a referendum on outlawing payday loans, they tend to pass, which is that people who don’t use payday loans tend to support getting rid of payday loans. And people who aren’t on the margins of whether they have a credit card or not tend to support credit card interest ceilings.

So a good example is if you take the Durbin amendment, for example, middle-class people have largely been unaffected by the Durbin amendment, that basically one of the things the Durbin amendment did was lead to just a dramatic increase in the monthly minimum balance that you have to keep in order to be eligible for free checking. A lot of people, especially a lot of people in Washington who make policy basically didn’t even notice a difference in their offerings, and so what we see is that — and I don’t think people appreciate that, for example, that it won’t just be that low-income consumers won’t get access to credit cards. It will also be the case that they will probably start to see things like rewards disappearing. They will start to see annual fees returning, and then they’ll be kind of mystified as to why that was.

So the Durbin amendment, for example, even though a lot of people kept free checking, it basically also led to the demise or pretty much the complete elimination of rewards on debit cards. And high-income consumers just shifted over to credit cards because credit cards were unregulated with respect to interchange fees. And so a lot of people just shifted over to that. So it’s one of those scary things where public opinion tends to often support something like this, even though it always ends up ending tragically, and especially tragically for lower-income and the most vulnerable people.

Hon. Wayne Abernathy:  Great. Well, I certainly had a question come to my mind, Todd, as you were discussing a little bit about how interest rates are developed and so forth. It’s interesting that this number of 15 percent appears in the legislation. What’s the scientific data or research that underlies that particular number?

Prof. Todd Zywicki:  I have no idea where they plucked that number from. Traditionally, the numbers have changed. Traditionally, we’ve had different numbers. It’s very radical back in the 20s to lift the interest rate ceiling from 6 percent per year to 36 percent APR. That was the proposal in the Uniform Small Loan Law. I have not been able to figure out where that magic number came from, other than I guess they think it sounds just about right. I think, unless I’m mistaken, that number is embedded in the — is it 15 percent, the number that’s embedded in the credit union regulations? Wayne, do you know?

Hon. Wayne Abernathy:  I believe, yeah, that there is that in one of the credit union rules from the NCUA is 15 percent, if I’m not mistaken.

Prof. Todd Zywicki:  And I’m not sure where that came from back when they devised that number back in the old days, either. So it seems to be just completely arbitrarily plucked out of the air, which is a curious way of setting a price control.

Hon. Wayne Abernathy:  Certainly, if the idea is that you’re trying to maximize the benefit for the borrowers, you’d think you’ve done some kind of research on what would work best for borrowers.

Prof. Todd Zywicki:  Right. And even the Durbin amendment, as kind of cockamamie as it’s structured, they tried to tie it to some sort of calculation of cost, whereas here, it seems to just be plucked completely out of the air and bears — it’s not like there’s some formula they seem to suggest that it would, as far as I know, that would bear a resemblance to any sort of cost-based structure.

Hon. Wayne Abernathy:  If we don’t currently have another call there, a caller with a question, I have another question I’d like to put to you, if I may. And this is looking at things from the point of view of the merchants. We’ve been talking a little bit about the borrowers, but if the credit card company is not able to cover its risks with a 15 percent number, and you’ve mentioned some ways they can try to get around that, but if the result is that you’re going to have fewer people with credit cards in their pockets, how does that affect the seller’s side, the merchants who are trying to sell their products to people that might require a credit in order to make that purchase; television, the refrigerator freezer, the utility. Are they affected by that?

Prof. Todd Zywicki:  Absolutely. And that’s one of the — I don’t think miracle is too much of an overstatement. One of the miracles of the way that the credit card market has evolved since the effective deregulation in Marquette is to break this traditional link between being a merchant and having to extend credit. If you look back, even to the 1920s, appliances were always bought on credit. Back in the 1920s, there were radios, pianos, encyclopedias. You probably remember, Wayne, when it used to be that people had — you would finance the Encyclopedia Britannica.

Hon. Wayne Abernathy:  Absolutely.

Prof. Todd Zywicki:  People would pay for that on time, and they would pay for it. Hardware, furniture, all this stuff was sold on credit because for reasons we could talk about, why that makes sense to buy all that stuff on credit rather than saving up for it. And it basically forced stores to offer credit along with the product because that’s what the consumers wanted. And what the real effect of that was, was it created a huge cost advantage, a huge comparative advantage for the big department stores, so the big retailers who could afford the cost and risk of running an in-house credit operation.

And so it created a huge advantage for big department stores versus boutique, sort of small businesses and the like. And we still see that today that some of the large stores still operate their own credit operation. And so the first thing we would likely see is to the extent that it makes it more difficult for people to have credit cards, and we’ve already made it more difficult for a lot of people to have debit cards because of the Durbin amendment, that will have an impact on merchants directly, especially smaller merchants who nowadays basically can outsource that credit operation and compete on fair ground with the big boys.

Over the long run, the other possible thing that merchants might end up seeing is that the other main source of revenue that credit card issuers generate now is about two-thirds of their revenues come from people who have revolving balances on credit cards. That used to be about 80 percent, and it’s declined over time. The other main source is interchange fees, which is the fee for every, say, $1 transaction you make at the store, 2 cents gets routed back to the credit card issuers, or 2.5 cents, or whatever the case may be.

One could very easily expect that if offering credit becomes an area of loss rather than gain, you can very well see that consumers would — or that issuers might end up having to further increase interchange fees to make up for those revenue losses with respect to merchants, just as newspapers who’ve seen advertising revenues fall have had to respond by basically raising subscription prices and the like, more typically. And so to the extent that you make it more difficult for consumers to get credit cards, make it more expensive, less attractive, that is obviously going to filter through to merchants over the long run.

Hon. Wayne Abernathy:  I was going to suggest why don’t you talk about Post Office?

Prof. Todd Zywicki:  Which is what I was just about to talk about because that’s where I think — this is where they eventually go. This has been an idea that’s been kicking around for a while. As I said, the Loan Shark Prevention Act is only about four pages long. The only concrete proposal I’ve been able to find for postal banking was by Senator Kirsten Gillibrand. I think it was two pages long. And so it’s a very nascent idea, but it seems to be an idea that they and some commentators have glommed onto.

So let’s talk about that a little bit, which is that basically their idea is that the Post Office would step in and serve a lot of the functions of a bank. And they point to historical experience in the U.S. and experiences abroad where they do that. And I would just say a few things about that, which is, first, Post Office banking is really a government-created response to a government-created problem, which is what we just spent the last several minutes talking about is a variety of interventions, primarily during the Obama administration, that led to pushing people out of mainstream financial products, whether it was the Credit Card Act which reduced ownership of credit cards. There’s the Durbin amendment that pushed people out of bank accounts and left people scrambling around for financial services.

It’s really those regulations that have interfered with the ability of banks to offer financial products to low-income households. Durbin amendment, for example, at its peak, about 76 percent of bank accounts in the United States were free checking accounts. Nowadays, that’s been cut in half to about 38 percent. And the effect has been largely at the bank’s — the large banks affected by the Durbin amendment. And so that would be my first thought.

I think the other thing I would point to, personally—and I’m not sure if you or your members would agree, Wayne—is that allowing other institutions into the banking industry, for example, the Post Office, would really just be, as far as it makes any sense at all, replicating what Walmart is doing already, which is about a decade ago, Walmart sought a banking charter to be able to issue a full suite of banking products to consumers. And they weren’t able to do it because of regulatory and political law opposition, but they are offering already 88 cent money orders, $3 check cashing, and it’s not clear that the post office is going to be able to do anything cheaper than Walmart, or more ubiquitously.

And what’s especially ironic about the idea of Post Office banking is the idea that the Post Office will offer small loans, and that somehow, the Post Office is going to replace payday lenders. And that is absurd almost to the point of comedy for a variety of reasons, which is loss rates on payday loans are very high. They estimate that they could be as high as 10, 20 percent, depending on how you measure it. And that’s one of the reasons payday loan costs are high. And so is the Post Office going to get into the world of collecting debts, of suing people, of having people sitting there on the phone, calling debtors to collect money from them when they can’t pay? It’s kind of a bizarre scenario to think about. So there’s a lot of problems with the idea of the Post Office somehow making small loans in a way that makes any sense as opposed to issuing money orders, and pre-paid cards, and stuff like that other providers are already doing that people have a lot of access to.

But the other thing that I find very humorous about the idea, especially if small-dollar loans is when you ask payday loan customers why do you prefer — they often say that they prefer payday loans over banks based on their own personal experience. And when you ask them why, they say basically, it’s because payday loans are fast, convenient, and have good customer service. And whatever one says about the Post Office, and whatever [one] thinks about the Post Office, fast, convenient, and good customer service is not typically the words that come to mind if you are to read a Yelp report on the Post Office.

So it’s not even clear that they really understand why people use the payday lenders that they use and the idea that the Post Office could actually compete. And in all likelihood, right now they seem to see this as a way of stemming the tide of red ink that the Post Office currently has. In all likelihood, if they were to actually try to get into a small-dollar loan business, they’ll end up losing massive amounts of money, and with very few customers, and it’s going to end up just adding to the woes of the Post Office rather than detracting from it.

Not to mention the fact that in terms of convenience and the like, payday lending offices are open till 9, 10, 11 o’clock at night. They’re open so that construction workers who work all day on the job site can come in and get some money if they want. They’re for people who work all day. And the 9 to 5, or whatever the hours are of the Post Office, the closed on Sunday hours of the Post Office, aren’t going to work for a lot of the people who go to payday lenders precisely because they need money in a hurry in order to keep a utility bill from bouncing or a rent check from not clearing. And so the Post Office is going to have to radically change its business model if it’s going to be open for the kind of hours that payday lenders operate and to be able to compete on speed and customer service.

Hon. Wayne Abernathy:  Todd, you mentioned one of the concerns that I have with this idea of the Post Office getting into some select types of banking business is the point that who wants to go through, as you point out, the vicissitudes of customer service at the Post Office? And my worry is that won’t succeed, but in order to make it succeed, the Congress that would have created that opportunity, the opportunity to do banking at a Post Office will see it’s not working, and they’ll therefore create monopolies so that that’s the only place where you’ll be able to do certain types of service.

Prof. Todd Zywicki:  Yeah, like the traditional monopoly on first class mail that they held for so long and that FedEx had to work around in order to compete with them. And that’s on of my big concerns here, Wayne. And Jerry Loeser asked a question of what are the odds on this succeeding? And if it does succeed, in the past, what has happened is that progressive liberals, consumer advocates have eventually seen the light, and they’ve basically said, “Okay, we get it. Consumers are better off with competition, and choice, and transparent markets rather than having to turn to the leg breakers and the Blind Louie Cavallaros of the world.”

And what concerns me about this is that it’s not clear that the market for ideas works quite that way anymore. So if you look, for example, at the fallout from the Obama regulatory onslaught, Dodd-Frank, the Durbin amendment, the Credit Card Act, the CFPB, all the things that they did, the response of the CFPB from then-Director Richard Cordray was, as consumers were losing bank accounts, he basically sent a letter to the banks and said, “Consumers losing bank accounts…” — I think he suggested, hinted very strongly, “Maybe you guys should give free bank accounts to consumers who otherwise seem like they can’t afford them.”

And so it was basically kind of using the failure of government regulation, and then using it as an opportunity to intervene yet again to force more subsidies to the system, more redistribution. And so the scenario you describe of the Post Office failing at this and then, essentially, basically getting massive subsidies to do it or a monopoly to provide these products is — I do not think is a completely far-fetched or unrealistic scenario, unfortunately.

Hon. Wayne Abernathy:  And part of it really becomes not so much control of industry as control of consumers. If the Post Office failed at offering banking business to consumers, it’s because consumers didn’t want to go there and patronize the Post Office for these banking products. And so the action might be, “Well, we’re going to force you to do that.”

Or maybe another example, really, is looking with regard to credit cards, I shop around when I’m looking for the terms and conditions of the particular credit card that I like, that matches my particular lifestyle, whether I pay off like you do at the end of the month, or whether I carry a balance. In one case, interest rate’s more important; in others, the annual fee is more important. But I find the one that matches that. When you’re putting these limits in place, aren’t you in essence saying, “We don’t trust the consumers be able to make these decisions for themselves.”

Prof. Todd Zywicki:  That’s exactly right, Wayne. And adding fuel to that fire is something we’ve talked about in other occasions, I think, on Federalist Society teleforum calls is the role of behavioral economics. And once you add in this idea that consumers are irrational, consumers are easily manipulated by sophisticated businesses, we saw that for example with overdraft, the overdraft protection when the Federal Reserve amended the rules and made it required consumers to opt into overdraft protection. Those who overdrafted the most opted in the most because they had the highest demand. But in the world of government regulation and behavioral economics, all that really showed was how irrational and irresponsible those consumers really were. And so a lot of people’s response were, “Well, a nudge wasn’t enough. We need to shove them even more, or even prohibit them from this product.”

And so I think your concern is well-founded, Wayne, which is that if we offer these products to consumers at a lower price, and yet they continue to go elsewhere because the hours are better, or because they’re treated better, or because they get better customer service, and the like, it’s not implausible at all that the regulators might just say, “Well, you know, you’re still irrational because we think you should care most about price and not those other things, and so we’ll just get rid of those competitors and force you to go to our monopoly provider.”

Hon. Wayne Abernathy:  Micah, do we have any questions from our callers?

Micah Wallen:  We actually do have one question, Wayne. Without further ado, we’ll go to that question.

Bob Cardwell:  Todd, it’s Bob Cardwell with Capco. When can we get you on Tucker Carlson Tonight to debate him and educate his viewers?

[Laughter]

Prof. Todd Zywicki:  Well, I’m just grading exams right now, so I’m looking for any reason to do anything but that. But I’m happy to do anything I can to educate the public on this because it’s a bad idea. It’s a bad idea that just seems — it really is like a Whack-a-Mole type thing. It comes up again, and again, and again, and again. And again and again, we’ve had to learn the lesson the hard way, so I would be happy to explain to Tucker or anybody else I can as to maybe why don’t we learn the lesson the easy way this time, or maybe not learn the lesson at all because we know how this movie ends.

Bob Cardwell:  It would be a great debate. Thank you.

Micah Wallen:  No other questions in the queue, so if either of you had any closing remarks?

Hon. Wayne Abernathy:  Todd, any closing remarks?

Prof. Todd Zywicki:  Well, if people are interested in this, I wrote — to show you how timeless this is, about 15 years ago, I wrote an article called “The Economics of Credit Cards,” which I wrote for a symposium in the Chapman University Law Review, if people are interested in following up and sort of getting more of the data, and the background, and the details of this. It’s a very long article. I don’t recommend it for the faint-hearted, but you could read that. Or, if you’re feeling especially — have an especially high degree of fortitude, you can get ahold of my co-authored book, Consumer Credit and the American Economy, which is about 600 pages long, but is a pretty comprehensive treatment of American credit markets, including a lot of the history of regulation, and the interaction of regulation with economics, and the development of the consumer credit economy, but in particular, the consumer economy more generally.

The story of consumer credit in America is really the story of the American dream in the 20th Century, which is the migration to the suburbs in the post-war era as people left the cities and moved. Levittown was basically settled by credit. When people left the cities and moved out to the suburbs to Levittown, and they got the three-bedroom house, and the car in the garage, and the modern appliances, and the bedroom sets, and the furniture, and the radios, and eventually, the TVs, all of that was done through credit.

And to shut off credit is, in many ways, to shut off the American dream. It’s to shut off the opportunity that people have to be able to get access to the products that make their lives better, whether it’s a bedroom set, braces for their kids, a clarinet for their kids, or a car so that they can get to work, or $500 to get a new set of tires so that they can get to work. It’s not something that should be trivialized. It’s not something that should be joked about as being comparable to the kind of predation and brutality that loan sharks inflicted on generations of Americans, which has sort of been the attitude and the rhetoric of this. And I think it’s something that requires some real thought to understand the complexities of this and the way in which this simple intervention into a very complex world has all kind of ripple effects through the economy and through people’s lives.

Hon. Wayne Abernathy:  Great summary. Thank you very much, Professor Todd Zywicki, and thanks to all of you for listening in.

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