On Monday, Senator Bernie Sanders (D-VT) and Congresswoman Alexandria Ocasio-Cortez (D-NY) teamed up together for a rally promoting the Green New Deal.
The rally resembled a meeting of the Soviet Politburo; the policy proposals being thrown around at the event would have made Bernie’s comrades in the old USSR proud.
Besides all the fantastical Green New Deal ideas, AOC and Bernie had another idea: Turn the post office into banks and protect consumers from predatory lenders.
The latter idea sounds nice, no one likes to be taken advantage of; however, the idea isn’t as good or practical as it sounds.
They also want to nationalize the banking industry, which is of course, not a good idea.
Sanders and AOC Support the “Stop Loan Sharks Act”
The two expressed support for the “Stop Loan Sharks Act,” which would eliminate so-called “payday loans” and a host of other high-interest products that are used mostly by low-income borrowers with poor credit.
The legislation calls for interest rates on loans and credit cards to be capped at 15%.
Sounds great, what could possibly be wrong with that?
Actually, there are quite a few problems with this proposal.
The most serious problem being that there would be fewer loans available.
Let’s do a little economic thought experiment: By capping the cost of credit, there will be less of it.
It’s basic economics: If there is a price ceiling for producers, they are going to produce less of it. There is less incentive to produce because there aren’t able to set a price that will profit maximizing.
The same applies for banks and lenders.
Lenders take on a certain degree of risk when they lend. The degree of risk varies by the likelihood of repayment, that is why each of us has a credit score. If a person has a history of repaying loans and paying their bills on time, they will be charged a lower interest rate; however, if a person doesn’t, they will pay a higher interest rate to compensate for the risk.
This is similar to how the insurance market works. Like banks, health insurance companies charge higher deductibles and premiums for those with increased health risks. That was until
Obamacare mandated the coverage that the health insurers had to provide and distorted the market causing the cost of health insurance to rise for everyone, regardless of their health history.
What Happens If the Post Office Becomes a Bank?
Under Sanders’ and Ocasio-Cortez’s plan, your neighborhood postman would become your neighborhood banker, as well.
The plan calls for local post offices to become national bank branches. The idea is that payday lenders would be replaced by the post office and would thus help support poor depositors.
However, if payday lenders were so bad, then why don’t new financial institutions offer services to those with bad or no credit?
Answer: Because they will not get repaid.
It is pretty simple. The borrowers have poor credit for a reason, and the lender would likely never get repaid. If there was money to be made by lending to these people, then a competitor would swoop in and offer them loans.
Offering cheap credit to high-risk borrowers would create a massive burden for taxpayers. Taxpayers would be on the hook for these loans, and the U.S. Treasury would take a massive hit. It would become another fiscally unsound program. The last thing our government finances need right now.
Once again, AOC and Bernie have not thought out the ramifications of their misguided policy proposals.
But, hey, that has never stopped a socialist before.