Prime + 5% = Y?

Speaking in Brampton today, Jack Layton promised that an NDP government (cough) would cap credit card interest rates at prime plus 5% and roll back transaction fees.

This sort of loopy nonsense is where the NDP loses me. Not that I particularly like siding with the banks, but in an ostensibly “free” market (and yes, I know that’s a loaded and even misleading term), the government shouldn’t have the ability to cap the interest rates that lenders charge their customers. Perhaps next they would like to dictate what the appropriate level of wages and prices should be… I mean, why just stop at the banks and credit card companies?

By the way, I have to retract something said in a previous post about the NDP allowing comments on their YouTube videos – apparently, they do not. So, in that respect at least, they’re COWARDS too… just like the Harper Conservatives.

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31 Comments

Filed under 2011 Canadian Election, Jack Layton, NDP

31 responses to “Prime + 5% = Y?

  1. Rotterdam

    The Liberals “edit” comments.
    I tried several times on the liberal you tube site, including a soft bs comment “normally vote Tory but willing to give Ignatieff a look”…never got printed.
    As far as I am concerned they should all disable youtube comments, and cut the illusion of free speech.

    You are right on the credit cards. I pay mine off every month, if the banks were forced to rates, my fee’s would go up. I do not like subsidizing peoples stupid spending habits.

  2. I’ve never understood the NDP’s penchant for going after the banks for charges that are totally avoidable, like credit card fees and bank card fees. Don’t want to pay, then don’t use the service.

  3. billg

    Thats the point, the NDP wouldnt stop. Loopy is such a great word, it saves me from having to say fuckin nuts.

  4. Rotterdam: That’s very disappointing to hear. This blog at least, unlike the official channels and blogs of the mostly contemptible and censorious BTs, is a free-speech zone, open to anyone.

  5. While I do think that 20% interest rates on credit card balances are criminal, calling for 5% over prime as a cap just makes Jack look loopy no matter how well intentioned the policy proposal may be.

  6. Gordon S

    Governments do determine what an appropriate wage is… and they call it the minimum wage.

    Honestly, once you accept any government intrusion into the private economy, and I’m sure we both agree on a huge number of those intrusions, then why should anything be automatically off limits?

    And in light of a still-recent multi-trillion dollar economic catastrofuck, perhaps singling out stricter regulation dealing with predatory lending practices isn’t the most sane thing to be doing.

  7. Ted

    Interesting first two days of policy. And very revealing about a certain essential element of all three parties, however much you like the policy or not:

    1. NDP (capping credit card interest rates): create a problem with your own spending and the government will be there to bail you out or at least really limit the damage you cause yourself.

    2. Liberals (learning passport): we’re not going to do it all for you, but we won’t leave you on your own, as long as you educate your kids.

    3. Conservatives (income splitting): we’re not going to do anything for you for a long time, if at all, and when we do it’ll be after the corporations get their tax cuts and we’ll only be helping the wealthiest and not two income families.

    If that is the shape of policies to come in the rest of their respective platforms, the Liberals may actually have a chance. A really good chance.

  8. Gordon: I was waiting for that comment. 😉

    Perhaps the critical difference here is between setting a floor (in terms of the minimum wage) and imposing a ceiling on profits.

    I think perhaps a better proposal might have been to crack down on the usurious rates of interest charged by so-called “payday lenders” that prey on the most vulnerable. That scenario is one of outright exploitation.

    With respect to the banks however, there is competition and alternatives. You can elect not to use credit, shop around for a better deal, or even negotiate with the lenders to lower your rates (they are surprisingly flexible if you actually take them to task on it).

    So I guess my bottom line is that I’m all for government intervention to set absolute minimum standards and protect those who wouldn’t otherwise have leverage to get a “fair deal” in the marketplace, but otherwise, the government should butt out and let the market operate as freely as possible.

  9. Ted: Nice summation of the parties’ positions thusfar!

  10. au_sht

    This suggestion is only partially tongue-in-cheek, but I do have to at least ask: Did we not bail out some companies to the tune of billions of dollars? Some might wonder why we can’t also ask for a bailout.

    Maybe the bailed out companies could bail out the public once in a while.

  11. jkg

    For Layton, this is par for the course, really. This is an example of making unrealistic proposals to make them look like they are taking the moral high ground. It is designed mostly to chip away at certain voters who would be attracted to these lofty proposals. The Liberals approach to education has so far been somewhat consistent. As Ted mentioned, Iggy has said that his party would not just ‘do it all for you,” but that it has to be earned. Thus, it that is shown to be true, his party would help. This is a good angle to take. The greatest asset to a nation’s economy is an educated workforce, and those benefits show up in economic indicators. It is a pretty safe deal to make as it can be grounded in sort of realpolitik than pure ideology.

    It should be said though that income splitting is extremely attractive to young families, so it is difficult to criticize that type of policy proposal without those criticisms being spun by the CPC as being ‘anti-family.” The counter-logic usually proposed is that income splitting for struggling families allows them to shift their savings for their children’s future. The corporate tax cuts are argued as an employment enhancer. Thus, the overall statement is like this “Not only will you have more employment options but you can save while raising your child.” I would suspect that is the sanitized message the CPC machine will broadcast. The Grits and the NDP will have to be extremely specific on how they would attack that. Ted notes that these types of initiatives are not fully effective because they are conditional on other policies before them (like the corporate tax cut), but I think that is sort of the ‘switch’ that is happening here. After all, if the CPC were serious about income splitting, that would have been included in the budget (as Duceppe aptly pointed out).

  12. Au_Shit: Good point. There was a sneaky “transfer of assets” via CMHC through a couple of tranches to the tune of $75 billion back in 2009. Although the Harper Government claimed at the time that it would cost nothing, it did effectively bail out the banks while driving up the public debt by that amount.

    Fortunately for the Harper Government, most people (including our lovely press corps) are confused by this kind of stuff, so they basically ignored the issue.

    Having said that, I think sorting out who owes what with respect to the banks is a matter between the federal government and the chartered banks and shouldn’t be the justification for meddling in the fees they charge retail customers.

  13. Gordon S

    I’m pretty pessimistic about the market being able to figure important things out on it’s own. It’s pretty obvious that a high interest rate on credit cards doesn’t help Canadian society, so why allow it? It’s not a matter of free speech, it’s just banks ripping people off.

    Perhaps the debate should be framed this way: Isn’t it absolutely absurd that in all of our technological advancement we still do not have a system which allows people to cashlessly and cheaply move currency from the bank to the store? Visa, MC et al charge stores out the ass for their services. Joseph Stiglitz highlights this as one of the great examples of the unregulated (or underregulated) free market’s inability to provide reasonably priced services.

    It’s the same reason it still costs so much to place a phone call to London or Beijing, why we pay so much for cell phone data plans, why car insurance in Ontario is far higher than car insurance through ICBC. Why Canadian ISPs were almost able to charge us all $2+ per gigabyte for high internet usage.

    Maybe I’m ranting, I just have no faith in the ability of free market agents to accomplish much of anything not related to entertainment and distribution without the government forcing them to act in ways that help the broader societies in which they operate.

    I think government has every right, and even the responsibility, to introduce actual competition via a crown corporation, or by limiting profit mechanisms.

  14. jkg

    One more thing, and I think hitfan touched upon this before in terms of the paradox of unions participating in the open market. The issue with Layton’s proposal ignores the bank’s ability to lend to what they deem as riskier borrowers. I know there has been a backlash against lending to riskier borrowers, but banks have always engaged in financing with greater premiums not only to increase their profits but allow at least a set of borrowers to finance themselves. The old adage of “borrow short and lend long” is common mantra among the Big Five, and really, this is one of the few areas where they make most of their money. It is true that they have to sustain losses from defaults, but many borrowers who take lending premiums are businesses that eventually improve their balance sheet. This allows them to renegotiate their terms. For the vast majority of corporate financing, the Big Five make sure that these borrowers are viable in the long term. What this means then is that investing in financial services, which is done by almost virtually every pension fund in Canada, is hobbled as fund managers would not be able to make their necessary returns to keep their pensions funded for the organizations they work for. In many ways, this is a double-edged sword: Does the transient relief from higher interest rates worth the potential long term effects of sustaining financial viability for businesses and investment funds? It is almost as if though you are cutting off your nose to spite your face.

    Layton is effectively negating that entire ecosystem where small to mid size businesses are able to start up using borrowing standards at a premium via business credit lines. All of this just to appeal to consumer frustration, which would be displaced and shifted to frustration at the fact that pension outlays and payments would have to be increased and reduced respectively to make up for lack of stable investment oppourtunities (and the greater risk of entering alternative investments in hopes of greater returns).

  15. jkg

    I just have no faith in the ability of free market agents to accomplish much of anything not related to entertainment and distribution without the government forcing them to act in ways that help the broader societies in which they operate.

    I think a lot of people share that view, Gordon. The issue is where and to what degree. Some of these initiatives have unintended consequences. A good example is the CRTC (I think they are responsible for what I am about to describe). In regional telecom, the federal government instilled a floor for what telecom business can charge in terms of phone rates. The big telecom companies somehow managed to convince the federal regulator to remove the floor in one region in the Prairies. The minute they did that, these big telecoms (like Telus) entered that market and offered extremely discounted rates. On the surface, that was a great short term benefit of the consumers. What really happened was that Telus muscled out the local providers because they couldn’t compete, and Telus was taking a loss yet were able to keep these prices because they were large enough to absorb it for a few quarters. Once Telus established a foothold and had primary market share, they ended up hiking their phone rates again.

    This same dynamic is played out in other areas as well. Some federal regulators are lobbied under the guise of improving ‘competitiveness,” but what they enact at the behest of major corporate players, is more of a corporatist policy. This makes the federal regulators look extremely bad relative to the major players who continue to gouge their consumers. It is an irony really: The fear by free marketers of strengthening regulators prompts a weakening of their power only to result in policies that are corporatist, which then fuel the argument of not allowing a lot of power to regulators. Wash, rinse, repeat.

  16. Gordon S

    jkg, I really do not understand how that Telus example is a result of government regulation. That’s just what happens in any situation where government fails to stop monopolization. You can see this in entire national economies when poorer nations are opened up for free trade exploitation.

    In both cases, the preventative measure is not to reduce regulation, it is to ensure that regulation is structured to ensure the right outcome.

    Regulatory capture is not solved by getting rid of regulation, it is solved by keeping the regulators at arms length, by responding adequately to attempts by corporations to capture regulators.

    If someone uses dynamite to break into a banks safe, you don’t start storing your money in a shoebox, you build a better bank.

  17. MoS

    What makes you think Canadian banking has anything to do with free markets? Canadian banks enjoy a very comfortable sinecure under the Bank Act. Chartered banks are, essentially, creatures of statute and benefit substantially from the public advantages conferred on them. We have every right to tell them exactly what they can and cannot do. They tried that ‘free market’ argument when they twisted Paul Martin’s arm for permission to indulge in the Casino Capitalism that was then so popular with American banks and led to their country’s ruin.

  18. MoS: It could be argued that any number of businesses are in effect “creatures of statute,” so I’m not sure that argument undermines my contention that there should be as much “free” competition as possible within the scope of their operations.

  19. Gordon S

    What competition?

    Even with large numbers of players (which our banking system lacks, by the way), I don’t believe that competition is something which strives towards the lowest prices and best services. Rather, it is a competition to charge as much as possible while losing as few customers as possible. Because humans are both highly and predictably irrational, and because we simply do not have the time to fully inform ourselves of all the choices open to us (especially when, as you say, the best rates have to be aggressively bargained for), this ensures high prices.

  20. MoS

    How many countries, including the US, Iceland and Ireland, paid a dreadful price for experimenting in free market banking? I know you watch Bill Maher’s Real Time so you’ve probably enjoyed his interviews with Elizabeth Warren. She has some enlightened views on free market banking and credit cards. If anything she views America’s banks as regulatory rapscallions in dire need of legislative straightjackets.

  21. hitfan

    Jack is pandering to the maxed out credit card constituency.

    My situation is this: I have one VISA card. It’s interest rate is 19.9%. But I effectively get 1% of the money back when I make purchases.

    Since I pay my credit card balance in full every month, I effectively pay zero interest. It seems that if I want a card with a lower rate, there’s always a caveat of an annual fee, which I definitely don’t want.

    The credit card companies have insider ‘lingo’ for people like me who do not carry a blance: deadbeats. I get telephone calls from my bank constantly asking if I want to buy fraud insurance or to switch to a lower rate card with an annual fee. I flat out refuse.

    My worry is that if the government ever mandates a lower rate of interest (as Jack proposes) that the credit card industry will conspire to try to squeeze money from the ‘deadbeats’ like me to make up for the shortfall.

  22. Gordon/MoS: First of all, I think it’s wrong to conflate the situation with the banks here in Canada with those in the U.S. or elsewhere. Our system is quite unlike theirs. Some of the shit the banks down there pull on ordinary consumers is just unbelievable — charging just to look at your balance at an ATM, for example.

    Speaking personally, I’ve never really had a problem with them here. Sure, I find their fees a little irritating sometimes, but generally they’re not that unreasonable — certainly worth the convenience in most cases. Mind you, except for a modest overdraft on my chequing account, I haven’t used credit in more than 10 years, so I avoid all of the ridiculous fees associated with that form of borrowing.

  23. Gordon S

    I don’t think I’m conflating anything, just pointing out the similarity of the shenanigans they pull. Everything I’ve said is just to give the lie to this rather silly notion that the free market is beneficial seemingly regardless of the profound failures it produces.

    With regards to high credit card rates, they serve absolutely no purpose. They are designed to trap people in debt, to make it hard to get out of, and to ensure people pay the bank as much as possible. It would be better for society if people could spend that money locally, on actual things and actual activities.

  24. CWTF

    I tend to agree with the NDP on this one.

    Banks have long ago given up on the best aspects of the free market and espoused the worst aspects of capitalism.
    It used to be that would keep your money safe and with all that capital invest it and make a profit. The users fees, if any, were negligible.
    Then came the aspect of making money for the clients. Transaction fees ballooned, tellers were reduced by bank cards, product “offerings” were multiplied with the only goal of extracting more money from their clients.

    Since the Bank of Canada sets the interest rate, why should Canadians not benefit from that? Are you saying that only the rich should have that monopoly?

    Red, even you state that there are “ridiculous fees” – that should be telling enough. Companies are entitled to make a profit but in the case of banks, this is pure greed and usurious…

  25. Gordon: Well, in fact both you and MoS are conflating the two by alluding to egregious business practices of American banks and their catastrophic failures in order to bolster your arguments. In Canada, I think we’ve managed to strike a pretty good regulatory balance.

    As for high credit card rates and becoming entrapped in debt, there is a simple way to avoid that financial hazard: don’t borrow recklessly! Besides, the argument from the banks – not an altogether unreasonable one – is that interest rates need to be high because the debt involved is unsecured.

  26. CWTF: First off, for some reason your comments are being routed into my Askimet, so apologies if there’s a delay in them appearing as I have to go fish them out. It’s not anything that I’m doing, and I’m not always on top of that, but I just wanted to let you know what was going on there…

    Since the Bank of Canada sets the interest rate, why should Canadians not benefit from that? Are you saying that only the rich should have that monopoly?

    Um, no. I’m not saying that at all. (Man, I hate being in the position of defending banks – it really sucks.) We do all “benefit” from the rates set by the Bank of Canada and the historically low prime rate stemming from that. At least if you’re a borrower… savers on the other hand, well, not so much. I always laugh at the posted savings interest rates of like 1.5% or whatever. Good grief, what’s even the point of that? Might as well just stick it under the mattress for all the difference it makes.

    Red, even you state that there are “ridiculous fees” – that should be telling enough. Companies are entitled to make a profit but in the case of banks, this is pure greed and usurious…

    I don’t actually think that I said that. I do find some of their fees a bit annoying (what they charge for EFTs, for example), but generally they’re quite reasonable and worth the convenience. Now, in the U.S. it’s another matter… There are so many scams being run by banks on consumers that it’s just insane. The one I like especially is the (soon to be eliminated) overdraft on debit purchases, whereby a cup of coffee could end up costing you $40.

  27. Gordon S

    Well, I didn’t mean to conflate the two practices directly, just their kind.

    You are arguing that people can protect themselves by not getting into credit card debt. Supposedly you’d also argue that people should have avoided sub prime mortgages. I agree, they should and should have. But the simple reality is that they don’t. I do not think we should be crafting our regulatory systems based on what people ought to do, but what they actually do.

  28. Gordon: I don’t have a problem with the government outlawing certain egregiously predatory or fraudulent business practices, but at the same time, I think people should be allowed to make their own choices.

    I’ll give you another example, that’s removed from banks (although still concerned with credit) and see how you feel about this.

    There is a niche industry in selling household appliances, furniture, computers, etc. to low income families that have no credit. Easyhome.ca, for example. There, you can get a TV for like $12 a month. Catch is that by the time you’ve worked through the payment plan, the TV may have cost you $3,000 when it was only worth $600.

    Personally, I think it’s an outrageous rip-off and you’d have to be a total idiot to get locked in with this outfit… but obviously they’re serving a market of some kind out there.

    Should the government step in and put this company and others like it out of business? You know… to protect them against their own stupidity, greed, ignorance, or whatever.

  29. Gordon S

    Yes, they should put such companies out of business, or at least force them to drastically change their business model. Just as they should do with payday lenders and the like.

    I really just don’t see a problem with it.

    We’ll probably never agree on this, I just don’t feel that the right to economically exploit the everliving shit out of people who don’t intuitively grasp exponential math is a right on par with freedom of assembly.

  30. Gordon S

    I need to disallow myself from typing “just”, Christ.

  31. I have to admit that I’m torn on the issue. Part of me would love to see outfits like easyhome.ca banished to Hell.

    Perhaps this is one of those things we’ll just have to agree to disagree on.

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