A Case for the Elimination of Institutional Usury

As a boy I was always fighting bullies. Good thing my parents enrolled me in the practice of Judo. Soon I became adept at defending myself by bringing down and immobilizing these predators.

Today, I am deeply offended by the pain inflicted on American working families by predators of a different kind: The banks and consumer credit-issuing corporations that enjoy windfall profits from unreasonable interest charges on the outstanding, never shrinking, balances of consumer debt held by the people of the United States. Confronting successfully these "institutional financial bullies", however, is beyond me.

Americans of good conscience will need to band together to bring down these bullies. And, we are going to require the courageous support of our representatives in Congress, at both State and Federal levels.

Americans work very hard in making better lives for their loved ones. Yet a disproportionate amount of the fruits of their labor is imperceptibly taken away – stolen - by these institutional financial bullies.

Why are Americans paying as much as 29.9% rates of interest on their consumer debt balances? Since biblical times this practice has been understood to be usury.

Let's put an end to institutional usury. Why? Three fundamental reasons come to mind:

A modern serfdom has emerged in these United States and their yoke is debt - consumer debt. The American family needs to gain freedom from this bondage to unleash its productive potential, increase the rate of personal savings and improve the quality of life.

The solution is not easy. For the past two decades the typical family has struggled to maintain purchasing power by having both spouses work. Survival for many of these families is achieved by charging for current living expenditures. Yet, even if it where possible for the typical American family to stop charging today, it could take a generation for them to clear-out credit card balances they now owe. Based on today’s typical 18.9% credit card interest and payment terms, it would take 34 years to pay off a $2,500 balance, with payments totaling more than 300 percent of the original principal.

The emerging serf class is composed of low and middle income working families, residents of inner cities, the rural poor, the young, and asset-less families across the United States – mostly the weaker elements of our society. These vulnerable groups are targeted by the financial industry in predatory ways.

In a recent article appearing in the Wall Street Journal, Household Finance Corporation's CEO, Mr. William F. Aldinger explained how HFC intensified credit marketing efforts while at the same time it raised interest rates. As expected, loan volume went up, not down, thus confirming that there is no elasticity between the demand for consumer credit and its cost.

Another HFC executive candidly described how their business fits just two notches above the informal loan market - the loan shark. The same executive explained: "No one applies for a loan, it’s all push."

The young in our society are bombarded with credit cards upon reaching the age of 18. They are in no position to resist and soon enough are deeply indebted with significant amounts of credit card debt. Residents of inner cities and the rural poor are targeted when they achieve a modicum of wealth, i.e., ownership of homes. The outcome is often the loss of the estate. Stagnant wage earners and people with no assets continue to receive and accept high cost credit to make ends meet.

And then, the most unjust and unbelievable of all credit practices contributing to the economic indenturing of the working American is achieved through what is perhaps an unconstitutional phenomenon: The contract without maturity, where the right to amend terms is only granted to the credit card lender - without recourse by the debtor, except for full payment. This one sided power allows lenders unilaterally to raise or keep interest rates at the highest possible levels, without recourse by the borrower, especially when payments are late – if only by one day – within a stipulated period. Interest rates are never reduced for these families. Amortization of principal becomes impossible.

Predatory usurious practices cause the perennial indebtedness of the vulnerable in our society

In the information and high technology economy, labor has triumphed. Here labor becomes a stakeholder and an intellectual partner in the enterprise enjoying a higher value than capital itself.

When we examine the rest of the economy, however, we observe that the returns to the weaker elements of the labor force, those who are in debt because of consumer credit, have been gradually declining over the past 20 years.

This fact has been well documented in a 1996 national survey by The Washington Post / Kaiser Family Foundation / Harvard University that concludes:

From different sources and from a recent Congressional Budget Office study analyzing "Changes in Income by Group" (1977-1999), we can also document that:

• Sixty percent of American families have seen their incomes fall in real terms during the past two decades.

• The wealthiest one percent controls 30.4% of the national net worth, the next 9 percent controls 36.8% and the next 90 percent controls the remaining 32.8%.

• Since 1989 productivity has increased at twice the rate of pay and benefits to workers.

• By late 1996, total household debt totaled 95% of annual disposable income, compared with less than 83% in 1990, 75% in 1980 and only 60% in 1960,

• According to the Federal Reserve, consumer debt is growing at an annual rate greater than twice that of wages.

• The increase in consumer bankruptcy filings during a period of economic growth has no precedent in modem times. One out of every 100 households declares bankruptcy.

• Income inequality has reached levels unprecedented since the Great Depression. Over the past 22 years, these disparities have reached a level where the total after-tax income of the top 1% of American Households exceeds that of the bottom 20%.

In short, since 1977 a significant proportion of the U.S. population has experienced declining income levels, eaten into their savings, and taken on consumer debt amounts that require maintenance payments (interest carry and minimum principal monthly payments) estimated to be in excess of 20% of their shrinking disposable incomes. This problem is compounded by usurious interest charges on the consumer debt, artificially set by those who manage capital, that preclude the reasonable amortization of principal.

In other words, consumer lenders are siphoning whatever marginal surplus from labor is generated by and available to 60% of the American population that has experienced declining real income levels for more than 20 years now. In order to improve the well being of these families, we must either increase real wages or cut the real cost of consumption by reducing the cost of consumer debt, or ideally do both.

How to increase real wages is beyond the scope of this essay. However, we know that by reducing the current cost of consumption, i.e., the interest rate and related fees charged by credit card companies, we can immediately assist in improving the standard of living for the working families of America.

Perhaps, to my chagrin, only through regulation would we be able to achieve this objective and make possible for American working families to again consume without falling into economic bondage.

Jose Antonio Font
9921 Costa del Sol Blvd.
Miami, Florida 33178-2358
Tel: 305-513-0123
Fax: 305-513-8440
jfont@fontinternational.com

December 20, 1999

Mr. Font owns a firm that provides strategic advisory services in project finance and development. He is also a principal in several real estate and Internet related enterprises.