Why 10% in 10% Is Enough?

My friend and colleague Dan Rhodes posted an article on the "10% Is Enough" campaign over at the "Call and Response" blog of the Faith and Leadership program at Duke Divinity School. In a few paragraphs, he offered an brief overview of the campaign and some of the reasoning behind it. One comment chastised him for not providing an adequate analysis of the economics of consumer credit, its risks, and its basic operational principles. Dan gave a good response, acknowledging that in the short piece he could not cover everything. He also added some additional historical economic factors which are necessary to keep the discussion from pretending to be merely a technical discussion of "laws of economics." I am including here some comments I added to his post.

For centuries, banks were very profitable businesses operating under usury caps. Why are banks in our day so much more inept? Not all banks in the world charge high interest rates for credit. Why are US banks so much more inept at doing business?

We know that "risk" is calculated using benchmarks and tables and actuarial information based on certain assumptions. Of course, the assumptions may include demographic data and statistical probabilities that many can agree upon.

These assumption also include an assumed "cost of doing business" that includes the irrational exuberance of contemporary stockholders wanting short-term profits, the arrogance of CEOs with 8 figure packages, and big bonuses for executives known as "talent" who helped to bring about the economic crash. Consequently, none of the big banks is willing to name a rate of interest they believe to be too high. When asked by Congress if 36 % was too high, not one bank president would answer.

Wells Fargo/Wachovia recently introduced a new "product" for its customers. They will advance money at the end of the month to help a customer get through. Down the street from the bank, the little storefront calls this a "payday loan." Wells Fargo/Wachovia offers this "service" for an annual interest rate of 120%.

So if the banks want to be forthcoming about their cost of doing business, and if they will consider outside analysis of where they are spending frivolously, then we will be in a position to discuss what rate it would take to keep credit fair for customers, profitable for banks, and safe for everyone.