California is in crisis. The economy has been hit with record foreclosures that threaten the fabric of our way of life. Unemployment is soaring. Most predictions are that it will get worse before it gets better unless we take drastic actions. The state budget deficit is forcing cutbacks that threaten the safety and well being of our citizens. Efforts to resolve the California budget deficit must consider both spending cuts and tax increases; both options are difficult.

However there is a simple solution that might go a long way toward easing or even eliminating the deficit: a tax on usury.

Usury is the charging of interest in excess of that allowed by law. Throughout history the definition of usury was even tougher; it referred to any compensation paid on a loan. The term “usury” and “interest” were interchangeable. Laws prohibiting usury vary from state to state.

California “allows parties to contract for interest on a loan primarily for personal, family or household purposes at a rate not exceeding 10% per year. In regard to usury, a loan to be used primarily for home improvement or home purchase is not regarded as a loan for personal, family or household purposes. With these loans and for any other loans which are not for personal, family or household purposes, the allowable rate is the higher of 10% or 5% over the amount charged by the Federal Reserve Bank of San Francisco on advances to member banks on the 25th day of the month before the loan.” The current FRBSF discount rate is 0.5 percent.

Even though the California Constitution prohibits usury, Californians are charged and forced to pay usurious rates each and every day. It is important to understand that different statutes in California govern personal consumer loans as well as commercial non-consumer loans.

The 1978 Supreme Court decision Marquette National Bank v. First of Omaha Service Corp. concluded that national banks, such as Bank of America and Citibank, can charge the highest interest rate allowed in the bank's home state, regardless of where the borrower lives. This means that credit card issuers located in states with nonexistent usury laws, such as Delaware and South Dakota, can "export" the lack of an interest rate cap to customers in states with usury laws in place. Next, section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980, or DIDMCA, gave state-chartered banks the same rate-exporting powers. The Gramm-Leach-Bliley Act of 1999 permits local banks to charge the greater of the state usury limit or the rate charged by an out-of-state bank with a branch in California.

The laws are quite clear that there is nothing to prevent a lender from setting up shop in South Dakota and exporting excessive interest rates to California even though Californians have outlawed usury. South Dakota picks up a few jobs while California consumers and businesses are burdened with excessive and debilitating debt. It hardly seems fair, but that’s the law.

The solution is to tax usury. Business may have a way to circumvent the laws passed by the Legislature, but the Legislature retains the right to tax and it is in the best interest of the state to tax usurious interest. Any interest payments in excess of 10 percent (the current California usury rate) could be taxed. The Usury Tax would be collected from the usurers – the lenders.

There are, of course, restrictions on states’ rights to tax interstate commerce; the courts have handed down many decisions. For example, the courts have ruled that a tax must not be unreasonably burdensome. The Usury Tax would merely tighten the loophole the bankers have used to circumvent California’s constitutionally mandated usury laws. There is nothing unreasonably burdensome about a company not collecting excessive and unreasonable interest.

An added benefit is that a Usury Tax could wipe out the budget deficit and restore prosperity to the Golden State.

The two main components of household debt outstanding are mortgage debt of approximately $10.5 trillion and consumer credit of $2.6 trillion. A recent survey of 41 credit cards from 20 banks found the average interest rate for purchases was 13.54 percent. The average credit card debt per California household is more than $9,100 and there are more than 11,500,000 households in the state. Many home mortgages included adjustable rates that reset at usurious rates, or extremely high second mortgages. Californian’s exact share of outstanding debt is difficult to calculate, but based upon population and economic output it is conservatively estimated that Californians carry a household debt burden of approximately $1.5 trillion to $2 trillion. It is conservatively estimated that California’s household mortgage debt tops $1 trillion, with approximately 1 percent (or $10 billion) of that total exceeding the state’s usury limit. Further it is conservatively estimated that California’s household consumer credit tops $520 billion, with approximately 3 percent (or $15.6 billion) of that total exceeding the state’s usury limit.

In other words, a Usury Tax could easily generate $25.6 billion in tax revenue; that’s enough to pay off the budget deficit, maybe run a surplus, and possibly enough left over to give the citizens of California a substantial tax credit. Problem solved.

The Usury Tax would be a truly unique tax that has the ability to fill state coffers, pay off existing state debt, and put money back in the hands of the taxpayers. The Usury Tax would be the greatest economic stimulus package in the history of California. Excessive and unreasonable and illegal debt payment could be converted to productive use as it circulates through the state economy.

For many years the law prohibiting usury has been ignored because of the legal decisions that allow the banks to circumvent the California law. If California’s leaders and/or voters were to revisit those laws, bring them up to date, and rewrite them to provide more consumer protections, this could have the effect of doubling or tripling the revenue generated by the Usury Tax.

While legislators still need to trim fat and cut wasteful spending from the state budget there would be no need to cut to and through the bone on vital spending. We should continue to provide education opportunities. We should continue to maintain reasonable and adequate police and fire protection. We should never toss the terminally ill out on the street, and California should never be the only state in the Western world that fails to provide basic sustenance to impoverished children.

Of course it won’t be quite so easy; the banks would scream and threaten and they will sue; ultimately the banks have no moral, ethical, or legal ground to support the practice of usury. Any business model that is dependent on usury is deep flawed, just as a business model based on the exploitation of child labor is deeply flawed. The biggest obstacle to imposing a Usury Tax is not the courts, it is the intimidating power of the banks and the cowardice of elected officials to do the right thing.

The banks will say that the Usury Tax would destroy them. To paraphrase Franklin D. Roosevelt’s second inaugural address, the stress test for bank’s survival is not whether they add more to the abundance of those who have much, but whether they have willing hands of practical purpose.

The banks would probably threaten to pull out of California; this is an idle threat; the banks need California more than California needs the banks; state chartered banks could easily fill the void if the national banks dared try to threaten California.

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If the banks don’t want to pay the tax to California all they have to do is comply with the laws and Constitution of the state and stop taking advantage of its citizens. If the bankers do the right thing and comply with the California Constitution by bringing all existing debt into compliance; the newfound household income would be the largest state stimulus in history; it might be enough to save someone’s home from foreclosure; it might help thousands of households and businesses avoid bankruptcy; it might pull us out of the financial crisis that the bankers created.

A Usury Tax may be considered a “sin” tax; generally the least onerous category of taxes. Sin taxes are the least disruptive type of taxation and may even promote positive behavior. For example, a tax on cigarettes may lead some smokers to quit. The smoker/taxpayer can make a free decision to continue the behavior or not. If a smoker quits it is a benefit to society at large. If a smoker decides to smoke, the tax is not disruptive to the prosperity of the majority of citizens of California. If the bankers wish to reform - great, but if they wish to continue their sinful ways – let them be taxed.

The bankers will protest that a Usury Tax is an attempt to redistribute wealth. Of course they are only lending money that their customers deposited with them in the first place. They will accuse proponents of a Usury Tax of being socialists. While the bankers may have to forego multimillion dollar bonus packages, the truth is that they have privatized profits and socialized losses; just remember one word: bailout.

The bankers could still receive a reasonable interest of up to 10% and probably have a much greater chance of receiving full payment for their loans; predatory loans are more likely to default. The bankers could learn from Will Rogers, who said, “I am not as concerned about the return on my principal as I am the return of my principal”. We have always known that heedless self-interest was bad morals; we know now that it is bad economics. Dulled conscience, irresponsibility, corruption, and ruthless self-interest cannot be the business model for an essential segment of our society.

The most disturbing practice of the money lenders is the proliferation of “pay day” lenders, disproportionately located near military bases that prey on the true American Heroes in uniform and their families at this time of war. While our heroes sacrifice, the money lenders are acting as war profiteers.

Is there a valid reason to charge 900% APR for payday loans or 30% on credit card debt? These are rates that would make a loan shark wince. Is the only business model for the money lenders based on usury? Is this a business model we want to operate in our state?

The banks will cry that they really provide a valuable service and they give an opportunity of advancement that their customers could not otherwise have had. The usurer, like all those who appropriate the production of slaves, claims that he is a real benefit to his borrower. This is sad and familiar argument. The slave master of the Old South pointed to his well-fed, well-clothed, and happy people, merry in their cabins, and made a claim that was equally plausible; that these people are far better off and far happier than they could be in freedom. Make no mistake, debt is a burden and usury is a form of economic enslavement. There is no substitute for freedom.

Usury is so bound up with injustice that its practice cannot fail to result in increasing the severity of hard conditions. Throughout history usury has been considered odious and immoral; in ancient times usury meant an interest gained on a loan (not just excessive and unreasonable interest).

Some might argue the prohibition of usury belonged to the past and the practice of usury is all but universal in the present; they point to the expansion of commerce, travel, transportation, communication and the inventions that have brightened our civilization. Great civilizations flourished without charging any interest whatsoever and it is very possible that our advances could have been and could be even greater with recognition of the evils of usury. In the broad cloth of history, the current loophole that annuls this law is but a brief fad. Human nature, the laws of nature, the nature of money, the law of supply and demand and the equity in commercial transactions, great or small, are unchanged.

It is painfully obvious that Californians have been cheated of the lawful protections afforded in the state Constitution. Despite the seduction of greed and the lure of easy money, some truths remain self evident.

The Bible and the Koran cite numerous denunciations of usury. Multiple religions issued edicts that decreed that usury was a sin. There is no record of the repeal of any of these edicts. Jesus offered love and compassion for all manner of criminals but he resorted to violence and the whip to drive the money lenders from the temple and for them he offered no forgiveness.

Some of the greatest minds in history all denounced usury: King Solomon, David, Moses, Jeremiah, Nehemiah, Ezekiel, Luke, Matthew, John, Aristotle, Plato, Cato, Allah, Augustine, Charlemagne, Calvin, Luther, Shakespeare, Bacon, Washington, Franklin, Calhoun, Jefferson, Lincoln, McKinley, Roosevelt, and Ghandi – to name just a few. The list of those that favor usury is short and contemporary: Citigroup, Bank of America, JPMorgan Chase, and Goldman Sachs.

Jesus or JPMorgan, Aristotle or Bank of America, Ghandi or Goldman Sachs, St. John or St. Angelo Mozilo; whose side are you on?

Enacting a Usury Tax would require that California’s leaders would have to stand toe to toe against the financial lobby. Our politicians would have to do more than talk; they would have to prove they can’t be bought. The Constitution of the United States that I believe in says “We the People of the United States of America…” – NOT “We the Bankers of the United States…”

Perhaps our political leaders could find courage in the words of one of our Founding Fathers:

“I sincerely believe that banking establishments are more dangerous than standing armies. I am not among those who fear the people. They and not the rich are our dependence for continued freedom. And to preserve their independence, we must not let our leaders load us with perpetual debt.” – Thomas Jefferson

California’s response to the budget crisis has recently been called dysfunctional because Californians want to spend on worthwhile causes but they want to keep taxes low. We have been told it is impossible. Now a refusal to raise taxes is leading to drastic spending cuts. Here is the real dysfunction: if a thief breaks into your home and steals your money and your food would you look the other way? Would you tell a sick spouse that there is no money for their health care? Would you tell a famished child to sit in the corner and starve? No, never.

We can have low taxes and vital government services and protections. The time has come to chase away the thieves that have been stealing California’s prosperity and future. The time is now for the Usury Tax.

Sincerely,

Sinclair Noe

Editor,
www.bank-o-meter.com

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