Bernie Sanders versus Interest Rates

The amount of sheer economic ignorance coming from Bernie Sanders on the campaign trail is staggering. In a blind seething rage against business, big business, oil, Wall Street, banks, and corporations, Sanders fails to demonstrate even a tenuous grasp on basic economics. Recently, he (or whichever staffer runs his Twitter) spoke out against high interest rates, calling them "usury".

Usury was once defined to be loans with any level of interest, and was nearly universally condemned for much of human history. Today, most accept the necessity of interest, and understand its benefits. Some, like Bernie Sanders, still condemn a modern usury, any loan with an arbitrarily "excessive" rate of interest.

The economic reasons for lending at interest are simple. In the market for loanable funds, there are two key groups. The first group, savers, are those who willingly forgo immediate consumption in order to save for the future. From the largest venture capitalists to a student with a savings account, these are all savers. From their perspective, the interest rate is the reward they get by delaying consumption.

The second group, borrowers, want to access these savings for a variety of purposes, usually investment. Sanders is specifically referring to consumer loans rather than investment. A consumer loan is one made to a consumer for immediate consumption spending. "Payday lenders" offer short-term loans to consumers. From the perspective of borrowers, the interest rate is the cost of immediate consumption versus waiting.

The interest rate varies depending on many factors, one of which is risk. For short-term consumer loans, there is sometimes a high degree of risk. Namely, the risk that the consumer will be unable to pay back the loan (and default). Since payday loans, and other consumer loans, have a substantially higher risk than other loans, it makes sense for there to be a higher interest rate.

Sanders is clearly trying to tap into a populist,  anti-business, and anti-bank sentiment in order to drum up more support. Were he to succeed, and interest rates were capped at 15%, those he's trying to protect would lose out. People take payday loans, at the "usury" rates, because they see it was the best option available to them. When the alternative is losing your car or your house, some are willing to take out a payday loan. The highest interest rates are to consumers with the highest risk, either because of previous default or a particularly desperate situation.

If interest rates on consumer loans were capped, many of these lenders would no longer find it viable to lend to those who most desperately need it. The risk would be too high without a higher interest rate. Bernie Sanders, in his crusade against banks and business, is actually harming the people he's trying to help.