Tim Madden is an economist with expertise on credit and banking. Tim and I are colleagues in lobbying government for public banking, with concentration in the US for state-owned banks (and here). The structural solutions to our economic controlled demolition are obvious and simple; and explained beautifully by many of America’s brightest historical minds.
This is part 1 of 3.
How can something as manifestly important as a certain way that financial institutions calculate the amount of interest due from borrowers be recognized and prohibited as criminal fraud in the U.K., while concurrently being required by law in the U.S. under consumer protection legislation?
How can 24% per annum be “equal to” 0.058952% per day on a U.K. credit card, but 0.065753% per day in the U.S. and Canada? The difference since 1974 when the U.S./Canadian method was criminalized in the U.K. now accounts for an amount greater than all outstanding consumer debt in the U.S. and Canada.
Is there any more important determinant of quality of life for a typical human than the broadly-defined concept of interest? It pervades and saturates the price of everything. In the past fifty years alone, in many areas it has quietly caused the average price of a home to increase from about four years average annual wage, to more than ten years average annual wage.
And the velocity of interest is enormous. Vast sums can turn on fractions of a percent changes in the rate. That is why the base unit of measurement in the finance business is the basis point or 1/100 of 1%.
Assume that you have a billion dollars to lend to facilitate the daily purchase of stocks on Wall Street and that you charge 1/8 of 1%. Settlement occurs upon closing of the market so you are limited to one cycle/trade per day (although, again, you are not speculating in the price of stocks but advancing credit to others who are). Your gross return for the year is 37% or $370 million. But that is only in this time zone. You can perform the same function in Hong Kong after the closing bell and settlement in New York, and then again in London following closure and settlement in Hong Kong. Now your gross annual return is 155% or $1,550 millions on $1,000 millions of initial capital, plus you still have your initial capital. Pretty sweet. Also note that tripling the number of daily iterations from 1 to 3 causes much more that a three-fold increase in the annual yield from 37% to 155%.
And that is based on just 250 trading days per year. If you can perform the same function for a 1/8th of 1% gain per iteration three times per 24 hour cycle somewhere in the world, then your gross annual return goes to 293% or a $2.93 billion gross gain or profit per year per $1 billion.
Now shift your frame of reference to a typical payday loan. The most common example given in the mainstream media involves the giving of a post-dated cheque (check) for $400, payable in two weeks time (14 days), for a net cash advance of $300 today. According to a story on the CBC (Canadian Broadcasting Corporation) website, for example:
How much do payday loans cost?
They are the most expensive legal way to borrow money.
Typically, you can expect to pay up to $100 in interest and fees for a $300 payday loan. The Financial Consumer Agency of Canada says that amounts to an effective annual interest rate of 435 per cent on a 14-day loan.
The mainstream media generally report the same example transaction to the public as carrying an effective annual interest rate of from about 400% to 850%, while also implying that determination of the rate is a kind of black art that can give different results at different times. One article went as low as 180% per annum. Nobody appears to have complained or even mentioned it.
At the same time, a careful examination of dozens of mainstream articles purporting to explain the many class-action lawsuits that have been initiated against payday loan companies across North America, reveals many that are simply dripping with mens rea or guilty conscience (guilty mind) in their use of evasive language.
The cause of the system’s guilty conscience is that the interest rate defined by that transaction, as a matter of cold, hard, verifiable fact, is just over 180,000% per annum. It is a fairly simple calculation and easily verifiable.
So what is it about the mind that allows us to function in a world where there is no more real determinant of our quality of life than interest generally, where vast fortunes turn on small changes in rates, but where a typical observer/player cannot tell, from the three simple and given elements of the loan transaction just described, that the annual interest rate is about 180,000% and not 180% - a thousand-to-one difference in magnitude? It is precisely analogous (height-wise) to not being able to tell the difference between a child’s doll house and the Empire State Building!
The concurrent paradox is as to how the bogus “nominal” interest calculation methodology that is prohibited and criminalized in the U.K. under the Consumer Credit Act of 1974 (and multiple U.K. Criminal Code statutes), is actually required by law in the U.S. under the federal 1968 Consumer Protection Act (Regulation Z). Under the nominal method the same transaction is said to carry an annual interest rate of 869% (where the Financial Consumer Agency of Canada came up with 435% is anyone’s guess). The relevant dictionary definition of “nominal” is “existing in name only, not real or actual”.
If all consumer debt in the U.S. were recalculated (since criminalization of the U.S. method by the U.K. in 1974), using the same cash flows, but so that the lender receives interest amounts equal to the annual rate disclosed/agreed to, instead of the larger amounts determined by the recognized fraudulent formula, with the balance of any given payment applied to principal reduction for the next month, then there would today be no consumer debt in the U.S. - it is that significant a difference.
Consider that you have just signed the following mortgage contract:
Mortgage Principal: $100,000
Annual Interest Rate: 15%
Monthly Payment: $1,264.44
If you signed in the U.K., then you agreed to pay the lender a total of $283,293 for a $100,000 loan. If you signed the same document at a U.S. bank, then you agreed to pay the lender $455,198 for a $100,000 loan. One is 93% more expensive than the other. The issue is no more or less than that.
Nominal Method error is exponential or geometric
In the U.S., Visa banks, for example, that charge 2% per month on outstanding balances, declare that the annual rate is 24%. Such is illegal (criminal) in the U.K. where all lenders must declare 26.82% per annum as the true annual rate to 2% per month. At this level the 2.82 percentage point difference accounts for 10.5% of Visa’s gross interest revenue in the U.S. (on any given day). After thirty years the interest overcharge compounded carry-forward is vastly greater than the debt itself. Also it is not merely a matter of disclosure because the annual rate is the rate the borrower understands and expressly contracts to. So it is more correct to say that in the U.K., based on a disclosed/declared 24% per annum, a lender may assess no more than 1.808% per month, the mathematical equivalent to 24% per annum. At this level the error, again at 2.82 percentage points on a stated 24%, is over 20 times the maximum legal variance of 1/8 of 1% for disclosure accuracy. Above about 5% per annum the math error is above 1/8 of 1% per annum and would otherwise be illegal on that basis alone.
Either way, the nature of the discrepancy is geometric
with respect to the represented annual rate. At 1% per annum the difference is tiny, but at a stated annual rate of 20% it is 20 x 20 = 400 times greater, per se
. At a stated 30% it is 900 times greater, per se
. At a stated annual rate of approximately 15%, general use of the fraudulent methodology exactly doubles the amount of interest assessed/received by all financial institutions
, measured at the end of a twenty-five year period
Part 2: Calculated to deceive, tomorrow.
(=(((1+($100/$300))^(365/14))-1)) = 1807.5417 = 180,754.17%) (^ means “raise to the power of”))
 The conventional power-of-two exponentiality occurs in this respect based on “calculating semi-annually”. “Calculating monthly” results in a somewhat greater relative error (about 10% per se, or 440 times greater at a stated 20% v 1% “calculated monthly” but only 400 times greater at 20% per annum “calculated semi-annually” versus 1% per annum “calculated semi-annually).
, Politics america
, consumer protection legislation
, controlled demolition
, criminal fraud
, gross return
, Hong Kong
, New York
, North America
, structural solutions
, Tim Madden
, typical human
, unit of measurement
, wall street