Alaska’s latest attempt to cap loan interest rates could backfire catastrophically, sending desperate borrowers straight into the arms of loan sharks while politicians pat themselves on the back.
At a Glance
- Alaska’s state legislature is considering a bill to cap annual percentage rates on loans under $25,000 at 36 percent
- The Supreme Court’s refusal to review Madden v. Midland Funding created legal uncertainty that threatens consumer credit availability
- Historically, strict usury laws that aim to protect consumers often backfire by eliminating legitimate lending options
- Even Robert F. Kennedy warned in 1964 that interest rate ceilings could lead to lack of available funds for those most in need
- This regulatory overreach represents a broader trend of government intrusion into financial markets that hurts the very people it claims to help
Another Day, Another Government “Solution” to Non-Existent Problems
The Alaska state legislature is charging full speed ahead with yet another misguided attempt to “protect” citizens from themselves. Their brilliant plan? Cap annual percentage rates on loans under $25,000 at 36 percent. On the surface, this sounds reasonable to the economically illiterate crowd – “130% interest rates? How horrible!” But as usual, the unintended consequences of government meddling will harm the very people these well-meaning but clueless legislators claim to protect.
Payday loans often carry higher rates because they serve borrowers with limited options facing emergency situations. A $1,000 loan with an APR of 130.35 percent might sound outrageous until you’re the one who needs emergency cash to fix your car so you can keep your job.
The historical evidence is crystal clear for anyone who bothers to look. When governments cap interest rates, legitimate lenders simply stop offering services to higher-risk borrowers. These aren’t evil corporations twirling their mustaches – they’re businesses that can’t operate at a loss. When legitimate options disappear, desperate people don’t magically need less money. They turn to illegal loan sharks who don’t worry about things like “regulations” or “kneecaps.” Even the Cato Institute – which legislators might want to consult before making laws about things they don’t understand – has repeatedly highlighted how such regulations harm those they claim to help.
When Even a Kennedy Got It Right
Here’s a shocking revelation: even Robert F. Kennedy, hardly a champion of free-market economics, recognized this reality. Back in 1964, RFK noted that low interest rate ceilings could lead to a complete lack of available funds for those in desperate need. When a Kennedy has a better grasp of economics than today’s legislators, we’re in serious trouble. The Alaska bill represents a dangerous pattern we’re seeing nationwide – when federal initiatives fail due to that pesky thing called “economic reality,” states and localities step in with their own half-baked solutions, creating a patchwork of conflicting regulations that make compliance nearly impossible for lenders.
The Madden Muddle: How the Courts Made Things Worse
The legal landscape became even more twisted when the Supreme Court refused to review the Second Circuit’s misguided ruling in Madden v. Midland Funding. This decision upended nearly a century of established precedent on federal preemption under the National Banking Act. The Second Circuit essentially ruled that federal preemption of state usury laws doesn’t extend to certain entities holding debt originated by national banks. This isn’t just legal mumbo-jumbo – it has real-world consequences. It increases the cost of consumer credit and reduces availability, particularly for high-risk borrowers who already have limited options.
The ruling undermines secondary credit markets by creating price confusion and complicating securitizations of debt. What does this mean in plain English? Banks can’t sell their loans as easily, which means they can’t make as many new loans. The result? Less credit available for everyday Americans. This is particularly damaging to the emerging peer-to-peer lending market, which offered a promising alternative to traditional bank loans. Legal uncertainty is the enemy of financial innovation, and the Madden ruling created uncertainty in spades.
The Road to Financial Hell is Paved with Good Intentions
The Alaska legislature’s attempt to impose a 36% interest rate cap is the perfect example of how government “solutions” create more problems than they solve. These legislators, comfortable in their middle-class lives with ready access to mainstream credit, have no idea what it’s like to need emergency cash when traditional banks won’t give you the time of day. Someone who needs a short-term loan to cover emergency car repairs so they can keep their job doesn’t care about APR calculations – they care about having the money they need right now. When government shuts down these options, they’re not protecting consumers – they’re condemning them to worse alternatives.
The National Banking Act was designed to create a stable, federalized banking system and preempt the chaos of conflicting state usury laws. Now we’re seeing a return to the regulatory dark ages, with each state imposing its own arbitrary rules. The result will be exactly what it’s been every other time this has been tried: reduced credit availability, higher costs for those who can least afford it, and the growth of unregulated, illegal lending. Congratulations, Alaska legislators – you’re about to make loan sharks great again while patting yourselves on the back for your compassion.
