Banks have a dangerous degree of power over the interest rate

Interest rates are designed to incentivize banks to lend money to broader society. Consequently, it is crucial that banks are allowed some leeway when setting interest rates for personal loans, so that they may generate some profit. Thus banks allow saved funds to 'flow' through the economy, generating money. This vital function is, however, only fulfilled if the interest rate makes the act of borrowing, and not only lending, a sensible and safe option. The interest rate is a recognition of the risk that the bank takes in (temporarily) parting with its wealth, particularly in light of inflation. The borrower gets some spare cash for immediate personal use, and the lender makes a medium- or long-term profit on their lending. All seems good, right? Well no, not necessarily, and most certainly not in the current economic climate. The problem is that banks have dangerous amounts of power. If a lender, or potential lender, is desperate for cash, then banks can hike the interest rate charged on a loan, given their monopoly on bargaining power in such a situation, and the lack of competition in most banking sectors [[http://www.bankingtimes.co.uk/26082009-personal-loan-margins-increase-tenfold/]]. Crucially, it must be remembered that banks are not an homogeneous entity, but a collection of self-interested bankers who make personal profit from giving out high-risk high-interest rate loans. Invariably it is the poor, or working class slightly above them, who bear the brunt of such an unregulated lending policy, and who are manipulated by self-serving bankers [[http://www.glitec.co.uk/2008/03/interest-rates-on-personal-loans-continue-to-rise/]] [[http://www.glitec.co.uk/2009/04/rates-on-personal-loans-continue-to-increase/]]. Why? The poor represent a 'demonstrable' risk to banks - there is less guarantee that a poor or working class person will repay a loan than a wealthier person. More specifically, the bank has a better shot at legally obtaining outstanding debt from a rich person with assets that could be attached via a court order... than being able to recoup its outstanding debt from a poorer client who has fewer assets. Poorer people also generally have less legal accountability (because they cannot afford to hire lawyers) and thus are seen as easy targets for high return interest rates. Of course, there can also be high risk present in lending to the rich: the not-so-frugal lifestyle, and business habits, of the rich make even their capacity to otherwise honour a loan, uncertain. It seem, on the face of it, that banks have a plausible right to compensate for this risk by charging risky clients high interest rates. While this may be somewhat intuitively fair, three losers will still result from unserviceable and unserviced debts: banks, clients & society. Banks who cannot make the full return on their loans, courtesy of bankrupt clients, thereby suffer direct economic loss. High interest rates come home to roost. It is not so much the individual banker who loses, but the entire collective. Clients whose assets are attached suffer direct material, and often concomitant emotional and social, setback. They also get bad credit records that hamper future ability to obtain credit - impacting future financial health, in addition to immediate loss. Over the last few months many thousands of Americans lost their homes because they were bought on unserviceable loans, incurring huge personal loss and emotional trauma. Society, collectively, suffers: unprofitable banks collapse, driving down credit liquidity (precisely what interest rates are meant to preserve!). Lehman Brothers, Northern Rock, and a number of other American and European banks are now literally history, not least because unserviceable loans were granted. The collapsed, or even partially collapesed, banking systems have resulted in a global recession with grave negative social impact everywhere: job losses, decreases in govt coffers for socioeconomic projects, etc. So, unregulated lending rates need to end, and we propose that a 20 per cent cap is an excellent measure. This is, as we said, not the SOLE worry when we think of the current recession. But, as Tesco's motto goes, 'Every little helps'.