A 20 per cent cap is precisely what is required

We see a contradiction in the government’s line of thought. They claim that the policy shall reduce incentives for excessively risky lending to take place and yet the policy they propose is capping the interest rate, which does not deal with the source of the problem. If excessive (unjustifiably high) risk is taken, it comes primarily from incorrect risk assessment models. If the model is wrong, then at ANY risk level the results are incorrect and therefore pricing of any risky contract is incorrect. Take the Long Term Capital Management [[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=169449]] funds or the infamous credit default swaps – they were mispriced because the formulas did not incorporate the factor of “things getting way worse”. If excessive risk problem exists, capping is not the way to reduce this problem. The cap may reduce the number of “bad” high interest loans, but the very fact that those “bad” loans are made possible would point to deficiencies in the system and would require other policy measures. The government also draws a bright picture: in their happy low-interest-kingdom people will pay less interest on their loans and therefore will be better off. Just like in the Soviet Union, where prices were artificially low, but there was deficit for most things. In reality, most people would be prevented from getting the loans in the first place. Government fails to understand that loans for different people, as well as different maturity, are different goods. A $2k one-year personal loan cost less for a lawyer for an unemployed bachelor, because their ability to repay differs substantially. The proposed policy would just remove risky personal loans from the market and thus effectively deprive the bachelor from taking the loan. We believe that it is the person who should assess her willingness to pay for a debt, not the government. We agree that debt spirals are not the most pleasant thing to be in, but more importantly we acknowledge that individual should be able to make a free choice of taking such a risk unless she harms someone else. For instance, we do allow people to gamble in casinos although it also poses potential harms to them. Also, the government is confused about the effect of interest rates for the economy. High interest rate is exactly the factor that prevents people from lavish spending, because they impose tangible costs. On contrary, lending at low interest rate (what government is exactly promoting) is what actually encourages people to live on credit, spend more; just because they know that it's so easily accessible. As mentioned before, economic bubbles are exactly caused by abundant bank lending and lax monetary policies of governments. An example of sub-prime mortgage crisis: People took such loans because they offered low interest rates in the beginning (two-three years). Afterwards, such loans could be refinanced with yet other ones that again offered low interest rates at the beginning of repayment period. If there was no scheme that allowed offering low interest rates to people, no sub-prime lending would have taken place. Although the cap per se does not promote more borrowing (this is proven in our first substantive argument), the government is completely mistaken that it will allow people to borrow more cheaply. Lastly, here we also agree with the govt on some points! Yes, banks could stay afloat with the cap. Yes, society benefits from careful investment – this is true by definition. However, how the plan will increase the investment levels remains unknown.