Hey, who needs good credit when the state becomes your banker?

Oh dear Ben!

Hat Tip to Zero Hedge on this one.  Heck, we weren’t going to sift through 2,315 pages of American legislative sludge to find little tidbits like this.  The Dodd-Frank bill recently passed by Congress and signed in to law by King Barack is by a country mile the largest piece of financial regulation ever enacted in the US.  Like the ridiculous Health Care Bill, this one is also too long too read and contains reams and reams of government regulatory minutia that collectively amounts to a gargantuan edifice of Orwellian Leviathanism.

Mark J. Perry produces a brilliant graph over at his blog (which was also picked up by Dennis Gartman) on the enormity of this bill, which we have included below.  If it shows one thing it’s that the size of the Fed’s balance sheet looks pretty well correlated with the thickness in legislative bills.   The sheer size is ridiculous by any objective standard, and certainly makes the important bills of the past look microscopic.  What’s scary is that this is not much longer than the +-2,000 Healthcare Bill passed by Congress on Dec 24, 2009.  Welcome to the age of not big government, but enormous government.  We doubt even Orwell himself truly comprehended the sheer size and scale of the modern state and the legislative gunk it would be able to foist upon the people (As JGalt remarked to me, “boom times for lawyers!”  Too true, not to mention paper-merchants).

As the days and weeks go by we’re going to see more of what’s actually in the new financial regulation bill as diligent bloggers wade through the swamp.  We’ll happily just pick up their scraps thank you very much.  In the latest finding, Zero Hedge reports that a provision buried deep in the bill may open the way for direct state lending to the private sector.  Now, of course this was happening in effect with Fannie Mae and Freddie Mac as the Federal government tried to push low interest rate loans to the people in a bit to find a shortcut to the American dream, which the dummies haven’t realised doesn’t exist.

Now it seems they’re looking to take this further by extending payday loans to households.  A payday loan is pretty well established in the US and is starting to gain a higher profile here in South Africa.  The concept is simple.  Essentially you take out a payday loan by borrowing a sum of money against your paycheck to receive an advance ahead of payday to meet household cashflow needs.  These are ultra-short term loans and interest rates tend to be very high to compensate for the lack of collateral and credit risk of the average payday loan borrower.

People who require payday loans have either managed their finances poorly, or are not able to access traditional lines of credit via normal banking channels when an unexpected crisis hits and cashflows are tight (hence the value of building up savings, but that is a rant for another day).  Despite the state’s best efforts to clamp down on such ‘predatory lending’ practices, there is a market for payday loans as willing lenders and willing borrowers come together.

Of course, in a time of bad credit, there is an increasing reluctance in the market to make these loans and lenders face higher risks of default.  This, as you would expect, drives up interest rates to almost totally prohibitive levels, despite uncle Ben assuring us interest rates are near-zero%.  Not to worry though, Uncle Sam will get the credit juice flowing…

From Zero Hedge:

Deep in the bowels of Donk (DOdd-fraNK Financial abomination bill, whose 2315 pages nobody has read in their entirety), in Title XII: IMPROVING ACCESS TO MAINSTREAM FINANCIAL INSTITUTIONS, section 1205 is a provision titled “Low-cost alternatives to payday loans” in which the government outlines its plans for establishing what is essentially a payday loan advance business (and even odder, the title of Sec. 1205 in the Index references “payday” loans while the actual title of the section is “small dollar” loans – was mere “payday loans” too narrow a definition for the government and got changed in drafting, with the index remaining unchanged?)

In Section 1205, LOW-COST ALTERNATIVES TO SMALL DOLLAR LOANS we read: 

(a) GRANTS AUTHORIZED.—The Secretary is authorized to establish multiyear demonstration programs by means of grants, cooperative agreements, financial agency agreements, and similar contracts or undertakings, with eligible entities to provide low-cost, small loans to consumers that will provide alternatives to more costly small dollar loans.

(b) TERMS AND CONDITIONS.—19 (1) IN GENERAL.—Loans under this section shall be made on terms and conditions, and pursuant to lending practices, that are reasonable for consumers.

Does this mean the government is going into the business of direct lending and bypassing the stingy banks completely? As payday loans tend to be the most usurious of all short-term credit instruments for the lower classes, will the government’s intervention into this most recent arena result in the obliteration of the existing business model for payday lenders? But far more importantly, will the government use this platform as a means to provide cash to virtually anyone in exchange for shoddy collateral and mere promises to repay the loan? And nowhere in the text is it said the loans are  even collateralized with something like a deferred paycheck: these loans could very easily be on par or even worse than NINJA loans, in which the ability to breathe and walk at the same time is sufficient for eligibility, while the ability to actually repay never even figures in the loan officer’s mind?

And lastly, what will be the penalties for delinquency and/or charge offs? Since this will come straight from the government’s balance sheet (i.e. the Treasury), without bank intermediation, this will be the perfect forum for the government to lend out at any terms it desires, with the implicit understanding that it has no interest in getting paid back.

Is Ben loading up the chopper for one more flight in which he will start handing out non-recourse, no-collateral, no interest rate loans to all of America in one final, valiant attempt to reflate the economy?

For those a bit confused on the final reference there to Ben and his helicopter, that would be Federal Reserve Chairman Ben Bernanke and his acclaimed ability to bestow printed dollars on the hopeless peasantry from aloft in his helicopter (Ben Bernanke’s claim, not ours).

This small provision could open a legislative hatch for Ben and Timmy and Good King Barack to basically give newly printed cash, created out of thin air, directly to Joe Sixpack, requiring a pulse as collateral.  Hey, why worry about economic scarcity when you can just abolish it with a crafty piece of lawmaking and a willing accomplice in the Federal Reserve?  It failed when Freddie Mac and Fannie Mae did it for the housing market, so why not give it another go to see how badly history will record these times and the men and women that perpetrated such insanities.

Even more disturbing is that this little legislative paragraph is likely one of thousands buried in a wad of pages written in legislative language that most lawyers would squint at, let alone the average dude on the street, or, below that, your average Washington lawmaker.

The Dodd-Frank Bill is being passed off as a protection of the poor, helpless public from the nasty, wily foxes on Wall St.  Instead it may come to be known as one of the seminal documents that paved the road to serfdom.

UPDATE: Thomas J. DiLorenzo has a very entertaining and illuminating article over at Mises.org on the rapid and insatiable growth of US government.  Well worth a read.  Government growing this large this rapidly never ends well.