What “vibes” predict about the future of financial sector policy
And which vibes will prevail after the federal election
Canadian politics is fraught with uncertainty right now, but the “vibes” that shape our politics are giving us clues about where things are going. And the clues are everywhere because the vibes are transcending both political parties and geographies.
That’s why I wondered whether the following was populism or paternalism: Democratic congresswoman Alexandria Ocasio-Cortez recently teamed up with her Republican counterpart, Anna Paulina Luna, to deliver a promise president Donald Trump made on the campaign trail last year. The millennial congresswomen introduced a bill that would put a 10-percent cap on credit card interest rates by amending the Truth in Lending Act, an American law that requires lenders to disclose the terms and conditions of consumer loans. Last month, after a similar bill was introduced by senators Bernie Sanders and Josh Hawley, American banks warned of the unintended consequences: less credit, pushing desperate consumers toward unsavoury sources thereof, such as pawnshops and payday lenders.
What we’re seeing is neither populism—appeals to the public’s frustration with profiteering elites—nor paternalism—protecting people from themselves.
What we’re seeing is a fusion of the two. American lawmakers were flattering populist prejudices when they highlighted the profits of credit card network CEOs, even though it’s banks, not the credit card networks, that lend and collect interest. But lawmakers were also being paternalistic. If requiring lenders to disclose the terms and conditions of a loan isn’t enough, then it must be that borrowers are unable to rationally process information and make optimal decisions—and so it must be that lawmakers need to come to the rescue with caps on interest rates because they ostensibly know better.
The fusion has been forged in Canada
Financial sector policy here is already paternalistic, and for mostly good reason. As Dan Ciuriak once wrote, it is an “impossibility for depositors to judge the soundness of a bank from the quality of the marble in its foyers or the implications of the footnotes in its annual reports.” Asymmetric information, exploitable by banks at the expense of their customers, doesn’t just compromise the soundness of the financial system. It also compromises the customers themselves, which is why the Financial Consumer Agency of Canada, our financial consumer protection watchdog, has been sharpening its teeth over the years.
When the Liberal government announced its “crackdown” on “predatory” lending, it was populism fusing with paternalism. To protect Canadians from themselves, the Liberals were picking a public fight with lenders. They reduced the criminal rate of interest—the most a lender can charge without running afoul of the Criminal Code—from an annual percentage rate of 48 to 35 percent. Many lenders erupted in opposition, arguing that risky borrowers were just going to be squeezed out of the legal credit market, while consumer groups cheered. Lenders were aware of the vibes they were up against, which is probably why their trade association refused to appear before a parliamentary committee to defend them.
The Conservatives could have criticized the Liberals when the new interest rate was being studied by the House of Commons finance committee, but they didn’t. With a lower criminal rate of interest, according to the government’s own estimates, there would be 93,000 fewer loans made available to Canadians in the first year after the new rate cap was implemented. Here is what the government said:
The resulting reduction in loans will have a variety of outcomes. As mentioned, for some this will be beneficial. However, for others a lowered supply of loans could result in additional costs such as incurring consequences for late payments on other financial obligations such as utilities. If the late payment results in disconnection of service, reconnection charges could be significant. This could also result in additional non-sufficient funds fees from banks. In extreme cases borrowers may seek out black-market lenders (loan sharks). Loan sharks charge rates above criminal limits and may use threats and/or violence to encourage repayment.
Though Conservatives understood the unintended consequences—one Conservative MP on the committee even invoked the name of Milton Friedman—they went with the vibes. One Conservative MP said the lacklustre economy “is no doubt motivating individuals, or maybe ‘forcing’ is the right word, to take on ‘unfair’ credit.”
The Conservatives were flattering our populist prejudices by choosing not to side with lenders. But they were also flattering our paternalistic ones, being careful not to dispute the premise that desperate Canadians are making poor choices.
These same vibes were on display when another one of our parliamentary committees decided to study credit cards last year. MPs from different parties were saying the same thing. One Conservative MP called the interest rates on credit cards “usury,” equating the conduct of banks to “preying on the most vulnerable people, who get trapped in a loop.” A little later, an NDP MP said the interest rates on credit cards would “make Tony Soprano blush,” before calling the upselling tactics of banks “predatory towards working class people.”
Populism, paternalism, or both?
Exactly how financial sector public policy will evolve over the next few years is uncertain. Mark Carney, the new Liberal leader and “caretaker” prime minister of Canada, is expected to call an election sooner rather than later to capitalize on the halo effect his leadership has had on the Liberal party. The outcome of the election will say a lot about which vibes will prevail and which vibes will not, but no outcome is guaranteed. Based on the latest polling and projections, from 338Canada to CBC Poll Tracker, it’s most likely that the Conservatives will win the most seats with the Liberals trailing behind them (a Liberal majority is possible yet unlikely). However, there are different permutations of this outcome. We could end up with a Conservative majority government. Or we could get a minority government, built on an alliance between the Conservatives or Liberals and the other parties.
While a Poilievre-led Conservative government may be more populist, and a Carney-led Liberal government more paternalist, a Conservative- or Liberal-led minority government will feel the pressure to be both. For a fusion between populism and paternalism to work, they don’t need to sincerely believe in the merits of both. They just need to believe in the merit of one, and see merit in laundering their populism into the other’s paternalism, or vice versa, out of necessity to keep a minority government in power.
If I were a big bank, a payment network, or a financial technology company, I’d be a little worried. I’d worry about caps on credit card interest rates in my future. Or regulation to lower payment processing fees for merchants. Or the use of the Competition Bureau to coerce concessions from providers of financial sector infrastructure. I would even worry about crackdowns on surveillance of consumer behaviour by financial technology companies, or on financial technology companies that make day trading too easy.
And if I listened to Conservative leader Pierre Poilievre when he told me to fire my lobbyist, I would beware the vibes and consider hiring them again.