The 2022 passage of House Bill 132, which set a stringent cap of 36% on interest rates for consumer loans, is having its intended and significant repercussions on New Mexico’s financial landscape.

This was no accident: by restricting the interest rates that small-dollar lenders can charge, the rate cap effectively marginalized an entire segment of the credit market. This legislative action created an artificial crisis in the form of a credit shortage, particularly for high-risk borrowers. Now, this manufactured scarcity is being used to justify the establishment of a public bank as proposed by Representative Patricia Roybal Caballero’s House Bill 125: she’s beyond the pale.

House Bill 132 capped interest rates at 36%, making it economically unviable for small-dollar lenders to operate, leading to their gradual exit from the market. These lenders, often criticized, actually played a crucial role in providing credit to high-risk borrowers who do not have access to traditional banking services. By eliminating these lenders, the bill removed a critical financial lifeline for a segment of the population.

With the exit of these small-dollar lenders, a significant void in credit availability emerged. This vacuum is particularly acute for high-risk borrowers who, due to their credit history or lack of collateral, are unable to secure loans from traditional banks. The consequence has been a credit shortage, leaving many without access to essential funds for emergencies or personal financial management.

The credit shortage is now being leveraged to advocate for the establishment of the Public Bank of New Mexico, as proposed in House Bill 125. Proponents argue that a public bank would fill the gap left by small-dollar lenders, offering credit to those underserved by the traditional banking sector. However, this approach overlooks the fact that the gap was artificially created by regulatory intervention, not by market failure.

New Mexico’s banking sector, already robust in its diversity, is vital for the state’s economic growth. Introducing a state-run entity threatens to disrupt this sensitive competitive balance. It could lead to unfair advantages, given the backing of state resources, and possibly crowd out smaller, community-based financial institutions that have long been the backbone of our local economies.

If New Mexico’s public schools are any indication of future success, a bigger government approach is the wrong direction. Taking pride in some of the worst-performing government schools in the country, is New Mexico prepared to boast the worst public bank in the country?

Government institutions are subject to political pressures and inefficiencies. A government-operated financial institution is no different. There is a risk that the bank may not operate on the sound financial principles that guide private banks but may instead become an instrument for political ends. This could lead to riskier lending practices prompted by a public bank being forced to lend to all borrowers regardless of risk, misallocating resources, and ultimately, financial instability.

Establishing a public bank in response to the artificial crisis created by regulation risks further distortion of the credit market. It sets a precedent where government intervention, rather than market dynamics, becomes the primary driver in determining credit availability. Such an approach will stifle competition, innovation, and efficiency in the financial sector.

The scenario unfolding in New Mexico presents a cautionary tale about the consequences of excessive regulation and the dangers of government overreach into financial markets. House Bill 132’s interest rate cap has significantly reduced credit availability. The proposed response does not address the root cause of the issue and instead introduces a new set of risks associated with government-run banking, creating more government dependence in a state already heavily dependent on government assistance.

A more prudent approach would be to reassess and recalibrate existing regulations and to stop Big Brother from meddling in the marketplace.

Originally published at January 21, 2024.

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