Although we're in a period of historically low interest rates, credit cards and some other consumer-driven interest rates remain quite high. Some Federal Reserve data via Felix Salmon shows quite clearly. Are banks merely gouging consumers or is there some other explanation?

Here's that chart:

salmon rates chart 2010-09.png

Salmon was tipped off on this data by Joe Toms, who is affiliated with the Lending Club. Toms says:

Consumer credit has been the one area that has dropped the least. Said in a nice way, this points to the structural inefficiency. A more blunt assessment is that banks have been taking advantage of consumers.

Is that really the whole story? If nothing had changed much with the economy since 1981, then it would be hard to argue otherwise. But there have been very significant changes.

First, let's look at each of these bars. The first three all have something in common: essentially they're guaranteed by the government. So this new interest rates shown don't include a much of a default premium. The next two columns are corporate bonds. Although some companies have struggled during the recession, in general most of those with good credit ratings have hung in there, with only a select few defaulting on their debt. So it makes sense that the default premium on these hasn't changed much.

But then there's consumer credit. Why hasn't this declined? I would cite two major reasons.

First, the current recession was specifically caused by consumers defaulting on loans at historically high rates due to easy credit offered to a very broad a population. That wasn't the case in 1981, when a far smaller group of Americans qualified for consumer credit products. Fed data shows, since 1981, per capita revolving debt has increased from $242 to $2,700, 11x as much. In response to the crisis, the market decided that the default risk premium that accompanied this broader credit wasn't high enough. So the default risk premium rose. If you've got scared banks giving credit to a group including much riskier borrowers, of course rates will be higher.

Second, regulation has ramped up -- particularly for credit cards, which are responsible for the highest rates within consumer credit. One way banks justified expanding credit to a larger portion of the population was through more fees and penalties. Since recent regulation now prevents banks from relying on as many fees, they have to rely more heavily on interest rate charges. Put another way, some fees that kept rates relatively flat in the past when they should have risen are gone, so now rates must rise.

That second reason might not be as legitimate in the eyes of consumer advocates. After all, their complaint is that banks were making too much money through these fees. That may or may not be true -- we can't really determine that from this chart. To know if banks have increased their profit margin on consumer lending, we would need to know what that profit margin was in 1981 versus 2010.

It's likely those profit margins have risen, but by how much is unclear. It certainly isn't by as much as the chart above suggests, since higher rates are replacing some of the fee income they used to rely on and consumer risk profiles have changed a great deal in three decades.

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