Friday, September 25, 2009

Politicians shocked! Price controls produce the same result as always. 

This time, with credit cards. Your credit card.

Earlier this year Congress enacted new restrictions on credit card issuers' ability to raise borrowers' interest rates, banned several common credit card fees, and prohibited issuers from using some common credit-rating practices when determining borrowers' credit ratings for the purpose of setting their interest rates. (Details)

After passing the new law by an overwhelming vote, it hailed its achievement as a great bipartisan act of consumer protection.*

But now Reps. Barney Frank and Carolyn Maloney, the prime political movers behind the new restrictions, are shocked and appalled to find that credit card issuers are raising interest rates before the effective date of the new law, as per their press release ...
Pew Charitable Trust reports that interest rates have spiked by an average of 20% on credit cards representing more than 91% of the $864 billion in outstanding credit card balances. It’s clear that credit card companies are taking advantage of this period between the signing of my bill and the current effective date,” Rep. Maloney said. “The breadth and depth of the rate hikes happening now point to the need for faster consumer protections. Americans need relief now.”
So they've just introduced new law to move up their prior new law's effective dates from next year to December 1, 2009.

Wow, that's quite a rate hike: an average of 20% on 91% of all credit card balances.

But, one wonders ... what did they expect?

When the government curtails the ability of employers to fire employees by imposing "job protections", it increases the cost to employers of hiring employees (by reducing their ability to get rid of bad and/or unneeded ones), so they employ fewer. Does anyone think we lack data on this? (See: Western Europe.)

When landlords are denied the ability to raise rents and not renew leases by rent controls and regulations, the cost to landlords of renting goes up. So rental apartments go off the market (to become co-ops or go into the owner's personal use, if not be abandoned) and market rents for the remaining available apartments increase. Economic common sense and overwhelming empirical data agree! (See: New York City).

Now, when politicians restrict the ability of credit card companies to change their rates flexibly up as well as down -- and ban a host of fees they charge -- what do we expect will happen?

Maybe ... the cost to lenders of issuing unsecured credit will go up ... so credit card rates will go up, and cards will become less freely available than before?

This is a surprise?

The credit card industry is very competitive -- extremely so in fact. If I want to find the best offer for a new credit card I can go to,, or a whole bunch of other web sites and see competing offers for a zillion of them lined up right in front of me to compare.

Has there been any serious analysis indicating to the contrary about the industry: that market concentration, anti-competitive cartels or the like, exist in it? So issuers reap monopoly excess profits? If so, I've missed it.

If not, then the competitive-level income lost to the industry by legislators banning given fees and rates and risk-evaluation practices must be recouped by the industry in other ways -- by raising basic "initial offer" interest rates and other unregulated fees, and giving out fewer cards to those with the greatest credit risk. Virtually QED.

Price controls reduce supply and thus increase the market price of the supply that remains. How about that?!

Yet it always comes as shocking surprise to politicians how price controls always work out exactly the same way as they have always worked out before.

If your credit card is among the 91% that have had an average 20% rate increase applied, perhaps you'll want to make a call or send a note of appreciation to Barney and/or to Carolyn, saying "thanks!".

* There's an old saying in Washington that there's a stupid party and an evil party, and that once in a while they set aside their differences to act together in a bipartisan manner that is both stupid and evil.

[HT re. the press release to