You thought today’s consumer news was bad? Just wait.
Senator Chris Dodd, who has suffered from the impression that he is too close to the banking industry, has proposed an incredibly stupid immediate rate freeze on credit cards.
Tom Brown at Bankingstocks.com explains why this is so stupid.
If Dodd were to get his wish, the first result would be to severely restrict the flow of consumer credit, which is precisely what the economy does not need at this point in the cycle.
Here’s a basic truth in banking: The more restrictions government places on lenders’ ability to extend credit, the more expensive credit will become. We’ve already seen how lenders have responded to the bill Congress passed in May: rates have risen and fees have proliferated. Now Dodd wants to impose even further restrictions. Guess what figures to happen next? Follow this process to its logical conclusion, and credit won’t simply become even more expensive, it will dry up altogether. As I say, this is just what the economy does not need.
If government changes the rules under which banks can extend credit, lawmakers shouldn’t be surprised that banks will in turn change the rules under which they extend credit. Any bank that’s interested in staying in business has no choice but to do that.
Why is Dodd even considering this stupid move? Lawmakers on Capitol Hill are angry that banks have been raising rates on consumers in advance of restrictions in due to take effect in February. They are once again shocked–shocked!–that the banking sector is responding rationally to the incentives of the legal structure they put in place.
Unfortunately, this blindness to incentives and unintended consequences is continuing.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.