Sure as the sun rises in the morning, the nattering ninnies that have been stretching the Overton Window leftward produce pandering policy proposal after pandering policy proposal. Bernie Sanders and Alexandria Ocasio-Cortez, dubbed the Nutty Professor and Bronx Barbie by the President and a political acquaintance of mine, respectively, now have the answer to America’s consumer debt problem: They want to cap the interest rates that credit card companies can charge at 15%.
Amusing alliteration aside, this duo continue to demonstrate, via all that they say, that they believe market forces don’t exist, that the state of matters economic is unjustly skewed by the power of the powerful, and that things can be made better simply by forcing their will upon others.
But, as Newton figured out over 400 years ago, actions produce reactions, and a cap on credit card interest rates would be no exception.
Cap interest rates, and banks will simply stop issuing cards to people who are bad credit risks.
Without having access to credit cards, many won’t be able to, via good behavior over time, fix their credit. Without good credit, they’ll have greater trouble buying a home, or a car, and might even be denied some jobs or careers.
Without having access to credit cards, many will have to turn to other sources for short-term money, including payday lenders (themselves targeted by the do-gooders who’d rather leave the poor with no options at all) and the black market (i.e. loan sharks). Freed from competitive pressures, those other sources could become even more usurious, since their customers will have fewer options.
Of course, Bernie and AOC won’t be happy when (and I stress when) this happens. So, they’ll throw the coercive might of government at those evil credit card companies which won’t issue cards to the high-risk folks if they can’t make enough money off them to cover the defaults. A credit card version of the Community Reinvestment Act will emerge, along with other forms of pressure, subtle and overt, and the credit card companies will be forced to issue credit to bad risks.
Next, we will hear of an impending financial crisis, as the defaults are no longer offset by the high interest rates others in that bad-risk category pay. Bailouts will be proposed, and approved, because a bubble burst would be bad for the economy, because the poor still need access to credit, and because regulatory capture.
Before you wave all this off, and presume that a credit card company that charges 24.99% interest has a license to print money, pay attention to all the television ads for credit card debt relief services. There are a lot of people out there who dig themselves into deep debt holes because they are irresponsible, buying stuff that they can’t afford but want anyway. The charge-off rate, i.e. the fraction of credit card debts that the companies write off as uncollectible, has been sitting at about 3.5% since the end of the Great Recession. Yes, credit card companies do write off bad debt, just like any lender does, and the interest rates they charge need to make up for the risk of those write-offs.
Take note of that chart, by the way. Notice how it spiked during and immediately after the Great Recession, up to nearly 11%. When Bernie and AOC’s other plans tank the economy, as we all know they will, and they layer on the effect of their interest rate cap, what do you think’s going to happen? Yep, even more big companies running hat-in-hand to the government, saying “you did this to us, now bail us out.” The Dem-Socialists will fall out of power, because it’s about the economy, somebody who figures he can make quick-fixes by rescuing the economy via more public-debt-funded bailouts will be voted in, and the cycle continues.
Of course, none of this will make an anthill-of-beans difference to Bernie and AOC, because they don’t bother contemplating the harm their ideas will cause (and, no, I don’t think they’re smart and deep enough to know but not care). They figure that this idea will sell to people who are stuck paying high interest rates, because handouts (this is what it is) work, and if it’ll help get them in power, well, that’s the ultimate prize. The damage they’ll do, before, during, and after, apparently doesn’t figure into their figuring.
When the government inflates bubbles, bad things eventually happen. When politicians refuse to learn from past bubbles, even worse things happen.
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