Congress has used the financial crisis as an excuse to regulate what it calls “predatory lending.” As so often happens, its new regulations have had unintended consequences.
A bank in South Dakota, in order to comply with the new rules, is charging 79.9 percent interest for one of its low-limit credit cards. The pre-regulation rate was 9.9 percent.
The Credit Card Accountability, Responsibility and Disclosure Act of 2009 makes it illegal to charge annual fees greater than a quarter of a card’s limit. For small-balance cards, the allowable fees are tiny now. That leaves banks with three options:
-1. Lose money. The Wall Street Journal correctly notes that “Banks can’t be expected to give money away, even if Congress is in the habit of doing just that.” So this option is unlikely.
-2. Stop offering low-limit cards. This will hurt people who need them, such as people with low incomes, people with bad credit records, and young people who are trying to establish a credit record.
-3. Charge higher interest rates to make up for the money lost in fees. This is exactly what is happening here with the 79.9 percent rate for a $250-limit card.
If the bank calculated correctly, the 79.9 percent rate will be roughly a wash compared to the earlier high-fee, low-rate policy. But different customers will be paying. The people who incur a lot of interest-rate charges are usually the people who can’t afford them. And they’ll be paying a lot more than they were before the CCARD Act.
People who can afford to pay their balances on time often don’t pay little or no interest interest anyway. The 79.9 percent rate doesn’t really affect them. And now their annual fees have gone way down. The CCARD Act is, completely unintentionally, a wealth transfer from poor people to richer people. Congress is actively hurting the very people it intended to help.
In RealClearMarkets.com, Fred Smith and I explain how the seemingly forgotten — but still important — goal of Social Security reform can help unleash capital, now that the U.S. economy desperately needs it.
Whole thing here.
Welcome to Episode 33 of the LibertyWeek podcast, with your hosts Richard Morrison and Cord Blomquist and technical producer (and this week’s special guest) Ryan Young. After bidding our friend Thor Halvorssen a very happy birthday, we get a fresh recap from Ryan Young on the events of the Free State Project’s recent Liberty Forum in Nashua, New Hampshire (photos). Google’s CEO spurns Twitter (transcript via TechCrunch) in Technology News, John McCain and Richard Shelby say that the government should end the bailouts and let poorly-managed banks go bankrupt, and brewers pin their hopes on robust St. Patrick’s Day sales in this week’s edition of Beer News. Next, we go abroad for Scandal Watch where the Chinese government is cracking down on sub-optimal milk quality and finally back home to America for Olympic News, where the head of the U.S. Olympic Committee is calling it quits.
The honor of Tweet of the Week™ goes to dan_hayes of Reason.tv!
The Wall Street Journal editorial got it exactly right:
The Federal Reserve cut rates to historic lows Tuesday, but today it plans to vote to tighten consumer credit — taking away with one hand what it gives with the other. On the agenda is a rule-making that would impose, for the first time, what amount to federal price controls on credit cards.
That’s what the Fed’s proposed amendment to Regulation AA would do. In changes pushed by consumerist groups and grand-standing lawmakers, the proposal would tell banks how to divide payments on a credit card account when there are different balances on that account. The changes would also prohibit card issuers from increasing the interest rate on an outstanding balance even if the borrower is less creditworthy. And the proposed rules wouldn’t allow banks to charge consumers for going over their credit limit if it’s because of a hold on the account for an expected cost, say, of a hotel or a rental car.
In trying to lower their credit card exposure risk, banks have already tightened up their requirements for issuing credit cards. They’ve also cut credit limits of lots of borrowers. This new proposal will tighten up credit even more and shift the increased costs to the good borrowers — those who stay within their limits and make their payments by the due date.
Guess who’s been one of the big advocates for these changes? No other than Rep. Barney Frank (D-MA), who also pushed for Fannie and Freddie to expand their portfolio of high-risk mortgage loans in the name of the Community Reinvestment Act. We all know what came of that policy.
Oh, Happy Day! And it certainly is for all those who value freedom, responsibility and the true free market in which individuals are free to profit from their risks on the condition that they don’t stick the rest of us with their losses.
It’s not hyperbole to say the Republican and Democratic backbenchers who defied both parties’ leadership to defeat this $700 billion package of Wall Street socialism literally saved America. Whatever their reasons, this defeat (or rather victory for freedom), means that America is much less likely to turn into France, Venezuela, or the old Soviet Union, as this bailout/nationalization package would have set us on the road to becoming.
Several great speeches on the Right and Left were given. Democrats Brad Sherman of California and Earl Blumenauer of Oregon gave powerful speeches against corporate giveaways. And conservative leaders of the Republican Study Committee — such as Jeb Hensarling, Jeff Flake, Mike Pence, and of course Ron Paul — spoke about how government intervention was largely the cause of this predicament, but the bailout would doom arguments for the free market form here on out. The idea of the government making this kind of outlay to high-flying risk takers just didn’t jibe with members, and certainly not with the American people.
[click to continue…]
Unfettered greed is the suspect many point at to explain the current economic crisis. To some extent, they are right, but it isn’t irrational greed on the part of bank managers or fat cat CEOs. It is the unwieldy bank regulations that forced the entire industry to walk the proverbial plank and then blame it for drowning.
Critics have alternately claimed that over-regulation and under-regulation are the causes for the current crisis. I believe one specific regulation, the Community Reinvestment Act (CRA), should shoulder a lot of the blame for creating an environment where a lending institution’s short-term survival hinged on it making the decisions that in the long-term would likely cause its demise.
As I noted in my paper The Community Reinvestment Act’s Harmful Legacy, one of the effects of the CRA was the creation of a weapon that has been effectively utilized to extort money from lenders. When lending institutions wish to open a new branch, expand, or merge, they must apply for permission from one of the four governing bodies (Federal Reserve, Office of Comptroller of the Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision). Their request can be postponed or outright denied if any community group files a CRA protest. Lending institutions can of course fight these protests, but CRA investigations can take months and cost large sums of money.
[click to continue…]
RSS Updates 
RSS E-Mail Updates 
Twitter 
Facebook 
CEI.org 
WorkPlaceChoice.org 
GlobalWarming.org 
CEI On Demand Video 
Liberty Week Podcast 