Price controls don’t work, even in credit markets


Many believe that conservative members of Congress reliably protect private markets against government intervention. History has proven the opposite, especially when it comes to credit markets.

In 2017, for example, a Republican-controlled Congress was given the opportunity to repeal the Durbin Amendment, but chose not to. Special interest politics have won out over supposed conservative principles, even though price controls have had a dismal track record.

This episode made this week Senate hearing particularly interesting. All Republicans who support Senator Jeff Merkley (D-Oreg.) new invoice essentially vote to impose interest rate caps on a large segment of the credit market.

Thursday’s hearing is titled “Protect Americans from debt traps by extending the military’s 36% interest rate cap to everyone.” As the name suggests, Merkley and several co-sponsors want to extend an interest rate cap that currently applies to active duty members (for certain types of loans) to just about everyone.

To implement this general price control, the new bill extends the main features of the 2006 Military Loans Act (MLA). Specifically, it extends to all Americans the MLA provision that prohibits lenders from providing Consumer credit active duty members (as well as their spouses and dependents) at an annual percentage rate greater than 36 per cent.

Obviously, the definition of Consumer credit is critically important here, but let’s get back to it.

No matter what the title of the audience suggests, this kind of politics not protect high-risk consumers from the problems associated with high debt. In fact, it will harm consumers more than it helps. It’s price control, and this is what price controls do.

Like this Summary of the problem Explain, the interest rate ceilings are price caps, and like all other price caps, they lead to shortages. They make it more expensive to supply consumers, but they do absolutely nothing to limit consumer demand. In this case, the ceiling rates will make the supply of credit more expensive while doing nothing to reduce people’s demand for borrowing.

People will simply develop alternative (more expensive) means of both providing and obtaining credit. This will mean fewer people will get the loans they need and others will pay more for the loans they are able to get. (It seems obvious that many credit card companies would drop their rewards programs.)

Of course, this is not how the people of the Center for Responsible Lending (CRL) see it. They support Merkley’s new invoice, the Fair Credit Act for Veterans and Consumers. (The accompanying invoice in the American house has the same name).

According to their website,

Predatory and unaffordable loans bury people in debt. They are causing people to lose their cars, their bank accounts and their good health. The Fair Credit for Veterans and Consumers Act would put an end to this gross exploitation.

It is tempting to argue that, rather than simply advocating for the government to impose price caps in accordance with their own views, the people who run the CRL should pool their resources and start providing credit at their interest rates. favorite. The only problem is that CRL already has two affiliated organizations that can do just that. According to to their website,

Our affiliated organizations — Self-Help Credit Union and Self-Help Federal Credit Union — offer auto loans, credit cards, home equity products, debit cards, automated teller machines and convenient cashier services in more than from a dozen communities in North Carolina, California. , Greater Chicago and Florida.

Now back to that little detail from above, the definition of Consumer credit. It turns out that MLA and Merkley’s Fair Credit Act for Veterans and Consumers, residential mortgages and exempt auto loans. Section 2 of the Merkley Bill also exempts loans made by federal credit unions.

The folks at CRL will surely point out that the bill requires that these loans from federal credit unions respect the usury limits implemented by the Federal Credit Union Act. On the surface, these limits seem stricter, with a ceiling of 15% “per year on the unpaid balance, including all financial charges”.

Dig a little deeper, however, and we find that the Federal Credit Union Act includes a safeguard clause. Section 1757 (5) (A) (vi) (I) authorizes credit unions to set “an interest rate cap exceeding this rate by 15% per annum, for periods not exceeding 18 months”, in some cases, after consultation with “the appropriate committees of Congress, the Department of the Treasury, and regulators of federal financial institutions.” ”

What are these special cases?

Only when it is clear that “money market interest rates have risen over the past six months and prevailing interest rate levels threaten the safety and soundness of individual credit unions, as evidenced by adverse trends in liquidity, capital, earnings and growth. ”

In other words, federal credit unions have a workaround if market conditions make it impossible to grant credit when invoicing at the ceiling price. Everyone will just have to face the negative consequences.

All of this makes him irresistible, so there you have it: If the folks at CRL want to offer consumer loans at insanely low interest rates, this is what they should be doing. It should be easy enough to take market share by helping all these supposedly exploited borrowers.

If Congress imposes price controls such as those in the Fair Credit Act for Veterans and Consumers, the new rate caps will essentially apply to all credit cards, deposit advances, credit lines. overdraft credit and many types of installment loans. This type of policy will make it harder to get credit for those who need it most – and it will ultimately increase the cost of credit for many other borrowers.

These types of blanket rate caps will likely even reinforce the false pretext for more price controls and increased government-provided credit. A cynic would point out that some credit unions already provide subsidized credit, indicating that perhaps hurting the private lenders they compete with while increasing people’s dependence on government is exactly what they want.

If Congress is serious about making sure people get the credit they need, it should start removing the countless regulatory barriers – which Congress is tasked with creating in the first place – which destroy the competitiveness of private credit markets.


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