Freeing up credit?

Posted by Jason | Posted in Economics, Government | Posted on 29-10-2009

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Rather than letting the free market deliver credit to consumers, Chris Dodd needs to grandstand for his constituents. He wants the government to limit interest rates on credit cards.

Senate Banking Chairman Chris Dodd has been hearing from constituents upset because banks have been raising the interest rates on their credit cards. This week Mr. Dodd decided to do something about it. He proposed a bill imposing an immediate freeze on those rates.

“At a time when families are struggling to make ends meet, jacked up rates can quickly create crushing debt,” Mr. Dodd said in a statement. “People need to be responsible with their money, but they shouldn’t be taken to the cleaners by outrageous rates.”

If customers are being taken to the cleaners, it is because lawmakers like Mr. Dodd sent them there. In May, Congress passed the Credit Card Accountability, Responsibility and Disclosure Act, which bars rate increases without a 45-day notification. To reduce their risk under this law, banks are rushing to raise rates before it takes effect in February. Thus the Senator’s latest political grandstand.

via Dodd Tries to Freeze Credit Card Rates – WSJ.com.

This is no different than price caps. What do price caps do? In order for price to be driven down, you need demand to decline while supply remains steady, supply to increase while demand remains steady, or demand to decrease while supply increases. If you artificially limit price, while not lowering demand, you automatically lower supply. It will happen no other way, so while Dodd does some showing off, he is decreasing credit in the market, which we are told is one of our biggest problems right now. I have an idea. How about Dodd tells his constituents to quit borrowing money. The credit card companies can’t charge you if you don’t ask for their services.


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