Should the government control credit card interest rates?
I find the question so ludicrous that I don’t understand why anyone would ask it. But, leave it to people in government. They seem to deal in the ludicrous. Since they grant themselves the power to control every aspect of our lives, the question becomes legitimate.
Some legislators say the high interest rates are “immoral.” I heard one say, “Yes the account regulations state that the credit card issuer can increase rates at any time. But, the regulations governing the accounts are too long for consumers to read. They’re just like those long mortgage loan documents.” Most just say the higher rates are “unfair.” So they want, as usual, to protect us from our own immorality, ignorance, and irresponsibility.
But, what does capping interest rates really do?
Those who advocate any form of “price control” (and interest rate caps amount to another form of price control) don’t understand that the government cannot control prices. They actually control quantities. Let me explain.
A price amounts to the ratio at which traders exchange goods in a market. If you exchange $10 for 2 pounds of manure, the price (or ratio) equals $5 per pound of manure. To change that price, the quantity of dollars must change, the quantity of manure must change, or both must change. Only changes in the quantities will change that ratio.
In a market where the price has settled to $5 per pound of manure some buyers might have been willing to pay more and some sellers might have been willing to accept less. On the other hand buyers unable to pay the market price and sellers unwilling to accept it would be closed out of the market. When the government set price limits those quantity relationships change.
If the government sets a limits the quantity of money (not the price directly) needed to buy a pound of manure to $2, the number of people able to buy will increase. They may have expanded the demand, but what about the quantity of supply? Sellers not willing to take as little as $2 per pound will take their supply off the market. Government action has limited the quantity of manure that suppliers will offer (not the price directly).
In the case of minimum wages (a price floor) the government eliminates the amount of labor that would be supplied and demanded below their floor. It does not raise wages of people below the minimum; it tells them they need not apply.
Controlling credit card interest has an effect similar to the price ceiling for manure. Lenders willing to supply funds at higher rates will withdraw from the market. Borrowers willing to pay higher rates will get shut out of the market.
In an environment in which the government espouses the expansion of credit for them to advocate a regulations that amounts to a limitation of credit seems like…well, a load of manure.