Exactly Wrong: The Real Unintended Consequences of New Credit Card Regs
By Bryan Caplan
Here’s a bizarre set of predictions about the effect of new credit card regs:
…Congress is moving to limit the penalties on
riskier borrowers, who have become a prime source of billions of
dollars in fee revenue for the industry. And to make up for lost
income, the card companies are going after those people with sterling
expected to look at reviving annual fees, curtailing cash-back and
other rewards programs and charging interest immediately on a purchase
instead of allowing a grace period of weeks, according to bank
officials and trade groups.
will be a different business,” said Edward L. Yingling, the chief
executive of the American Bankers Association, which has been lobbying
Congress for more lenient legislation on behalf of the nation’s biggest
banks. “Those that manage their credit well will in some degree
subsidize those that have credit problems.”
Wrong, wrong, wrong. When you make lending to high-risk people less attractive, the result is not worse terms for low-risk people who have been profitable all along. The result is that high-risk people get less credit. They used to be able to get credit despite their credit-unworthiness by paying extra; if the law forbids this, why lend to them?
This article is as crazy as a story about the minimum wage claiming that highly-skilled workers suffer the most because employers need to “make up the difference somewhere.” The correct retort, of course, is “Yea, they make up the difference by buying less of the labor that now costs more.”
But who am I to question the wisdom of leading members of the credit card industry? The answer, I strongly suspect, is that the industry leaders don’t believe their own argument. They’re demagoging. The sensible objection that, “Credit card regs that protect high-risk consumers will make it harder for them to get credit,” is almost impossible to sell. The ridiculous objection that, “Low-risk consumers will pay the price,” is, alas, a far easier sell.