Kerpen column: Reject a government takeover of consumer lending
Price controls don’t work, cause shortages, and have precipitated economic disaster in every sector and jurisdiction that has attempted to impose them on any significant scale. But their braindead simplicity – something is too expensive, so we’ll mandate that it be cheaper – makes them forever seductive to politicians looking for easy political talking points.
So they remain in vogue, from proposals for national rent control to prescription drug “negotiations” in which government sets the price under threat of seizing all profits. It also includes financial services, where Bernie Sanders and Alexandria Ocasio-Cortez have proposed an annualized interest rate cap of 15 percent. Maybe they’re trying to make House Financial Services Chair Maxine Waters, who has proposed a 36 percent cap, appear reasonable.
Either version would have severe negative consequences for the availability of credit to consumers, especially people with lower credit scores that represent higher default risks.
The Waters cap is hardly reasonable. First of all, the headline number of 36 percent is deceptive because the “all-in” calculation includes all fees, making it equivalent to a retail annual rate cap of about 26 percent. An industry analysis found that would price at least 34 million consumers out of the credit card market – and that’s at a time of historically low interest rates. When and if the Fed tightens and the prime rate rises, the cost of capital for lenders will go up and millions more consumers will be priced out of credit cards.
Waters and her bill sponsors, Democrat Chuy Garcia and token Republican Glen Grothman, have justified their bill by saying it extends the 36 percent cap, already imposed by the Military Lending Act to veterans, to all consumers. But the actual results of the MLA should serve as a warning.
According to a Harris Poll: “Military Lending Act (MLA) borrowing restrictions have resulted in a majority of active duty military households being turned down for credit (51% turned down due to the MLA) and these households have higher usage of non-bank credit or debt.”
Of course, if we accept the logic of a federally imposed annualized rate cap, there will be relentless political pressure to ratchet it down over time.
Democratic presidential contender Bernie Sanders is already there. His legislation with AOC would impose a 15 percent annualized cap, which would affect hundreds of millions of credit card customers, some of whom would lose access to credit entirely and most of whom would lose popular rewards programs.
Pre-empting even liberal states like California and Virginia that have strictly regulated but allowed them to operate, the Waters and Sanders bills would effectively ban payday, vehicle title, and other small-dollar loans. These loans are inherently short-term and therefore cannot be priced on an all-in annualized basis, because most default risk is taken as soon as money is out the door. That means people in desperate circumstances will find themselves with no lawful options.
As Nobel prize-winning economist Paul Samuelson famously testified in 1969: “The concern for the consumer and for the less affluent is well taken. But often it has been expressed in a form that has done the consumer more harm than good. For fifty years the Russell Sage Foundation and others have demonstrated that setting too low ceilings on small loan interest rates will result in drying up legitimate funds to the poor who need it most and will send them into the hands of the illegal loan sharks. History is replete with cases where loan sharks have lobbied in legislatures for unrealistic minimum rates, knowing that such meaningless ceilings would permit them to charge much higher rates.”
Sanders tacitly admits that his rate cap could crush private sector consumer lending. His bill welcomes that possibility by authorizing government lending via the U.S. Postal Service. That would put taxpayers ultimately on the hook for substantial losses, because the lending would inherently be at rates that are insufficient to cover default risks.
I give it about one election cycle between when postal lending begins and when Democrats start calling for blanket postal loan forgiveness – at taxpayer expense.
Congress should do the right thing for taxpayers and consumers and reject price controls on consumer credit.
Phil Kerpen can be reached at firstname.lastname@example.org.
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