ANALYSIS / OPINION:
On July 29, the Senate Banking Committee held a hearing titled “Protect Americans from Debt Traps by Extending the Army’s 36% Interest Rate Cap to All.” “
The title is a paragon of political rhetoric. It is also completely misleading.
Who could be against protecting Americans from debt traps? And what better way to do that than to force everyone to meet the same standards that apply to the military?
The problem, however, is that this sweet-sounding language distracts attention from the real issue: Should the federal government control the interest rates charged by private lenders?
Given the fiscal mess Congress has created over the past decades, with no sign of caring how much debt (and unfunded liabilities) it imposes on future taxpayers, or how many mortgages long term low-cap income ”, this question may seem absurd. And he should.
One of the primary goals of the American system of government is to limit what people can do through their government. There is hardly any end to the ideas humans might have for helping others, but when the ruling class uses the government to force respect for their ideas, things usually go wrong.
In the case of interest rate caps, America has a long and sad history of ignoring this principle. These experiences show why the limited government approach is better.
A federal price cap on bank deposit rates was one of the main causes consumers withdrew massive sums of money from banks during the 1970s, along with the savings and loan debacle. from the 1980s.
Prior to 1978, when pre-empted by the federal government, a patchwork of state usury laws on consumer loans and credit cards limited competition, resulting in fewer credit cards available and high annual fees. to avoid tariff ceilings.
Despite all the evidence on price caps, as well as what experience shows about the detrimental effects of other types of price controls, some members of Congress simply cannot pass the idea.
Now Oregon Democrat Sen. Jeff Merkley and several co-sponsors want to extend to almost everyone an interest rate cap that currently applies only to active duty members. Specifically, they want to extend to all Americans a federal law that prohibits lenders from providing consumer credit to active-duty members at an annual percentage rate (APR) greater than 36%.
In this case, the definition of consumer credit means that the rate cap will essentially apply to all credit cards, deposit advance loans, overdraft lines of credit, and many different types of credit. installment loans. It will also impose a standardized version of an APR on many forms of credit for which an APR is an inappropriate measure of cost.
No matter what the title of the hearing suggests, these policies will not protect consumers from debt issues. In fact, they harm consumers more than they help. Price caps are price controls, and that’s what price controls do.
Ceiling rates will make it more difficult for those most desperately in need of credit to obtain credit, and will eventually increase the cost of credit for many other borrowers. People will develop alternative (more expensive) ways to both provide and obtain credit.
Lenders are likely to make fewer small loans, which will lock in some borrowers. They will also lend more money to some consumers for longer terms than they need. Credit card companies will likely abandon their rewards programs. Of course, none of this – neither the rate cap, nor the efforts of lenders to stay in business – will reduce people’s demand for credit.
Compared to alternatives, private markets do a great job of satisfying people’s needs and wants, largely thanks to the decentralized pricing system. If Mr. Merkley and his colleagues really believe that some lenders charge “too much”, then they should compete with those lenders by offering them cheaper loans.
This is precisely how limited government allows people to help and protect each other.
• Norbert Michel is the director of the Data Analysis Center of the Fondation du patrimoine.