A different credit crunch
The bailouts may be winding down for the financial services industry, but the regulatory buildup is just beginning. New measures signed into law this week on credit card companies and mortgage lenders signal the postelection shift in attitude about the government’s role in vigorously competitive markets. Congress is also considering additional safeguards on payday and home loans, and the administration may propose a new commission to regulate consumer credit and investment products. Rather than trusting market forces, Democrats in Congress and the administration argue that unbridled capitalism has victimized consumers. Deregulation, seen for so long as a way to spur innovation and efficiency, is now blamed for enabling onerous mortgages, skyrocketing credit card fees and burgeoning interest charges.
And so the backlash begins. But as the Democratic majorities in Congress clip the financial industry’s wings in the hope of protecting vulnerable consumers, they’re also raising costs and limiting the freedom of savvy investors and borrowers. Regulations designed to bar predatory behavior may go too far in restraining both businesses and consumers, many of whom do not want or need to be protected from themselves.
The credit card bill, for example, is a mix of sensible safeguards and arbitrary rules that are likely to shift costs onto less-risky borrowers. Among the welcome changes, it stops card issuers from slapping customers with fees for transactions that shouldn’t have been approved or for payments that were recorded late because the issuers mishandled them. But like the Federal Reserve’s new truth-in-lending rules, it also bars issuers from changing interest rates during new customers’ first year regardless of their behavior. This restriction could lead issuers to raise the cost or limit the availability of cards for all applicants with thin or damaged credit histories.
The housing bubble and subsequent credit crunch exposed some problems that justify a rebalancing of the regulatory scales. Nevertheless, we don’t think Congress should micromanage how banks and other suppliers of credit deliver services in highly competitive markets. The role of lawmakers and regulators is much more broad. They should demand disclosures that are full and easy to understand. They should prevent lenders from setting debt traps for customers or surprising them with fees for services delivered without consent. And they should prohibit business models that are indifferent to or profit from consumers’ inability to repay what they borrow. Beyond that, companies should be free to innovate and compete, and their customers should be expected to understand the risks.
