Cut Credit-Card Rates? Careful How You Do It : Offering political lollipops won’t improve the economy

The problem in Washington these days is that almost any discussion of the nation’s economic woes deteriorates into political posturing. Take the ill-conceived effort to put a cap on credit-card rates. It was an example of Washington at its worst. The President and the Senate wantonly raised new fears for already jittery consumers and investors. They should be working overtime at a coherent and constructive approach to jump-start the economy.

The President’s first mistake was to raise the issue of credit-card interest rates in a political speech last Tuesday without consulting his economic advisers. He called on banks to lower the rates, which have remained virtually unchanged at high double-digit levels despite a series of interest rates cuts by the Federal Reserve. Bush may have thought he could jawbone banks into cutting rates, but instead he unleashed Sen. Alfonse D’Amato.

The very next day the always-opportunistic New York Republican ramrodded a measure through the Senate to cap credit-card interest rates on a formula that would bring credit-card rates down to 14% from the current average of 18.9%. That threw the stock market into disarray by Friday when the Dow Jones Industrial Average plummeted 120 points. The market thankfully recovered Monday, rising 29.52 points, as the House postponed action on the credit-card measure.

Still, the damage was done. It was the second time (the first was with those rambling discussions of possible tax cuts) that Washington moved opportunistically with quick economic fixes that make better TV sound bites than economic sense. In both cases, the stock market reacted intelligently--i.e., negatively.

The populist appeal of lower credit-card rates is undeniable. But to legislate such a move now would be a disaster both for consumers and the already fragile banking industry. Capping rates now would force banks to scale back on issuing credit cards. That could make credit less available to hard-pressed consumers, who sometimes use their cards to survive. For banks, credit cards have been profitable business. A big cutback in rates could put many in the red and could force some to seek a government bailout. If the President and Congress would work together on a bank-reform bill to allow banks to move into new businesses, that would be the time to negotiate with banks to cut credit-card rates voluntarily and extend other credit to consumers on more favorable terms.

Washington further needs to come up with an economic agenda for growth and jobs. Action on the $100-billion-plus transportation bill before Congress would help. And forget the President’s tired call for cutting capital-gains taxes. His formulation would help the wealthy but probably not trigger new investment in industries or factories that create jobs.

Consumers are reluctant to spend because of uncertainty about the economy and the seemingly unending rounds of layoffs. The nation needs Washington to come up with programs to pump real capital--not political hot air--into the economy. That’s plain old common sense--sadly lacking in Washington these days.

Dow Jones Jitter Bugs Friday 10 a.m.: 3,048.48 Friday close: 2,943.20 Monday 10 a.m.: 2,955.72 Monday close: 2,972.72