Tue, 19 May 2009 18:36:52 +0000 – By Phil Kerpen and James Valvo
Americans for Prosperity
The federal government can't seem to decide whether it wants to get credit flowing--as we're told the endless bailouts will do--or dry it up, the inevitable result of the credit card crackdown moving through Congress and being advanced by informal pressure from the White House.
The central thrust of federal policy from the first Bush-Paulson bailout through the whole alphabet soup of Fed facilities to the Obama-Geithner Public-Private Investment Partnership is to provide additional liquidity to the banking system in the hopes of jump-starting lending.
But, legislation passed overwhelmingly by the Senate today will have exactly the opposite effect.
Bashing bankers has become something of a national pastime of late, and there are plenty of legitimate reasons to dislike credit card issuers. There is certainly merit to the provisions of the bill that would strengthen disclosures and help people understand their credit card agreements. But it's too easy to blame credit card companies when people irresponsibly take on too much debt.
In fact, one of the real lessons of the economic crisis is that excessive debt was pervasive in our economy--from credit cards and home equity loans for individuals, to over-leveraged balance sheets for corporations, to excessive bonded-indebtedness for state and local governments, all the way to unsustainable deficits at the federal level. When the credit crunch hit, all of this snapped back to an extreme in the other direction, with loans increasingly difficult to come by for everyone except the federal government, whose deficits have shot into the stratosphere as the least-bad place to park capital.
Scapegoating credit card issuers for excessive borrowing for individuals is unfair, dangerous, and counterproductive. The effects of the proposed legislation will undermine the central thrust of federal policy, getting credit flowing more freely.
The credit card companies can feel the winds of Obama-style change blowing their way and are scrambling to get last minute rate increases done before legislation restricts their ability to do so. This has two bad effects: one economic, one political. First, cardholders are feeling the pinch when they really shouldn't be. Card issuers want to guard against future restrictions and are unnecessarily hurting their own customers along the way. Second, the issuers are creating one poster child after another for the need for reform. Their last minute rate hikes are only strengthening the hand of politicians set on crippling them.
The looming changes to interest rate adjustments, fee structures and policy disclosure regulations will have the effect of tightening credit. Credit card companies have been largely immune to the struggling economy and have shielded themselves by adjusting their lending terms to cope with their highest risk customers. This is the way the system is supposed to work. The Dodd bill will disallow universal default on existing balances, which means that if a borrower's credit profile changes because of missed car or mortgage payments, the credit card companies are not allowed to take that into account. The bill also prohibits credit card issuers from increasing rates on cardholders in the first year after the card is issued and requires that promotional rates last as least six months.
Stripped of flexibility, lenders will be much more cautious in approving cards in the first place, with lower spending limits and higher interest rates. They may even go to a fixed-term model in which cards automatically expire after a year or even six months and borrowers are then forced to re-apply. There may be other unforeseen consequences, but the movement will be in the direction of restricting credit. The implications go beyond consumer demand, because a huge number of small businesses often get their start using personal credit cards. Now that's likely to become much more difficult.
If we really want to get credit flowing more freely in our economy, restricting credit card lending is a big step in the wrong direction.
Mr. Kerpen is director of policy and Mr. Valvo is government affairs manager for Americans for Prosperity.