Tuesday, May 12, 2009

Price Caps on Credit

Like price caps on anything else, they won’t work as advertised.  

There’s no argument that to be paying monthly on credit card balances is an extremely bad financial deal. After you get through the teaser rate period, and the monthly interest goes up to 18 - 21 – 26 – 30% or so, it takes an extremely disciplined effort to get out.  

Of course, folks with that kind of discipline rarely get into much trouble in the first place. 

Still, once Chris Dodd ( D-Countrywide) and friends manage to cap rates, one of the consequences will be that the credit card companies will be reducing credit limits, reducing or eliminating incentives, and making it tougher to for many people to borrow.  

That’s just the way the world works; raise costs and eliminate profits, and less product (in this case credit) will be made available. Essentially, this is a proposal to create a credit shortage.  

The upside – making it more difficult to borrow – will tend to encourage people to save, and increasing the savings rate is an important step in capital formation. Unfortunately, the Obama Administration’s war on capital and investors strongly suggests that you won’t be seeing much in the way of profitable investment options.

Perhaps if MBNA can come up a sweetheart deal for Dodd on his cards, or make some mortgage payments on his Irish “cottage”, they can make all of this go away.  

Pity for Dodd; if he loses his re-election campaign, his wife will likely lose her $500,000 income from sitting on multiple corporate boards. After all, without his connections to the Senate, she’s not worth very much, and there’s probably another Senate Spouse who could deliver the juice.  

Just one more natural consequence of having the government so deeply ingrained in the business world – paying off politicos by hiring their spouses becomes an important investment.