Tuesday, October 27, 2009

Dodd Takes Us Back in Time

Chris Dodd holds the record for the most ridiculous Congressional proposals in modern time. He is working hard to hang on to that record (Barbara Boxer is closing in fast).

Dodd's latest is a proposal to "freeze" credit card interest rates. There's a great idea. That was the way the world used to work -- "usury" laws. The idea is that some rates are just plain unfair. Heck, in the Islamic world, all rates are unfair. They ban interest on loans. Islamic banking manages to get around that in practice by redefining what is meant by a loan.

So, what is Dodd up to? His idea is that by capping interest rates, borrowers will be better off and those stingy old lenders will not be able to "rip off" the borrowers. But, what if the stingy old lenders behave rationally. What will they do?

They will quit offering loans to all but the best credit borrowers -- rich people. Middle income and lower income folks need not apply. They will lose access to credit or worse, be forced to deal with unsavory illegal lenders.

When you pass a "maximum price" law what you are doing is telling a willing buyer and a willing seller: "Sorry, government knows better." You prohibit the transaction. This doesn't mean the buyer gets a lower price. What it means is that the transaction does not place. (Hint: that's why minimum wage laws create unemployment...such laws prohibit a transaction between a willing buyer and a willing seller).

That is what will happen in Dodd's brave new world. If borrowers can't charge the interest rates they need to take the risk of lending to middle income Americans, then they won't lend to middle income Americans.

Thanks to Chris Dodd, the plight of American middle income families could become worse than it is already.