LLR Pages

Friday, May 2, 2008

Fed to Ban Certain Credit Card Practices

The Fed is pushing for new government regulations on the credit card industry, regulations that would ban specific practices of the companies.

Here's a snippet of what the Washington Post piece on the ban:

If they are instituted, they would constitute the most significant crackdown on the credit card industry in decades. The rules would, among other things, specify when card issuers can increase interest rates on existing balances, ban finance charges on balances that have been repaid, and prohibit late fees on customers who were not given a reasonable amount of time to pay.

Consumers have long complained about such practices. The Fed responded last year with a proposal, still under consideration, to require card companies to improve disclosure forms.

Wait a second here! Didn't the Federal Reserve, with the passage of laws such as the Fair Credit Reporting Act, the Truth in Lending Act, and the Fair Credit Billing Act, help usher in the credit card industry with its expansionist pool of credit in the economy? Weren't these regulations supposed to control what credit card companies can charge via interest rates, the waiting period of consumers submitting in their credit card payments, etc.? Didn't the credit card consumers read the fine print before they signed up with the firms?

These companies are a creation of the Fed and have nothing to do with the free market. The Fed and the card companies have been in collusion for years as far as what the card companies can do with regards to charging their customers, boosting the interest rates (which are tacked onto the Fed's subprime rate) to high levels (partly because of federal intervention in the credit and housing markets and partly because of credit risks, not to mention bad decision making between the credit card companies and the credit cardholders).

These new regulations will do more harm than good, simply because they will encourage more credit risks consumers who lag behind on their payments to become more irresponsible with their spending and payment habits and unfairly penalize consumers with excellent credit.

As one paragraph in the Washington Post piece correctly noted:

Edward L. Yingling, president and chief executive of the American Bankers Association, said the rules would restrict the ability of card companies to charge interest rates that reflect the risks of different customers, thus forcing them to raise rates on everyone, even those with good credit.

If anything, why doesn't the government get out of the money-printing and credit card business and allow private decisions be handled more effectively between the customers and the card companies? Wouldn't that be far more worth it than a bunch of never-ending regulations that are designed to fix the old regulations that failed? After all, won't the new regulations end up failing too in the long term as well?