CONGRESS’ GIFT TO CONSUMERS: MORE EXPENSIVE CREDIT, AND LESS OF IT. HAPPY NEW YEAR!

Todd Zywicki points out the obvious: while new regulations (in this case, new credit card regulations) tend to have unintended consequences, those consequences, whether they’re unintended or not, shouldn’t come as a surprise:

In a competitive market, regulation of consumer credit has three predictable types of unintended consequences. First, regulation of some terms of the credit contract will result in the repricing of other terms. Thus restrictions on the ability to raise interest rates in response to a change in a borrower’s risk profile lead card issuers to raise interest rates on all cardholders, good and bad risks alike.

But even if card issuers reprice some terms, they may still be unable to price risk efficiently under the new rules. This gives rise to a second type of unintended consequence: product substitution. Card issuers can’t price risk, so they issue fewer cards-pushing would-be customers to payday lenders and other nontraditional credit products.

Third, if issuers can’t price risk effectively, they will ration lending. In order to make a loan, a lender must be able to price its risk efficiently or to reduce risk exposure by rationing credit. One way to do the latter is to lend less to existing borrowers, which is part of the reason why more than $1 trillion in credit-card lines have been slashed since the onset of the credit crunch. [Emph. added]

So at the tail end of a recession, thanks to the government, card rates have gone up, credit lines have been cut, and, at the low end, erstwhile cardholders have been cut off and sent back to deal with payday lenders and check cashers. Expansionary! This may or may not have been what legislators had in mind when they passed the CARD Act and, later on, Dodd-Frank. But they shouldn’t be surprised it’s all happened as a result, anyway. “And just wait,” Zywicki adds, “until the Consumer Financial Protection Bureau comes on line, increasing costs and further restricting credit for low-income consumers. “ Oh, boy. Just wait, indeed. . . .