January 8, 2016
By Tim Worstall
I came across something in Salon which, even for there, seemed to me to be a very odd thing to be celebrating. Which is a speech Bernie Sanders gave in which he threatened to pretty much kill off the entire credit card industry. That isn’t, of course, what he thinks he said but it is the meaning of what he did say. If you cap the interest rate at which people can lend money, and your cap is below the economic cost of lending that money, then people don’t cut their interest rates to the new cap: they just stop lending money. And Bernie’s number for interest rates on credit cards is rather below current market rates for credit cards. In fact, only those with very high credit scores would currently be able to have a credit card under the rate Bernie is proposing.
I do assume that Senator Sanders simply doesn’t understand this rather than he is trying to close down that credit card industry. It’s a little difficult to know with some of his statements but it does seem rather more polite to assume ignorance of the subject rather than malevolence. The statement that Salon is, in its ignorance, cheering is here:
Cap credit card interest and ATM fees. Banks and credit card companies must be stopped “from ripping off the American people by charging sky-high interest rates and outrageous fees,” Sanders said. “It is unacceptable that Americans are paying a $4 or $5 fee each time they go to the ATM. It is unacceptable that millions of Americans are paying credit card interest rates of 20 or 30 percent.”
“The Bible has a term for this practice. It’s called usury,” Sanders said. “And inThe Divine Comedy, Dante reserved a special place in the Seventh Circle of Hell for those who charged people usurious interest rates. Today, we don’t need the hellfire and the pitch forks, we don’t need the rivers of boiling blood, but we do need a national usury law.”
Interest rates should be capped at no more than 15 percent for borrowed money, he said, pointing to a now-repealed 1980 law with that threshold. He also said ATM fees should be capped at $2. “People should not have to pay a 10 percent fee for withdrawing $40 of their own money out of an ATM. Big banks need to stop acting like loan sharks and start acting like responsible lenders.”
ATM fees aren’t my point here, credit card rates are. This is exactly the same mistake Venezuela made with toilet paper. If you set the price of something below the market clearing price then you don’t get cheaper toilet paper: you get an absence of toilet paper. If you set the cost of credit below what it costs to provide credit then you won’t get cheaper credit: you’ll get an absence of credit. Plus, as with toilet paper, people turning to substitutes. Instead of with credit yesterday’s newspapers aren’t even a bad substitute, while the guy around the corner who lends money illegally against the security of your kneecaps is an alternative.
Read the full article at Forbes.com: Does Bernie Sanders Understand He's About To Abolish The Credit Card Industry And Cause A Recession?