With one foot out the door, the Biden administration’s CFPB announced a new rule to cap overdraft fees that banks charge when spotting borrowers’ money. Fortunately, the Trump administration’s subsequent efforts to rein in the CFPB ought to make similar future policy mistakes less likely. This is especially welcomed given that capping overdraft fees would be particularly harmful to those with fewer means, as they would be at most heightened risk of losing this available line of credit. This is doubly saddening considering the (often emergency) circumstances that may compel one to overdraft from their account in the first place.
All that said, no business wishes to provide a service while losing money — nor should we compel them to, which would only serve to drive their failure. In capping the price that banks may charge to borrowers who have spent beyond their resources — regardless of their ability to repay or creditworthiness — the logical outcome is that banks will offer these services to fewer people.
The good news is that Congress will soon take up a CRA vote, which should stop the Biden rule from going into effect. The bad news is that there remains either ignorance or denial (among politicians on both sides) of the simple truth that price controls beget shortages — in this case, it would be a shortage of available credit.
The lessons here extend beyond overdraft fees. Republicans like Senator Josh Hawley and Democrats including Alexandria Ocasio-Cortez are among those in Congress now pushing for credit card interest rates to be capped at 10 percent. Notably, those advocating for these price caps have never been in the business of lending money. For anyone doubting the efficiency of the credit card interest market in pricing risk, a tremendous business opportunity exists. If a startup could provide consumers with the same access to capital as credit cards, but at a significantly lower interest rate — potentially reduced by half or more — consumers would undoubtedly flock to that service. The challenge, of course, lies in sustaining that business model – i.e., providing that service profitably. One hopes this highlights that those in the business of lending understand the market better than politicians who, despite their lack of experience, feel compelled to dictate prices.
To their credit, it seems as if the AOCs and Bernie Sanderses of the world concede they know financial institutions cannot make these loans without assuming a loss — that’s why, in their moments of greatest candor, they express support for “Postal Banking” wherein the government takes over some degree of lending services altogether. Translation: Banks don’t need to lend money; Washington, D.C., can do it instead.
But what is the excuse for alleged conservatives like Josh Hawley, who, ostensibly, wouldn’t claim to support a government takeover of finance? If Senator Hawley had the wisdom to run a credit card business while charging only a ten percent interest rate, he should be running that company instead of sitting in the Senate. It’s a definite moneymaker – if one could make the math work.
Given his lack of expertise, what a shame he joined ranks with AOC in demanding financial institutions do what he cannot do himself.
Originally posted to Real Clear Markets.
