According to a recently released report from the New York Fed, Americans collectively owe over $1.1 trillion on their credit cards. Reports like this have a tendency to elicit bad ideas from politicians. For instance, Donald Trump has called for federal caps on interest rates charged to those who run up credit-card debt.
Except that readers know the obvious implications of such a cap. There’s nothing kind or good-hearted about it. When prices in the marketplace are meddled with, scarcity of the market good is the logical result. Price controls are cruel. Still, there’s an answer to the perceived problem of credit-card debt, and it already exists in the marketplace: debit cards.
Notable about debit cards is that they’re already the way that the vast majority of bank-account holders interface with the cash in their accounts. Of much greater importance in light of worries expressed about credit-card debt is that debit cards, while having the look and most of the capabilities of credit cards, help mitigate the debt problem.
When banks liquefy purchases made with debit cards, they directly debit the money spent from the account holder’s bank account. Call it individual regulation par excellence. Debit cards make it easy for users of same to live within their means.
The problem is that Fed governor Christopher Waller is oddly – and dangerously – hot to cap fees that debit-card issuers can charge per swipe. Though Waller is a bank regulator as opposed to an operator of banks, his intent is to cap debit-card swipe fees at .14 cents given his own view that the latter is the break-even point for banks. Which requires a pause: think about what Waller is attempting to impose on banks.
It’s not just that a regulator is arrogating to himself the power to impose price controls despite their peerless track record when it comes to fostering shortages of the market good controlled. Indeed, it almost insults the reader to point out that the caps being demanded by Waller will shrink the availability and usage of the very card most utilized by bank customers.
Of greater importance, it’s apparently lost on Waller that banks, like every other business, have shareholders too. And those shareholders want a return on their investment. For Waller to then decree “break even” on banks is for Waller to scale the proverbial heights of conceit. Seriously, what bank can continue to provide a service in return for break even?
Rather than insult readers with the answer to the above question, it’s useful to add that Waller’s demanded price control on debit-card swipe fees will cause problems beyond reduced access and usability of those cards. To see why, consider what happened to debit cards after 2008, when the Durbin Amendment levied a .21 cent cap on debit-card swipe fees: the result was that various perks that came with debit-card usage were discontinued. Repeat it over and over again that there are no price controls, just shortages.
What this meant back in 2008 is that debit cards that formerly rewarded individual prudence were rendered imprudent by government decree. Out of nowhere, debit-card usage brought with it negative opportunity costs since the benefits that formerly competed with uncapped credit cards were suddenly gone.
Contemplate this now. The Fed is fearful of credit card debt, Trump is attacking interest rates on that debt, and Kamala Harris will almost certainly follow.
The good news is that no political or regulatory action is required. Instead, just get the Fed out of the business of price controls so that market forces can set debit-card swipe fees. If so, watch as consumers migrate even more to debt-regulating debit cards that offer all manner of perks associated with their usage.
