Toddy Zwycki On The Unintended Consequences Of Credit Card Regulation

See Dodd-Frank and the Return of the Loan Shark: In the name of consumer protection, Congress has pushed more Americans outside the traditional banking system. From the WSJ, 1-4-11 (Hat Tip: Jay Richards, AEI). Excerpts:

"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."

Mr. Zywicki teaches bankruptcy and contracts at the George Mason University School of Law and is co- editor of the University of Chicago's Supreme Court Economic Review.