A Josh Hawley-Bernie Sanders Mind Meld

They want a 10% cap on credit-card rates that would mean less credit.

WSJ editorial. Excerpts:

"Remember when economists and Republicans criticized Kamala Harris for proposing price controls on groceries? Well, a cap on interest rates is a price control on credit. When you put a price control on something, you are asking for less of it. Apologies for this lesson in Econ 101, but that’s where we are with the political class these days.

It’s true that credit-card rates have climbed over the last decade. This is what happens when inflation rises and the Federal Reserve raises interest rates in response. The average monthly annual percentage rate on new credit cards is 24.3%—meaning that someone will pay $20.25 in interest a month on a $1,000 unpaid balance.

A 2022 paper by Federal Reserve Board staff found that card issuers in recent years have also steered more card revenue into consumer rewards like travel miles. It noted that banks are originating “credit cards to riskier borrowers who paid higher interest rates.”

Credit card delinquencies have also increased over the past couple of years, so banks are charging higher rates to compensate. Delinquency rates are now roughly the same as in early 2009. People typically prioritize payments on mortgages and auto loans over unsecured debt, which is why credit cards carry higher rates. Yet credit-card profits have remained relatively stable over time.

In other words, credit-card issuers aren’t getting “richer and richer.” They’ve adjusted rates to compensate for increasing costs and customer risk. Capping the interest rate at 10% would render most credit cards unprofitable. Issuers might try to compensate by charging higher fees. But the 2009 CARD Act restricts the kinds of fees issuers can charge.

The result of that law is instructive. Card issuers responded by raising rates and reducing credit to non-prime borrowers. A paper by the Philadelphia Fed concluded the law “likely had an adverse effect on non-prime borrowers.” The same would be true of the Hawley-Sanders bill. Some might have to turn to payday loans, which carry higher fees."