Credit Card Regulation And Unintended Consequences: Bringing Back Old Memories

Yesterday’s one-sided Senate vote to increase regulation of credit cards brought back some old mixed memories. My first testimony to a legislative body was to a Committee of the Maryland Legislature in the early 1980s warning them of the likely unintended consequences if they put a limit on credit card interest as they were proposing to do.

Of course, they imposed limits anyway, and the Maryland banks moved their credit card operations to Delaware. Many jobs were lost in Maryland and gained in Delaware. That was an unintended consequence, but probably not an unexpected consequence since the Maryland bankers had made their intentions pretty clear. The lawmakers called the bankers’ bluff and found they weren’t bluffing.

Recalling those events bring mixed feelings, although not evenly mixed. On the selfish positive side, I survived the ordeal of my first testimony, and my warnings were borne out. What happened was exactly what I said would happen. On the negative side was the loss of jobs in Maryland, and the increase in costs to the bankers, although not as great an increase as the alternative of a below-market ceiling on rates.

At about that time nationally, we had a brief but nasty little experiment with government tinkering with credit card spending, which made the recession worse. I don’t know how much worse, but unemployment peaked in that recession at 10.8 percent, a peak that may be exceeded in the current recession within a few months.

The current credit card legislation is not a simple cap on interest rates charged, so the unintended consequences are not as easy to predict. The timing and notification of rate increases are controlled, as are many other terms of the lender-borrower relationship.

I will probably be one victim of the legislation. I try to use my credit card for a lot of purchases I might otherwise pay cash for to earn frequent flyer miles. On the other hand, for years I’ve paid the full balance each month to avoid interest charges. Higher bank costs in one part of their business will likely be recovered in another part of their business. “Good behavior” is once again likely to be punished for the “bad behavior” of others, unless Congress would be willing to share some of their economizing secrets with the banks, as they have been willing to do in the automobile industry.

Let me close by noting that many of the credit card issuers brought this on themselves by some of their egregious actions and lack of proper communication with their customers. The economics of the situation and my gut are pulling in opposite directions. Dare I call that “gut wrenching”?

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