Unintended Consequences?

Back In May, President Obama signed a bill making it harder for credit card companies to remain profitable–by making it illegal for them to charge higher interest rates to demonstrably high-risk borrowers. At the time, the President had this to say (emphasis mine):

“We’re not going to give people a free pass, and we expect consumers to live within their means and pay what they owe, but we also expect financial institutions to act with the same sense of responsibility that the American people aspire to in their own lives[.]”

Credit companies, through their own volition, perform an important service. In exchange for interest payments, they allow people to spend money they don’t yet have. This is a good thing. If we could only buy what we could pay cash for, we would naturally buy less. Buying less means companies that sell the things we buy would produce less of those things and therefor employ less people. This is a bad result.

Permitting responsible people to promise to pay money (plus interest) in the future that they’re reasonably certain to acquire in exchange for the benefit of having an object or service today permits our economy to grow.

Credit companies (as with anyone) only lend money if the risks involved (non-repayment) are sufficiently mitigated by their receipt from borrowers of a promise to pay higher interest rates and late fees for failure to repay. This promise to be penalized is an incentive to the borrower to “act responsibly” and to “live within their means” and to “pay what they owe.”

By removing credit companies’ ability to charge appropriate interest rates and late fees to higher risk borrowers, Obama’s removed the incentives for those borrowers to act responsibly and has actually achieved the opposite result by incentivizing bad behavior. If there is no penalty for spending more than you can afford to repay, then why not do so?

Credit companies have of course reacted by doing what I feel Obama always intended them to do. He’s forced credit card companies to subsidize their losses by pulling the fees and late fees from responsible borrowers:

Starting next year, Bank of America will charge a small number of customers an annual fee, ranging from $29 to $99. The bank has characterized the fee as experimental. But card holders who have never carried a balance or paid late fees could be among those affected.

Citigroup, meanwhile, has started charging annual fees to card holders who don’t put more than a specific amount on their cards, typically $2,400 a year. Other banks are charging inactivity fees if customers don’t use their credit cards during a specific period of time.

And another layer of Obama’s socialist agenda is revealed.

Whether it’s the stimulus, cap-and-trade, health care or this credit card legislation, Obama’s overarching objective is to redistribute America’s wealth–from the hands of those who create it, to the hands of those who do not.

This is anti-growth and will prolong our economic downturn.

Gimme That New-Time Irreligion...
D-U-M Spells Dumb