Hawley-Sanders Rate Caps: Pre-Debunked

At RealClear Markets, Patrick M. Brenner of the Southwest Public Policy Institute considers the Hawley-Sanders proposal to cap credit card rates at 10% and finds it wanting on two levels.

Regulars here and at RealClear Markets will likely already be familiar with the theoretical objections to this proposal, which is simply an attempt to impose price controls on borrowing.

On top of being an improper violation of liberty, price controls lead to shortages:

Image by John Tenniel, via Wikimedia Commons, public domain.

Capping interest rates at 10 percent is not a free-market reform; it is an interventionist policy that will lead to unintended consequences, much like the economic restrictions seen in progressive strongholds.

Some supporters of the proposal argue that credit unions already function under an 18 percent cap and continue to issue credit, so a 10 percent cap should be feasible for traditional banks. This comparison ignores the unique structure of credit unions, which are member-owned cooperatives with different incentives than for-profit banks. Credit unions also have more flexibility to impose fees and limit access to credit in ways that traditional banks cannot. Credit availability under a 10 percent cap would not resemble credit unions, as banks would be forced to reduce credit lines, close accounts, and eliminate many of the benefits consumers currently take for granted. [bold added]

This can not only be seen for all kinds of price control attempts throughout history, there are two recent examples of states attempting exactly this particular type of price control!

The effects of a national rate cap would mirror those seen in states like New Mexico and Illinois, where similar policies have already restricted the availability of small-dollar loans. A 10 percent ceiling would not only make traditional credit cards unprofitable for banks but also eliminate the financial flexibility many consumers rely on. Those who can no longer qualify for credit cards will face limited choices, including expensive alternatives with hidden fees and fewer consumer protections. [bold added, links omitted]

This is a terrible idea, economists know exactly why it doesn't help anyone, and "real-world" data are there for the asking.

Nevertheless, if Trump's rubber stamp Congress passes this monstrosity, I expect Trump to sign it into law. He is, after all, a big fan of tariffs, and those were similarly debunked -- centuries ago -- but also have real-world data showing that they are terrible ideas. Why should things be any different here?

In a free society, some people will inevitably make bad choices. It is ironic that this bill is ostensibly to save such people from themselves, but would instead force Trump's mistakes on all of us.

-- CAV