Saturday, November 21, 2009

Congress should rein in spiraling credit card rates

Boston Globe article "Congress should rein in spiraling credit card rates" (November 21st, 2009) attributes insidious motives to an expected and profit-maximizing behavior.

The banks have jacked up interest rates to as much as 30 percent, apparently to preempt a new rule that comes into force in February, requiring that consumers receive notification 45 days before a new rate hike.

Interest rates are prices. When a company is free to vary its price depending on the state of the world that materializes, then we expect efficient prices immediately. When they are restricted from changing prices, they must deal in a world of expectations, and a weighted average price that lies somewhere between a low-state and a high-state is a firm's proper price.

Why should we be surprised that we have inefficient prices--sometimes too low, sometimes too high, when we restrict prices?

Members of Congress need to extricate themselves from the python-like embrace of the financial sector and establish a regulatory framework for determining fair and reasonable credit card rates.

The Globe should recognize that the market for credit, for capital, is perhaps the most competitive in the world, and the only result of interference will be inefficiency and shortages.

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