Peter Schiff’s latest piece, written at EuroPac.net, addresses the recent moves to protect credit card consumers from the high fees by lenders.
The bottom line is that credit card lending is a very risky business. The debts are unsecured and the probability of default is high, meaning big losses should borrowers choose not to pay. In addition, should a borrower file bankruptcy, credit card debt is often the first to be discharged. Given the risks, interest rates need to be very high to keep lenders in business.
One way to keep a lid on rates for those who do pay is for lenders to weed out those most likely to default. This can be accomplished through higher rates. Not only does this discourage riskier borrowers from taking on more debt, but it gives lenders a bigger cushion to absorb losses. However, by interfering with card issuers’ attempts to better price risk and limit losses, the government will reduce credit availability.
As usual, the simpler and more effective solution would be allowing the markets to function. While Schiff approves of the ends, he, and we, should most definitely not approve of the means. What the government is proposing would wean the nation off of its addiction to credit, an action President Obama ironically says is necessary. Far be it from the government to let its citizens bear the consequences of their own actions. You can read the full article here.Published in