Commonsensical Deregulation in Credit Markets

Commonsensical Deregulation in Credit Markets
by:  Paul Ghayad
Economics and Philosophy Major at George Washington University
Libertarian National Committee Intern
            Common sense has eluded Congress once again, as well as all sense of personal responsibility
            In its attempt to save the credit card market, Congress has interfered with the free market and private contracts. The independence of borrowers and lenders to do their own business under their own terms is an essential characteristic of the free market system.  Stemming from this is that the new credit card legislation to be enforced next winter, which pertains to a financially diverse American public, fails to accurately address this diversity.  By trying to solve a problem that only some but not all people have lacks a rational foundation.  Moreover, such a complete disregard for the individual differences within a people suppresses both the desire to strive for ever-higher goals and the need to follow the rules.  Any sense of ambition evaporates once everyone is punished for the fouls of a few, leaving no other option but to languish.
            The impending legislation will, among other things, primarily seek to curb random interest rate hikes, eliminate floating rates, and magnify contractual fine print.  The idea is to ameliorate the public’s understanding of exactly what they get themselves into when they sign a contract so that credit card companies cannot take advantage of their ignorance.  Congress need not act as a teacher.  A “dumbed-down” legislation lacks justification because the all the information people need about their credit cards is provided in the contract. Credit card companies expect borrowers to pay attention to each detail, as they should. 
            Most of the “random” increases in interest rates are actually reasonable.  Companies calculate the riskiness of borrowers in order to determine their default risk, or likeliness that they may not be able to pay their credit card bill.  This calculation takes into account several factors, each of which accurately represent what type of borrower a person is or is likely to be.  These factors include credit rating (which is based off of credit history), current credit status with other banks, and income.  When a borrower defaults, it makes sense to increase her rate proportional to these factors.  Thus, the recent complaints about “random” hikes lack merit, considering that borrowers know what triggers the hike and why it has increased so much.  Furthermore, rate increases act as a necessary deterrent for future defaults.
            The credit card industry has been deregulated since the 1970s.  There is no reason to end this deregulation.  The importance of paying off loans is made explicit by credit companies, firstly, in a contract, and, secondly, only if necessary, through interest rate increases.  The failure of credit-illiterate people to read their contracts does not substantiate governmental intervention.