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Credit Competition

Yesterday’s New York Times had a letter-to-the-editor from Mr. Morton Mintz who suspects that credit-card interest rates are too high — he even used the word usury.  Mr. Mintz calls upon Congress to investigate whether or not these interest rates really are usurious.

Overlook the ambiguity of such words as "usurious."  (Note: Mr. Mintz apparently believes that a clear dictionary definition of "usury" means that in reality usurious rates of interest are objectively distinguishable from non-usurious rates.  Such a belief is mistaken — as mistaken as would be, say, the belief that because the word "profound" has a clear dictionary definition that Congress (or anyone else, for that matter) could determine which books in a library are "profound" and which ones aren’t "profound.")

Overlook also the utter lack of expertise of politicians to assess the merits and terms of contracts between merchants and their customers.  And overlook Congress’ s unavoidable political nature: members of Congress are politicians who will behave as politicians rather than as objective finders of fact.

The germane fact is that many investigations into the appropriateness of credit-card interest rates and charges are continually underway.  They take place ruthlessly and constantly.  They are  done by competitive card issuers and by potential other suppliers of consumer credit seeking out, searching for, ways to expand their market shares.  They are also done by consumers themselves who can switch card issuers or refuse altogether to use credit cards.  If rates are too high, these investigations will discover this fact and correct it.

Am I naive?  Certainly no more naive that is Mr. Mintz and others who suppose that an investigation by Congress into credit-card rates will uncover trustworthy information and use this information as the basis for sound corrective actions.

Of course, I think that I am not naive (although I concede that, were I in fact naive, my naivete would itself hide its reality from my notice).  If there are government-imposed restrictions on the ability of banks and other firms to compete to offer consumer credit, then credit-card rates would then likely be too high.  But absent such restrictions — and I know of none — then our best guess is that rates are appropriate.  If rates were too high, then the greedy quest for profit would prompt one or several firms to lower rates or offer better terms to consumers.

I close by acknowledging that credit-card issuers sometimes resort to sneaky tactics.   Indeed, every time I write against the notion that such issuers should be hauled before Congress and "investigated," I receive a fair number of e-mails from people informing me of the tricks and snares that card issuers sometimes use to increase their profits.

The fact that such tactics are widely known reduces their effectiveness.  More to the point, fraud — if that’s what some of these tactics are — is an offense at common law and should be punished.  High interest-rate charges and late fees are themselves not fraudulent.