Regulatory Watchdogs

Center for Regulatory Effectiveness

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Trying to Fuel the Banking Crisis
What’s the proper government response to a financial situation characterized by an over-indebted public, mortgage defaults, and a resulting slow down in the credit markets? Encourage consumers to take on even more debt while discouraging consumer lending according to Public Citizen and Consumer Watchdog.

The joint recommendations of the two NGOs include capping “interest rates on credit cards and mortgage rates at a level based about 3 percentage points above the Federal Reserve's Discount Window, which is presently 2.25 percent.”

While placing price controls on consumer interest rates sounds like a real crowd pleaser, the result would be to encourage consumers to get even more deeply in debt while discouraging savings and investment. Moreover, the price caps would discourage institutions from extending credit, thus limiting consumer credit and spurring demand a.k.a. creating a new credit crunch. Since lending institutions would allocate their limited credit resources to the safest borrowers, lower income consumers would be particularly hard hit by the Public Citizen/Consumer Watchdog proposal.

The sad history of price controls has repeatedly demonstrated that they lead only to economic misery. As the administrator of President Nixon’s price control scheme later explained, “…the kindest thing I can say about it is that it was a disaster.” If interest rate price controls were actually enacted, the biggest victims would be the very consumers PC and CW purport to protect.

See NGO press release

See speech by the Director of the FTC’s Bureau of Economics

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