Government to Set Credit Card Rates?

Last week NYC Councilwoman Melinda Katz reiterated her call for the government to limit the rates credit card companies can charge their customers. As Cafe Hayek blogger and economist Don Bourdeaux pointed out on his blog, this example is just another “ironic pitfall of government bailouts of private firms – namely, the inevitable demands by demagoguing politicians that recipient firms be hamstrung in their ability to respond to market forces.”

Katz said in a letter to the New York Times:

“When taxpayers are asked to recapitalize banks, they should not be charged for the privilege. Yet the cost of consumer credit has only increased since the first bailout package. While some conditions were imposed on shareholder dividends and executive compensation, there were never any provisions to protect consumers. This is unacceptable.”

Bourdeaux responds:

“While I have no sympathy for any firm that accepted taxpayer funds, the fact is that a firm must be able to change its prices in response to changing market conditions if it is to survive in the market. By turning private firms into quasi-political entities, bailouts undermine their own ostensible purpose of making these firms strong and nimble competitors.”

The frustration of Ms. Katz is understandable, that taxpayer money would fund a firm charging high rates for taxpayers. But if the firm is charging unacceptable rates it should be run out of business by the market, by people not using their services, and thus the firm closing down for lack of customers. But the government can’t keep the firm alive and then complain about it’s businesses practices. Either the business practices are necessary for its survival and acceptable given the supply and demand signals, or the practices aren’t aren’t acceptable and may have been while the bailed out firm was struggling to begin with.