More Unintended Consequences on the Way

What Goes Around Comes Around

The Law of Unintended Consequences says that when a government attempts to bring about a social good by positive legislation, the unintended consequences result in the exact opposite actually occurring. "Positive good" laws result in creating social harm.

The Law of Unintended Consequences cannot be ignored, prorogued, or repealed. "Positive good" laws produce bad unintended consequences because laws cannot redeem people or make them good. That is not the way the creation was made to work. People simply work their way around or exploit the law to maximise their own advantage, and the advantage of those to whom they are responsible. And so they should. Taking care of one's own is a God-given duty.

President Obama either does not understand the Law of Unintended Consequences, or he disbelieves its existence. Consequently, wanting to create a new world through positive laws, he is providing plenty of material to illustrate and demonstrate the law's existence and power. Not that we expect that he will learn lessons and change tack any time soon. There is such a thing as invincible ignorance. A hundred blows on the back of a fool make no impression, whereas a mere word to the wise is sufficient.

With much fanfare, the Democratic Congress and the President recently created the the "Credit-Card Consumer Protection Law". The intent of the law is pious. It seeks to protect consumers who have been awarded credit cards. "Nefarious" practices of credit cared companies have been outlawed. What practices, you ask? Well, credit card issuers will no longer be able to charge late fees so easily. The lending contracts will be less adjustable at the discretion of the credit card issuer. Obama thinks that this has ripped consumers off. Well intentioned, to be sure.

Hear the great orator himself:

“Contracts are drafted not to inform but to confuse,” Obama said. “Mysterious fees appear on statements. Payment deadlines shift. Terms change. Interest rates rise. And suddenly a credit card becomes less of a lifeline and more of an anchor,” he said.

The measure requires 45 days’ notice before lenders can increase a card’s interest rate. It would prohibit retroactive rate increases on existing balances unless a consumer was 60 days late with a payment. Companies would have to restore the original, lower rate if a cardholder stayed current six months after a late payment. Banks will have to comply with the new law in nine months.

Credit card lending is unsecured and risky by nature. Therefore, it requires lenders to charge a higher interest rate to compensate for the higher risk. They have to do this if they are to take care of the lenders. Without lenders they would not be able to issue credit cards in the first place. Late fees, interest rate adjustments, and additional charges have all served to keep the interest rates charged on credit cards artificially low. the extra charges have subsidised the interest rate charge, and kept it down. It is these charges--which have fallen particularly upon those who have lower credit ratings--that is, those who are poorer, which have offended Obama and others. But these charges have only been a proxy for higher interest rates.

Now, as a consequence of the new law, interest rates on credit cards will rise. The risk still has to be paid for or compensated for. Now it will come where it should have come all along--via the actual interest rates charged. And, since the rates will be less flexible, safety requires setting rates at the higher end of the scale, "just in case." According to one market expert,

Card issuers are likely to raise interest rates “so they can continue to maintain a level of profitability,” he said. In the long run, “you’ll see much more competitive interest rates” for people with the best credit ratings, said Truono, now a managing director of BDO Consulting in New York.

Unintended consequence numbers one and two. Overall rates will rise; secondly, well-off people will pay lower rates. The rich will get richer, while the poor will have more of their meagre cash flow eaten up in higher interest payments.

Moreover, fewer people will be able to get credit cards--particularly poor people, or those on the fringes of poverty. An "inalienable" right of American consumers is going to disappear for many, according to those who actually have grass roots experience--that is, those who actually know how these things work.

“The unintended, unpleasant, undiscussed consequence of this legislation is that banks will cut credit to reduce exposure to future loan losses,” Hammer said. . . .

“You’ll see a reduction in credit available to subprime customers, and even those in the near-prime range where the card companies have a hard time gauging what the risk is,” said Scott Valentin, an analyst at Arlington, Virginia-based FBR Capital Markets Corp.

Unintended consequence number three.

Those on the fringes, and desperate, will be forced to go to loan sharks who do not require a credit history because they have "other ways" of ensuring payment. The "black market" for credit will explode and the poor and vulnerable will be gouged cruelly by it. The very people it was designed to protect will be made more vulnerable as a consequence of this measure.

Unintended consequence number four.

And finally worst of all for a President hoping to get re-elected, the new protection law is going to slow down the US (consumer led) recovery.

The credit-card legislation will reduce the number of individuals who have access to cards and discourage the use of credit cards for those who have them, which “clearly cannot help the recovery in the near term,” said Martin Feldstein, an economics professor at Harvard University in Cambridge, Massachusetts, and a former head of the National Bureau of Economic Research.

Unintended consequence number five.

But, never mind. Give them a couple of years and the "do gooders" will be back at it. Deeply insightful and caring politicians will start to say it is discriminatory and unfair that poor people do not have access to credit cards, and that nasty banks and financial institutions are charging them higher interest rates than rich people. This will be framed as racist and institutionalised discrimination against minorities. The NAACP will get involved with its righteous indignation at megaphone volume.

More laws will be passed requiring credit card companies to stop their racist and discriminatory practices and to issue cards to members of underprivileged minorities, and requiring that they be charged equal interest rates along with rich white folks. Who could oppose that? Its fair, after all. To aid and abet the entrance into this brave new world, Government supported companies will be set up to purchase credit card outstandings, taking them off the balance sheets of banks, to encourage the provision of credit to disadvantaged folk. Credit card companies will rapidly expand their business books; credit volumes and amounts outstanding will rise exponentially, and--well, banks will collapse.

"It's the dirty, greedy, rapacious bankers' fault," the sanctimonious politicians will fulminate. Others, with longer memories, will merely shake their heads and say, "Here we go again." The more things change, the more they stay the same. The Law of Unintended Consequences remains alive and well. As do naive, stupid, dumb politicians and judges, afflicted with overweening hubris--and voters who are complicit in the same sins.

The moral of the story is clear. No matter how populist or well-intentioned a politician or legislator you may be, the Law of Unintended Consequences will get everybody in the end. You either do things God's way, or everyone pays the price of foolishness and pride. This, of course, is not music in the ears of Athenians. But it is the tune they will end up dancing to whether they like it or not.