Fed Meddles With Credit Card Issuers
The Federal Reserve's plan to clamp down on credit card issuers represents a funny about-turn on its previous hands-off economic stance. Only a little while ago, you might remember, former Fed Chairman Alan Greenspan mulled a similar sort of effort over subprime lenders, but concluded ultimately that it would "require a vast effort with no certainty of results."
Today, the Fed "proposed" tough new rules for credit card lenders, which will stop them from unexpectedly raising interest rates in an account holder's first year, double-billing customers at higher interest rates, and issuing cards to anyone under 21.
If these rules sound a little old to you, that's because they are. In fact, they are exactly the same rules which were signed into law by Barack Obama back in May. It's unclear why the Fed is re-hashing months-ago news this morning.
Either way, there is something unsettling about the Federal Reserve Bank trying to get so deeply involved in consumer protection. In effect, any involvement that it has will only lead to one of two possibilities: Either large credit card company directors will cosy up to key Fed officials, and gain a distinct market advantage, or any attempt by Fed officials to change the way things are done will be so broad-based, and so far-reaching, that they will end up penalizing lots of lenders which provide valuable services to small businesses.
In each case, it will be the consumer that ends up losing out. (With CIT Group's recent turmoil, that's not a good thing right now, either).
Reuters' Felix Salmon has a useful suggestion: "we need a Consumer Financial Protection Agency working in conjunction with the macroprudential regulator," he wrote at the beginning of the week. That's a much more logical idea, since as Salmon correctly asserts, the Fed has consistently proven itself to be a lousy consumer protection advocate.
Part of the reason for that, of course, is that the Federal Reserve is a bank. It may be more politically active than most financial institutions, but it's still a bank. As such, its functions are limited to those of an economic or business sphere, rather than a policy one.
It will be better off for financial institutions and consumers alike if things stay that way, too.