From the article –
“Low prices can’t be decreed or legislated. We see this time after time. Scarcity is not a market outcome, rather it’s an effect of government meddling in prices. When governments decree cheap what isn’t, the good in question is more difficult to attain. Basic economics.”Or more simply put from a Michigan credit market standpoint – If you lower interest rates too low, you end up hurting the people (those with less than ideal credit) you are trying to help.
Here is the full article
Despite what Fed officials, economists, and their media enablers tell you, there’s no such thing as costless credit. This is important simply because economists and pundits who should know better still claim against all logic and reason that when the Fed goes to “zero,” so do interest rates. No, that’s not true.
Low prices can’t be decreed or legislated. We see this time after time. Scarcity is not a market outcome, rather it’s an effect of government meddling in prices. When governments decree cheap what isn’t, the good in question is more difficult to attain. Basic economics.
Stop and contemplate this truth vis-à-vis credit, and in thinking about it, readers must remind themselves that no one borrows or lends “money.” In reality, the borrower is borrowing near-term access to market goods and services, while the lender is delaying access to both in the near term in return for access to both in greater amounts in the future. The interest earned on the loan represents the market goods that will be attained in greater amounts.
Which raises a question: why, if price controls always and everywhere fail with one market good, would they work with money exchangeable for all market goods? It’s a good question, and it’s one that Senators Bernie Sanders and Josh Hawley perhaps haven’t contemplated.
They’re presently working together on legislation that would cap interest rates charged by credit card companies at 10 percent. To which some will say the latter sounds nice, but it won’t work. Actually, the proposed legislation sounds awful precisely because it amounts to the senators presuming to coerce a market outcome with decrees of artificially low prices. They’ve failed before they’ve begun.
What the Senators gloss over firstly is that interest rates are an effect of production. Put another way, absent production no one would have any reason to borrow to begin with exactly because borrowing is once again an accession of market goods.
From there, those with surplus access to market goods want to be compensated for giving up near-term access to the market goods. The interest rate is their compensation, and they logically want to be compensated not just for lending out their access, but also for the risk of doing so. Which is no insight. Call interest rates the mechanization of skepticism about being paid back, or something like that.
Applied to low interest rates or the impossibility that is “zero,” when the Fed merely goes low the latter is paradoxically a sign of tight credit to the extent that markets comply. To presume otherwise is to presume not just that those with cash would lend it out for next to nothing, but that they would lend it out without regard to the presumed ability of the borrower to pay the monies borrowed back. Lots of luck there. Which is why when the Fed goes to zero or some other number that could only be divined by price controllers, it’s a sign that the lending window is only open to the most blue chip of borrowers for whom paying the money back is a foregone conclusion.
Applying all this to the legislation proposed by Sanders and Hawley, they can legislate 10 percent interest rates on credit card debt, but they can’t legislate abundant credit card credit at 10 percent. Which speaks to the defeating nature of their legislation: aimed to enhance access to credit at low costs, it will achieve the exact opposite assuming what’s unlikely, that legislation this misguided could ever become law.
John Tamny – I’m President of the Parkview Institute, editor of RealClearMarkets, a senior fellow at the Market Institute.