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Everyone says they love low rates of interest, but do they really? Logic says no.

Think about it. And in thinking about it, imagine if the Fed could actually decree credit costless as politicians and economists imagine it can. If so, there aren’t enough 9s after 99.9 to put a number on the percentage of Americans who couldn’t borrow money at all. Which is pretty much a statement of the obvious.

It is simply because no lends or borrows “money.” Underlying every loan is the exchange of near-term access to actual resources (think trucks, tractors, computers, desks, chairs, buildings, labor!) in return for long-term access to same in greater amounts. Which is why credit would be near non-existent if it were costless.

We don’t borrow dollars as much as we borrow what dollars can be exchanged for. Lenders loan out money to borrowers at a rate of interest so that they can be compensated for delaying consumption. In other words, a lender is only willing to lend insofar as payment of the loan plus interest will entitle the lender to future resources greater in amount to what he or she initially loaned out.

It’s a long way of saying that if you find yourself wishing for cheap credit, careful what you wish for. What’s cheap or costless is generally scarce. Particularly if cheap or costless is decreed by regulators or politicians.

These truths come to mind as the Consumer Financial Protection Bureau (CFPB) pats itself on the back for “slashing” late fees levied on credit card holders. The CFPB just finalized a “rule” to bring the average monthly cost for late credit card payments down to $8 from $31. The bureau claims its rule will save consumers something on the order of $10 billion per year.

Sure, but why is the CFPB being so stingy? If “slashing” the price of lateness from $31 to $8 will save consumers $10 billion, why not save them even more by pushing the number down to $0?

Of course, buried in the CFPB’s rule is the answer to the above question. The CFPB didn’t slash late fees to $0 simply because the act of doing so would result in substantially less credit for the borrowers it claims to want to protect from late fees to begin with. About the previous assertion, it’s hardly novel or insightful unless the most basic truism in economics is novel or insightful. If you’re scratching your head, there’s no such thing as a free good.

Applied to late fees on loans, there’s a cost to borrowing money. Thank goodness there’s a cost. Take away the costs associated with a market good and you take away the market good. As this column notes routinely, there aren’t price controls as much as there’s scarcity.

If lenders can’t get back the principle loaned plus interest, they’ll explicitly be giving away precious near-term access to resources for free. Implied in the CFPB’s $8 rule is acknowledgement of the previous truth, along with acknowledgement that a $0 rule would wipe out credit access in massive amounts. The problem is that $8 is hardly an improvement.  

Indeed, the $31 fee wasn’t created out of thin air as much as there’s yet again a substantial cost associated with loaning out money. Particularly with higher-risk borrowers occasionally prone to paying bills late. Those with savings need to be compensated for putting their savings at risk. Basic stuff. But if regulators run roughshod over free market forces rooted in basic economics, markets won’t cease speaking freely. In other words, if you decree late bill paying costless on the backs of lenders, the lenders will take their savings elsewhere.   

Which is why it’s crucial that the CFPB’s rule be revisited very quickly. Meant to protect borrowers, what it will really do is make it much less likely that would-be borrowers will have access to credit at all.

John Tamny is editor of RealClearMarkets, President of the Parkview Institute, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His latest book, set for release in April of 2024 and co-authored with Jack Ryan, is Bringing Adam Smith Into the American Home: A Case Against Homeownership

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