PRESIDENT-ELECT DONALD TRUMP'S PROPOSAL TO CAP CREDIT CARD INTEREST RATES AT 10% HAS DRAWN SUPPORT FROM PROGRESSIVES LIKE SENATOR BERNIE SANDERS AND ELIZABETH WARREN. BUT SOME EXPERTS WARN THAT THAT CAP COULD COME WITH A BIG CATCH. POTENTIALLY MAKING IT MUCH HARDER FOR CONSUMERS TO QUALIFY FOR CREDIT CARDS OR ACCESS LINES OF CREDIT.
JOINING US RIGHT NOW IS NATASHA SARIN, A YALE UNIVERSITY PROFESSOR WHO IS ALSO A FORMER TREASURY DEPARTMENT OFFICIAL. ALSO, MICHAEL STRAIN IS A. I.
-- AEI DIRECTOR OF ECONOMIC POLICY STUDIES. LET'S START WITH YOU, BECAUSE YOU DON'T LIKE THIS POLICY AT ALL. >> I DON'T LIKE THIS POLICY AT ALL.
I THINK YOU GOT A SITUATION WHERE BERNIE SANDERS IS FOR SOMETHING, THE PROGRESSIVE LEFT IS FOR SOMETHING, AND KIND OF POPULIST NATIONALIST RIGHT IS FOR IT AND TYPICALLY WHEN THOSE TWO GROUPS ARE AGREEING, THE POLICY IS BAD. THIS IS A POLICY THAT IS EFFECTIVELY A PRICE CONTROL. THIS IS A POLICY THAT WOULD LEAD CREDIT CARD LENDERS NOT TO EXTEND CREDIT TO PEOPLE WITH RELATIVELY LOW CREDIT SCORES.
PEOPLE WHO ARE KIND OF JUST GETTING STARTED IN THEIR CAREERS OR PEOPLE WHO FOR WHATEVER REASON HAVE A LOW SCORE. THOSE ARE OFTEN PEOPLE WHO REALLY NEED CREDIT. THE ONLY WAY IT MAKES SENSE TO LEND TO THEM IS TO CHARGE THEM A HIGH RATE OF INTEREST BECAUSE THEIR DEFAULT RISK IS HIGHER.
SO THIS IS A KIND OF CLASSIC EXAMPLE OF A POLICY WITH -- DESIGNED WITH GOOD INTENTIONS, BUT THEN WOULD END UP HURTING THE VERY PEOPLE THAT IT IS DESIGNED TO HELP. >> NATASHA, CAN YOU SPEAK TO THAT? THIS IS A SITUATION, YOU DON'T WANT USERY RATES FOR CREDIT CARDS, BUT YOU WANT TO MAKE SURE PEOPLE WHO ARE JUST STARTING OUT AREN'T GOING TO BE TOLD THERE IS NO ROOM FOR YOU, BECAUSE YOU DON'T HAVE A CREDIT SCORE, YOU DON'T HAVE A CREDIT HISTORY WE CAN TRUST OR MAKE THESE DECISIONS BASED ON.
>> AND INTERESTINGLY, THIS IS AN AREA WHERE I AGREE WITH MICHAEL. IT IS A SITUATION WHERE YOU UNDERSTAND, LIKE, THE POLITICAL ATTRACTIVENESS OF A PROPOSAL LIKE THIS. YOU HAVE AMERICANS PAYING, IT IS HIGH INTEREST RATE ENVIRONMENT AND AMERICANS ARE PAYING $100 BILLION A YEAR IN INTEREST ON CREDIT CARD LENDING.
BUT WHEN YOU HAVE SUCH A PROPOSAL, YOU HAVE TO EVALUATE IT NOT JUST FOR ITS INTENDED CONSEQUENCES, BUT ALSO FOR ITS UNINTENDED CONSEQUENCES. AND MICHAEL IS RIGHT, WHAT IS GOING TO HAPPEN IS CERTAIN TYPES OF CONSUMERS, PARTICULARLY NEW BORROWERS WHO ARE SUBPRIME AND DON'T HAVE A CREDIT HISTORY WILL BE PRICED OUT OF THE MARKET IN A SITUATION WHERE BANKS AND LENDERS AREN'T ABLE TO CHARGE THEM A HIGHER RATE OF INTEREST. AND WHAT IS GOING TO HAPPEN WHEN THEY GET PRICED OUT OF THE MARKET, WHAT IS GOING TO HAPPEN IS THEY'RE GOING TO TURN TO MORE EXPENSIVE ALTERNATIVES SO YOU HAVE CREDIT CARD INTEREST RATES THAT AVERAGE 20% TODAY, AND PAYDAY LENDER INTEREST RATES ARE 400%.
>> THAT'S A REALLY GOOD POINT. THIS IS A SIMPLISTIC POLICY THAT IGNORES A LOT OF THINGS. NOT JUST FROM THE PERSPECTIVE THAT IT DOESN'T GET OUTSIDE OF THE CREDIT CARD INDUSTRY.
BUT, MICHAEL WHAT ABOUT THE IDEA WE SAY 10%, OKAY, MAYBE THAT'S ONE THING WHEN THE TEN-YEAR IS SITTING AT 4% AND CHANGE. WHAT HAPPENS IF RATES WERE TO GO UP TO 8%, 9%, 10%, THAT WOULD PRICE A LOT OF PEOPLE OUT OF THE MARKET. >> IT WOULD.
AND, AGAIN, IT IS A GOOD EXAMPLE OF WHY IT IS DIFFICULT FOR THE GOVERNMENT TO KIND OF REACH INTO MARKETS. AND MICROMANAGE WHAT IS HAPPENING WITH BUSINESSES. 10% IS A RATE THAT SOUNDS HIGH, AND ZERO INTEREST RATE ENVIRONMENT, BUT WE ARE NO LONGER IN A ZERO INTEREST RATE ENVIRONMENT.
AND THERE ARE A WHOLE LOT OF REASONS TO BELIEVE THAT YIELDS ARE GOING TO RISE EVEN HIGHER RELATIVE TO WHERE THEY ARE TODAY. AND THAT MAKES 10%, YOU KNOW, LOOK MORE AND MORE RESTRICTIVE. >> I DO WANT TO SAY, THIS, LIKE, I DON'T WANT TO SORT OF AGREE WITH MICHAEL FULLY IN THAT THIS CREDIT CARD MARKET AND PAYMENTS MARKET IN GENERAL ARE AN AREA WHERE REGULATORY INTERVENTION I THINK CAN BE SUCCESSFUL.
>> WHAT IS THE RIGHT WAY TO DO THIS? IF THIS IS NOT THE RIGHT WAY, WHAT WOULD YOU RECOMMEND, NATASHA? >> THERE ARE TWO COMPONENT PARTS.
ONE IS THAT CREDIT CARD CONTRACTS USED TO BE A PAGE LONG AND READABLE TO YOU AND ME. I TEACH CORPORATE FINANCE. AND CREDIT CARD CONTRACTS TODAY ARE 38 PAGES LONG, AND INDESEAVERABLE INDECIPHERABLE TO PEOPLE WHO DON'T HAVE A DEGREE.
>> OTHERS SAY THAT IS BECAUSE OF SARBANES OXLEY. >> I THINK THEY'RE THINKING ABOUT REGULATION AND THE WAY TO ACCURATELY DESIGN REGULATION IS SUPER IMPORTANT. UNDERSTANDING THAT WHAT HAS HAPPENED IS THE MARKETS HAVE BECOME MORE COMPLEX IS THESE CARD COMPANIES ARE ABLE TO ATTACH CONTRACT TERMS THAT NO ONE READS THAT RAISE THE PRICE OF CREDIT FOR CONSUMERS.
AND THE RESULT IS NOT JUST THAT THE PRICE OF CREDIT IS HIGH, IT IS ALSO THAT WE DON'T ACTUALLY KNOW WHAT WE'RE PAYING FOR CREDIT. AND SO I THINK A REALLY IMPORTANT ASPECT HERE IS DISCLOSURE, A REALLY IMPORTANT ASPECT HERE IS THINKING SERIOUSLY ABOUT THE WAYS IN WHICH WE CAN TRY TO GET AT SOME OF THE HIDDEN TERMS. >> DISCLOSURE SOUNDS LIKE THE CONTRACTS ARE GOING TO GET EVEN LONGER.
>> I TOTALLY -- DISCLOSURE, SIMPLICITY, I AGREE WITH YOU. >> THEIR Y'RE TWO DIFFERENT THI. >> I REALLY THINK IN PAYMENTS MARKETS IT IS IMPORTANT FOR US TO UNPACK WHEN YOU AND I GO TO THE GROCERY STORE AND PAY WITH OUR REWARDS CREDIT CARDS, WE GET A KICKBACK IN THE FORM OF REWARDS POINTS OR AIRLINE MILES, AND WHEN SORT OF POOR PEOPLE WHO DISPROPORTIONATELY PAY IN CASH MAYBE BECAUSE THEY DON'T HAVE ACCESS TO CREDIT CARDS, THEY DON'T GET ACCESS TO ANY OF THOSE SAME TYPE OF REWARDS.
>> I DON'T KNOW HOW YOU FIX THAT. DO YOU AGREE WITH NATASHA ON THIS POINT? >> NO, I DON'T AGREE WITH NATASHA ON THIS.
I THINK THAT GROCERY STORES AND RETAIL STORES SHOULD BE FREE TO GIVE THOSE KICKBACKS TO PEOPLE THEY WANT AND IF PAYING WITH A CREDIT CARD IS MORE VALUABLE TO A GROCERY STORE OR RETAIL STORE THAN PAYING IN CASH OR PAYING WITH A CHECK, THE GROCERY STORE SHOULD BE ABLE TO ENGAGE IN THAT TRANSACTION THE WAY THAT THEY SEE FIT. TRYING TO MICROMANAGE THAT TYPE OF PAYMENT -- >> NATASHA, IT SOUNDS LIKE YOU -- IT SOUNDS LIKE YOU'RE SAYING SOMETHING MORE LIKE AIRLINE REWARDS PROGRAMS, BUT WHAT DOES THAT MEAN? THEY HAVE TO LET EVERYBODY INTO THE PROGRAM?
>> JUST TO BE CLEAR -- NO, NO, NO. NOT ALL. THE CREDIT CARD COMPANIES ARE PAYING -- ARE CHARGING A 5% INTERCHANGE RATE ON THESE TRANSACTIONS.
THAT MEANS THAT WHEN YOU GO TO THE GROCERY STORE, THE GROCER HAS TO PAY 5% FOR YOUR USING YOUR REWARDS CREDIT CARD. SOMEONE PAYS IN CASH, THE GROCERY STORE DOESN'T HAVE TO PAY ANYTHING. BECAUSE OF THE WAY THAT CARD COMPANY HAS DESIGNED THESE CONTRACTS, IT IS IMPOSSIBLE FOR THE GROCERY STORE TO PASS ON THAT 5% JUST TO THOSE CONSUMERS WHO ARE PAYING WITH THEIR REWARDS CREDIT CARDS.
SO THE RESULT IS HIGHER PRICES FOR EVERYONE AND REWARDS JUST FOR THOSE AT THE VERY TOP OF THE DISTRIBUTION. AND I DON'T THINK THAT'S A FAIR SYSTEM. I DON'T THINK THAT'S AN EQUITABLE SYSTEM.
>> SO NOBODY SHOULD BE ABLE TO OFFER THOSE REWARDS TO CUSTOMERS WHO THEY WANT ON AS CUSTOMERS? >> NO, PEOPLE SHOULD BE ABLE TO OFFER REWARDS TO CUSTOMERS, BUT IF YOU COMPARE US TO EUROPE AND AUSTRALIA, THEY DON'T HAVE THOSE TYPE OF REGRESSIVE SUBSIDIES IN THEIR SYSTEM AND THE REASON THEY DON'T IS BECAUSE THEY HAVE DESIGNED REGULATIONS -- >> IT IS NOT A SUBSIDY THAT COMES FROM A TAXPAYER. THIS IS A COMPANY THAT WANTS TO SUBSIDIZE WHO THEY THINK IS GOING TO BE A VALUABLE CUSTOMER, THAT'S A DIFFERENT THING.
>> BUT WHAT HAPPENS IN THOSE COUNTRIES IS THAT THE COST OF TRANSACTING ON THOSE CREDIT CARDS IS BORN BY THE CONSUMERS WHO ARE PAYING WITH THOSE CREDIT CARDS. THAT'S NOT WHAT HAPPENS IN THE U. S.
TODAY. THE COST OF TRANSACTING WITH THOSE CARDS IS BORN BY EVERYONE.
