Maloney Needs This “Conversation” More Than the Public Does

As noted in earlier posts, Isaiah Matos and other Libertarian leaders have invited Rep. Carolyn Maloney to have the “Main Street discussion” that she says was missing from the bailout brouhaha. If Maloney’s actions in Congress these last few weeks are any indication, she is in desperate need of some discussion on basic economic principles.

First, Maloney pushed through the House of Representatives something called the “Credit Card Holders Bill of Rights.” As the Wall Street Journal puts it, “[g]iven the current financial turmoil, the last thing Congress should do is undercut access to credit and increase its price. This bill would do both.”

The legislation, sponsored by New York Democrat Carolyn Maloney, is intended to address supposedly unfair and deceptive credit card practices. Specifically, the bill would constrain the ability of credit card companies to price risk by adjusting interest rates. Currently, interest rates and payment schedules vary from person to person based on the fact that some cardholders are more likely to default than others. But if lenders don’t have the flexibility to react to market changes and customer circumstances, they’ll be forced to spread these risks to everyone by increasing the cost of credit. That includes low-risk cardholders who would have to subsidize higher-risk customers.

Maloney’s legislation would further hurt low-income consumers by denying them low-interest credit cards:

The Maloney bill would also dictate how creditors allocate payments against balances. Where credit balances are subject to different interest rates — e.g., zero-percent interest for a balance transfer, but 12% for new purchases — the legislation would ban the current common practice of directing payments toward the lower interest rate balance first.

The likely result will be fewer zero-percent promotional rates that individuals and small businesses rely on to reduce borrowing costs. Lenders now have an incentive to extend these low rate offers — which allow borrowing at below-market rates — because they know these balances will be repaid first. Remove that incentive and we’ll almost certainly see fewer promotional rate offers.

Then this week, Maloney further demonstrated her financial ignorance during the congressional grilling of disgraced Lehman Brothers CEO Richard Fuld. As the New York Times reports:

Monday’s hearing was illuminating only in what it showed about Congress’s sorry willingness to use a national emergency to score political points. Representative Carolyn Maloney, Democrat of New York, pressed a panel of experts who appeared before Mr. Fuld to say whether the crisis had been caused by the abolition of Glass-Steagall, the Depression-era law that had separated commercial banks from investment banks. (“Yes or no!” she demanded.)

She was implying that Republicans were the villains by tearing down financial regulation — which may well be true, though the example she picked was a poor one. The companies that have best withstood the crisis are those that took advantage of the end of Glass-Steagall to form one-stop-shopping banks: Citigroup, JPMorgan and Bank of America. The companies that have fallen are the stand-alone investment banks: Bear Stearns, Lehman Brothers and Merrill Lynch.

Please come to our town hall, Carolyn. You just might learn something.