05/27/2009 05:12 am ET | Updated May 25, 2011

The Folly of Credit Card Regulation

Government restrictions on credit card terms is a bad idea, and it betrays basic misunderstanding of economics.

Elizabeth Warren, a Harvard law professor recently appointed as chair of the Congressional Oversight Panel created to oversee the Emergency Economic Stabilization Act, is a leading proponent of new terms for credit card companies.

The current credit terms which Professor Warren wants to restrict increase credit to consumers. Indeed, current terms give issuers the incentive to extend more credit to consumers than they otherwise would, credit which is so critical in this economy, especially to low-income consumers. Assuming Congress has their best interest in mind, they should not interfere.

The credit card business is highly competitive. For anyone that believes otherwise, for anyone that believes credit card companies enjoy inflated profits, the best way to help consumers is not regulation but competition. Therefore Professor Warren, along with other proponents of government restrictions, should put their money where their mouths are, quit their jobs and start a credit card company.

When they offer better terms to credit card users, customers will line out the door. Other credit card companies will either go out of business or match their terms. Professor Warren will make a fortune for herself, and at the same time help poor consumers much more than she could do otherwise.

But if Congress allows new regulations, costs will go up for credit card companies, and the inevitable results will be less credit available, and at higher interest rates. That would be an unwelcome swipe at the already vulnerable American consumer.

Protectionism and regulation are plagues, and they emanate from arrogant government officials and feed on ignorance and economic hardship. During the Great Depression the first thing to be sacrificed was free markets. People expected Washington to provide subsidies and "protect" them with regulations. And today those sentiments are abundant.

It is important to understand that regulation and price controls such as the ones proposed by the Obama administration discourage entrepreneurs from coming up with ways to make products and services cheaper and better. Competitive markets are much better than government bureaucrats in determining the best terms for consumers. Over-regulating creates deleterious side effects.

It is also worth noting that access to low cost goods and services make us richer, not poorer. Free economies create changes in consumer spending, and job losses are inevitably involved. Yes, allowing American to buy cheap goods and services from abroad causes American producers that are uncompetitive to lose their jobs. But when these uncompetitive American producers lose their jobs, American consumers gain, and on the whole the economy is better off.

Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at