Sunday, April 17, 2005

Is the market for consumer credit competitive?

Left wing people who hate and do not understand markets think the bankrupcy reform bill is bad. I do not know the details of the current bill, but neither do they. They think making bankrupcy harder is bad because it hurts consumers and helps fat cat credit card companies. The argument that tougher bankrupcy laws help consumers by lowering interest rates, and thus the cost of borrowing, does not move them because credit card companies are exploding with profits.

These things can be tested. (See this great article).

1) Are interest rates for houses, cars, and credit cards different? And are these differences in line with the ease of recovering the money in an event of default?

The answer to both these questions is yes. Mortgages are cheapest, then car loans, and finally credit car loans. This indicates 1) competition between different credit markets, 2) competition within credit markets, 3) real cost from default. Credit card companies may make money, but they are in a competitive market.

2) Are interest rates sensitive to default risk?

The came up with this device they could install in cars that would make the car stop working if the owner stopped paying his car loan (can't find link). Defaults fell, probably through some combination of disuading those who intended to default from buying those cars and creating negative consequences for owners who defaulted. Interest rates for cars with this device are lower than for cars without this device.


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