The Credit Card Cap: A Faustian Bargain?

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The year, as they say, is unfolding with a particular… exuberance. President Trump, a man who understands spectacle, has proposed a cap on credit card interest rates – a mere ten percent. A benevolent gesture, one might initially assume, until one recalls the peculiar logic of benevolent gestures. It is, shall we say, a fascinating development, observed from the vantage point of a dedicated, if somewhat cynical, student of capital flows. The midterm elections loom, naturally. Affordability, that ever-elusive phantom, is the cry of the masses. And a ten percent cap… it feels less like a solution and more like a conjuring trick.

The announcement, delivered with characteristic fanfare, lacked, shall we say, granular detail. Implementation? Enforcement? These are questions for lesser mortals. The President prefers to deal in grand pronouncements, leaving the messy practicalities to… well, to those who will inevitably find themselves facing the music. The potential consequences, however, are anything but musical. They resonate with a distinctly discordant note.

The Peculiar Economics of Debt

The public’s irritation with high interest rates is, of course, understandable. We live in an age of escalating costs, of wages that stubbornly refuse to keep pace. People find themselves trapped in a relentless cycle, chasing a standard of living that perpetually recedes. It is a tragedy, certainly. But tragedy rarely responds to arbitrary price controls.

One does not pay interest, you see, if one is… disciplined. If one settles one’s accounts promptly. The interest accrues only when one succumbs to temptation, when one embraces the fleeting pleasures of immediate gratification. It is a moral failing, disguised as an economic one. The average rate, as the Federal Reserve informs us, hovers around twenty-one percent. A considerable sum, to be sure. But a reflection of risk, not malice.

Consider Capital One, a venerable institution in the lending game. They extend credit to all manner of borrowers, from the impeccably solvent to those… less so. In the last quarter, their loan portfolio yielded 13.83 percent. A handsome return, one might say. But a return that must account for defaults, for unforeseen calamities. The cost of funds, of course, must also be considered. Capital One’s net interest margin came in at 8.36 percent. A respectable figure, though not, perhaps, sufficient to tempt the devil himself.

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A fantastic margin, some might argue. But investors, those discerning creatures, demand a risk premium. Credit card lending is, after all, a precarious business. Defaults are inevitable. The net charge-off rate at Capital One currently stands at 3.16 percent. A seemingly modest figure, until one remembers that we are currently enjoying a period of… unusual calm. The true rate, during a recession, could be considerably higher. Profits, naturally, tend to evaporate. It is a cyclical business, like life itself.

An expert, speaking on condition of anonymity (a common precaution in these increasingly… interesting times), confided to CNBC that offering products at a loss is simply not an option. “There’s no scenario where we would take our entire portfolio to 10%,” they said. “It’s not a stretch to suggest this will very quickly tank the economy.” A rather dramatic pronouncement, perhaps. But not entirely implausible.

The Illusion of Control

Credit card companies, you see, price risk. The more precarious the borrower, the higher the rate. It is a simple equation, really. A four or five percent default rate demands a correspondingly high return on the remainder of the portfolio. To deny this is to embrace fantasy. The challenge lies in balancing access to credit with responsible lending practices. A delicate dance, indeed.

One desires, naturally, to extend credit to all. But reckless lending invites disaster. The Great Recession of 2008 serves as a rather stark reminder of this. Mortgages were issued to anyone with a pulse, without so much as a cursory glance at their creditworthiness. The consequences, as we all know, were… catastrophic. The banks, even now, struggle to regain their reputation. A slow, agonizing process.

Therefore, a ten percent cap will inevitably lead to a contraction in lending. The major players – Capital One, American Express, JPMorgan Chase, Bank of America, Citigroup – will simply reduce their exposure. The returns will no longer justify the risk. And a reduction in credit will, in turn, stifle economic growth. Remember, consumer spending accounts for more than two-thirds of our gross domestic product. A rather significant figure.

Implementing and enforcing such a cap will also prove… problematic. Controlling market forces is rarely a straightforward endeavor. The Trump administration, with its characteristic haste, seems to have overlooked this rather crucial detail. The unintended consequences, one suspects, will be considerable. A Faustian bargain, perhaps, dressed up as a populist gesture. A fitting end, one might say, to this most peculiar of years.

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2026-01-16 14:03