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Credit card watchdog may be defanged

by Peter Andrew

When we at IndexCreditCards.com recently covered the role of regulation in the credit card industry (Credit card regulation: Do we really need it?), we had no idea that an excellent example of government intervention bringing catastrophic and unintended consequences would arise so soon. But that's exactly what you can see if you cast your eyes across the Atlantic to Europe.

Government regulation and unintended consequences

Recently, the Romanian government implemented a 2007 law that had the wholly admirable goal of reducing traffic deaths and casualties by banning horses and donkeys from many roads. These beasts were widely used for transport purposes, and the administration knew that an economic impact would be felt, but it decided that the long-term effects on the modernization of the nation, as well as road safety, would be worthwhile.

A less widely anticipated consequence was that huge numbers of newly redundant equines would quickly find their way to local abattoirs, dramatically driving down the price of horse meat. And nobody realized that this cheap meat would tempt some in a long and complex cross-border supply chain to illegally relabel horse flesh as beef -- until, that is, an Irish laboratory found it in frozen dinners. Since then, some of the biggest food companies and retailers across Europe have discovered small or large -- up to 100 percent -- amounts of horse in their beef products.

In itself, this isn't as bad as you might think. The only reason few of us have ever eaten horse is cultural squeamishness. In some ways, it's better for you than beef. But there are two reasons why this story is turning into a long-running scandal on the other side of the pond:

  • In the 21st century, consumers expect packaging to accurately reflect ingredients.
  • Horses that are not intended for human consumption are sometimes treated with medications (especially the painkiller Bute) that can be harmful if they enter the food chain.

But better a strict nanny than no nanny at all?

So far, this may sound like an argument for governments to interfere less in our lives. But you can take the opposite view: imagine the outcry if the FDA had allowed something similar to happen here. And, in Europe, many now share the view of Steve Richard writing in The Independent, a British newspaper:

In theory, everyone loathes regulation, until some calamity arises when everyone calls for tougher regulations and curses those responsible for not intervening more intensively. To put it more colloquially, virtually everyone despises or feels threatened by the so-called nanny state until they feel very vulnerable, at which point they demand a controlling nanny.

Credit card watchdog at risk

At the time of writing, some in Congress are fighting to neutralize the Consumer Financial Protection Bureau (CFPB), a federal body that regulates credit cards, mortgages and other financial products and services. Knowing that many of the bureau's powers are vested in its director, these legislators are trying to block the appointment of the President's nominee, effectively leaving the watchdog headless -- and consequently toothless. In an editorial on Feb. 10, The New York Times (registration/subscription may be required) took a typically partisan view of these moves:

The consumer bureau has taken seriously its mandate to protect the public from the kinds of abuses that helped lead to the 2009 recession, and it has not been intimidated by the financial industry's army of lobbyists. That's what worries Republicans. They can't prevent the bureau from regulating their financial supporters. Having failed to block the creation of the bureau in the 2010 Dodd-Frank financial reform bill, they are now trying to take away its power by filibuster, and they may well succeed.

Regulation and nuance

In an increasingly polarized America, all too many stick dogmatically to one side of every political argument, including the one about regulation. But you might think that reality is more nuanced. It's true that all governments -- not just the Romanian one -- frequently fail to foresee the consequences of their actions, and make bad situations worse when they tinker.

But most regulations are introduced to counter a perceived social wrong. Following our international theme, take as an example one of the first instances anywhere of government intervention in a free market. It happened in Britain, and was the Mines Act of 1842. Before this, young children -- boys and girls -- routinely worked for up to 14 hours a day underground in coal mines. Some of them, such as 8-year-old Sarah Gooder, would often arrive at her colliery at 3:30 a.m., and leave at 5:30 p.m. She told a government commission that she had to work all day in pitch blackness as a "trapper," opening and closing ventilation shafts. She was constantly scared, so much so that she was too frightened to even comfort herself by singing in the dark.

When the new law -- which banned women and girls from mines, and set a minimum age of 10 years for boys -- was making its way through parliament in London, it faced stiff opposition. Lobbyists warned that British coal would become uncompetitive, and the industry would collapse under a deluge of cheap foreign imports from countries that allowed child labor. They also said regulation would hurt the people it was supposed to help by denying poor families the essential wages of their children. You can still hear echoes of those same arguments 170 years later when governments propose intervening in free markets.

Nobody's trying to equate the cruelest forms of child labor with occasional -- and mostly historical -- unfairnesses perpetrated by credit card companies. But, in the personal view of this writer, it's nonsense to say that all government regulation is bad -- just as it is to suggest it's always good. Isn't it time for a more nuanced conversation about this?

Published 03/04/13 (Modified 11/20/13)


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