Sen. Warren’s “Free” Act would stifle the health of the consumer credit industry

Following the widespread news coverage of the Equifax data breach, which entailed the theft of millions of Americans' personal data, left-wing experts argued that consumers should freeze their credit. Senator Elizabeth Warren, realizing that this would be the perfect moment to capitalize on public outrage, proposed the “Free Act.” If passed, the bill would not only impose damaging regulations on the consumer credit industry, it would also compel affected firms to start providing a range of services, including credit freezes, at no cost to consumers.  Rather than be tempted by the allure of Sen. Warren’s proposed legislation, people should realize that the most preferable outcome for average Americans would probably occur if the government simply left the consumer credit industry to its own devices, and that isn’t just a conjectural notion—it’s exactly what happened during Ronald Reagan’s presidency. Some of the most fruitful years that the American economy ever experienced took place during Reagan’s tenure because, among other things, Reagan was a relentless opponent of needless and cumbersome consumer credit regulations.

In 1982, Reagan signed into law the Garn-St. Germain Act, which prudently authorized loan providers to engage more freely in the offering of commercial loans and allowed them to offer high-interest savings accounts to consumers, which gave lenders the freedom to compete with lucrative money market mutual funds. These new freedoms granted by Reagan to providers of consumer credit, allowed affected firms to act more like commercial banks instead of highly specialized mortgage lending institutions—in other words, the Garn-St. Germain Act leveled the playing field.    The results of the legislation were positive. Between 1982 and 1985, deposits from consumers previously wary of taking out loans flowed into the industry, at which point that subsection of the economy underwent a rapid economic expansion. Judicious investors realized the enormous potential for profit represented by these new freedoms and invested widely in real estate, precipitating a boom in real estate markets that made home ownership far more accessible to the average American family.   Aside from direct consumer credit deregulation, Reagan's extensive budget cuts also reduced burdensome and unnecessary regulatory staff at the Federal Home Loan Bank Board, thereby reducing the degree of the agency’s reach and power. Likewise, federal requirements that set maximum interest rates on savings accounts were slowly phased out—allowing savings account providers to compete with each other by offering consumers successively higher interest rates on their savings.   These regulatory reforms weren’t happy accidents; they were the product of a coherent worldview. According to Stephen Moore, a Senior Distinguished Visiting Fellow at the Heritage Foundation, “The Reagan philosophy was to incentivize production…by lowering restraints on business expansion and investment. This was done by slashing marginal income tax rates, eliminating regulatory high hurdles, and reining in inflation with a tighter monetary policy.”

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"When government—in pursuit of good intentions tries to rearrange the economy, legislate morality, or help special interests, the cost comes in inefficiency, lack of motivation, and loss of freedom. Government should be a referee, not an active player"

Moore continues, “By the end of the summer of Reagan's third year in office, the economy was soaring. The GDP growth rate was 5% and racing toward 7%, even 8% growth. In 1983 and '84 output was growing so fast the biggest worry was that the economy would ‘overheat.’” This period of economic growth, which was precipitated in part by Reagan’s support for consumer credit deregulation, testifies to the proposition that less regulation is what helps consumers most.    In the words of Chicago School economist, Milton Friedman, an inspiration for Reaganomics, “When government—in pursuit of good intentions tries to rearrange the economy, legislate morality, or help special interests, the cost comes in inefficiency, lack of motivation, and loss of freedom. Government should be a referee, not an active player.” Friedman was right; today’s politicians could learn a lot from Reagan’s crusade against destructive regulations. Sen. Warren’s ironically named “Free” Act would do nothing more than stifle the health of the consumer credit industry and ultimately, it would end up hurting the consumers who benefit from and rely on that industry’s wellbeing. Recognizing perhaps that the Free Act stands little chance on its own, Warren is currently trying to insert critical elements of the legislation into Sen. Crapo’s bill to ease regulations on the banking industry. Sen. Crapo and other champions of the free market should recognize that, while bipartisan support for their legislation is important, it is not worth the consequences of giving away free credit monitoring. For Sen. Warren and her like-minded colleagues, credit freezes are not an end in themselves, but rather, a means by which the government can eventually take control over the credit file. Advocates of credit regulation will not stop until the credit industry becomes another government utility.