Obama Eyes Credit Card Clampdown

June 16, 2008 — -- When Sen. Barack Obama, D-Ill., spoke about the credit crisis last week, he gave only a hint of the kind of reforms he might seek if elected president.

One of the more ambitious ideas he is considering, according to a campaign spokeswoman, would be to restore government regulation of credit card interest rates. The government has not been involved in interest rate regulation for 30 years, after a Supreme Court ruling blocked states from effectively engaging in the practice.

Obama would "examine ways to more strictly regulate interest rates, and believes such regulation should be done carefully to ensure that we do not harm consumers with unintended consequences," Obama spokeswoman Jen Psaki told ABC News.

Stricter regulation of interest rates would likely provoke a titanic struggle with the credit card industry, which would argue that the government should not meddle in the free market. But advocates of re-regulating interest rates argue that this change is needed to prevent more families from falling into bankruptcy.

As part of his "Change That Works for You" tour, Obama held a roundtable talk in Chicago last week with three consumers apparently gouged by the credit card industry. He was joined at the event by Harvard law professor Elizabeth Warren, the nation's leading advocate of re-regulating credit card interest rates.

"The key is that you need to break the cycle of no regulation," Warren told ABC News. "Currently, the states can't regulate and the federal government won't. So there are two ways to fix that: Either let the states do the regulating or put some regulation in at the federal level."

"Do one or do the other," she said, "because if you do neither, it's the Wild West out there."

Harvard Law School professor David Wilkins introduced Warren to Obama when the Democratic senator from Illinois was getting ready to run for the U.S. Senate in 2004.

Warren, who teaches bankruptcy law at Harvard, said that her first talk with Obama focused on the impact of the Supreme Court's 1978 Marquette decision, which opened the door for banks to "export" interest rates from one state to another.

In her 2003 book, "The Two-Income Trap," Warren explained that the Marquette decision meant that a bank that set up lending operations in South Dakota could issue loans at borrowing rates as high as 24 percent to a family living in New York and circumvent New York's cap of around 12 percent.

After the court's 1978 ruling, banks in South Dakota (and other states with lax lending laws) could collect profits from New York families, and the New York legal system was powerless to stop them.