Price Fixing and Credit

Most people with a reasonable grasp of economics understand the basic issues associated with price fixing. Fix the price of bananas and there will be either a glut of bananas (if you fix too high) or a shortage of bananas (if you fix too low). Alternatively with a less fungible product you might get a shift in quality instead of quantity. So for instance if the price of cars is fixed too low then you might get a decline in quality rather than a shortage, although probably in practice you would get a bit of both (or maybe a lot of both). Free Market types generally agree that you shouldn’t fix prices but rather you should allow the market price to signal to consumers and producers the relative scarcity of a given good for a given quality. Behaviour can then adjust accordingly.

Of course there is more than one way to fix a price. Generally price fixing is achieved by laws and regulations. However what if the price of bananas was fixed high by governments going to market and buying bananas to force the price up? We have seen such interventions previously with governments buying wheat to ensure that the price of wheat wouldn’t fall below some benchmark. Gluts would follow but the government would own the excess and perhaps dump it at sea. And in fact given that they would be leading the market on price it would be the best quality grain that got dumped at sea.

Now what if the latter form of price fixing was applied to a more esoteric market such as the credit markets. What if the price of credit (ie the rate of interest) was fixed using some market intervention in the way that the price of grain has at times been fixed by market intervention. Perhaps a commitee of wise officials would meet every few months and decide the right price for credit and then use some form of market intervention to fix the price. Would we see gluts and shortages? Would we see a shift in quality away from what might be natural or optimal. For instance if the price was fixed low for a long time is it possible that we would see both a shortage of credit and a decline in the quality of credit. Or do such laws of economics only apply to wheat, bananas and cars? And is a freely adjusting price signal only relevant to those that consume or produce the likes of wheat, bananas and cars?