"In less than two hours, liquor will be declared illegal by decree of the distinguished gentlemen of our nation's Congress. To those beautiful, ignorant bastards!"
-- Steve Buscemi as Enoch "Nucky" Thompson, Boardwalk Empire
Put that vodka down! The sale, manufacturing, and transport of alcohol is now illegal!
You'd bust a gut laughing if the government made that announcement today. But the 18th Amendment was deadly serious when it took effect in 1920. So why did Nucky Thompson celebrate? Because he'd be able to make a fortune off bootlegged liquor on the black market.
That's what almost always happens when the government introduces price controls, a ridiculous breed of legislation that continues today. Like Nucky, investors such as yourself can profit -- provided you know how.
"It'll be like Prohibition never happened, except prices will increase 20-fold!"
Whenever there is demand for a product (liquor), but the product is made scarce through restricted supply (legislation), the product's price rises. That's Economics 101 -- supply and demand. This causes black markets to appear, as "entrepreneurs" like Nucky seek to fulfill that demand illegally -- and make a lot of money in the process.
Price controls can also wreak havoc for regular folks, especially if they lead to rationing. When oil prices rise today, so does the price of gas. But back in 1973, the OPEC Oil Embargo reduced oil supplies, which meant less gas, which led to a big spike in gas prices, and then to rationing. Price controls made things worse.
"We got a product a fella's gotta have. Even better, we got a product a fella isn't allowed to have."
Investors can profit from the modern-day equivalents of price controls in a variety of different industries.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 was supposed to protect consumers from all those credit card fees we love to hate. Among other things, the legislation forces companies to apply payments to higher-APR balances first.
While some consumers have benefited, the law came with an unintended consequence: a sizable decrease in the availability of credit, at a time when banks aren't lending and Americans need credit to help make ends meet. Furthermore, the banks that issue credit cards have simply found different ways of charging folks to make up for the revenue they've lost.
Even worse, the Consumer Financial Protection Act tacked on price controls on debit card "interchange fees," which means those costs will get shifted onto consumers, or will cause the banks to add charges via other consumer products.
Who won't be affected much? Big banks with large credit card divisions, like Bank of America (NYSE: BAC ) and Wells Fargo (NYSE: WFC ) . There are so many legal ways for banks to charge for virtually anything they want ... and they will.
Payday lenders also illustrate the perils of price controls. Activist groups have pressured numerous state legislatures into capping lending rates, which makes it impossible for payday lenders like Advance America (NYSE: AEA ) , Cash America (NYSE: CSH ) , and Dollar Financial (Nasdaq: DLLR ) to operate profitably. This leads lenders to pull out of those states.
By reducing credit supply without a change in demand, the loss of payday lenders forces consumers to seek other forms of credit, which usually means vastly more expensive bank overdraft fees. Once again, the play here is to buy the banks -- particularly regional ones that operate in states where payday lending was outlawed.
(Are you starting to sense a theme? Why is it that the banks seem to always come out ahead with "consumer protection" legislation?)
Finally, the Department of Education wants to restrict student aid for enrollees in for-profit schools, such as those at DeVry (NYSE: DV ) and Apollo Group (Nasdaq: APOL ) . It's Prohibition all over again, but with student loans. The limitations will make student loans scarcer to get, driving up the price of that credit. Worse, it will mean declining enrollment for these companies, which harms their earnings and their stock prices.
This would certainly harm the for-profit education stocks, but I'd encourage investors to keep a close watch on the news. If the DOE establishes this rule by fiat, Congress may legislate to stop it. In that case, the stocks will soar. Advanced Fools may want to buy puts and/or calls, depending on the circumstances.
Price controls simply don't work. As Nucky says, "If a man wants a drink and he can't get it, he'll pay the price for it."
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