Right Thinking From The Left Coast
I find that the harder I work, the more luck I seem to have. - Thomas Jefferson

No Debt Left Behind

The latest effort to turn us into a nation of children?  Credit card reform, specifically a Bill of Rights (PDF).  Stossel lets fly:

A little context first: No one has a natural right to a credit card. Someone has to be willing to undertake the risk in issuing it. Banks issue cards in their quest for profits. Nothing wrong with that.

Think about what a credit card is. It’s convenient access to unsecured loans, permitting consumers to buy things large and small—not to mention emergency services—without cash. Pay the bill promptly, and you enjoy a fantastic service for virtually nothing. If circumstances prevent you from paying the bill in full, you can set your own payment schedule, realizing there is a minimum payment and that you will be charged interest on the unpaid balance. No surprise there.

To appreciate credit cards, it is worth recalling that before they came along, people got personal loans from banks, finance companies, pawnshops and loan sharks. Such loans were less convenient, and repayment was less flexible. Some people bought things on layaway, which meant they didn’t take the goods home until they were paid for. Loan sharks sometimes broke people’s legs.

Credit cards didn’t create consumer debt—they are merely a superior alternative to older methods.

Here’s the thing—most of what’s in the “Bill Of Rights” I have no problem with.  Companies shouldn’t change interest rates with little notice and they should let someone set a hard limit on their card.  I get angry when a company offers a 0% interest rate for six months and only lets you know in the micetype that they can change that at any time.

The difference is that I don’t want the Feds mandating this behavior.  If for no other reason than the credit card companies will find some other way to make money.  Or worse, people who have a sudden need for credit—because of medical emergencies or job loss or whatever—will borrow money from worse sources.

We’re seeing something similar with the bans on payday loans—the practice of borrowing small amounts of money against the lendee’s next paycheck.  Payday loans are impossible to make on any reasonable interest rate.  Even a $15 charge on a $100 paycheck loan is going to add up to 390% annual interest. I hate payday loans with a passion and do think the industry needs regulation as well as limits on what people can borrow for. But banning them can lead to worse options, such as loan sharks, pawn shops, late fees on credit cards or utilities, foreclosures, crime, etc.  And in some places, they already are.

What are these limitations on credit cards going to lead to?  Does anyone care?  Or do they simply believe in their own divine ability to make the universe better by passing laws?

Posted by Hal_10000 on 04/30/09 at 07:16 AM (Discuss this in the forums)


Posted by on 04/30/09 at 10:00 AM from United States

My wife recently got hit with a interest rate increase of triple what it had been the month before.  Solution: balance transfer to a credit card which wasn’t playing dumbass games.  Goodbye Citibank Visa....

Posted by Hal_10000 on 04/30/09 at 10:13 AM from United States

Yeah, we’ve done that too.  It’s fun to call up a company and tell them you’re closing the account because they’re fucking assholes.

Posted by Aaron - Free Will on 04/30/09 at 10:15 AM from United States

I recently told Bank of America to go screw themselves for a similar problem: their arbitrary overdraft fees and refusal to assist me with clearing up an unauthorized charge to my Visa Checkcard. The Feds have been investigating their practices since halfway through the Bush administration.

I think the rule should be this: banks should have to tell you exactly what they’re going to do and why, writing. Period. The rules should not be “at our discretion” or “the computer tells us”: the rules should be “here are the criteria by which we make these decisions and here are your rights”.

Part of the reason BoA has lost me as a customer is because a teller, a branch manager, and three phone representatives were unable to articulate their overdraft policy to me.

Posted by on 04/30/09 at 10:23 AM from United States

Phenomenal post Hal.  You are right on the money.

I will slightly disagree on regulating payday loan institutions.  No regulation is needed.  The term “predatory lending” comes to mind.  Just as there is no such thing as “price gouging” there is no such thing as “predatory lending.” It’s all about Orwellian newsspeak, or in other words, the corruption of language.

The entire purpose of a loan is the inherent mutual reslationship between the creditor and the debtor.  The creditor offers an agreed-upon sum of funds and the debtor agrees to pay back the principle plus interest (sometimes no interest, actually).  Each loan has specific terms, and by law the creditor must provide each term in writing to the debtor before the loan is closed.

The only place government has in this mutually beneficial process is to enforce the cotnract itself as it appears in legal documentation and to investigate fraud.

Millions of people around the nation engaged in poor financial decisions when they went heavily into debt.  This unfortunate chain of events was triggered by the Federal Reserve’s direct monetary policy from 2000 to 2005.  The Federal Reserve put strong pressure on short term and long term interest rates to plummet well below the market-determined level.  Greenspan commenced this insane process to avoid the necessary correction after the stock bubble of the 1990’s (also Federal-Reserve-generated).  With long and short term interest rates so low, the available money supply was enormous (in order to have very low interest rates the supply of money must be very high).  Naturally, banks and other financial institutions loaned the money out in various forms as this action was far more profitable than keeping the funds in Federal Reserve accounts.  Millions of Americans went into debt as a means to finance unsustainable consumption.

Long story short: don’t regulate the market, abolish or regulate the Federal Reserve.  Also abolish fractional-reserve banking as it violates basic property rights and exacerbates the Federal Reserve’s deplorable monetary policy through the money multiplier effect.  Also, remove the FDIC and NCUA.  None of these vital changes will ever be made, however, because of the implicit collusion between the federal government, the Federal Reserve and Wall Street.

Stossel is dead on, and he always is.

Still, a great post Hal.  Keep them coming.

Posted by on 04/30/09 at 10:26 AM from United States

Also, I should note that consumer choice is the self-regulating mechanism in the free market.  If a financial institution treats many consumers poorly, those consumers will take their business elsewhere.  Also, companies like Consumer Reports emerge to expose poor business practices such that consumers will avoid those businesses.

If these companies that offer credit cards are committing fraud then government has a right to step in.  If these companies are, however, simply engaging in shady business practices, then no government regulation is necessary.

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