The Great Credit Card Battle To Come
The next front in the banking wars will be over credit cards. Some of the nation's biggest bankers -- including representatives of Citigroup, JP Morgan Chase, and other recipients of billions of taxpayer dollars -- are meeting today with the President to ask him back off his move to reform credit-card lending practices.
What's happening to credit card lending is a smaller replay of what happened to mortgage lending. For years, banks used every gimmick possible to get the public to use their cards -- regardless of the credit worthiness of the customer. They lured borrowers with low "teaser" rates. They told borrowers they could get by paying minimum balances.
And now that tens of millions of Americans are poorer than they used to be, the credit-card bubble is bursting. Credit card delinquencies are soaring. At the Bank of America, the largest U.S. lender by assets, 7.8 percent of credit-card accounts were delinquent in February by more than 30 days, up from 5.9 percent last August. Yesterday, Bank of America reported a $1.8 billion first-quarter loss in its credit-card services unit.
As delinquencies mount and profits shrink, card lenders are raising fees and interest rates, including rates on existing balances. They're also charging higher fees when customers exceed their credit limits, and shortening the duration of the teaser rates. When a customer makes a payment in excess of what's owed, card companies now routinely apply the excess to balances with the lowest rates rather than those carrying the highest rates. And banks disclose very little of relevance: For example, most customers have no idea how long it will take them to pay off their balances if they make minimum repayments, or what interest they're actually paying on their balances.As more and more Americans find themselves in the credit-card squeeze, they're complaining loudly. But the bankers have their own loud lobbyists on Capitol Hill, whose voices haven't been muzzled despite the giant bank bailout. Last month, the Senate Banking Committee reported a bill that bans rate increases for existing balances, among other things. But the vote was close -- 12 in favor, 11 opposed -- and its future in the Senate is uncertain. A House bill advanced yesterday, sponsored by Representative Carolyn Maloney, Democrat from New York, has only a fifty-fifty chance of succeeding. Meanwhile, the Fed is working on a set of watered-down reforms scheduled to go into effect a year from July, but that's way too far off to avoid the pending battle.
Enter Obama. The Treasury holds lots of cards given how dependent the big banks are on its solicitude. Meanwhile, the public has grown weary and suspicious of the bank bailouts. Knowing how unpopular the bailouts have become, the Administration is considering how to get additional capital to the banks without going back to Congress for the money. One big idea is to convert taxpayer-provided bank loans into bank equity -- even though the swap puts taxpayers at greater risk (after all, loans have to be repaid, but equity can continue to fall).
That's why getting tough on the banks' credit card lending practices has such appeal for the Administration, politically. It puts the White House on the side of the people rather than Wall Street, on an issue that the public is becoming more and more upset about. And the Administration's push could be enough to get reform legislation through Congress.
The bankers will tell Obama today that any new contraints on credit card lending will cause the banks to reduce the amount of credit card lending they do, which will hurt the economy. But it's a weak argument because it presupposes that any lending is good for the economy -- even lending to people who don't know what they're getting into and can't repay the loans. It's the same argument banks used two years ago, when precient observers warned that constraints had to be placed on mortgage lending practices. What may hurt the economy in the short term, we now know, may save it from even larger pitfalls to come.
Banks have learned that they can make money by lending at very high interest rates (through credit cards) to people who are fundamentally bad credit risks. This practice is bad for the economy, and should be stopped.
Cap the interest rate on all credit cards at something (still outrageously high) like 19%. Do it effective immediately. Also establish a timeline for reducing this to 17%, then 15%, and/or finally tying it to some government rate plus 12 points (or something like that).
This will finally force banks to do some due dilligence in deciding whether to extend credit to customers. And it will be better for the economy in the coming years.
-- ARG
April 23, 2009 12:29 PM | Reply | Permalink
This might also encourage the credit card industry to adopt chip cards and secure protocols to prevent identity theft and card fraud.
As thing stand today, the uncollectible balance losses are so much larger than fraud losses that the latter aren't worth bothering about.
April 23, 2009 1:25 PM | Reply | Permalink
12% max for new balances, 5% for legacy balances if the card holder pays bills regularly.
This should have been done months ago.
That said, CC debt is a small fraction of total debt and I believe around 8% of consumer mortgage debt. Unless the defaults on CC turn out to be huge compared to mortgages, this strikes me as a marginal problem.
In both cases consumers need to take hits for their greed. In the case of people who bought houses to live in (as opposed to investment properties) I think the government bears some significant responsibility (poor regulation of large indebtedness, plus the Bush Ownership Society). In all other cases, CC and investment purchases of real estate as Nth properties, consumers get no sympathy from me in general if rate caps are implemented.
April 23, 2009 3:05 PM | Reply | Permalink
For me, it's not a question of sympathy vs. condemnation. Maybe some want to say that deeply over-leveraged borrowers are good folks victimized by the evil Man; maybe others want to say they are stupid and irresponsible shitheads who got what they deserve. But the bottom line is that excessively liberalized credit and predatory lending spreads pain and economic devastation, and we all have to live in the social mess that is created as a result. It's a drag on the common good. I think we just need to take a more paternalistic attitude toward the extension of credit. It's bad for people and society to let the credit pushers go around addicting people to credit crack, no matter what we think of the moral qualities of the addicts themselves.
April 23, 2009 4:17 PM | Reply | Permalink
I agree with you that this shouldn't really be about teaching ordinary people a "lesson" about greed, but more about re-balancing our finances toward sustainability, fairness and the public good.
I don't understand eds' crusade on this point--I see little difference between the "greed" of people who bought consumer goods on credit, and the "greed" of those who bought consumer goods on money they made by charging huge fees for the credit, or by selling risky financial instruments. The vice is the same, regardless of the method of satiation.
April 23, 2009 4:41 PM | Reply | Permalink
erica, I don't get which "crusade" of mine you mean: Living beyond one's means and then complaining or asking for a handout? Gambling at a casino, and then asking other people to cover your IOUs? Making investors and lenders and CC companies take losses instead of pandering to their lobbyists and apathetic whining?
And talk about "credit addiction" (Dan K) is wrong-headed except in a very abstract sense. Moral responsibility resides with individual human beings first. "paternalism" might be one way to spin my notion of temporary interest rate caps (and limited lines of credit too), but dunno if that's how Dan meant it nor why you brought up "lesson". In fact, individuals do need to learn lessons, and generally sooner rather than later up to a point.
April 23, 2009 7:03 PM | Reply | Permalink
Right, that oil prices and healthcare prices will increase by 100s of %s, and their wages would remain flat, even if they never ever did so before.
People were NOT living beyond their means, eds.
That's why people get so frustrated with you. You refuse to acknowledge reality.
April 23, 2009 7:31 PM | Reply | Permalink
The problem is that the credit card companies don't distinguish between the two, and did not bother because they could always soak the rest of their customers to make up for any losses on the "beyond their means" types when they defaulted.
If credit card companies are restricted from the "soak the good customers to make up for the bad" practices, they will have to start paying attention to the real creditworthiness when issuing cards. Overall, this would (will) be a huge improvement. The transition may be a bit painful though.
April 23, 2009 9:23 PM | Reply | Permalink
"The problem is that the credit card companies don't distinguish between the two, and did not bother because they could always soak the rest of their customers to make up for any losses on the "beyond their means" types when they defaulted."
I'm not sure the first part is entirely true, and I'm pretty sure the second part is false. That is, rates on existing balances cannot just go through the roof, right? Yes, new purchases might have a different rate.
But if a company raises its rates, you apply at another company which is offering a better deal, or simply tell your CC company that you're thinking of doing it. If the whole industry does it, that looks like anti-trust territory and criminal charges.
So, overall, I don't get the power of your point. I do think that returning to better controls is a good idea, in fact I'm a bit radical on rate caps in the short term.
April 24, 2009 5:54 AM | Reply | Permalink
Of course they were (living beyond their means). You cannot seriously maintain that nobody overspent or bought houses they couldn't likely afford. I'm not saying EVERYONE, but enough to count.
"Right, that oil prices and healthcare prices will increase by 100s of %s, and their wages would remain flat, even if they never ever did so before."
That's supposed to be apropos of... what in my comment??
If you get frustrated, you might try a different approach to reading my pretty straightforward usage of English which I would assure you is grounded in reality.
April 24, 2009 5:44 AM | Reply | Permalink
Are you missing my point? Yes, at the time they could afford them.
At the time. Then the greed hit the fan. Now run along and complain about huge fractions of these people again. You do understand, eds, that the largest reason for personal bankruptcies were due to medical costs? Those costs that were (mostly) uncovered by people paying for medical insurance? I guess according to you, since these people couldn't afford to become sick, they should have just rolled over and died?
Or was all this going on before you became a born again moralist?
April 24, 2009 6:28 AM | Reply | Permalink
You are determined to miss the larger view on account of your fetish for medical bill bankruptcies.
Spending too much money on medical bills is called "living beyond your means", Bwak. Now, that's not how I meant it, per se, but since you bring it up, it's right back atcha.
But this thread is not so much about the causes of debt and default in the past, but about how to reform. I gave my cap proposal earlier. Do you believe it would not help people who are overextended?
April 24, 2009 7:20 AM | Reply | Permalink
well eds, I'm a bit of a Biblephile on questions of monetary interest. Anything over 3% is usury. Ugly word, isn't it. There used to be laws...
I would like to see a study on what exactly it is Americans are putting on their credit cards. I think the results would surprise you. Medicine and groceries. Things they easily afforded 10 years ago.
April 24, 2009 7:26 AM | Reply | Permalink
That might be an interesting study.
You're a bit more radical on interest than I am. Have you read up on Sharia Finance? I get the impression that all interest, in the Western sense, is considered usury. So there are different mechanisms for the use of capital, not loans as we usually think of them. I'm no expert, just asking if you are.
April 24, 2009 2:23 PM | Reply | Permalink
Bwfst- sometimes it is just better to ignore the likes of 'eds' types and let the comments die from lack of interest...Reason and truth are not in their vocab!
April 25, 2009 7:58 PM | Reply | Permalink
Yup, that's the one.
April 23, 2009 8:13 PM | Reply | Permalink
Sorry eds, I'm not out to start a war here. You and I disagree on this point.
I'm all for individual responsibility on an individual basis, and the higher up on the totem pole people are, the more I expect of them as individuals.
But on a population basis, or when large groups of not-very-sophisticated people get cut down by a crisis that they didn't see coming (even though if they were more sophisticated they might have), I'm a lot more sympathetic toward those people than I am for the ones who had MBAs and presumably attended classes on business ethics and stuff.
When, in addition, there are such desperate social consequences for families and neighborhoods, I'm much more likely to suggest that we get on with it, put our help in the places where it will make the most difference in the lives of American families, and leave the judgment for next time.
I still think that stabilizing the lives of the poor buggers affected by the mortgage crisis would be the best possible use of public money in what is no doubt a bad situation all around.
It seems you agree that the high-level bailout is a bad idea, but then can't bear the idea of helping out the feckless among us and thereby stabilize the economy.
Or, as one of my more cynical friends recently put it, "It's great to help out the people who deserve it. Too bad there aren't enough of them to make a difference."
So, as bwak pointed out, it does seem like a blind spot in a commenter who usually seems pretty objective.
April 23, 2009 9:05 PM | Reply | Permalink
I almost missed that since you replied to yourself.
No war, just value differences and perhaps information differences, imo.
No, I don't agree that all high level bailouts are always a bad idea. Yes, I'm pretty strict on government "helping" statistical people with real money. I also don't know how many people are just how cut down by which crisis. That is, I'm strongly against throwing money at a grab-bag alleged problem. I've made suggestions since Oct. 2008 for ways to help some homeowners stay in their homes (angel investor and more). None of them have been refuted but they just don't seem to generate much interest. Maybe it's my style. I understand that undereducated or less intelligent people might get taken advantage of in ways which more educated or intelligent people wouldn't. I'm sympathetic to both groups to some extent. But you seem to insist on ignoring some of the "large population" statistics, such as that a huge fraction of bubble houses were for investment, not to live in. So a person/family losing that house is not being forced to move in with relatives or live out of a car.
As for desperate social consequences, if localized, then I favor primarily local responses but I don't oppose global legislative changes which ease transitional burdens. Leaving the judgment for later is running the country into the ground, so that would be regressive thinking, not progressive thinking, in my view.
I hope that clarifies my view for you.
April 24, 2009 6:10 AM | Reply | Permalink
Misleading hyperbole?
Put down the jumbo shrimp, eds.
April 24, 2009 6:23 AM | Reply | Permalink
Don't talk with your mouth full of gravel, Bwak. Swallow, digest, then speak you mind clearly.
April 24, 2009 7:13 AM | Reply | Permalink
I thought that was pretty clear.
Here, have a nit. They're crunchy.
April 24, 2009 7:15 AM | Reply | Permalink
Pardon me, but that reminds me of "you are what you eat!"
~~
April 24, 2009 2:24 PM | Reply | Permalink
Oh, about "huge fraction", does "very significant fraction" work for your taste in nitwit puns?
April 24, 2009 2:39 PM | Reply | Permalink
Moral responsibility is a fine ideal. But people are frequently dumb, impulsive, childlike, and vice-ridden. Along with the good, their lives are filled with avarice, wrath, sloth, gluttony and all the rest. But though they are not always consistently smart or strong, but they are at least smart enough in lucid moments to recognize their own weaknesses. That's one reason why they create laws to protect themselves from themselves.
I don't trust people to give themselves access to easy and bottomless credit, and then restrain themselves unilaterally because they are so damned morally responsible. (In the same way, I don't trust people to administer heroin to themselves without becoming junkies.) I don't trust credit mongers to be given unregulated license to advance credit as they see fit, and not quickly turn that license into every manner of Ponzi scheme and fly-by-night racket.
Giving ourselves these freedoms, many will fuck everything up quickly, and the great aggregate fuck-up will rain down on all of us. We need laws; not sermons about moral responsibility. Sermons don't work.
April 23, 2009 9:59 PM | Reply | Permalink
I'm not sure how far apart we are once the rhetoric is stripped away.
Maybe I allow for a fraction of a kind of Social Darwinism which you rule out entirely. That is, I don't believe laws are the whole answer, and I do believe that some people need to sink if they won't swim (to put it a bit harshly for effect). You seem to favor maternalism, a social womb for all. I prefer a marginal social safety net for adults and their kids.
I have both libertarian and socialist leanings.
April 24, 2009 6:16 AM | Reply | Permalink
Let this be a lesson to all our young readers. This is what happens to you when you believe. Now go and believe no more.
See? It feels better already, doesn't it?
April 25, 2009 6:48 PM | Reply | Permalink
Dan K - you might appreciate this quote from a Rothschild upon introducing banking methods into America many years ago: "The few who can understand the system will be either so interested in its profits, or so dependent on its favors that there will be no opposition from that class, while, on the other hand, that great body of people, mentally incapable of comprehending the tremendous advantage that Capital derives from the system, will bear its burden without complaint, and, perhaps without even suspecting that the system is inimical to their interests."
April 25, 2009 1:45 PM | Reply | Permalink
This should have been done months ago.
I had to stop reading there. Eds, for once I fully agreed with you and didn't want to ruin it.
April 23, 2009 9:32 PM | Reply | Permalink
Yikes. :-)
April 24, 2009 5:59 AM | Reply | Permalink
What's the difference? An irresponsible borrower is an irresponsible borrower. Why should people who paid more for their homes than they could afford get a bailout (a "reduction of principle" - an appropriate term in more ways than one), but not people who owe on their cards? Note that "falling home values" is not an excuse. My investments have tanked, too, and the government's not offering me a bailout on those.
April 25, 2009 2:55 AM | Reply | Permalink
Here's a simple law:
No credit card interest rate can exceed the prime rate plus 5 percentage points. Credit card interest rates must be established when the card is first issued and may not be increased without the written consent of the credit card holder. Credit cards may be canceled by either the lender or the borrower at any time without penalty. No late fee will exceed $15 per month. No fees other than late fees can be charged. Credit card issuers must provide a payment grace period of at least 45 days from the monthly statement close date. Statements must be mailed or sent electronically within two business days of the monthly statement close date. Minimum payments must be set so that the entire outstanding credit balance will be paid off in no more than seven years.
April 23, 2009 8:03 PM | Reply | Permalink
Purple State, I like most of your other proposed terms. I'm inclined to give the credit card companies greater leeway on the rate (prime+5% is pretty restrictive), but there definitely needs to be a cap at something in the teens (based on current "real" interest rates).
I especially like your proposal regarding the minimum payments. Even if you extended it to 10 years, rather than 7, it would be a warning sign to borrowers, as they start getting into trouble, because it would directly affect their cash flow.
-- ARG
April 24, 2009 12:21 PM | Reply | Permalink
You're right ARG. Prime plus 5 would limit banks' willingness to lend to anyone except those with truly excellent credit. So maybe your suggestion downthread of prime + 10 is good since it's probably desirable that people with medium credit ratings have some access to credit card loans. The avg credit card right right now is about 13%, which is just about prime plus 10. That still sounds very high to me when prime is around 3.5%, but at least the prime +10 rule would get rid of the 17% and 20% rates that apparently are being offered to folks with poor credit now.
April 24, 2009 11:21 PM | Reply | Permalink
Can you explain the expectation that interest rates should be so low?
I recall a mortgage my parents got in the late 70's - it was around 15%, considered a pretty good rate at the time, and they only got it because they had a LARGE downpayment in hand.
I mention this to point out that current rates are very low at this point in time, especially compared to the past.
If we lower the price of credit, by lowering the rates, the "laws" of economics tell us that demand for it will go up. (This does assume that consumers of credit are uniformly rational actors, so my point is already off the rails.)
Is that really what we want? Or need?
Seems to me like that's what got us into this situation in the first place.
April 24, 2009 8:16 AM | Reply | Permalink
Hi, kenga.
You make a good point that we don't really want to encourage people to (over)use credit. But, as you acknowledged, most people are not getting into debt because they think it's cheap money.
What I've proposed is a step-down of maximum allowed interest rates that would ultimately level off at something tied to a real "going" rate. Someone upthread suggested prime+6% I think. I'd be willing to allow prime+10%.
I remember when rates were higher. But it was also possible then to save at a higher rate. When mortgages were 15% one could put money into a CD at 10%. Banks make their money (traditionally) by paying a lower rate on savings, and charging a higher rate on loans.
But, as you pointed out, interest rates (in general) are very low now. So, in my view, it makes no sense for a credit card company to be able to charge 29.99% interest. That's usery, beyond any doubt.
I just want to make it possible for those who have run up credit card debt to have a chance to pay it back. I don't think my proposal would cause a lot of people to say, "Hey, credit card rates are down to just 15% now -- let's book that cruise we can't afford!"
-- ARG
April 24, 2009 12:16 PM | Reply | Permalink
Hey ARG,
Which "we" are we talking about? I think the "we" as spoken by the management of Citi, BoA, Chase, etc. have demonstrated in the past that that was precisely what we/they wanted, at the time. They've changed their tune - I know this because one of them recently closed a couple of credit card accounts that I had, and hadn't used in several years. $0.00 balance, 5 digit credit availability and I have a very high credit score. So why did they cancel them? If I'd been asked, I would have kept them open, just in case I needed them - but they undertook that action without consulting me.I'd forgotten that interest rates on savings accounts and CDs were likewise much higher during that period as well.
I didn't mean to acknowledge that people aren't going into debt because it's cheap money. I just meant that economically rational credit consumers seem to be the exception. I sometimes suspect it's an innumeracy issue, in that most people don't or can't think using mathematics, and very few have any background in economics or finance(personal or corporate). Of course, the lenders have never encouraged borrowers to take a long term view, instead focusing on this month's minimum payment - "see, you can afford that".
I agree that it seems as if the object is to allow consumers to become permanently indebted, rather than to use the credit temporarily for purchases they would otherwise not be able to afford.
It's pretty clear that the credit card(and other credit) issuers deliberately take actions to inhibit paying them off, or even down.
One could(he wrote passively) convincingly argue that the lenders rely on that, as it allows them to make a defensible revenue projection, which of course makes the stock more attractive to profit-oriented investors ...
April 24, 2009 1:26 PM | Reply | Permalink
Stiglitz thinks that a very small group of venture capitalists finance almost all creative endeavors in the United States, that community and local banks make most of the small business loans, and that the very large banks which were responsible for our present mess and are absorbing the lions share of the bailout, are nothing but greedy parasites.
April 23, 2009 12:41 PM | Reply | Permalink
A couple of days after my son turned 18 he received a pre-apporved credit card in the mail, which he could have activated in the usual way with a phone call. I believe the credit limit was $19,000. My son is a responsible kid, but he is also a high school senior whose only source of income apart from his parents is a part-time job at the local Abercrombie & Fitch.
Somebody has to stop these blood-suckers.
April 23, 2009 12:52 PM | Reply | Permalink
Dot was a wompire from Delaware ...
April 24, 2009 1:29 PM | Reply | Permalink
One "industry" or business line will have to suffer or be wiped out to stabilize the financial sector. I hope it's Credit Cards and Payday Loans.
Once we get rid of this Predatory Lending, we'll see a REAL fight to increase the minimum wage and to put a cap on Executive Compensation.
April 23, 2009 1:42 PM | Reply | Permalink
PROF. REICH: Not to say "I told you so, but..." :)
--I mentioned Credit Cards to you at a book signing for SuperCapitalism in Tucson when you were in town for Gabby Gifford's wedding. I noted that Credit Cards weren't listed in the Index of the book as a partial explanation for the loss of active citizenship in the last 30+ years. I argued that CC's allow people to sort of "paper over" their lack of wage growth, and continue to appear middle class. We all lived like the cast of Friends, with the income of Rosanne. Take away that ability to pretend things are OK economically, and look out! (God I hope we start protesting soon...)
If you do a New Preface/Forward for the next edition, can you quote me? :) :)
April 23, 2009 2:00 PM | Reply | Permalink
Just so.
April 23, 2009 7:33 PM | Reply | Permalink
This is just another battle in the war that's been hot and ongoing since the middle of the decade. Was it 2006 or 2007 that finance industry profits from fees and penalties first matched profits from actual lending? The difference, perhaps, is that people who can write their representatives are getting hit now. As a result, it's not a foregone conclusion that the industry can keep buying hwatever legislation it wants.
April 23, 2009 3:28 PM | Reply | Permalink
As usual, the crooked lords of finance are squeezing everyone but themselves to recoup the losses that came from their totally irresonpsible business practices. Don't look for anything substantive to happen folks. The rich guys will get their way after a symbolic trip to the woodshed. It's just that simple and obvious. If you don't understand that is the game being played here folks then you need to wake up and smell the coffee. It's just a show to make people feel like something was done when in reality they won't do a damn thing to put an end to any of these rotten, unfair and predatory practices. They are criminals in expensive suits and the politicians are their smooth talking enablers.
April 23, 2009 4:39 PM | Reply | Permalink
I don't disagree. But don't give up hope: I tell my Republican friends that it IS indeed possible to imagine a prosperous American capitalism without usurious interest. Everything before 1974 or so.
In the meantime, Oleeb, I agree with you. The best course of action is to stop all banking with these peonage-based banks, and encourage friends, family, and strangers to do the same.
April 23, 2009 5:21 PM | Reply | Permalink
We don't have to stop banking with them. We need to nationalize them and put them to work for us! After all, they ARE bankrupt and sponging off of us aren't they?
I too, remember when there were reasonable controls on the bloodsuckers, but our Democratic jellyfish members of congress caved in the moment they got their palms greased by the rich bastards and let them do whatever they wanted on credit cards while simultaneously making Chapter 7 bankruptcy all but impossible for most people.
April 23, 2009 5:51 PM | Reply | Permalink
"our Democratic jellyfish members of congress caved in the moment they got their palms greased by the rich bastards and let them do whatever they wanted on credit cards while simultaneously making Chapter 7 bankruptcy all but impossible for most people"
It really was a double whammy, wasn't it? and they claim the people in favor of a 39% maringal tax rate for the rich are engaging in "class warfare."
April 23, 2009 6:13 PM | Reply | Permalink
OLB,
I agree completely. Screw these masterbaiters of the universe. The time has come for them to step up and take the same kind of bath they are FORCING on everyone else.
Cher sang it best
♪♫♪Gypsies, tramps and thieves♪♫♪
No excuse they get away with the shit they do.
April 24, 2009 7:44 PM | Reply | Permalink
I see it as a continuation of the tobacco company lawsuit issue.
As we develop more understanding of how easy it is to scam people, we are developing limits on the nature and injury levels of the scams. Which is a good thing.
April 23, 2009 6:46 PM | Reply | Permalink
I like the example of the "tobacco company lawsuit issue" as analogous to the "credit card company issue" for the reason that ---
The tobacco settlement cost the tobacco companies nothing. Indeed, they were protected from competition from tobacco companies which hadn't engaged in fraudulent activities -- that is, no company is allowed to sell cigarettes below the price established in the settlement in order that the profits of tobacco companies would not be affected by the settlement. In the end lower income smokers paid for everyone else's sidewalks.
Today, the government wants to transfer credit card holders' debts to the taxpayer. How to do it.
Push down credit card rates and fees and invite credit card users to increase their debts. Then, when these overextended debtors stop paying and the banks suffer losses, hand the banks more TALF or PPIP money from the taxpayers.
Problem solved. Credit flows and the taxpayer picks up the tab. And -- as in the case of the tobacco settlement -- nobody's the wiser.
April 23, 2009 9:28 PM | Reply | Permalink
Sigh. I try so hard.
April 23, 2009 9:50 PM | Reply | Permalink
"Today, the government wants to transfer credit card holders' debts to the taxpayer."
Is there an initiative to do this on the table?
April 24, 2009 7:12 AM | Reply | Permalink
Yep.
It's called S. 414, "The Credit Card Accountability, Responsibility and Disclosure Act."
Currently, credit card companies are monitoring the credit worthiness of their card holders checking to see whether those card holders are missing or going late on other obligations. They know that as card holders become financially stressed they turn to their credit cards' "available credit" to ease that stress.
The Act in question would make it more difficult to tighten up card holders' credit. The result will be additional losses for the banks, and as Obama says, "If you're a bank and need money, don't be shy; sound off; I'm here to write you a check."
April 24, 2009 10:01 AM | Reply | Permalink
I'm short on time, but I think there's something to the stimulus being sluggish as a result of CC Co's hand in everyone's pocket.
The Fed's and Treasury's usual macroeconomic tools aren't able to funtion properly because of consumer debt & CC Companies sopping up what should be stimulative spending. Instead, it's just interest payments to Banks.
If someone could prove that the Banks and CC Co's render the Treasury and Fed innefective, perhaps that is the way to bring the hammer down on them and end superfluous consumer credit.
April 24, 2009 1:20 PM | Reply | Permalink
I agree but ---
I don't think the way to increase demand is to encourage over-indebted card holders to increase their borrowing. It's bad for them and bad for the rest of us.
April 24, 2009 2:13 PM | Reply | Permalink
But interest rate relief need not create another bubble in borrowing if the caps and mechanisms are done right.
The only people who will realize losses are those who assetized their rents (pardon my idiosyncratic phrasing but I've defined it in my blog - happy to say more here as needed...). Otherwise investors will show reduced cash flow due to lower interest rates but arguably also see fewer defaults and bankruptcies. While missed payments generate ridiculous "late payment fees" (that should be legislated, imo), defaults don't help the normal CC company or its investors. It's partly a matter of reducing the parasitic drain to a sustainable level, cooking the frog slowly. Of course that's only one aspect/view. Capping rates will help struggling debtors to some extent too. Macro-wise, I don't know if it's better to bleed the population or try to kill off the disease by killing off some of the population (CC debtors' debts).
Thanks for the 414 reference. I will try to research it and write a blog on it if it looks as bad (fake or negative reforms) as your comments make it sound.
April 24, 2009 2:33 PM | Reply | Permalink
I think Obama should take this one. Not as an outright attack on CCCs but as the good point that heavy interest payments are anti-stimulative at the consumer level, and generally feed the bottom lines of CCCs and their investors by bleeding borrowers heavily.
If Obama wants his already weak stimulus package to work, he needs to care for it, not treat it like a done deal which will work as well as it could without attention.
That said, I would guess that the bulk of CC debt which can be moved into home equity loans has been moved. So if those folks are paying about 5-6%, they are already sheltered to some extent from usurious CC rates. On the macro scale, I'd want to see meaningful numbers before rushing into solving some perhaps marginal problem (even though it might still affect many individuals).
April 24, 2009 2:46 PM | Reply | Permalink
One issue that I hope will be discussed - but almost definitely will not - is the issue of Class Action Waivers. Most people don't realize that when they sign their membership agreements part of the fine print is a Class Action Waiver that waives their right to participate in a class action.
To make a long story short, this waiver - which is not even legal in some jurisdictions - immunizes credit card companies from most of the mass litigation that would deter them from hurting consumers. It forces customers who have been screwed over to submit to arbitration, and individually. Which means that most customers will not litigate at all, since they've often only been screwed out of 10 cents, or 10 dollars - which is not worth fighting over.
Credit card companies have been waging a quiet war over the past few years to make these waivers enforceable, and thus ensure that consumers have no redress when they are taken advantage of.
People need to make some noise and shine a light on this issue before its too late.
April 23, 2009 9:49 PM | Reply | Permalink
Good point. While arbitration can have merits, it can also be abused by the powerful, thus totally negating its general value. And while some "class action suits" might be on the frivolous side, some abuses do rise to the level of large scale remedies and justice.
April 24, 2009 2:51 PM | Reply | Permalink
Banks have learned to dominate the U.S. economy. They have freed themselves from the old Depression-era constraints and went to making really big-money deals with wealthy investors so that they could take a larger slice off the top. Freeing themselves of government controls means that the banks, and only the banks, determine what the slice off the top amounts to. Bundling the mortgages was a way of doing that, and selling Credit default swaps to make that work became both an additional source of revenue and a sales gimmick for the original investment bundles. The bundles weren't big enough to meet the market (created as Greenspan flood the economy with cash to keep the recession at bay) so they abandoned the quality controls on the mortgages they were bundling.
All of this was being done by independent actors, each collecting larger and larger cuts off their own little piece of the big system. Elimination of SEC controls and government oversight meant that no one was looking at the system as a whole. The laissez faire ideology is being pushed by the wealthy oligarchy to protect this system. it was pushed further as the old insured deposit banks were allowed to consolidate.
The investment banking aspects weren't enough profit. The newly aggregated and centralized deposit banks tried to keep up with the old Investment banks, and the solution there was elimination of the usury laws. credit cards soaked the middle class, while payday loans and subprime car loans and check-cashing fees soaked the 35% of the working population which is unbanked.
All of this is pretty clear to me now. What is less clear is how it has hollowed out the American economy and caused the middle class production jobs to be shipped overseas, financializing the economy. Here's what I think happened.
The extensions of the laissez faire ideology permitted the big businesses to participate in with the big banks at the trough. That worked by eliminating union power, something intentionally done by the government since Reagan was elected. But as consumers ceased to have the mass of well-paying middle class production jobs to depend on, they ceased to be as effective as consumers. So it was necessary to both lower the cost of consumer items (have them made overseas by non-union starvation-level workers) and extend credit through both credit cards and second mortgages or refinancing mortgages.
Greenspan's expansion of the money supply to prevent recessions worked through this expansion of credit to the middle class. It's been funded by increased government borrowing during Reagan - Bush I and Bush II. Clinton held that down, probably leading to the almost utterly irrational levels of conservative (oligarchical) anger at his "usurpation" of the Presidency.
That's what I think has happened to the U.S. economy. The system clearly was not stable over the long-run, so it had to collapse. That all came to a head when Greenspan started increasing the interest rates and shrinking the money supply immediately after Bush II was reelected. The Housing Bubble he had allowed to be created was the first domino, the investment banks dependent on that Housing Bubble were the second to go (last Fall) and now the Credit Card Bubble is set to fall.
The existence of the Conservative Movement has been a key element in making all this happen, since they have been the carriers of the laissez faire doctrine into government policy. The removal of Depression-era control and Greenspan's irrational expansion of the money supply provided the last blocks on the disaster over the last decade. The conservatives are, of course, the dominant element of the Republican Party. The evangelicals were allied to the laissez faire Republicans and were critical to providing the political foot soldiers that made it all possible politically.
If Bob Reich reads this analysis I'd be very interested in his opinion of whether I caught the major threads and their interactions.
April 23, 2009 10:50 PM | Reply | Permalink
Let's keep it simple: The banks are borrowing from the Fed and lending out at as much as 29.99%. This is thievery, disgraceful, and an attack on the most vulnerable.
Used to be CC rates were in one fashion or another tied to the prime rate.
April 23, 2009 11:39 PM | Reply | Permalink
Oops: prior post should read:
Let's keep it simple: The banks are borrowing from the Fed at 0% and lending out at as much as 29.99%. This is thievery, disgraceful, and an attack on the most vulnerable.
Used to be CC rates were in one fashion or another tied to the prime rate.
April 23, 2009 11:41 PM | Reply | Permalink
Of course, the banks themselves create the Prime Rate. The government controls the money supply (through what bank regulation they bother to apply), but the banks create or organize, consolidate and transmit the demand for loans.
Think the big banks don't manipulate the Prime Rate to fit their own needs?
April 24, 2009 1:11 AM | Reply | Permalink
This seems to be the snake that eats itself. On one side you have interest being raised, causing defaults that lower credit ratings. On the other, lending has disapeared for people with lowered credit ratings and tightened significantly for the rest.
What I see as more important than credit card abuses are the credit rating abuses. The credit reporting agencies are making good risk borrowers into bad risk borrowers. How these reports are used has more to do with you getting a loan than anything else.
April 24, 2009 9:12 AM | Reply | Permalink
What a great country we live in.
You start a credit card company that offers a needed service to consumers. After you get over the "usery" fear and laws, you start running up the interest rates, the penalty rates, etc. The folks that can't keep up with the payments start generating huge debts, two or three or ten or twenty times the original amount borrowed for those consumer purchases. Huge profits are generated.
Then comes a recession. Because of the other greedy idiotic things your company did, you are eligible for TARP money...the company still turns a profit in the middle of a recession, moving to depression.
Then you get to write off the losses of the multimillions of consumer/customers who cannot pay the now 20 times the original amount loaned credit card balances, most of which are merely paper losses. Helps the old Income Statement once again.
Then, usuing TARP money, you get to go to Washington for luxury lunches and dinners, or pay lobbyists to do this for you, with Congresspeople and Senators to convince them why they better not muck with your gravy train.
What a Great Country!!
April 24, 2009 10:20 AM | Reply | Permalink
Wvbiker, you have made good points. Interestingly, this model is not unlike the one used on immigrants and the paycheck to paycheck folks...except they are sometimes charged up to 300%..Additionally, several WS banks are the 'investors' in these firms..This is the Shock Doctrine model that will KILL the middle /lower class..is in fact ruining families.
The WS Banks are whinning about 19% interest on TARP funds when the American public has been raped with the consent of Congress for decades!
Call them and tell them to stop this BS. 1.800.828.9498!!!!
April 25, 2009 9:02 PM | Reply | Permalink
How big is this credit card crunch likely to be, compared with the current mess? Can we expect another, perhaps smaller financial collapse this Fall?
April 24, 2009 10:31 AM | Reply | Permalink
Can someone please explain how much of the current predation by CC companies is a direct result of passing last summer's credit card bill?
April 24, 2009 11:06 AM | Reply | Permalink
I can't quantify that for you.
I can tell you my experience, in the late 80's, wherein I got my first credit card.
I was in college, asleep in my dorm room at 8:30AM.
I got several phone calls, and finally picked it up, to the friendly chirp of a rep for Associates.
She wanted to give me a credit card, which I told her I didn't need. My upbringing was such that I considered it too impolite to simply hang up, so after several minutes of trying to decline their generous offer, I finally agreed to take a card so she would leave me alone to get back to sleep.
I later found out that I was far from the only student at that particular university to receive such an offer.
I also later found out that Associates had settled more than one class-action suit for fraudulent business practices.
It would seem that predation, of one kind or another, has been part of the business model for decades.
April 24, 2009 1:08 PM | Reply | Permalink
An estimate for the average interest rate that should be charged for credit cards can be computed as follows:
- risk free depositor medium term interest rate = 2% currently
- bank interest rate margin = 2% (this is what the bank makes as a lender instead of collecting deposits)
- rate of inflation = 1%, and
- rate of uncollectable balances = 10% (rule of thumb for credit card balances is that the percent uncollectibles is about the same as the unemployment rate, which is expected to go to 10%)
Therefore, the interest rate on credit card balances should be about 15%.
The actual rate is a bit above that, but not very much. The actual rate is a blend of the "teaser" rates to get people to take out new cards, move balances, etc, and the rates charged normally as well as the punitive rates.
This assumes that the issuer's processing costs and other operational costs are covered by the issuer's shares of merchant fees and fees charged to cardholders. This has to be the case in order for the issuers to make money on cardholders who pay their balances each month.
In the current environment, the only way to get interest rates down is to reduce uncollectibles. That means tightening up the underwriting standard to require higher FICO and other credit indicator scores, reducing the credit limits on cards for all but the best borrowers, and agressively collecting from cardholders as soon as they become delinquent.
April 24, 2009 4:20 PM | Reply | Permalink
But we want to punish the bankers who extended credit to low FICOers expecting that they could use the Debt Slave Act of 2005 (per Mish) to squeeze blood from these turnips -- not because the turnips were taken advantage of (they probably were) but because now, we taxpayers have to bailout the bankers.
How do we punish the bankers without increasing the ultimate cost of the bailouts?
April 24, 2009 10:19 PM | Reply | Permalink
I don't think that the taxpayer is having to bail out the bankers on credit cards. The rates are being raised, the credit limits are being lowered, and credit analysis is being strengthened.
But I think that the business would be healthier for both banks and consumers if:
- teaser and introductory rates were eliminated,
- affinity cards were eliminated (cards could only carry the branding of the actual issuer), and
- rewards cards for other than cash back to the account balance were eliminated.
This would decrease industry churn and simplify the business tremendously. It would be a lot more transparent to consumers and the issuers would have to compete more on price.
April 25, 2009 9:19 AM | Reply | Permalink
Well, Prof. Reich, this lands us about where you and a few others had predicted. And the changes to bankruptcy rules that got through the bank-funded republican-branded congress back in 2005 tilt the game in favor of the banks.
funny, we would never let a casino change the rules of the game if the house started losing and yet, Banks can.
they can take on any amount of risky credit card business as long as they can soak those of us who are still paying for the difference between bad judgment and healthy profit. Why are we supposed to feel for these card sharp bankers or their unrealistic customers?
April 24, 2009 5:27 PM | Reply | Permalink
Doesn't anyone see the irony of fundamentally amoral people talking about the moral obligation of consumers not to live beyond their means and to repay their debts?
Aren't these the same guys who were leveraging debt at more than 30 to 1 ratios? And does anyone actually believe that these guys would NOT default on THEIR obligations in a New York minute if they thought they could get away with it.
For decades, the goal of these usurers was to take a chunk of everyone's paycheck by charging ever increasing interest and fees. They did not give one whit about the consumer's ability to repay the debt, so long as they could take an increasingly large portion of the consumer's income.
Besides, this is only one half of the problem. Credit card companies also charge merchants at the other end, typically one or two percent of all purchases made with the credit card.
In effect, they are printing money, albeit in an electronic form, and collecting huge sums to do so.
The consumer does have a remedy: simply refuse to pay the outrageous fees and interest -- i.e. default. If the credit card companies think the money truly is owed, they can file lawsuits to collect it. After all, isn't this exactly how these banksters treat their own creditors?
We need to stop bailing out these crooks whenever they start losing money on their crooked deals.
April 25, 2009 6:17 AM | Reply | Permalink
All this talk about class action lawsuits, mandatory arbitration and legislative changes is all happy talk which has nothing to do with the reality of the credit card business: compliance with the credit card agreement is largely voluntary, and almost impossible for the credit card industry to actually enforce.
What happens if you default on your credit card?
The Credit Card companies never file a lawsuit on anyone to collect on the card.
Instead they harass you for six months, sending nasty letters and making nasty phone calls.
After six months, they write off the debt and sell it to a collection agency. Before they do this, they typically will offer to settle the debt for 75% of the balance.
Collection agencies, of course, are governed by the Fair Debt Collection Practices Act (both State and Federal), and often do not comply with the requirements of this act. (Each violation carries a minimum $1,000 penalty, plus attorneys fees.)
If the consumer tires of the harassment, he only need send the collection agency a letter, telling them to knock it off. At this point, the collection agency is legally required to cease contact with the consumer -- except for one more communication where they can state they have a right to file a lawsuit.
At this stage, the collection agencies seldom file lawsuits. Instead, if they are unsucessful collecting, the matter is transfered to yet another collection agency. And around and around it goes for several years, as the matter is transfered from one collection agency to another.
After several years of this dog and pony show, the debt will be transfered to one of the bottom suckers who buy bad debts for pennies on the dollar. Any money they collect is just gravy. Usually they will offer to settle for 50% of the debt right out of the box.
By the time the debt reaches these guys, there is a good chance the statute of limitations has run. (assuming the consumer has not made any payments on the debt -- the worst thing a consumer can do is try to work with these bloodsuckers and make a payment. Some of these guys will actually credit a payment to the consumer in an effort to stop the statute of limitations from running.)
In many cases, the company collecting was just provided information concerning the debt, but they do not have copies of the credit card agreements or the charge and payment history. The credit card company has no incentive to provide it to them because they have already written off the debt and been paid pennies on the dollar for the outstanding debt. This means that the collector really cannot prove up a case in Court.
So here's the bottom line -- what happens if you default on your credit cards? Probably nothing.
The only payments that are made are those made voluntarily by consumers who feel bad about cheating crooks who are trying to cheat them.
April 25, 2009 1:09 PM | Reply | Permalink
So here's the bottom line -- what happens if you default on your credit cards? Probably nothing.
Unless you want to by a house, a car, a cell phone...
April 25, 2009 7:24 PM | Reply | Permalink