Just a few hours ago, the Senate passed a bill which effectively limits a number of “unfair” practices utilized by credit card companies.
Senate Majority Leader, Harry Reid (D-NV) had this to say about the bill (The New York Times):
“We stood up for consumers and stood up to abusive credit card companies…We said that big banks can no longer take advantage of hardworking Americans. We demanded that when Americans use a credit card — as almost everyone does almost every day — they no longer have to fear that they’ll be abused.”
Nevertheless, along with requiring more accountability and better communication from credit card companies, the bill also appears to restrict the availability of credit; and this can be problematic for our economy.
Mark Calabria, the Director of Financial Regulation Studies at the Cato Institute, has this to say about the possible impact of such regulation of credit card companies.
The most basic function of all financial transactions is to allow households to more closely align their lifetime flows of consumption and income. While the most important mismatch between desired consumption and income happens over the life-cycle — workers earn less at the beginnings and ends of their lives than in the middle — shifting income from good economic times to bad also improves household welfare.
Credit cards have been an essential element of these efforts. Credit cards allow the un- or under-employed to spend now out of future expected income. To limit credit solely to the financially stable leaves those most in need outside of our formal financial system, instead forcing such households to borrow from less efficient, and often more costly, sources, such as friends and family, or pawn-shops and loan sharks. The trend in recent months of households shifting away from mortgage debt to credit card debt has been essential in allowing households to maintain spending in the face of declining home values — absent such spending our economy would be in worse shape.
Of course, financial contracts are like any other form of contract — should they be unconscionable, fraudulent or lacking in consideration — they should not be enforced by courts. And that decision should be judged by courts on an individual basis — and not driven by politics.
As credit risks in the economy change, so should credit pricing. While we want credit to be widely available, that credit should be accurately priced — to provide the right incentives for borrowers and lenders alike. Practices such as universal default — where credit card rates are raised upon the default of other loans — provides for a more accurate pricing of risk. Someone defaulting on their car loan is undoubtedly a higher risk to their credit card company than someone making their car loan. If we’ve learned anything, it should be that in times of stress, risks across various kinds of credit become more highly correlated.
Aside from potentially damaging economic effects, I am concerned about the tone which politicians like Reid, are adopting in the fight against “big banks” and “abusive” businesses. To what extent does the government have the obligation of protecting us from ourselves? Like the restrictions placed on payday lenders in Salt Lake City, it seems that many people are more than happy to lay the blame on the “abusive” and “predatory” business in question, but there is usually little or no accountability demanded on the part of the consumer.
I once read an essay about the demise of the American Dream, that essentially, Americans are moving further and further away from some of the most basic principles which our ancestors believed made this country exceptional: that hard work and risk could yield tremedous prosperity. If we try to eliminate the risk component, can we still reach the “American Dream?” I don’t believe so.
- Marc
I don’t mean to derail you here, necessarily, but I want to point out that it’s becoming very apparent that the Newt Gingrich Weekly Talking Points are going out now with a reminder to use the words “concerned” and “alarmed” as often as you should quote Chuck Norris and compare Obama to Marx.
It’s a very tired song and dance, especially since the convservative sides of not only the House/Senate, but also now the public aren’t really bringing much to the debate but a lot of irrational “concern” and “alarm” they can’t really explain, just know is keeping them awake at night being concerned and alarmed about everything.
Perhaps you are all simply “concerned” and “alarmed” that it looks like a while more in the woods for the GOP, I don’t know. But I write this in seriousness, not just to be flippant. It’s annoying.
Jeff P, as annoyed or exhausted you may be by the alleged “Gingrich Talking Points,” you fail to ever address any of those obnoxious concerns. How challenging is it to dismiss a criticism instead of confronting it in a meaningful way? How ironic and frankly, hypocritical you and your fellow minions on the Left are… constantly berating the “teabaggers” and “obstructionist” Republicans for bringing nothing to the table, yet what valid point do you bring to this particular debate?
I don’t side with any Republican on this issue. If you would take a few minutes to read WaPo or Politico (or maybe in your case, Huffington Post), you would realize that the bill passed with votes from both Republicans and Democrats. These so-called “talking points” you are mentioning do not exist. I have been rather torn over the idea of regulating payday lenders in Logan, Utah, and I found this issue to have some relevancy. I am a capitalist first, a conservative second, and a Republican third. I feel that the role of government should rarely, if ever, be to protect the citizenry from itself… and in this circumstance, it seems to me that the accountability of the consumer is being completely overlooked by BOTH PARTIES.
It cheapens the discussion when you so openly try to have me absorbed into the far rightwing of the GOP… as if I am somehow in perfect synchronization with the likes of Rush Limbaugh, Dick Cheney, and Newt Gingrich. I rarely if ever take the time to solicit their opinions and views… quite honestly, I couldn’t care less what any of them has to say. And to be forced to continually explain my deepest political convictions and influences is outrageously obnoxious. If I were to define where I stand in the political spectrum, it would be somewhere between Edmund Burke and Milton Freidman, not Chuck Norris and Rush Limbaugh.
Is that good enough for you? Or do I need to write a self-confession for the blog? My concerns are real, my convictions are solid… and yet I have the feeling that no matter what issue I confront, it would never save me the aggravation of having to explain my political leanings to the herd of liberal hypocrites who enjoy to lambast Republicans for bringing nothing to the table, yet they only seek to discredit, not disprove, not to mention, they blindly follow their party leaders to whatever end.
Jeff P, spew your prepared vitriol somewhere else… it may be more appropriately directed at a Republican who actually quotes Chuck Norris or actually has compared Obama to Karl Marx. Go after someone who has stonger loyalties to the Republican party… as for me, I will continue to discuss issues accordingly and refer back to my convictions, which are completely and utterly independent.
I actually am leaning toward the opinion that the regulation isn’t necessary or helpful in regards to the points posted here.
However, I didn’t appreciate Discover card raising my interest rate over 3% four or so months ago, citing something about the economic climate. Lucky for me, it was paid off the next month and I could close the account. Discover had no reason to penalize me as a credit risk other than throwing a panic blanket over all of their customers because it was scared that we all were risks. I used to like Discover card before they punished me because of the climate.
Now, if this regulation solely targeted predatory credit lending practices I wouldn’t be as skeptical of it. Practices such as raising interest rates for reasons external to the borrowing customer, or because a customer made one late payment.
I am torn over regulating credit limits, because when someone applies for a credit card, most trust that the bank knows what it is doing when it sets a credit limit, and that it is setting a limit in the customer’s best interest that the customer will be able to manage. I mean, the customer filled out a detailed application and had a credit check run on them, so the bank should know right? At the same time, the people spending the money should be able to look at their budget and decide if they can afford to put something on credit.
I would lean more toward integrating credit/budget education into high-school curriculum (or are they doing that already?), and providing information and educational tools that people can look up on their own to decide if they can afford a credit card.
What is really ironic is if you make a willful, cognizant choice to buy cigaretts and Big Macs with a credit card, you can sue three different “big” companies for being fat, broke, and cancerous.
“If we try to eliminate the risk component, can we still reach the “American Dream?””
I prefer my risk at a blackjack, craps, or poker table, Fed. Do you still think I should not be saved from myself?