Credit Card Act Is Affecting the Job Market
Despite the economic stimulus and various financial bailouts, our economy continues to shed jobs. One of the reasons for continued job losses is the decline in new hires, especially the lack of new hiring by small business.
As bank analyst Meredith Whitney discusses in the Wall Street Journal [$], all the major credit programs created by Congress and the Federal Reserve have been targeted at big corporations and Wall Street firms. However, small companies, especially start-ups and partnerships, do not issue bonds in the debt markets, nor do they borrow from Goldman Sachs. So these firms have been left out in the cold, as federal credit inventions have favored corporate America.
Adding insult to injury is that not only has Washington subsidized credit to large firms, it has taken actions that restrict the credit available to small firms and start-ups. The prime example of this is the Credit Card Reform Act signed by President Obama in May.
As Whitney reports, “Credit cards are the most common source of liquidity to small businesses, used by 82 percent as a vital portion of their overall funding.” In restricting the usage of credit cards and reducing the ability to risk-base price, Washington has eliminated the most important source of credit to small business.
Of course, being unable to project their future health care costs, or tax burdens (yes, they are going up, but by how much), many small businesses have either been forced to or chosen to sit on the sidelines of our economy. Washington needs to recognize that Wall Street and corporate American are not the sum of our economy, if we hope to turn the employment situation around.
Don’t Bail Out Bernanke
Here is the message members of Congress should send to Ben Bernanke during the Fed chief’s annual Capitol Hill testimony this week: He is fighting for his job. With his term up in January of next year, Bernanke needs to be called to account for the Fed’s many questionable actions during the financial turmoil of the past year.
Even while correctly identifying the “global savings glut,” Bernanke sat by and did nothing about the unsustainable build-up of leverage in the housing market—the “bubble” which famously burst in late 2008. Bernanke also used Fed financing to bail out Bear Stearns and AIG—hotly political moves which should rightfully have been left to Congress—and oversaw the massive expansion of the Fed’s balance sheet from about $900 billion to over $2 trillion. Under Bernanke, the Fed has transcended monetary policy and bank supervision into the world of fiscal policy.
While thus politicizing the Fed on one hand, Bernanke has sought to insulate the bank from congressional pressures by appeasing majority Democrats with various new credit regulations. Both the recently proposed credit card and mortgage rules unnecessarily restrict credit and increase the litigation risk facing banks, while doing nothing to roll back some of the irresponsible lending policies that exacerbated the housing bubble.
Bernanke’s pandering to the Left on misguided “consumer protections,” and the absence of any debate over the Fed’s role in the housing bubble, raise serious questions as to whether Bernanke understands the causes of the current financial crisis. We cannot hope to avoid the next financial crisis without a Fed chairman who understands the current one.
Does the PASS ID Act Protect Privacy?
I’ve written about PASS ID here a couple of times before – first on whether or not it’s a national ID and, second, on the politics of this REAL ID revival bill. Now I’ll take a look at whether it fixes the privacy issues with REAL ID. Privacy is complicated. Buckle up.
The day the bill was introduced, the Center for Democracy and Technology issued a press release giving it a privacy stamp of approval.
“The PASS ID Act addresses most of the major privacy and security concerns with REAL ID,” said Ari Schwartz, Vice-President of CDT. The release cited four ways that PASS ID was an improvement over the bill it’s modeled on, REAL ID.
Interstate Data Sharing?
First, CDT said, PASS ID “[r]emoves the requirement that states ‘provide electronic access’ allowing every other state to search their motor vehicles records.” It’s technically true: The language from REAL ID directly requiring states to share information among themselves came out of PASS ID. But the requirements of the law will cause that information sharing to happen all the same.
Like REAL ID did, PASS ID would require states to confirm that “a person submitting an application for a driver’s license or identification card is terminating or has terminated any driver’s license or identification card” issued by another state.
How do you do that? You check the driver license databases of every other state. Maybe you do this by directly accessing other states’ databases; maybe you do this indirectly, through a “pointer system” or “hub.” But to confirm that you’re talking about the right person, you don’t just compare names. You compare names, addresses, pictures, and other biometrics.
Congress Just Raised Our Credit Card Fees
Technically, it was the companies which raised their fees. But they did so to anticipate new legislative restrictions on fees taking effect. Congress wanted to cut costs for consumers, but ended up costing them instead.
Credit card companies are raising interest rates and fees seven months before new rules go into effect that will limit their ability to do so, much to the irritation of Congress and consumer advocates.
Chase, for instance, will raise the minimum payment required of some of its customers from 2 percent to 5 percent of the statement balance starting in August. Chase and Discover have increased the maximum fee charged for transferring a balance to the card to 5 percent of the amount, up from 3 and 4 percent, respectively. Bank of America last month raised the transaction fee for balance transfers and cash advances from 3 to 4 percent. Card issuers including Bank of America and Citi also continue to cut limits and hike up rates, which they have been doing with more frequency since January.
“This is a common practice and will continue to be common, because issuers can do these things for really no reason until February,” said John Ulzheimer, president of consumer education for Credit.com, which tracks the industry. “It’s what I call the Credit Card Trifecta — lower limits, higher rates, higher minimum payments.”
It’s not just the top card issuers making changes. Atlanta-based InfiBank, for example, will raise the minimum annual percentage rate it charges nearly all of its customers in September “in order to more effectively manage the profitability of our credit card account portfolio in a very challenging economic environment,” said spokesman Kevin C. Langin.
The flurry of activity, which the banks say is necessary to shore up their revenue losses, has irked members of Congress, who passed a new credit card law, which was signed by President Obama in May. The law, among other things, would prevent card companies from raising rates on existing balances unless the borrower was at least 60 days late and would require the original rate to be restored if payments are received on time for six months. The law would also require banks to get customers’ permission before allowing them to go over their limits, for which they would have to pay a fee.
One hates to think of what additional “help” Congress plans on providing for us in the future.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Regulatory Studies
Consumer Financial Product Commission Distracts from Real Reform
Today the Obama Administration released a 152-page draft bill to create a new Consumer Financial Product Commission. While intended to protect against consumer confusion and reduce the likelihood of future financial crises, the proposed agency will at best have little impact and at worst contribute to the next financial crisis, with the added effect of decreased homeownership and increased litigation.
The president promises that “those ridiculous contracts with pages of fine print that no one can figure out – those things will be a thing of the past,” The president ignores that those “ridiculous contracts” and “fine print” are the result of previous rounds of so-called consumer protections. The disclosures one receives with a mortgage or a credit card are those mandated by some level of government. They don’t call those credit card disclosures a “Schumer Box” because they were invented by a baron of industry. In addition to the government-mandated disclosures that have failed, are the endless amount of fine print added to protect companies from frivolous litigation. The Obama approach to that problem is to increase the amount of litigation.
If the president were serious about avoiding the next housing bubble and financial crisis, he would propose eliminating some of the various federal policies that contributed to the housing bubble. For instance, how about requiring real down payments when the taxpayer is on the hook – as with Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA). Talk about bad incentives; under FHA, a borrower can put almost nothing down and if the loan goes bad, the government covers the lender for 100 percent of their losses. No wonder we had a housing bubble. In addition, the proposed agency does nothing to address the underlying causes of any type of credit default: unemployment, unexpected health care costs or divorce.
Once again, when given the opportunity to address the real flaws in our financial system, the administration chooses to appease the special interests and provide a distraction from the underlying causes of our current financial crisis.
Week in Review: The War on Drugs, SCOTUS Prospects and Credit Card Regulation
White House Official Says Government Will Stop Using Term ‘War on Drugs’
The Wall Street Journal reports that White House Drug Czar Gil Kerlikowske is calling for a new strategy on federal drug policy and is putting a stop to the term “War on Drugs.”
The Obama administration’s new drug czar says he wants to banish the idea that the U.S. is fighting ‘a war on drugs,’ a move that would underscore a shift favoring treatment over incarceration in trying to reduce illicit drug use…. The Obama administration is likely to deal with drugs as a matter of public health rather than criminal justice alone, with treatment’s role growing relative to incarceration, Mr. Kerlikowske said.
Will Kerlikowske’s words actually translate to an actual shift in policy? Cato scholar Ted Galen Carpenter calls it a step in the right direction, but remains skeptical about a true change in direction. “A change in terminology won’t mean much if the authorities still routinely throw people in jail for violating drug laws,” he says.
Cato scholar Tim Lynch channels Nike and says when it comes to ending the drug war, “Let’s just do it.” In a Cato Daily Podcast, Lynch explained why the war on drugs should end:
Cato scholars have long argued that our current drug policies have failed, and that Congress should deal with drug prohibition the way it dealt with alcohol prohibition. With the door seemingly open for change, Cato research shows the best way to proceed.
In a recent Cato study, Glenn Greenwald examined Portugal’s successful implementation of a drug decriminalization program, in which drug users are offered treatment instead of jail time. Drug use has actually dropped since the program began in 2001.
In the 2009 Cato Handbook for Policymakers, David Boaz and Tim Lynch outline a clear plan for ending the drug war once and for all in the United States.
Help Wanted: Supreme Court Justice
Justice David Souter announced his retirement from the Supreme Court at the end of last month, sparking national speculation about his replacement.
Calling Souter’s retirement “the end of an error,” Cato senior fellow Ilya Shapiro makes some early predictions as to whom President Obama will choose to fill the seat in October. Naturally, there will be a pushback regardless of who he picks. Shapiro and Cato scholar Roger Pilon weigh in on how the opposition should react to his appointment.
Shapiro: “Instead of shrilly opposing whomever Obama nominates on partisan grounds, now is the time to show the American people the stark differences between the two parties on one of the few issues on which the stated Republican view continues to command strong and steady support nationwide. If the party is serious about constitutionalism and the rule of law, it should use this opportunity for education, not grandstanding.”
Obama Pushing for Credit Card Regulation
President Obama has called for tighter regulation of credit card companies, a move that “would prohibit so-called double-cycle billing and retroactive rate hikes and would prevent companies from giving credit cards to anyone under 18,” according to CBSNews.com.
But Cato analyst Mark Calabria argues that this is no time to be reducing access to credit:
We are in the midst of a recession, which will not turn around until consumer spending turns around — so why reduce the availability of consumer credit now?
Congress should keep in mind that credit cards have been a significant source of consumer liquidity during this downturn. While few of us want to have to cover our basic living expenses on our credit card, that option is certainly better than going without those basic needs. The wide availability of credit cards has helped to significantly maintain some level of consumer purchasing, even while confidence and other indicators have nosedived.
In a Cato Daily Podcast, Calabria explains how credit card companies have been a major source of liquidity for a population that is strapped for cash to pay for everyday goods.
Filed under: Cato Publications; General; Law and Civil Liberties; Regulatory Studies
Old Enough to Die for Your Country, Too Young for a Credit Card
While much of the debate around the so-called “Credit Cardholders’ Bill of Rights” has been on ending various card policies aimed at disguising different credit risks, one group of cardholders is certain to lose their right to credit under this bill: adults between the ages of 18 and 21.
Under the current Senate bill, the only way for someone under the age of 21 to get a credit card would be either:
1) they have a co-signer, such as their parent, sign for it, or
2) they maintain a job with sufficient income to cover any obligations arising from the credit card.
By contrast, neither of these requirements is put in place for student loans; there is the clear expectation that you pay those loans back in the future from your increased future income that results from going to college. While the purpose of a student loan is to offer one the means to get a higher education, the purpose of any form of credit is to borrow against your future earnings in order to enjoy some consumption today. Whether that consumption is in the form of textbooks or beer and pizza should be left up to the individual—we are talking about adults here—and not the state.
As with any legislation, there are likely to be substantial unintended consequences. Of the approximately 18 million students enrolled in U.S. colleges, some number of those will not want to give up their credit cards (maybe they value their beer and pizza) and will accordingly take what may be their only option to maintain that consumption: a job in addition to their studies. As with any choice in lift, this one comes with a trade-off. One of the primary factors related to whether one graduates from college is if one is holding a job while in college—the relationship being that the more hours a student works unrelated to classes, the less likely they are to finish college. Some students are going to take that trade-off. That means one impact of this bill will be that slightly fewer students will finish college. If we are ever to expect college students to start behaving as adults, we should start treating them as such, including allowing them to make their own credit decisions.
Of Course, It Is the Banks’ Fault!
Congress is off on another crusade, to save Americans from credit cards. People get into debt, run up big fees, generally feel abused, and complain to their elected officials. Never mind the obvious convenience, which is why credit cards have become an indispensable part of American commerce. Legislators plan on micro-managing the credit terms which may be offered across America.
“We like credit cards — they are valuable vehicles for many people,” said Senator Christopher J. Dodd, Democrat of Connecticut, the chairman of the Senate banking committee and author of the measure now being considered by the Senate. “It’s when these vehicles are being abused by the card issuers at the expense of the consumers that we must step in and change the rules.”
“Abused by the card issuers.” Of course. The very same card issuers who kidnapped people, forced consumers to apply for cards at gunpoint, and convinced merchants to refuse to accept checks or cash in order to force everyone to pull out “plastic.” The poor helpless consumers who had nothing to do with the fact that they wandered amidst America’s cathedrals of consumption buying wiz-bang electronic goods, furniture, CDs, clothes, and more. The stuff just magically showed up in their homes, with a charge being entered against them against their will. It’s all the card issuers’ fault!
But then, Sen. Dodd’s assumption that consumers are not responsible for their actions fits his legislative style: no one is ever responsible for anything. Least of all the residents of Capitol Hill.
Filed under: Finance, Banking & Monetary Policy; Government and Politics
Obama’s Broken Toaster
Recently on Leno, President Obama compared some financial products to an exploding toaster. His words:
When you buy a toaster, if it explodes in your face there’s a law that says your toasters need to be safe. But when you get a credit card, or you get a mortgage, there’s no law on the books that says if that explodes in your face financially, somehow you’re going to be protected.
So this is — the need for getting back to some common sense regulations — there’s nothing wrong with innovation in the financial markets. We want people to be successful; we want people to be able to make a profit. Banks are critical to our economy and we want credit to flow again. But we just want to make sure that there’s enough regulatory common sense in place that ordinary Americans aren’t taken advantage of, and taxpayers, after the fact, aren’t taken advantage of.
While I think we would all like to get to “common sense” regulation – arriving at such is unlikely if one’s understanding of the very problem is flawed, as seems to be the president’s.
Unlike broken toasters, mortgages and credit cards do not fail to pay themselves – borrowers fail to pay, almost always for a reason that has little to do with the characteristics of the loan itself. There is a wealth of empirical data documenting the causes of bankruptcy, mortgage and credit card default – much of which has been assembled by those on the left (take a look at any of Professor Elizabeth Warren’s work on bankruptcy). The fact is that the number one cause of all of these events is job loss. If the president has a plan for a mortgage that protects you from losing your job, I would love to see how that’s going to work. After job loss, comes unexpected health bills and divorce.
My hope had been that Obama’s talk about broken toasters was just a little pandering and could be safely ignored. However, judging from the structure of his foreclosure relief plan, he appears to believe that if we just lower the borrower’s rate, all would be saved. The sad truth is that his foreclosure plan does nothing for those really in need – who have lost their job for instance – they are simply out of luck. But then helping people who have lost their job would undermine the argument that it is all the fault of the product.
Now Is Not the Time to Reduce Credit Card Availability
With the House having passed credit card legislation and the Senate scheduled to take up its own bill this week, one questions keeps coming back to me: What’s the hurry?
We are in the midst of a recession, which will not turn around until consumer spending turns around—so why reduce the availability of consumer credit now? And the Federal Reserve has already proposed a rule that would address many of Congress’ supposed concerns. The Fed rule will be implemented July 2010. Were Congress to get a bill to the president by Memorial Day, as he has asked, the Federal Reserve and the industry still couldn’t implement it before maybe January, if they were lucky.
Congress should keep in mind that credit cards have been a significant source of consumer liquidity during this downturn. While few of us want to have to cover our basic living expenses on our credit card, that option is certainly better than going without those basic needs. The wide availability of credit cards has helped to significantly maintain some level of consumer purchasing, even while confidence and other indicators have nosedived.
It was the massive under-pricing of risk, often at the urging of Washington, that brought on our current financial market crisis. To now pressure credit card companies not to raise their fees or more accurately price credit risk, will only reduce the availability of credit while undermining the financial viability of the companies, ultimately prolonging the recession and potentially increasing the cost of bank bailouts to the taxpayer.
As Treasury Secretary Timothy Geithner has repeatedly said, some of the biggest credit card issuers will not be allowed to fail (think Citibank, American Express, Capital One, KepCorp) should they suffer significant losses to their credit card portfolios. Will taxpayers ultimately be the ones covering those losses?
Congress should also further examine the wisdom of restricting credit to college students under the age of 21. Outside of the obvious age discrimination, why treat adults between the ages of 18 and 21 any differently from those above 21? The basic premise of college is making sacrifices today in order to have a wealthier tomorrow—accordingly being able to borrow against that better tomorrow should be an option for any college student. Just as some small number of college students don’t benefit from college, some don’t benefit from credit cards, but throwing the “baby out with the bathwater” hardly seems the idea solution.
In Ensuring Credit Card Holders’ ‘Rights,’ Congress May Actually Take Away Their Credit
With a vote expected today on the so-called Credit Card Holders’ Bill of Rights, the U.S. House is poised to follow up on President Obama’s finger-wagging rhetoric about fees and other perceived sins of the credit industry.
But Congress should keep in mind that credit cards have been a significant source of consumer liquidity during this downturn. Now is the worst time to push measures that would curtail the availability of consumer credit, and that is exactly what the Credit Card Holders’ Bill of Rights will do.
While few of us want to have to cover our basic living expenses on our credit card, that option is certainly better than going without those basic needs. The wide availability of credit cards has helped to significantly maintain some level of consumer purchasing during this downturn.
It was the massive under-pricing of risk, often at the urging of Washington, that brought on our current financial market crisis. To now pressure credit card companies not to raise their fees or more accurately price credit risk, will only reduce the availability of credit while undermining the financial viability of the companies, ultimately prolonging the recession and potentially increasing the cost of bank bailouts to the taxpayer.
The Federal Reserve recently issued regulations targeting practices in the credit card industry. While this regulation was itself overkill, it should be given an opportunity to work, and be modified if it results in significant contraction of credit. It is far easier to go back and change harmful regulations than legislation.
Love the Cards, Hate the Card Issuers
God hates the sin but loves the sinner, we are told. Americans have a similar attitude towards credit cards. They love the cards but hate the card issuers.
Naturally, President Barack Obama has picked up on this sentiment and wants the credit card companies to be “fair.” Reports the Washington Post:
The Obama administration yesterday called for an end to unfair credit card industry practices such as retroactive interest rate increases for any reason, late-fee traps that penalize borrowers with weekend or middle-of-the-day deadlines and teaser rates that last less than six months.
In a written statement released by the Treasury Department, the administration outlined practices it would like Congress to reform as it considers two bills that would crack down on the industry. One proposal would force card companies to apply payments above the minimum amount to the highest interest rate debt. To crack down on over-limit fees, the administration would also like Congress to require card companies to get customers’ permission to set up accounts so transactions over the limit can still be processed.
There are lots of reasons to criticize the practices of credit card companies, but many of the rules are simply mechanisms to charge riskier borrowers more. If you pay off your bill every month, you don’t pay the extra fees and interest. If you are more disorganized, short on cash, or both, you pay more.
Higher charges make it possible to provide more credit to more people. Of course, politicians believe in the latter but not the former. Banks should provide credit cards, make loans, and issue mortgages to everyone, irrespective of credit standing, at rates akin to those charged Bill Gates. Anything more is viewed as a variant of “predatory” lending deserving condemnation.
Maybe it would be best for some people not to buy so much on credit, but that isn’t — at least so far — the government’s decision. However, it would be more honest if government branded people with the Scarlet C and banned them from borrowing than prohibiting companies from charging higher rates and fees to reflect higher credit risks.
The credit card debate is stranger than most in Washington. Listening to critics you’d think that the card companies were dragooning people off the streets, forcing them at gunpoint to sign up for cards, and demanding that they spend money else their children will be kidnapped and sold into slavery. Precisely who was forced to accept and use these terrible cards with their terrible terms? No one.
Instead of posturing as defenders of the body politic, crusading politicians should, as my friend Don Boudreaux of George Mason University suggested, give up their day jobs and start credit card companies. These entrepreneurs then could offer consumers better cards with less onerous terms, making everyone better off.
Any takers?
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