The Folly of Credit Card Regulation
Government restrictions on credit card terms is a bad idea, and it betrays basic misunderstanding of economics.
Elizabeth Warren, a Harvard law professor recently appointed as chair of the Congressional Oversight Panel created to oversee the Emergency Economic Stabilization Act, is a leading proponent of new terms for credit card companies.
The current credit terms which Professor Warren wants to restrict increase credit to consumers. Indeed, current terms give issuers the incentive to extend more credit to consumers than they otherwise would, credit which is so critical in this economy, especially to low-income consumers. Assuming Congress has their best interest in mind, they should not interfere.
The credit card business is highly competitive. For anyone that believes otherwise, for anyone that believes credit card companies enjoy inflated profits, the best way to help consumers is not regulation but competition. Therefore Professor Warren, along with other proponents of government restrictions, should put their money where their mouths are, quit their jobs and start a credit card company.
When they offer better terms to credit card users, customers will line out the door. Other credit card companies will either go out of business or match their terms. Professor Warren will make a fortune for herself, and at the same time help poor consumers much more than she could do otherwise.
But if Congress allows new regulations, costs will go up for credit card companies, and the inevitable results will be less credit available, and at higher interest rates. That would be an unwelcome swipe at the already vulnerable American consumer.
Protectionism and regulation are plagues, and they emanate from arrogant government officials and feed on ignorance and economic hardship. During the Great Depression the first thing to be sacrificed was free markets. People expected Washington to provide subsidies and "protect" them with regulations. And today those sentiments are abundant.
It is important to understand that regulation and price controls such as the ones proposed by the Obama administration discourage entrepreneurs from coming up with ways to make products and services cheaper and better. Competitive markets are much better than government bureaucrats in determining the best terms for consumers. Over-regulating creates deleterious side effects.
It is also worth noting that access to low cost goods and services make us richer, not poorer. Free economies create changes in consumer spending, and job losses are inevitably involved. Yes, allowing American to buy cheap goods and services from abroad causes American producers that are uncompetitive to lose their jobs. But when these uncompetitive American producers lose their jobs, American consumers gain, and on the whole the economy is better off.
Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at aschram@wellcappartners.com.
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Pure nonsense. My head hurts from reading this.
A simple question to anybody who favors letting the credit card companies continue their current abuses: what would you do if Treasury suddenly jacked up the interest rates on TARP money sometime down the road? My guess is many of you would be on CNBC, screeching about the government's "unfair" treatment of the banks. Yet you're unfazed when this behavior is perpetuated on everyday Americans. That's because many self-styled "free marketers" are actually just apologists for the oligarchs.
I agree with starting up a new credit card company. How do we do it? As for the rest of the post, whaaaaa?
I have found my feeble way of regulating credit cards useful. I do not have any credit cards. That allows me to avoid controversial practices of those who issue credit cards. It is probable that those who solicit consumers to apply for credit cards exchange data for I have not gotten any letters offering any credit card to me for 5 years. I doubt if my practice of sending the business reply envelopes I found in letters offering me a credit card to the sender but not putting anything in such business reply envelopes was popular. The postage due probably was less than 50 cents. I doubt if those who open business reply envelopes are well paid. Business reply envelopes could be opened by a machine. If the envelope contains nothing-there is no need to process the contents of business reply envelopes. Only the US Postal Service makes money delivering empty business reply envelopes. Perhaps, USPS could keep the cost of stamps lower when I sent empty business reply envelopes to the sender; but I doubt that.
Regulation on usury is not a plague, it is a blessing. It prevents abuse. And, if I remember correctly, the credit card companies are losing money, since they gave out too many bad loans, right, and these companies losing money is causing a recession? I think it would be a logical conclusion to assume that regulation would make them more profitable and we poor (non hedge-fund managers) might have more money.
A Proposed Credit Card Bill of Rights:
1) Credit Card Annual Percentage Rates are to be limited to 15% maximum.
2) Credit Card Payment Grace Periods are to be a minimum of 30-35 days in order to match the pay periods of our employers.
3) Annual Percentage Rates, Grace Periods, and Credit Limits are to be prominently displayed on our individual Credit Cards the way food ingredients are displayed on cereal boxes.
4) Combine our credit card limits into one number that will apply to all cards belonging to an individual or family. For example, an individual or family earning less than $100,000 would be limited to a maximum of four credit card accounts with a combined credit limit of 5% of individual or family annual income for all card accounts. A higher Credit Card Limit could be established with a separate line of collateralized credit established at a bank that would be linked to the Credit Card.
5) Our credit cards will be required to track and display how much credit we currently have available and will become void upon reaching our credit limit.
6) Our credit cards will be required to have our picture on them in order to prevent theft.
7) Any customer who reaches their credit limit is required to convert to a conventional bank loan, backed by collateral, before any further “Credit Card” credit is permitted.
8) Elimination of all small and hard to read terms and conditions.
I'll try again.
"Protectionism and regulation are plagues, and they emanate from arrogant government officials and feed on ignorance and economic hardship".
I have no idea why protectionism is equated with regulation. One has to do with keeping suppliers out of markets. The other one has to do with rules and laws to protect people from other people's stupidity, recklessness, or , this time, predatory practices.
"arrogant government officials" may be redundant on both sides of the aisle, but not everyone who sponsors a regulation is arrogant.. I have found nothing in history that indicates Glass and Steagall were arrogant. I do have public evidence that Phil Gramm was arrogant, when he said the economy was fine and Americans were "whiners". Gramm was point man on killing the Glass-Steagall Act.. E investment banks and their destructive practices.
I submit that it is Credit Card Companies who "feed on ignorance and economic hardship." Their best customers are the ones who don't understand revolving credit, money costing 20+%, or all the fees, charges, etc that the company can implement or increase at any time. With personal wealth eroding at historic levels, and millions of jobs disappearing every quarter aren't we in economic hardship? And wouldn't doubling and tripling the cost of consumer credit be predatory and not coincidence?
Banks like Citi and BoA are insolvent without consumer/taxpayer money? They are gouging to stay in business.
Unfortunately, the average American is their victim again.
Pay more suckers! This from a hedge fund manager who pays less of a percentage in taxes on his income than the average auto worker (his income is "capital gains" for tax purposes).
If you think 30% or higher rates are going to encourage people to spend more, I've got bad news for you. My rates just doubled for no good reason other than greed. My company also got $3B in taxpayer money. Probably sitting in an offshore account somewhere along with the rest of the company's hidden profits.
Well Mr Schram ; Spoken like a good Republican . I'll tell you there is not enough "regulation " of credit card companies IE. Banks. You people just don't get it ; Non-regulation is what got the country in the spot it's in now . Yet you far-right republicans still want to go on raping the people . Less credit cards are just what is needed with much lower interest rates ; Maybe set to the mortgage rates .
We can Nationalize the entire credit card industry and declare one year to pay off or down balances interest free...!
Then issue new rates and rules not to exceed 8% as our Founding Fathers respected...
Simple as that...
Why let banks make such usurious predatory interest rates that immoral and are also strangling and further restricting our economy...?
We could use NSPD-51 and HSPD-20 to Nationalize even temporarily any industry including the financial by just declaring an "Emergency..", which this clearly is..!
The two flaws in this arguement - at least at present - are:
At present - the start-up costs for any 'new' bank or financial company to offer credit cards are sizable
And
At present - the near monopoly on providing credit cards (BoA, Citi, Chase, and a scant few others) that are already in financial trouble (mostly due to their own mismanagement of risk) means that non of these big players has an incentive or ability to change their ways.
Until the current debtors can clear thier personal books of the debt they are already under, new credit cards under equally bad terms are not going to happen.
Macy's just changed its original contract of rate hikes to.... "if you default on one payment, your interest will be 52%".... that's right.... 52%. Forget the original agreement of 24%.... they just picked 52% out of a hat and are running with it.
Macy's card users.... .BEWARE.
Every time you close a credit card account, it hurts your FICO score. So switching even as frequently as once every year or so it going to keep your FICO score low, despite a glowing payment history. In addition, the rate you start out with can be changed in an instant, with simply a notification from the credit card company. Elizabeth Warren is looking out for people, not just big business.
As to the STUPID remark that America is "richer" for all our decent-paying jobs being sent over seas, give us that line in another year. Because we basically only produce "services" and boutique products, we continue to lose approximately 600,000 jobs a month in this country. As more and more people lose their jobs, we will finally see the results of a "trickle-down" economy. Fewer jobs means fewer Starbucks, movies, dining out, clothes for adults, and all the other extraneous stuff we buy that we really don't have to. (Funny how trickle down only works negatively, not in a positive direction.)
Big business is finally realizing that if you don't pay people anything, eventually they don't have anything to spend. The median family income in this country probably is not enough to cover even a modest mortgage, groceries, and modest comforts for a family of 4. No wonder so many people are in deep credit card debt.
Yeah, losing all our high paying jobs to other countries is going to make the country very profitable!
trixie you are right on the money . I already have a better opinion of Texas :) Over the last 20 years we have moved our heavy industry to 3rd,world countries to get slave labor. If you have nothing to sell you soon become a third world country . The Wall street types have been passing money around in circles for at least ten years now ; All the while believing they were creating good business for the country.
This is a laughingly ridiculous post.
The only thing that tampers my laughter is that I'm sure that Mr. Schram believes this nonsense.
When companies collude to screw the citizen/consumer, and there is no regulation to stop them, history has shown that the system eventually collapses. Competition amongst virtual criminals in no way assures a reasonable outcome.
By your argument, a murderer who kills three people is 'better' than the murderer who kills 5.
As a citizen I say lets throw BOTH in jail and set laws that prevent them from murdering at all.
is this a joke?... I won't bother to argue against it... every other user here as already made the necessary points.
You mean if we regulate credit card companies, they will stop giving credit to people who shouldn't have it??? How horrid.
I remember the story of an insurance analyst investigating the credit cards of one of these companies, and pointing out that if they got rid of the bottom 5% of their customers, their rate of default would go down 90%. The company CEO responded that those 5% of customers were responsible for 95% of the revenues (late fees, minimum balance payments, highest interest rates...).
After the credit card companies got congress to effectivly repeal the bankruptcy laws (declare bankruptcy and see if your credit card balances go away...), they aggressively went after college and HIGH SCHOOL students, knowing that either the parents would pay, or the kids would pay eventually, plus years of 30% interest...
So by all means, cut credit and only offer it to the people who should have it, that is a fair trade. Lets regulate these folks, starting by restoring the bankruptcy laws in place in 1950.
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