Conservative Logic

An economic guide to politics, designed for post-Baby Boomers

What’s In Your Wallet? Uncle Sam.

Posted by A Hamilton on April 24, 2009

It’s looking like Obama is now supporting the idea of adding new regulations for credit card companies.

America’s economically ill-advised populist lurch continued today as Obama met with leaders from major credit card companies and lectured them on the evils of their industry, then threatened them with increased regulation and oversight by the Federal government. 100 days ago, such patronizing interference would have been an unprecedented act for a US President — but it is starting to become a recurring theme in the Obama Administration.

As the economy worsens and consumer credit risk increases, credit card companies have increased interest rates and fees on cardholders. This seems like a fairly logical business reaction to increasing unemployment rates and related nonpayment or default on revolving debt.

Obama wants to place limits on how high rates can go. He also wants to limit how credit card companies can impose and change fee structures for late payments — something he considers an area of abusive practice.

Perhaps Obama hasn’t considered the likely consequences of this move. It will certainly drive credit card companies to further reduce credit lines and become less willing to extend lenders new credit cards. The net effect will be to further reduce the amount of liquidity in the economy. The timing couldn’t be worse, as consumers and small businesses (another major constituency dependent on revolving credit from credit cards) already face significant challenges from banks that are reluctant to lend.

Or, perhaps Obama has considered the consequences of the move.

We’re all aware of the moral hazard created by the Community Reinvestment Act, which essentially drove mortgage lenders to extend credit to borrowers that might not have otherwise qualified for loans. The unintended consequence of this act contributed significantly to the economic havoc of the mortgage crisis.

If the credit card companies react to increased regulation by tightening up on available credit, how long will it be before the government steps in and mandates extension of credit to risky borrowers — a Community Credit Card Act? Ultimately, we could very well be looking at federal guarantees of consumer credit card debt, or even a situation where the federal government itself starts issuing credit cards directly in order to maintain the flow of credit in the economy.

When given the opportunity, Obama has almost always chosen to extend the reach of government into the private sector. This could set him up with another excuse to do just that. We’re on a slippery slope. The idea of government-issued credit cards is a scary one. Setting aside the privacy implications of the government keeping tabs on every purchase you make, do you really want the IRS knocking on your door if you’re late with a payment or two?

These regulations are being introduced at exactly the wrong time. Short term, they will reduce liquidity and slow economic recovery. Longer term, they could lead to a situation where once again, the taxpayers are stuck bailing out the most financially irresponsible members of society. When that happens, it’s future generations that inevitably foot the bill.

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2 Responses to “What’s In Your Wallet? Uncle Sam.”

  1. pino said

    It will certainly drive credit card companies to further reduce credit lines and become less willing to extend lenders new credit cards.

    I completely agree. By stepping in and creating a a limit on the amount one can charge for money, it is going to have the same affect that happens when one steps in a creates a limit on the amount one can charge for rent. Namely, less places to rent, or here, less money for sale.

    And I had not considered the whole Fannie and Freddie for credit cards. Oi vei!

  2. The thing is, even before President Obama signed the credit card legislation into law, credit card companies were already making preemptive moves to respond. All 10 major credit card companies have completed some form of Change In Terms on either their entire portfolio or significant portions of their portfolios. With rampant predictions that some of the more radical versions of the legislation would be passed, credit card companies have increased rates, added membership fees, and decreased rewards, and not just for the riskier segments of their portfolios.

    This exemplifies the true meaning of “redistribution of wealth”, now responsible credit consumers are footing even more of the bill for less credit worthy consumers.

    I’ve had a Chase rewards card for years…I’ve never missed a payment, use my card regularly, revolve a balance (so they are making money on me), and have a great FICO (so I’m low risk). And yet, I just got a Change In Terms where they decreased my rewards and added an annual fee (I’ve never paid an annual fee on a credit card).

    And don’t even get me started on the fact that the legislation (some of which takes effect in August of this year) isn’t even defined yet. I know its the vogue to harsh on credit card companies, but I also know how long it takes to implement complex IT projects. There is no magic wand that can be waived so that suddenly all the credit card systems do what the legislation demands. Making that happen in the 90 days between the bill being signed and the August implementaiton date would have been hard enough, but since the Fed still hasn’t provided any details on the legislation, you can’t even lock down requirements to start coding. Nice to require xcomapnies to comply with undefined legislation!

    ~The Conservative Blogster

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