On Wednesday the House passed an important piece of legislation tightening regulations on credit cards, legislation that we can safely assume would not have come within 1000 miles of passage under Republican leadership. The bill raised less of a fuss than I expected – although maybe I should withhold judgment until Talk Radio and the wingnut blogosphere has had a few days to settle on a talking point and go into pant-shitting rage about the encroaching socialism of it all. What objections have been raised are as predictable as they are confusing.
The primary criticism issuing from the lenders is that the new regulations will make it very difficult to extend consumer credit to "risky borrowers" and that it will dampen consumer spending, further wounding the already battered retail sector of the economy. Both of these complaints are patently silly.
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Regarding the first, that is precisely the intent of the legislation. The fact that lenders are complaining about this is indicative of just how much of their profitability relies on lending money to people who stand absolutely no chance of repaying it. The second claim is spurious, implying that debt is a prerequisite to consumption. If only we could think of some way to have people buy things without borrowing the money to do it.
Encouraging less borrowing and less debt-fueled consumption will force people, for better or worse, to live within their means.
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Because of this fact Congress and the lending industry have been like two men pressing guns to one another's foreheads regarding loose credit and government regulation.
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Representatives of both parties know this is the right thing to do (witness the 90-5 vote in the Senate on this bill) but have always been afraid to do it explicitly because it will force people to realize just how little wealth they possess.
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Since real wages stopped growing thirty years ago the political system has relied on the complete abandonment of sound lending practices to placate the unwashed masses with easy credit; as I've said many times on these pages, "Sure, you can have a raise" was gradually phased out in favor of "We're cutting your salary, but here's another MasterCard!" So throughout the last few decades the lending industry has refused to blink, knowing full well how harsh the political retribution would be, primarily for the Republicans, if the working poor and middle class suddenly realized exactly how much of the American Dream they can really afford.
I'm not painting the Democrats as heroes here; current events have more to do with the increased regulations than any show of political will. But it is going to be interesting to see how the lower income and overextended middle class voters so crucial to the 1994-2004 Republican majorities react. It can't be easy to realize just how financially unstable one is when ability to go balls-deep in debt is taken away, an ability that has been the key to maintaining the illusion that our generation is not the first to be less financially successful than our parents.
The downside of this legislation for the lenders is that they lose a very profitable component of their business – banging honest borrowers with fee hikes and charging non-payers substantial penalties. I'll try not to lose sleep over that while reminding them, amidst their whining, that there is no Constitutional right to maintain the profit margins they enjoyed before this crisis. To claim that regulating dishonest, gray area practices by lenders will (further) bankrupt the banks and bring lending to a halt is approximately as logical, and as true, as claiming that laws against stalking and rape mean there will be no more sex.
D.R.Scott says:
What's in your wallet?
Uh, high interest rates, hidden charges, and late fees. In the end, the imaginary money is more expensive than the real stuff. Most of the time, of course, it isn't the spendthrifts maxing out their plastic on big-screen TVs and trips to Vegas. It's medical bills, an unreliable junkbox of a car or losing the dead end job. Can you say layaway? Oh yeah, we can't afford that anymore.
Hopefully this will be a step in the right direction because all of us can't work at Wally World, right?
doug says:
I would tag it 'insightful comment', rather than a rant. Excellent point as to why PTB would want people to have plenty of credit.
As for layaways, some stores have started that again around here. It is actually a better idea. You pay in full for the item overtime, and only then do you get the item.
Nicole says:
"At a time when Americans are struggling to pay their mortgages, groceries and health care costs, why would we want to make credit more expensive and less available?" said Rep. Jeb Hensarling, R-Texas.
Why indeed? The statement makes fun of itself.
Prudence says:
Brilliant post, mate.
Another downside is the impressively stupid bill slipped inside the CC legislation which allows nationals parks and wildlife refuge visitors to bring loaded and concealed firearms with them! You know, in case Bambi gets ornery or some shit. http://www.nytimes.com/2009/05/21/us/politics/21cards.html?_r=1&ref=us
A Cat says:
The use of indebtedness as a means of profiting from another human beings misery has long history and I'm glad to see a line finally get drawn. Its a shame that the timing makes it seem like the only reason the cause was taken up by our government was because it started hurting the middle class and (gasp) even some people they knew!
Payday loans, check cashing stores, and buy-here-pay-here car lots have been the load stone around the lower class's economic progress for decades now while the credit card companies "enhanced marketing techniques" targeting the uniformed and intellectually lazy middle class are relatively recent occurrence.
Its very likely people on the cusp of making ends meet are going to be ruined by this new law as they will get locked into the payday loan cycle of never catching back up and they'll hit that economic pot hole and they'll be back to being poor again. In communities without the luxury of a usurious loans, the needy will be paying the local loan shark. Whats that saying? "When you out law high interest rate loans, only criminals will have high interest rate loans." I maybe misremembering that.
D.R. Scott hit the nail on the head though, the biggest barrier to escaping poverty is transportation and health care. One unexpected illness or car repair is the biggest risk financially to the lower class.
JKP says:
It's a great start. There's still no cap on interest rates, though. One step at a time, I suppose.
Bugboy says:
I'm beginning to see the light in my decade ago struggle with debt, which I climbed out of after a messy divorce.
The logic was beyond me how creditors could think that raising interest rates when your payments were late would motivate you to pay rather than default, it's all stick and no carrot. Then when the collectors would call they would ask if "I was prepared to pay the balance today", like "No shit Sherlock, would you be calling me if I was??"
The minute I started talking about REAL money they got real cooperative. Most of them did, at least, taking a fraction of the dollar on payoff. I still have one stick in the mud who won't even give me anything in writing because it was a judgement against me and my ex-wife (MIA) by Sears, who has a track record for playing dirty. I think I'll need to hire a lawyer to get that one settled. As long as I keep paying them they are happy, though.
So on one hand while you are bleeding they are happy to keep that blood running freely, just like a leech, with no end in sight to paying the debt down. But the minute the blood stops, when the debtor says "ENOUGH!", they know the game is up and want to unload you ASAP.
Kiki says:
"…pant-shitting rage…" I am now in pant-peeing hysterics.