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overwhelming barack-racy

April 24th, 2009

obamexYesterday Obama met with the credit card companies to admonish them for charging too much in interest rates, and generally being not so nice to debtors. Have we forgotten how banks make money? I am serious. Banks are not supposed to be funded by the government, they are supposed to be funded by people, people’s savings accounts, the interest on their mortgages, car loans, and yes credit cards. We are heading down a seriously scary path when we as a society think access to credit comes right after freedom of speech in the constitution.

If America is hooked on credit then it should cost as much as the market demands. If enough people are willing to pay 20% APR on a loan so they can impress their neighbors by having an empty 62″ plasma TV box out on the curb, then why should the credit card companies charge any less? 

I once took an online poll designed to gauge financial acuity; I didn’t get 100%. One of the questions asked if I knew what the interest rates were on all my credit cards – I knew what they were getting at, but I said no. I said no because I have no idea what the interest rates on my credit cards are; there is a good reason for this. I am 25 years old, own my own apartment, graduated from business school, work and live in Manhattan, and I have had several credit cards since I was 18. Not once have I ever carried a balance over from one month to the next. See the question did not apply to me, and what is even more disturbing is that a multiple choice quiz, supposedly designed to give an accurate representation of the taker’s financial responsibility, had no answer (e) I have never carried a balance. That was the only question I got wrong, and I guess my situation is so rare that the authors of the quiz did not even take into consideration that perhaps there were people who have never and will never have credit card debt. According to the authors of the quiz a person with 20k in credit card debt but knows how much interest they are paying has a better grasp of financial responsibility then me, who has no idea what my rates are but has never carried a balance.

We have become a society so dependent on credit and the parlaying of debt that we have generations of Americans who believe the only way to afford something is to finance it on a credit card. Forget hard work, forget living within your means, as long as you can afford the low low $99.99 monthly charge, it would be foolish not own it. 

You know what got Enron, Worldcom, Fannie Mae, and the rest of them in trouble? The accounting of debt. Basically, passing off debt indefinitely into the future and only realizing gains to make it appear as if they were profitable. This is the same thing we as a society are doing. If we make 50k a year we consume as if we make three times that, and then pass the debt off for our future selves to pay. This works if your time horizon is infinity, unfortunately it is not. The debt catches up to you, and that is what is happening to us as a society. The debt has caught up to us.

This massive debt has caused inflated values, inflated inventory, and inflated demand for our major manufactured goods. Now, the only real way to reset the economy is to let it bleed. Businesses that only exist based off of artificial demand must fail, inventory must be diminished, prices must drop. Restoring credit should not be our goal, teaching America to live without it should be, once that happens the responsible management of debt will follow, and the credit markets will ease.

The government should make sure the student loan and housing markets remain liquid, after that there is no social imperative to ensure the availability of credit for buying overpriced status symbols.

The current economic policy coming out of the White House is designed to do only one thing, create the next bubble by keeping us spending. Americans (read: voters) are too impatient to wait out a correction, no, we need it to be “fixed” right now so we can continue to buy our Snuggies and iPhones. We have discounted the future so much that another bubble sounds pretty good right now, we can worry about what happens when it pops at a later date.

Shame on you credit card companies, shame on you for charging so much for your credit. You should be making it less expensive for Americans to get into debt. You should not expect our consumption rate to be rationally inverse to the cost of debt. No, you know that our demand for debt has become inelastic and that you can charge an addict anything you want, shame on you, not us, you!

Economics, Politics ,

  1. Scientist
    April 24th, 2009 at 15:11 | #1

    I agree but also lets think about this for a second. Not all the responsibility rests on the consumer. Many of these banks were irresponsibly lending out money i.e subprime mortgages due to deregulation policies, and now that they are getting bailed out by tax dollars they are also taking more of our money by jacking up the APR. But you are right, most people love credit and we need to get a handle on it and in order to pay back the tax dollars they have to make money somehow but I also think some of the APRs that I’ve heard on the news are a little exorbitant, like 30%.

    • JAM
      April 24th, 2009 at 16:46 | #2

      With due respect – it was not deregulation policies that caused sub-prime lending, quite the contrary, it was over regulation that caused it. The Community Reinvestment Act developed under Carter and bolstered under Clinton mandated by law that banks made substantial amounts of sub-prime loans to those who could not afford re-payment in a misplaced effort to encourage low income home ownership.

      Think about it, if you were a bank why would you lend to someone who could not pay it back? Because you were legally forced to. Then on top of it the government agreed to basically buy up all sub-prime loans via Fannie and Freddie, making the Banks act as their agents, with the incentive of collecting large application and processing fees. After some time, the Banks acted as the middle man for over bloated government run organizations that were being overseen by Barney Frank and Chris Dodd, who have both been caught with their hands in the cookie jar, via large campaign donations and sweetheart mortgages (4.5% for two homes for Dodd – when you say we need lower rates I doubt you mean disproportionately low rates exclusively for the politicians who write the laws regulating the banks)

      Then a few years ago when Fannie Mae and Freddie Mac were caught with accounting irregularities congress mandated that they up their portfolio to include even more sub-prime loans, all while Barney Frank said these companies are financially secure, and it is unhealthy to suggest otherwise. In addition, as we sit here, federal regulators are putting pressure on both companies to keep these subprime loans off of their books as to not derail the president’s agenda.

      If your credit card charges you 30% stop using credit cards – this is America, we have choice, if the market demands that interest rates should be 10% then guess what – they will.

  2. Scientist
    April 24th, 2009 at 17:28 | #3

    There seems to be some debate about whether the CRA really is responsible, for example:

    http://economistsview.typepad.com/economistsview/2008/09/it-wasnt-the-co.html

    Someone has to play devil’s advocate right? Maybe you could also enlighten and explain to us why the mets suck so bad.

    • JAM
      April 24th, 2009 at 18:17 | #4

      The article you cite is predicated on the fact that the CRA could not be the cause of financial meltdown because it was enacted in 1977, yet it fails to recognize the drastic revisions it underwent in the 90′s that increased the demand of the program. Not to mention the fact that other timely events subsequent to 1977 conspired with the CRA to create the bubble. I am not making the point that the CRA caused the financial meltdown, only that it caused an increase in sub-prime lending – which on face value, was its mandate. Clearly, both Democratic and Republican policies led to the financial mess we are in, that is clear, both sides are to blame. However, what happened in the past has nothing to do with the insanely risky policies Obama is instituting NOW that will blow both parties’ past regressions out of the water.

      Playing devil’s advocate is perhaps the most important position one can be in, if only someone would make Obama aware of its existance.

      The Mets suck so bad as a direct result of the failed policies of the Bush administration and the era of excess and waist heralded in by free marketeering cowboys with a hard-on for power and a lust for greed, just as Nancy Pelosi she will agree.

  3. Lefty McGee
    April 26th, 2009 at 18:22 | #5

    Wrong JAM. The Mets suck b/c MLB is an unfair capitalist pig of an organization who has failed to redistribute talent enough to create the only thing that is fair…complete parity. And come to think of it, I call foul! MLB is clearly also discriminatory. I don’t see any one-legged, transgendered, blind eskimos pitching for any MLB club do you?

  4. Smarter Than You
    April 28th, 2009 at 15:24 | #6

    Also don’t forget the fact that a moron is a moron, no matter what their interest rate. Let’s say for arguments sake you had a time machine and owned a credit card company. You give a moron a credit card with a 29% interest rate and they get themselves $40,000 in debt before they take a step back and say, oh shit, this is bad. Now you hop in your time machine and instead of the 29% interest rate, you go back and drop that rate to 15%. Does that mean this person is all the sudden going to get smarter when they’re $20,000 in debt? No, it might take a little bit longer but they’re still going to have to hit that $40,000 mark before they figure it out.

    A moron is a moron no matter what the interest rate on their credit card.

    And the Mets suck because Omar Minaya is a douche bag.

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