Evil Rorty, loan sharks, and Bastiat’s Broken Window

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Erik Kain

Erik writes about video games at Forbes and politics at Mother Jones. He's the contributor of The League though he hasn't written much here lately. He can be found occasionally composing 140 character cultural analysis on Twitter.

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104 Responses

  1. Avatar Michael Drew
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    says:

    I’m really appreciative that the sane and humane take on this has been getting some oxygen of late, and your presentation of it is one of the best I’ve seen. It’s a real balm to the preeminence in the blogosphere until recently of the McArdlian view of consumer debt. I give my hearty approval of this viewpoint being adopted here.Report

  2. Avatar Scott
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    says:

    Yes, all those borrowers are just innocents taken advantage of by the soulless bankers.Report

    • Avatar E.D. Kain in reply to Scott
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      says:

      Scott – it would be nice if you would actually read the post before commenting. My point is that there are more than one irresponsible party in this picture. Surely you can read the post and come up with better ripostes than this? I mean – this can’t be the best response you can muster, can it?Report

      • Avatar Scott in reply to E.D. Kain
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        says:

        I read it and saw the one throw away line about there being more than one irresponsible party in this picture. However, the fixes I see proposed are coming down on the bakers and not anything about the irresponsible borrowers.Report

        • Avatar Michael Drew in reply to Scott
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          says:

          We need a puff-pastry bailout!Report

        • Avatar E.D. Kain in reply to Scott
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          says:

          Well I guess it’s a question of where the buck stops, isn’t it? Is it easier to reform the actions of millions upon millions of borrowers? (How would we do that, by the way?) Or is it easier to change the lending behavior of banks? I guess it seems more practical to change the actions at the tap – where the money comes from – then on the receiving end, since the whole “fool and his money” thing is really a question of human nature….Report

        • Avatar gauche in reply to Scott
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          says:

          At the risk of oversimplifying, there is a significant difference in both sophistication and economic power between the lenders and the borrowers of personal credit. This difference justifies different approaches to the different classes of actors.Report

          • Avatar Dave in reply to gauche
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            says:

            Absolutely. Scott doesn’t seem to get that.Report

          • Avatar Scott in reply to gauche
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            says:

            How hard is it to understand that you will have to pay back the money you borrow plus an extra amount for the privilege of borrowing it?Report

            • Avatar E.D. Kain in reply to Scott
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              says:

              The difficulty comes in when people believe that they can make payments – say the minimum payment – but don’t realize how this will crush them under accrued interest. The problem comes when people have a hard time understanding how hard it is to pay back a great deal of money and are still given limits that are far too high for them. The problem comes when people who are young and irresponsible are still given enormous loans for no rational or sane reason.

              I mean, you could just be lazy and simplify everything, or you could actually think about how real people act in the real world.Report

              • Avatar Scott in reply to E.D. Kain
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                says:

                So now you say the problem is the lack of foresight and planning on the part of consumers? Why is the consumer’s lack of foresight and planning the industry’s fault?Report

              • Avatar ThatPirateGuy in reply to Scott
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                says:

                Because they specifically and intentionally designed their business rules, marketing, and IT systems to exploit it.

                To re-use E.D. Kain’s analogy this is like a window repair company sponsoring baseball fields with no fences towards business-fronts. While saying that it isn’t their fault the business don’t lobby the zoning committee to change the rules for little league baseball fields.Report

        • Avatar E.D. Kain in reply to Scott
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          says:

          P.S. – I mentioned this more than once. If you did, in fact, read the post then you didn’t read it very closely…Report

        • Avatar db in reply to Scott
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          says:

          I didn’t see any “coming down” on the hard-working makers of breads and pastries in this post. It seemed to deal mainly with banks, not bakeries.

          The lenders are more culpable than the borrowers: They’re not doing a single one-on-one transaction; they have multiple applicants for credit. When they lend to a high-risk borrower who will likely be unable to repay them, they’re depriving more solvent borrowers of the opportunity for credit. They’re investing their company’s assets in a risky manner; it’s not like giving your unreliable relative a $20 “loan” you probably won’t recoup–they’re giving out someone else’s money.

          In other words, it’s all well and good to have a dozen part-time minimum wage earners on the hook for thousands each, but that doesn’t mean they’ll be able to repay their debts in a timely manner. Or at all.

          Expecting people to just not use their credit is ridiculous, especially when it comes to medical and dental bills–it *hurts* when your incompetent dentist’s filling cracks and falls out after four months. And good luck trying to recover from the initial $600 of high-interest credit debt.

          Given your attitude, however, I expect the rebuttal to be a lecture on flossing and flouride.Report

  3. Avatar Jaybird
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    says:

    Here is where I start to get twitchy.

    What would a fix look like *IN PRACTICE*?

    Would certain groups, in aggregate, have less access to credit than other certain groups, in aggregate?

    If I were to take a step back and look and see who has credit cards and what the credit limits are on those credit cards, would I see a trend?

    {evil Jaybird}

    Are you not, in fact, proposing a system where, once again, the Inuit are left out in the cold while people who only co-incidentally, I’m sure, share your skin tone, your hair color, and your eye color have the same access to the same opportunities they’ve always had?

    {/evil Jaybird}Report

    • Avatar E.D. Kain in reply to Jaybird
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      says:

      Jaybird – this is a thought on my mind too (which I briefly mentioned toward the end). But I think that assuming an extreme and writing off a middle ground is just one way to look at it. Perhaps the problem is not that high risk people receive credit lines, but that the limits are too high. If the most debt you can accrue as a high risk borrower is $1000 then you can’t get yourself in too deep. You can still get a little credit to help out between paychecks/for emergencies/etc. but you won’t find yourself under so much water you’ll never get out. I’m not saying there is a perfect answer here, but I do think that lenders have more responsibility to make sure they’re lending appropriately and that may require a rethinking of incentives. If they can’t gain so much by lending to high risk people they might scale that back – not necessarily all the way, but to reasonably lower levels with reasonably lower fines, etc.Report

      • Avatar Jaybird in reply to E.D. Kain
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        says:

        For the record, I agree absolutely 100% with you. I just thought something to the effect of “if I were a credit card industry lobbyist, how could I break this?”

        And the first thought was “this will look like banking in the 60’s and 70’s.” Now, instead of the color of your skin, I’m sure that we’d finally only be looking at the color of your collar. Blue/Pink collar folks get X access to credit, white collar folks get X+Y access. Colorblind, right?

        But it would be exceptionally easy for me to paint all of this with a broad brush and say that this system is overwhelmingly weighted to maintain the privilege of the privileged.

        And I have no doubt that I could pick up puh-huh-*LENTY* of useful idiots to scream my message from the top of towers for me.Report

    • Avatar zic in reply to Jaybird
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      says:

      Jaybird, way back in the day of my young-adult life, I would never have been able to get a credit card.

      Today, my children (21/23) get offers pretty regularly.

      And I get them rarely, I pay my credit bills off every month, and they don’t want me because they don’t make money on me.

      This difference in the behavior of firms offering credit seems, to me, to be the heart of the problem. Or maybe I’m just looking at it through my good-ol-days-rose-colored-glasses.

      But I think the color of my vision is just fine, and the change is in the behavior of the credit extenders.Report

      • Avatar Jaybird in reply to zic
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        says:

        Here’s my story. I had a buddy who had a credit card in college and he went bats with it. His graduation present from his parents was delayed until he got a real job… and his present was “we’ll pay off your damn card if you cut it up”.

        He cut it up, his parents paid off his card, he has been temperate ever since.

        This scared the itshay out of me. I was 26 and married before I had a credit card (and if I’m misremembering somewhat, it certainly wasn’t before I was 25 and engaged). My (our) credit was non-existent. Our first card had a limit of $300.

        I remember the first time I used “pay at the pump”. It was incredible.

        We grew up and eventually became homeowners because, like you, we paid off the card every month. Instead of a “credit card”, we used it like a “no-interest loan” card… and the second we had enough “points” to get the $100 check or whatever it was, we called in and got it. Free money.

        Whenever a credit card company does something like tell us that our rates are hitting 28%, we call in, ask to talk to a manager, badger them until they get our rate back down to something less obscene (13%, I think), and laugh at the poor person on the other end of the phone when they try to explain “but you never carry a balance!” as a last-ditch attempt to get us to swerve in our little game of chicken.

        We’ve never really experienced the evilness of the credit card companies.

        And, as such, any “reform” of credit card companies wouldn’t really have much of an impact on our lives.

        Which goes back to my original point.Report

        • Avatar JohnR in reply to Jaybird
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          says:

          Here’s my story – when I moved to go to grad. school, my wife got a great job, and we wanted to furnish our new apartment. I got a pre-approved card, we went out and bought furniture and such, and three weeks later, my wife’s new group was purged in a corporate take-over, taking her with it. 4 weeks after that, she had an aneurism. We were left with several thousand in debt, a vastly boosted interest rate when I missed a payment (it was the card or the rent while I arranged to break our lease and get a cheaper place), and a stipend of $8K a year to try to cover everything. I’m glad you get satisfaction from badgering managers – they just farted in my general direction because I had no leverage. It took years of work with the state Credit Counseling folks to get sorted out from that, and even then I stupidly took out one of those “No APR! No Monthly Payments! We Love You!” cards during the 90’s boom when we moved into our new house. Same thing happened, except that my wife this time hadn’t had a job to lose, but between new medical bills and now 2 kids, the card went from 5% to 21% APR on 1 (1!) late payment and it was only recently that I got it paid off. While our neighbors and friends were spending happily during the boom years, we were scrimping and paying down debt. That’s the only reason why we’re still afloat now. My story is unique, but then so is yours. The point is, the goal for the banks is to get you hooked, then keep you hooked and suck as much money out of you as possible without your being able to go bankrupt. When you’re desperate and/or naive (or even stupid, like me), you don’t always have the time and knowledge (let alone the energy) to kick the bankers in the shins until they give in. I’ve finally learned my lesson; although I still get tempted to buy things on credit, I manage to remind myself that we can barely afford what credit we are presently carrying, but boy – is it tough sometimes. The house is falling apart faster than I can fix it and then get a pro in to fix my repair, but at some point we hope to stanch the money bleeding and finally break even – then perhaps we’ll start to move ahead again.Report

          • Avatar Jaybird in reply to JohnR
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            says:

            What options do you think should not have been made available to you?Report

            • Avatar JohnR in reply to Jaybird
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              says:

              Ah, it wasn’t the “options” – I have no problem with dealing with the consequences of my actions, which is why I refused to go bankrupt, but painfully paid off all my debt over time – what I resented like Hell was the way the banks (BankOne and Citi were the 2 offenders) played the system to their benefit and my loss: 1. extending $6,000 credit line to a first-year grad. student was a license to steal, and while it was my own fault that I ran up to the line in debt, I vividly remember hearing discussions among my classmates within less than 6 months how they were taking cash advances on 1 card to pay another card’s bill. These were no urban poor (ie Reagan’s “Welfare Queens”), mind you; these were a selection of highly educated, very intelligent, mainly well-off young men and women.
              And 2. Prominently promising a low introductory APR for 6-12 months, while hiding in the pages of fine print that they reserved to themselves the right to jack that rate up to levels that less than 20 years before were wildly illegal, for essentially any reason they chose.
              Of course I should have read the fine print before accepting the “pre-approved” card; equally, the grandmother who signs up with a con-man and loses her life’s savings should have exercised due diligence, but the con-man is still regarded as a malefactor. The difference is, I suppose, due to the facts that I am held to a higher standard than an elderly (and therefore self-evidently demented) person, and that corporations cannot by definition be ‘a con-man’.
              It was a useful, although painful and expensive, lesson, but the end result was a greater loss to me than was necessary, which rippled throughout my local economy – that money didn’t go to support my local small businesses; instead it just went away.
              A realistic initial credit limit, capped APRs and larger monthly payments would reduce those losses to the nation’s “real” economy, but since that would reduce the profit of the banks and the wealth of the officers and investors of those banks it is not a “reasonable” solution.Report

              • Avatar Jaybird in reply to JohnR
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                says:

                I appreciate that you went through a lot of very bad things. I wish that you had not, for what that is worth.

                My issue is that I do not see a solution that can possibly balance “don’t give people enough rope to hang themselves” against “allow people the tools they need to help themselves get a leg up.”

                Additionally, I see the good that comes from allowing people the tools they need to help themselves get a leg up as *FAR* outweighing the harm done by other people hanging themselves with enough rope.Report

              • Avatar ThatPirateGuy in reply to Jaybird
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                says:

                I’d just like to say that this is the kind of comment I like to read. Especially when I disagree with it.

                Intelligent, acknowledges the problem and addresses why they disagree with a practical cost-benefit analysis.Report

              • Avatar db in reply to Jaybird
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                says:

                “Additionally, I see the good that comes from allowing people the tools they need to help themselves get a leg up as *FAR* outweighing the harm done by other people hanging themselves with enough rope.”

                That’s a good point, but there is an easy solution to that–say, a credit card that’s only good for purchases of groceries, gas, medicine, paying the bills, small business expenses. (IE, no luxuries.)

                But that’s not how how the industry works. They *want* you to buy a PS3 you can’t afford and put it on your card. They *want* you to rack up more debt than you could pay off in five years. Usury is their lifeblood.

                The people that get sent these pre-approved credit cards are often the ones who grew up with poor parents, the f0lks who live paycheck to paycheck, the people who can count on one hand the times their bank balance has hit four digits.

                If you’re going to blame this on ignorant consumers, well… how are the consumers supposed to become non-ignorant? It’s not like finance is taught in high-school, and shunting it back to the parents doesn’t help, if the parents themselves are struggling.

                I’m securely middle class and I have a family that’s willing and able to support me when I hit rough patches, and I’ve still been taken for the proverbial ride.Report

              • Avatar Jaybird in reply to db
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                says:

                That’s a good point, but there is an easy solution to that–say, a credit card that’s only good for purchases of groceries, gas, medicine, paying the bills, small business expenses. (IE, no luxuries.)

                This strikes me as a recipe for a black market as a best case scenario. Middle-case scenarios have it be almost exactly like food stamps. Lobbyists for Idaho would explain how Potato Chips ought to be allowed to be purchased on the card, lobbyists for Intel would explain how computers ought to be allowed to be purchased on the card (“parents need computers in the home to allow their children a leg up in school!”), and lobbyists for PetsMart would explain how kitty litter ought to be allowed to be purchased on the card because children with pets learn responsibility.

                As for worst-case scenarios, I’ll let evil Jaybird field that one.

                {evil Jaybird}

                As much as I’m sure the inner city appreciates you picking up the White Man’s Burden and paternalistically telling them that PS3s are for white children and they need to make do with used Super Nintendo and Sega Genesis systems (perhaps you could point out that these are the systems Biggie enjoyed), the perfume of “maybe the kids would do their homework if they didn’t have access to timewasters!” doesn’t do much to cover the smell of the leftovers you leave for other folks. You eat pretty high on the hog and are now pointing out to those without your heritage, parentage, upbringing, and education that they shouldn’t have access to your entertainments?

                And you dare accuse *ME* of blaming things on “ignorant consumers”???

                {/evil Jaybird}

                If you’re going to blame this on ignorant consumers, well… how are the consumers supposed to become non-ignorant? It’s not like finance is taught in high-school, and shunting it back to the parents doesn’t help, if the parents themselves are struggling.

                I’m not blaming anything, really, on “ignorant consumers”.

                I just know that there are people out there who will use the rope they are given to hang themselves but I don’t know of a way to protect those people from themselves without harming people who will be legitimately helped by access to opportunity.

                Well, education reform might help… and a general atmosphere in which people know that “enough rope” means not only “enough to help” but “enough to hang oneself”.Report

              • Avatar JohnR in reply to Jaybird
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                says:

                Jay, I’m somewhat skeptical of your apparent assumption that the problem is limited to ignorant inner-city folks. I’ve seen plenty of problems with credit cards in my own family and socio-economic (Desperate Middle Class) circle. Few of us would qualify as welfare queens, although I did get government cheese one bad winter. Shudder.
                Anyway, I’ve come to the conclusion that credit cards in general, as operated by the industry, are simply too dangerous to use. As long as the goal of the credit card issuers is to get as much money from their “clients” as possible, there is no way to avoid the personal disasters – people just don’t seem to be built to think carefully beyond the immediate need (other than you, of course – I wouldn’t want to offend!). The original Diner’s Club/Amex model of pay-as-you-go is probably the only safe method.
                As for the argument over the evils of regulation and the moral arrogance of protecting us from ourselves, perhaps you feel we should formally remove traffic laws, lights and lane markings? For that matter, why not dispense with police entirely and let us each drive as we see fit – after all, we know the risks and we should know what our capabilities are. Speaking of evil twins…Report

              • Avatar Jaybird in reply to Jaybird
                Ignored
                says:

                Hey, evil Jaybird said that. I can’t defend what he said as much as try to explain it.

                Who is likely to be perceived to be “hardest hit” by this new policy you propose? Whose lines of credit will be perceived to be tightened the hardest?

                If we look at demographics and say, okay, let’s look at credit scores and shift everything to the right for, oh, 50 points. Stuff that used to require a score of 500 now requires a 550. Stuff that used to require 550, now requires 600. So on and so forth, up and down the chain.

                Let’s look at the margins and count heads… who will be perceived to be hardest hit by this proposed “for your own good” paternalism?

                From where I sit, the historically marginalized will be hurt the most by these marginal changes.

                And the companies in charge of exploiting folks won’t even have to buy lobbyists to scream the things that evil Jaybird was saying. There will be plenty of people out there doing that for them.Report

              • Avatar JohnR in reply to Jaybird
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                says:

                Hey – I think we ran out of “reply” options! Excellent!
                As for lines of credit – who said anything about tightening anything? My simple proposal is to do away with credit cards entirely and leave the field only to debit cards, bank cards and perhaps “pre-paid” cards if they don’t fall under one or the other of those 2 options. The very wealthy, who already can afford to handle credit cards can also handle debit and bank cards; the very poor, who (according to Eeeevil Jaybird, anyway) can’t handle credit cards will either have to buy only what they can afford or do without those unnecessary indulgences (they’re such children!). Those in the middle will manage with debit cards and the occasional line of credit from a local bank as determined by a (presumably) cautious and risk-averse local agent of that bank, rather than a “hook-’em-and-drain-’em” distant desk operator angling to increase his bonus. I already do that myself out of necessity, and other than my house falling down around my ears, things are working out fine. My debt is coming down at an increasing rate as loans are paid off, and is in fact almost gone.
                Will the “historically marginalized” be more hurt by my paternalistic attempt to shoulder the White Man’s Burden at their expense than they (according to Evil Jaybird, anyway) are at present? I suppose it’s possible, but I wonder how many of the “historically marginalized” are caught in these credit card traps in the first place? Anyone have any numbers? My experience and limited information suggests that the largest pool of lamprey-harboring fish are those in the middle class.
                Now, I doubt that there’s a prefect solution; debt is like a coffee addiction: to paraphrase old WC, it’s easy to quit – I’ve done it a thousand times! Unfortunately, like coffee, it’s just so darned easy to get hooked again. Unlike coffee, the cost of my unsustainable debt to my local family and community is far greater than the cost to myself. That should count for something, surely?Report

    • Avatar Murali in reply to Jaybird
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      says:

      This is going to sound really evil, but we might be able to change borrower’s behaviour if there are very visible, very nasty consequences for not paying your debts. i.e. if a credit card company can sue you for defaulting, then the court can force you to declare bankruptcy and institute garnishee orders against you. (if this is already in place and not disincentivising irresponsibility then I’m out of a solution)

      One thing I’m wondering is how the credit card companies expect to make money out of this. If irresponsible borrowers are borrowing more than they can repay, don’t credit car companies still make a loss (at least on that account) even if they impose nasty interest rates?Report

      • Avatar db in reply to Murali
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        says:

        “If irresponsible borrowers are borrowing more than they can repay, don’t credit car [sic] companies still make a loss (at least on that account) even if they impose nasty interest rates?”

        Well, that’s really the crux of the issue, isn’t it? I don’t pretend to have a good grasp on the housing bubble collapse, but the general gist I’ve grokked is that credit was extended to people it shouldn’t’ve been extended to, and then said debt was repackaged as, “we’ll be having this money come in for sure, with interest!” Original creditors resold the debt to other parties, the economy nosedived, and the people who’d bought the right to be repaid from the original lenders realized the debtors had no way to pay them.

        It comes down to sleight-of-hand, and selling off your status as a creditor. You lend $500 to someone with an abysmal credit score, slap a high interest rate on that loan, and then sell the loan to a third party after calculating in the interest that won’t matter, because the person with lousy credit won’t be able to pay it off anyway.

        Correct me if I’m wrong on the basic transaction.Report

  4. Avatar JohnR
    Ignored
    says:

    Well-reasoned, I think, speaking as one who was sucked in in the early wave of pre-approved cards to grad students 25 years ago. The problem is, as you point out, that the money which is sucked out of the economy into the big banks doesn’t benefit the country as a whole. Adding in the (deliberately set up) fines, fees and usurious APR traps, a huge amount of money is taken from productive use (purchase of groceries, car repairs, home repairs, etc.) and applied to relatively unproductive use (salary/bonuses and off-shore accounts, etc. In essence, you’ve taken money out of the lower, larger economic money cycle and moved it up into the higher, more restricted money cycle, from which very little ever “trickles down”. I’m sure that there are going to be any number of frenzied arm-waving responses purporting to show that what’s good for big banking business is good for America, but to them I merely say “Poo! My arm-waving argument is based on carefully reasoned biases and prejudices, while yours is an incoherent Beckage of random simian utterences!”Report

  5. Avatar db
    Ignored
    says:

    Thinking about this more, I’m curious as to how the high-risk credit lines look from the bank’s side. Are they genuinely profitable?

    At first I was inclined to think that having a big group of low earners owe large amounts wasn’t such a good idea, but assuming you have a massive amount of people who won’t even be able to keep their debt from growing… Leeching a slow trickle of cash from a huge number of people who’ll take years to square away their debts is probably better, even off paper, than giving a decent chunk of a loan to a small business owner who will promptly repay it.

    Perhaps that’s why I don’t get five credit card offers a month any more–my credit’s not the best, but I do pay.Report

    • Avatar E.D. Kain in reply to db
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      says:

      Well yeah. Low-income, high-risk people who can’t pay are very profitable. That’s the whole problem.Report

      • Avatar db in reply to E.D. Kain
        Ignored
        says:

        It’s pretty depressing, really.

        I’ve always been leery of my credit cards. Rationally, I know using one is spending money I don’t have. But when it comes down to needing to go to the clinic or ED *now*, or having to fill a prescription, or evacuating for a hurricane (gas prices during Katrina and Gustav were obscene), well… if you only have so much cash, and don’t know what you’ll have to pay out for food and lodging tomorrow, then it goes on the card. Hand-to-mouth, and all.

        If there’s one thing you can accuse the less-solvent borrowers of, it would be that once your debt gets to the point where you struggle through the year until your tax return comes in and it’s mostly paid off, it’s that you just stop believing it’s possible to have a life without debt. You settle for paying 5$-25$ a month, as the interest keeps growing.

        I still need about $1200 in dental work. I’ll probably put that on the card once I’m back in good standing. I’d rather pay usurious interest rates than lose my god damned teeth. Money is money, but I’m not gonna grow new molars.Report

  6. Avatar North
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    says:

    I’m sympathetic to your premise E.D. but am sadly forced to come down more on the Jaybird/Mcardle side. My concern is not principle, on which you and I agree, but implementation. I just don’t see a means by which we could regulate the credit industry that would not either:
    A) Become a convoluted reef of regulation through which the highly motivated credit companies would swim outmaneuvering their unmotivated regulators and building rent collection schemes to their great benefit and our great distress;
    Or
    B) Greatly contract the availability of credit and leave grounded, inevitably, the least fortunate in our society and thus opening ourselves to the howls that would ensue as minorities or the poor realized that they no longer are allowed to choose to spend themselves into penury.

    Now I’m open to the idea that maybe there’s a middle ground option C you’re thinking of somewhere along the lines of some sorts of actions to inform or educate the spending public about the hazards of easy credit. But being cynical about human nature and having witnessed the troglodytic idiocy of college students first hand I’m doubtful that anything we say is going to overcome the siren song of being able to buy beer without your parents finding out.Report

  7. Avatar Sam M
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    says:

    I agree that there are two irresponsible parties. But…

    “The whole process of luring in irresponsible borrowers and then saddling them with fines, fees, and extremely high interest rates strikes me as fairly awful.”

    Most of the people I know were not saddled with fines, fees and high interest rates. They were saddled with HUGE principles that they never would have been able to pay off, even if there were no interest rate involved. Because they bought a bunch of beer and cars and other stupid crap with it. Because they wanted that stuff. Sure, the other things hurt, but it was hardly a bait and swtich that did them in.

    “People with very little credit and fairly poor credit – high risk people like college kids, poor people, and so forth – are nevertheless given high credit limits, are lured in with perks and benefits”

    What perks and benefits? Free toasters? Airline miles? The people i know who went bonkers with credit cards cared very little about that crap. They cared about getting beers, cars and a bunch of other stuff they wanted without having to pay for it.

    Finally, with regard to switching interest rates, most of the people I know would have signed on for an initial interest rate of 5000 percent per month if it meant they could have gotten free beer and cars for a while.

    Again, shame on the companies for extending these credit lines. But it seems to me that the vast majority of people who enjoyed these credit lines actually made it through and didn’t declare bankruptcy.Report

    • Avatar E.D. Kain in reply to Sam M
      Ignored
      says:

      Sam – all good points. The main thrust of my argument, however, is that the companies who are lending should not be extending such long lines of credit to people who they know are high risk. That is irresponsible. The rest – high fees, etc. – is all icing on the cake.Report

  8. Avatar Madrocketscientist
    Ignored
    says:

    The best thing about the current contraction in available credit is the near elimination in CC offers of 0% APR on balance transfers until , and the spike in interest rates. Suddenly those carrying a lot of the CC debt are forced to choose between allowing their debt to skyrocket, or to buckle down and pay the damn things off instead of following Suzy Ormand’s advice of playing musical balance transfers.Report

    • Avatar ThatPirateGuy in reply to Madrocketscientist
      Ignored
      says:

      Can you summarize Suzie Ormans musical balance tranfer plan? I have a lurid curiosity about what that horrid plan might be like.Report

      • Avatar Jaybird in reply to ThatPirateGuy
        Ignored
        says:

        Imagine having $1X,000 in debt.

        Would you rather pay interest with your payments or pay principal only?

        Well, take all of your credit cards. Now cut them up. Transfer all of your credit card debt to a 0% interest (for 1 year) card for balance transfers. Pay it down as much as you can. At the end of 11.5 months, repeat. Cancel the old card. When you get the new card, cut it up. Start making payments of as much as you possibly can.

        In the 23ish months outlined above, you’d be able to pay off 5 grand with monthly payments of 220. Interest free.Report

        • Avatar ThatPirateGuy in reply to Jaybird
          Ignored
          says:

          I see. That is quite cheeky. My plan for my girlfriend and I is much less sophisticated. I have moved in recently, because I see how much stress the debt is on her I told her that I will pay for all of the rent(about the same I was paying for my old un-used apartment) so that she can take the 730 dollars and spend it knocking down the 16k in credit card debt. Perhaps when she is debt free, we will swap and I will knock down my 16k in student loans @ 2% apr.Report

          • Avatar JohnR in reply to ThatPirateGuy
            Ignored
            says:

            Of course, what the banks involved assume (generally safely) is that you will make a slip at some point which will allow them to bump the APR up to 21% or even higher. There is also the non-trivial possibility that circumstances may prevent you from getting a new low% transfer-in card and get stuck. I think you’re far better off getting a consolidation loan from a credit union and chewing that down gradually over time.Report

        • Avatar MadRocketScientist in reply to Jaybird
          Ignored
          says:

          Jaybird

          Yep, that is it. And it works great “if” you pay it down. However, many fall victim to the same trap that appliance and electronics dealers rely on when they offer “No payments, No Interest for 1 year” deals, i.e. no one makes any payments (or only makes the minimum payment) during the grace period.Report

  9. Avatar dollared
    Ignored
    says:

    The fix is rather simple:

    1. Cap VISA’s share of the take. They are a monopoly; regulate it!
    2. Cap fees and interest rates. Easy to do on a sliding scale without being draconian (e.g. up to 20% interest on debts up to $1000; up to 16% up to $50000; up to 12% above. No late fees above ($20/mo or $200/year).
    3. Let the issuers decide on credit advancement based on those limits.

    Bottom line: credit would contract, but far less than you might think. The issuers would still make money on college kid cards and starter cards, but keep much tighter limits. The real changes would be: lower credit limits for all categories; lower profits for VISA (and therefor less spent promoting card use); higher resale values for used furniture and housewares :-).Report

    • Avatar E.D. Kain in reply to dollared
      Ignored
      says:

      See, that makes sense to me. Maybe do away with some of the more egregious policies (like being able to change rates for basically any reason, etc.) Credit retracting isn’t the end of the world, after all. If it’s unsustainable and simply turns into bad debt (on macro and micro levels) which people can’t get out of, then I’m pretty sure we’d be better off with lower limits across the board. People will still use those limits in poor ways but they’ll have less dirt to dig themselves under.Report

    • Avatar North in reply to dollared
      Ignored
      says:

      Err, by what definition is Visa a monopoly? Mastercard? Amex? Discover?

      #2 will just be a labrynthine mess. The regulators will putt along happily and Visa or whoever will employ some clever monkeys who’ll figure a way to run rings around the regulations using new gimmicks and accounting.Report

      • Avatar E.D. Kain in reply to North
        Ignored
        says:

        North, that’s true. Regulation can only do so much. And of course, since our government is so hopelessly captured by the financial industry it can probably do very little in this area. However, do you really think that we can’t in any way change the incentive structure for bankers to make them less likely to issue very large credit limits to high risk consumers?Report

        • Avatar Jaybird in reply to E.D. Kain
          Ignored
          says:

          However, do you really think that we can’t in any way change the incentive structure for bankers to make them less likely to issue very large credit limits to high risk consumers?

          Assuming no regulatory capture, relatively lenient bankruptcy laws would do this.

          Megan McArdle made a brilliant point a few months (years?) back when she said that a lot of folks (liberals? I forget her exact wording) have no appreciation for how much heavy lifting is done in our society by our cultural norms.

          I totally agree and see the credit mess as a direct offshoot of the abandonment of some cultural norms. “Don’t spend what you don’t have” is something that my grandfather taught. “It’s a shame to be in debt” is another (shame is an interesting societal concept, isn’t it?). “Don’t borrow what you can’t pay back.” These aren’t even pieces of advice, really. They’re too banal. They’re boilerplate. “TANSTAAFL” was another big one.

          As cultural norms get abandoned, unintended consequences creep in.

          The whole credit thing is one of the unintended consequences.

          I don’t think that folks appreciate how much heavy lifting is done by cultural norms.Report

          • Avatar Mark Thompson in reply to Jaybird
            Ignored
            says:

            This is very true. I remember just a few years ago how an elderly relative of mine was absolutely horrified, HORRIFIED, at how much a middle-aged relative of mine was spending (albeit far more within their means than in many of the circumstances at issue here). The response by another middle-aged relative of mine was, in effect, “well, that kind of spending is good, because it’s what keeps the economy going.” The cultural norms had shifted. It’s probably correct to assume that, all things being equal, we’re in the process of seeing our cultural norms shift back to the ones recognized by my elderly relative. But…to the extent we make clear that government won’t allow people to get into bad debt situations, then we also create the sort of moral hazard that may undermine that norm-shift.Report

            • Avatar Jaybird in reply to Mark Thompson
              Ignored
              says:

              “But…to the extent we make clear that government won’t allow people to get into bad debt situations, then we also create the sort of moral hazard that may undermine that norm-shift.”

              It’s like debt, I find.
              Pay up-front.
              Pay soon (but not now) and pay a little bit more.
              Put it off for as long as you can and you’ll pay for the rest of your life.Report

            • Avatar Michael Drew in reply to Mark Thompson
              Ignored
              says:

              You really think that setting limits would undermine the norm-shift? Can’t government signals have the effect of stimulating this shift in thinking — whereby a consumer is informed that for their good their credit has been restricted so that they avoid serious debt problems down the road? (I would acknowledge that some might have the reaction ‘Who do you think you are to restrict my credit?’ and perversely seek more, but what are the chances that the norm shift will be taken up by such people naturally?) Can’t we at least slow the problem down so that the social damage doesn’t get to the point of being irreversible? Do we really have to allow the problem to get as bad as it will naturally so that the shift can be fully organic?Report

              • Avatar Mark Thompson in reply to Michael Drew
                Ignored
                says:

                I view it as similar to the airline security issue. You will never, ever, be able to prevent private firms from trying to maximize profits from their customers, no matter how many rules you make. If you place restrictions on one type of practice, then firms will find a way, eventually, of achieiving more or less precisely the same results, even as they comply with the letter of the new restrictions. Meanwhile, the existence of the restrictions creates a false sense of security in the consumer that, hey, now they’re protected from predatory practices of big business, so they may as well go nuts.

                To say nothing about the moral hazard issues of restructuring debt, etc.Report

              • Avatar Michael Drew in reply to Mark Thompson
                Ignored
                says:

                That sounds pretty reductively fatalistic to me. Surely some regulations have some efficacy. I agree firms will adjust. But if, say, they were limited in how much credit they could offer to consumers with debt trouble in their past to a percentage of their previous year’s income, we could save some folks considerable pain. I think a general aversion to nanny-stateism is a more legitimate objection to this than just the repetition that all attempts to regulate business are doomed to ironic failure.Report

          • Avatar greginak in reply to Jaybird
            Ignored
            says:

            True enough. some of those cultural norms might also be:

            don’t cheat customers. Don’t sell financial products you either don’t understand, know are shady or are clearly dumping the risk onto other parties.

            pay people decent wages as opposed to …oh I don’t know….schedule them for just enough hours so they do a lot of work but don’t qualify for health insurance.

            One kings ransom is plenty of salary for CEO, 12 kings ransoms is overkill

            I think Megan’s point is fair enough but should be applied at all levels not just on the little folk.Report

            • Avatar Jaybird in reply to greginak
              Ignored
              says:

              Unintended consequences. My first job in IT was as a contractor.

              Why? Well, Congress, in its infinite wisdom, passed legislation protecting “employees”. Not contractors. So I was hired by (Large Multinational Company) as a contractor. Congress, in its infinite wisdom, passed legislation at some point, protecting contractors. The law said that if you worked as a contractor for 2 years, the company *HAD* to hire you as a full employee. I worked with a guy who had been with the company for 3 1/2 years who was fixing to be laid off for a second time. He told me that the first time he was laid off, he was told to buy a playstation and to sit tight because his expertise was needed on the team, they just had to get past the 3 months he needed to be laid off before they could hire him as a contractor again.

              After a year and a half, I was laid off. I was quickly rehired by a “Managed Services” company. I was no longer a contractor but an employee!!! An employee of the Managed Services company, not an employee of the large multinational. Congress passed another few laws protecting me, I reckon… because, soon thereafter, they outsourced my job to Singapore.

              I don’t know how to feel about legislation protecting me in the absence of cultural norms.

              I’m more reminded of the opening story of Freakanomics. It involved a Day Care center. They had a rule that said “you will pick your child up at 5 PM and you will not be late!!!”

              People rarely broke this rule.

              They modified this rule. “you will pick your child up at 5 PM or you will pay a fee!!!”

              Lateness *SKYROCKETED*. “Hey, I paid the fee. What do you want?”Report

              • Avatar greginak in reply to Jaybird
                Ignored
                says:

                and of course there are unintended consequences to everything.

                My point was there are/were all sorts of cultural norms, but critics tend to focus on the those pesky individuals as the losers of cultural norms. Much like the discussion of responsibility the focus in on individuals on the norms or responsibilities of companies.Report

              • Avatar ThatPirateGuy in reply to Jaybird
                Ignored
                says:

                Jaybird, Did the employee protections have anything to do with healthcare being provided?Report

              • Avatar Jaybird in reply to ThatPirateGuy
                Ignored
                says:

                No idea. I’m pretty sure that benefits had much to do with it (because, seriously, that multi-national corporation had *SWEET* benefits) but I was just a kid in my 20s. I didn’t care about healthcare anywhere near as much as stuff like “using the gym” and “three weeks vacation”.Report

    • Avatar Jaybird in reply to dollared
      Ignored
      says:

      As good Jaybird, let me say that I kinda dig on this and think that it might work. Hard percentages might not be legislated but I like the idea of a “progressive”, if you will, percentage decrease.

      Now for the fun part.

      {evil Jaybird}

      2. Cap fees and interest rates. Easy to do on a sliding scale without being draconian (e.g. up to 20% interest on debts up to $1000; up to 16% up to $50000; up to 12% above. No late fees above ($20/mo or $200/year).

      So the rich pay less interest than the poor, do they? You are seriously putting forward a system that benefits the rich more than the poor? Your privilege is showing.

      3. Let the issuers decide on credit advancement based on those limits.

      I’ll assume that you aren’t deliberately trying to hide your racism behind a proverbial white sheet here but are merely ignorant of what the demographics of “letting issuers decide” would look like after a generation. Privileged whites would receive the lion’s share of the credit. Inuit peoples, in the mean time, would qualify for credit limits smaller than your Christmas bonus. Meanwhile, what defense would you give for this show of paternalism on your part? How similar would it be to the defenses for hiding them away on a reservation somewhere?

      {/evil Jaybird}Report

  10. Avatar mike farmer
    Ignored
    says:

    There was an incredible amount of pressure from government to provide credit to the working poor with not so good credit — http://www.businessinsider.com/government-pamphlet-taught-banks-how-to-finance-a-70000-with-a-500-downpayment-2009-6

    If I had all the evidence, it’s quite likely many lenders could still be seen as the largest part of the problem, but a free market takes care of this type of thing. Allowing the banks to fail would have gone a long way to solve some of the bad lending problems, but since government had given an implicit gaurantee that they had the banks’ backs, they couldn’t allow them to go under. There were plenty of smart banks to take their place.

    Free market solutions can still be implemented, there’s no need to start from scratch. A concerted effort between government and the financial industry to return to free market principles could happen. Competition would immediately create players who market open, honest and understandable banking — they would use the crisis to distinguish their services — each borrower coming in would be given a counseling session fully addressing the realities of their fiancial situation and what can be done. What many poor communities have received in the past is organizers placing them with banks they’ve blackmailed with government backing — the poor have been misled by organizers and the government as much as by lenders. But the government/lender enmeshment is so entangled, until it’s untangled, there’s no way to know where one begins and the other ends.Report

    • Avatar E.D. Kain in reply to mike farmer
      Ignored
      says:

      That tangled mess is why simply deregulating won’t ever work. And I’m honestly not sure how to properly deregulate in order to make it a smooth transition, nor have I seen a plan that I find convincing in that regard.Report

      • Avatar Michael Drew in reply to E.D. Kain
        Ignored
        says:

        Mike makes good points here, and the thing is that the (perhaps) creative destruction associated with pure free markets — allowing firms to fail, avoiding moral hazard, and the like — are never smooth. They’re disruptive and painful as hell, even cataclysmic. That’s the point. For the theory to work, the consequences of being excessive in the marketplace have to be scary as hell, and if that fear is disregarded, they have to be experienced in full force, and with all the attendant systemic disruption that goes along. Capitalism is a vicious bitch.Report

        • Avatar greginak in reply to Michael Drew
          Ignored
          says:

          So I wonder what the consequences would be for a country when a certain subset of people are essentially immune to the bad parts of creative destruction. And what if that subset of people, who due to power and bags of money, were the ones running the business that profit from others creative destruction or through their personal incompetence and greed led to bad outcomes.

          Its easy to talk about creative destruction when you are not being the one destroyed.Report

          • Avatar Michael Drew in reply to greginak
            Ignored
            says:

            I agree. I’m not a self-correcting laissez-faire capitalist because it uses the “natural” destruction of large numbers of people as its correcting mechanism rather than more marginal if still significant intervention into private actions. I’m for regulating the pain away, as we have almost completely done the last seven decades. But you have to be on top of it then — you can’t allow bubbles that can only be resolved and the appropriate lessons learned with really serious consequences to arise and then soften or eliminate the crash. You have to write the controls on moral hazard into the regulation on the front end.Report

  11. Avatar Tyler
    Ignored
    says:

    I’m not sure what you’re insinuating should be done to solve the issue. Saying that the credit card companies are in the wrong for providing temptation of overindulgence is to place all of the blame on McDonald’s for the world’s obesity. Ultimately the responsibility comes down squarely on the shoulders of the lendee (or the hungry person), and the terms are always available in their entirety.

    Again, to claim that young, “ill-educated” consumers are helpless against the offerings of the creditors essentially places what should be the consumer’s responsibility of due diligence into the lap of the lending institution. I agree with you that credit card companies are vile creatures to deal with and they have some nasty terms, but the fact remains that those who sign up for their cards are agreeing to the terms, regardless of how “unfair” they may be.

    And, as a youngster, only 22 years of age, in college, with multiple credit cards in my name, I know the repercussions of my actions with said cards and I would fully expect my peers to have the same level of consciousness about their financial matters.

    Are the credit card companies being irresponsible? Perhaps they are being irresponsible with the borrower’s credit, but that isn’t their concern. From their end, targeting these risky borrowers is a very calculated risk that pays dividends more than it kicks them in the nuts. That’s why they do it, it is in their best interest, and to expect them to watch out for interests outside of their own is to not comprehend the nature of capitalism.Report

    • Avatar E.D. Kain in reply to Tyler
      Ignored
      says:

      So you think that lenders have absolutely no responsibility to choose appropriate borrowers by evaluating risk and then issuing credit accordingly?Report

      • Avatar Tyler in reply to E.D. Kain
        Ignored
        says:

        I think that their responsibility ends where their interest ends. I’m advocating free market in this particular issue, because in my mind there is no wrongdoing on the part of lenders. The funny thing is that I usually go to bat against conservative stances on most issues, but on this particular one I see it from the standpoint of a fiscally responsible college student and think to myself, how can people simply not understand the terms of the contract that they sign? And it’s not just that they are signing the contract blindly, but they are then using the immense amount of credit extended to them without evaluating the circumstances? That sort of fiscal irresponsibility is simply unacceptable.

        It’s not so much that I want to let the Capital Ones and Chases off the hook, either though. I understand that they employ seriously questionable tactics to lure in these barely-legal types. My point is, and you mentioned this yourself, that the true problem lies in the way people understand and interact with money. Yes, it is harder to change the ways of millions of college-aged students than it is a couple of behemoth corporations, but that doesn’t make them any more at fault. You can’t simply transfer responsibility to the company because it’s easier.Report

        • Avatar E.D. Kain in reply to Tyler
          Ignored
          says:

          It’s not a matter of transferring responsibility. It is acknowledging that there are multiple parties at fault. Yes, of course irresponsible borrowers are at fault. That isn’t in dispute. And the idea that this is a shift in cultural norms (see Jaybird and Mark up-thread) is right on the money. My point is that the lenders are also responsible, and that a system has been erected whereby these lenders actively seek out borrowers who will default on payments, pay late, pay lots of fines, and get in over their heads. This is simply irresponsible. It’s essentially loan-sharking. Can this be easily fixed? Of course not. Nor can the moral problems of the big spenders be fixed – certainly not by the government.

          So the question becomes – are there ways that people can be nudged? Are there simple ways to change incentives so that lenders don’t seek out high risks to purposefully profit from them?

          This isn’t a free-market vs regulation question necessarily. It’s too complicated for that.Report

          • Avatar Tyler in reply to E.D. Kain
            Ignored
            says:

            I guess I just disagree with your main assertion.

            I don’t think that lenders are at fault in this scenario. They simply set the stage, but the borrower is the one showing up for the show.

            They’re already required to disclose all of the terms of their agreements, so the consumer is presented with a perfect information scenario. Granted there are slight deviations in what stages of action will be taken on each account, but the worst-case penalties schedule is included in the terms.

            To answer your question, short of regulation from the government I think the only thing that can change the current system is education. Consumers need to be more conscious of their decisions and spend more wisely. If more of the “risky” borrowers spend wisely and the rest of them default, it will no longer be in the lenders’ interest to target them.Report

            • Avatar E.D. Kain in reply to Tyler
              Ignored
              says:

              Tyler,

              It’s not that you’re in any way wrong about the borrowers responsibility. It’s that it is too simplified a representation of the facts on the ground. Most people who take out credit cards are not as skilled at understanding the terms and responsibilities and potential pitfalls associated (the risk, essentially) with using that credit. Perhaps they should read the fine print, but then again many people who take these out are too young to understand much of what they read, or are not very well educated, etc. It is an asymmetrical relationship – and one which is found in many areas where the rules are fairly opaque, and where experts hold all the cards.

              You are 22 years old and well educated as far as I can tell. Imagine you were not well educated (this is not so easy to do, actually) and didn’t understand the first thing about finance, credit, etc. except that if you have a credit card you can spend money you don’t currently have. Now a lender comes along, sees you that you are a low income, poorly educated person with no credit (or poor credit, or at the least very little credit history) and that you have no education and extends you a credit line of $6,000 dollars at a fairly low APR. Again, remember that you understand the basics here – you have to repay what you borrow. You can pay “minimum payments” which sounds great. Maybe you don’t realize that if you’re late on one of those they’ll jack up your APR to 29%. Maybe you don’t even understand what APR is. In a rational credit market, you probably wouldn’t have gotten a $6,000 credit line. A responsible lender would have seen you as a risk, rather than as a potential source of profit.Report

              • Avatar E.D. Kain in reply to E.D. Kain
                Ignored
                says:

                Most people (borrowers) are not as skilled at understanding the risks as the lenders is what I meant to say. Thus the asymmetrical relationship and so forth.Report

              • Avatar Tyler in reply to E.D. Kain
                Ignored
                says:

                I don’t see this as asymmetrical because there are resources out there and the information is available, and for free. Once you’re handed a card with a line of credit attached, you have the choice whether to use it or to research it. And you’re correct, it may be more tempting and less obvious to people who may be poorly educated, but there is still a debt counseling program that they could easily consult to learn the truth behind their terms.

                To put it into a comparison, I advocate a more socialized form of health care (told you I’m usually liberal) because the health care industry is one that is TRULY asymmetrical in nature where, as you said, the experts hold all of the cards. If a doctor comes to you and says that you have cancer and need a $10,000 surgery or you will die next week, chances are you aren’t shopping around for a cheaper price or a second opinion.

                The biggest difference in my eyes is that there is already regulation and programs in place to counteract the exploitation of gaps in understanding with regard to credit and lending. Not utilizing them is another issue.

                But as I said, I understand that this lack of knowledge is existent. I think that education is the single biggest hurdle to overcome; perhaps more integration of credit policy and terms into high school education?Report

              • Avatar ThatPirateGuy in reply to Tyler
                Ignored
                says:

                I’m all for more education, but sometimes I wish that when we discussed policy that we didn’t start with the premise that only the smart, clever, savvy, and responsible deserve to not get stabbed in the metaphorical neck.

                I can handle the idea that steps to stop the neck stabbing could be counter productive and thus those specific steps shouldn’t be tried. Indeed, that is a perspective I can be convinced of. But the entire they had/have it coming line doesn’t fly with me, since it is fairly obvious that people in general are pretty darned flawed.

                We should design and reform our institutions in ways that understand that. We should pay attention to incentives and real world results. When prudent we should avoid setting up systems that stab people in the neck.Report

        • Avatar Scott in reply to Tyler
          Ignored
          says:

          “Yes, it is harder to change the ways of millions of college-aged students than it is a couple of behemoth corporations, but that doesn’t make them any more at fault. You can’t simply transfer responsibility to the company because it’s easier.”

          Yet liberals demand that responsibility be transferred all the time. What is it about personal responsibility the liberals don’t like?Report

          • Avatar E.D. Kain in reply to Scott
            Ignored
            says:

            Scott – do you think that bankers are exempt from personal responsibility? Would you care to respond with something other than blanket judgments and boilerplate talking points?

            That would be more interesting to read in any case.Report

            • Avatar Scott in reply to E.D. Kain
              Ignored
              says:

              E.D.:

              The “bankers” are responsible to their company’s shareholders, no one else. A company doesn’t make money for itself instead makes it for the shareholders. If you accept a credit card offer it is b/c you choose to do so. If you run up large bills you can’t pay it is b/c you choose to do so.Report

      • Avatar North in reply to E.D. Kain
        Ignored
        says:

        Well E.D. They do have a responsibility right now. Any time that their customers go into bankruptcy (and this is a McArdle point; our bankruptcy laws are historically very lenient) the credit card companies have to swallow pretty much the entire loss because their unsecured debt definitely ends up pretty much last in line.

        So I guess one simplistic way to decrease their incentives would be to make it easier to declare bankruptcy. But if we did that, again, the credit would vanish like morning dew and we’d be back to the old days when only the monied and secure had lines of credit.

        And again the cold hearted dissenters do have a point. The credit card companies are twisting every marketing arm and pulling every string but in the end the decision to overspend on credit cards is one that people are making themselves. We’ve currently chosen as a society to make credit available to all. Part of the cost of that is that it’s available to ~all~ , including the uneducated and the gullible. But it seems to me that if we want to throw this bathwater out we’re going to send the baby of easy credit out the window right along with it. And people will suffer either way.Report

        • Avatar E.D. Kain in reply to North
          Ignored
          says:

          I think there is a middle road here, North, which you’re leaving out. Credit can be reduced without having a terrible impact if the problem is too much easy credit. A bigger credit limit on a credit card does not necessarily equal a higher standard of living for a low income borrower. More often than not it turns into just the opposite.Report

          • Avatar North in reply to E.D. Kain
            Ignored
            says:

            That is entirely possible E.D. I’m no financial services regulator so I have no absolute knowledge. But I do know that the private sector can afford to (and is inclined to) pay clever people thousands of dollars to get around regulation for every dollar that the public sector can afford to spend thinking up ways to close those loopholes.Report

    • Avatar worn in reply to Tyler
      Ignored
      says:

      The part of your argument that leaves me scratching my head is this:

      but the fact remains that those who sign up for their cards are agreeing to the terms, regardless of how “unfair” they may be.

      It is a simple matter of fact that the credit card companies with which I have done business over the years (Citibank, MNBA, BoFA, et. al.) all have somehow reserved the right for themselves to unilaterally revise the terms of their “contracts” with me (never in my favor, might I point out) and present these modifications to me as a binary choice: accept the new terms or close your account by paying down the balance in full. If that’s the choice it sort of runs counter to the purpose of credit then, doesn’t it?

      And I also would like to point out that these “contracts” are written by what I would imagine are some of the brightest legal minds available and delivered to the consumer in the form of a notecard-sized document & rendered in 6 point type, one that is essentially unreadable as delivered. Now I suppose it could be argued that as a borrower I have the responsibility to read & understand all of the terms but this is assuming a certain level of parsing legalese (i.e., language deliberately composed to be opaque) I think too much of an assumption as applied to the general populace. It could also be argued that perhaps then one should employ legal assistance in understanding the contract terms but I also think this tends to assume that the common man can afford to hire representation for this task, and, more importantly that their counsel is as good as that of the issuing bank(s).

      Or getting back to Rortybomb’s original hypothetical: generally speaking, in civilized society we condemn the confidence man who swindles the elderly, befuddled widow rather than piling approbation upon her for an unwise decision.

      To me, underlying motivations are important. And while the underlying motive to make profit is the same as for both the sort of responsible lending E.D. has hinted at and a specifically engineered system designed to prey on the least informed & most vulnerable, I am much more prone to judge actors by a more reality-based & common sense look at the world and how it really works – not a theory about how informed consumers are or should be in the abstract.Report

      • Avatar worn in reply to worn
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        says:

        As an extension of my last post it should be noted that I’ve said for years that were I able to unilaterally change the laws from on high one of the first things I would enact would be a law to require all ‘fine print’ in adverstising to be rendered in at least the same point size as the ‘come on’ offer. How anyone can see the endemic use of fine print as anything but a manipulative typographical device used solely to obscure, hide or make unclear the true terms of offers is quite beyond me.Report

        • Avatar Michael Drew in reply to worn
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          says:

          Not against that, but in fact you pretty much have to have a semester of law school under your belt to truly grasp what you’re getting into. Increasing font size won’t make the legal constructions they erect to preserve those prerogatives you describe any more comprehensible to the average consumer.Report

      • Avatar Michael Drew in reply to worn
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        says:

        Yup.Report

  12. Avatar Tyler
    Ignored
    says:

    By the way John, I do feel for your situation. It’s very unfortunate, but as you even pointed out it’s far from the ordinary. The ordinary situation is that people have a flat income level and spend over their head irregardless.

    The credit card companies take a risk when loaning to risky people, and they do calculations based on that risk.

    On the other hand, you are taking a certain risk of getting in over your head by borrowing against incredibly high interest rates. Individuals should perform their own analysis’ based on their income levels and their spending habits. Unfortunately, I can’t feel much sympathy for someone who simply overspend their paycheck.Report

    • Avatar worn in reply to Tyler
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      says:

      I wish I knew what you meant by “simply overspend their paycheck”. I think you mean this in the sense of don’t go out and put a $3k LCD TV on the charge card if you work at McDonalds, but to me it sorta reads as though you think house buying is an wise endeavor. And that by extension you would not “feel much sympathy” for someone who had done so (like me, for example) and who has now subsequently seen their employment income dwindle to barely a trickle (like me, for example). For it certainly is correct that I could not have afforded my house if I had been responsible and truly lived within the confines of my monthly take home pay. I suppose I could’ve instead tried putting away ~$1000k a month for what, 180-220 or so?

      I only write the above in the recognition that the question of credit card industry practices and consumer wisdom is not binary, as several commentors seem to suggest. Rather, I believe each side can find copious examples of banks screwing folks and of folks screwing themselves. Sometimes it is even the same fluid motion…Report

      • Avatar Tyler in reply to worn
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        says:

        My apologies for not making it more clear in the above comment. I was attempting to draw a dichotomy here between those who fall on actual hardship and those who simply spend over their head.

        I DO indeed understand that bad things come about, and feel very real and true empathy for folks who get themselves into perfectly manageable situations only to see their income erode shortly thereafter. That’s not what I meant by overspending their paychecks.

        Your first example more accurately illustrates my point in that it’s hard for me to feel sorry for people who take lines of credit to mean free money. Regardless of the terms of your credit card and your ability to comprehend the more intricate details, does it not seem more than apparent that people don’t just hand out free money without an incentive? It may come back to an educational debate here, but at some point you can only make the system so dummy-proof.

        I’ll extrapolate further by saying that in my current line of work I see a constant stream of individuals that get in over their heads and then point fingers at the institutions they borrowed from. The most scathing part is that these individuals will call in to cry that they’ve come upon financial “hardship”, when in reality they have a fixed income and have had the same fixed income throughout the course of their spending. They simply overspent that amount.

        This is NOT financial hardship, and again, I have a hard time feeling sympathy for people who take credit cards as a license to live way outside of their means.

        As for those who do suffer financial hardship after obtaining a large balance — such as yourself and JohnR — I do feel sympathetic, but my point is that the relationship between lender and borrower involves risk for both parties. You are staking your credit on your ability to pay and in turn they are staking their money. So, to be fair, you must realize that anytime you are borrowing there is risk involved from your end as well as the lender’s.

        It’s unfortunate that some people fall victim to these sort of circumstances even while being financial prudent, but in context, extending credit is essentially a BET. It’s a calculated risk-taking venture in which money is wagered against the odds of defaulting. As with any sort of wager, there must be winners and losers in these types of transactions.

        Generally, the winner is the bank in the form of interest.

        Sometimes the the bank loses in the form of default. And sometimes the loser is the individuals in the form of exorbitant fees.Report

  13. Avatar angullimala
    Ignored
    says:

    Since whendoes lending money to deadbeats make you a victim? It doesn’t … it makes you stupid.

    If I lent money to a crackhead guys like Scott would have no sympathy for me when (surprise) I found it to be a bad decision, but when banks lend money to deadbeats suddenly its a pity party for the banks.

    Pathetic.Report

  14. Avatar angullimala
    Ignored
    says:

    This seems related to Evil Rorty’s point about the difference between coercion and “coercion” for libertarians. Coercion is just coercion and just fine, but “Coercion” are those forms of coercion that I find objectionable. Likewise, there is being irresponsible and there is being “irresponsible “. Being irresponsible is just being irresponsible. Being “irresponsible” , however, is being irresponsible in ways I care about.Report

  15. Avatar steve
    Ignored
    says:

    Reading al of this, the libertarians have still not addressed the issue of whether it is ok to make money from the asymmetry of dealing with those impaired by age. After age, how about reduced intelligence? At what level? People also seem to be concentrating on the loan principle, ignoring the fact that it is fees that are not disucced up front which are making the credit card companies a lot of their money.

    SteveReport

    • Avatar Tyler in reply to steve
      Ignored
      says:

      I think that the point here — as you made it yourself — is, where is the line drawn? It’s unfortunate that people aren’t presented with upfront and direct terms that they clearly comprehend. But even if that were the case, does that mean that the individual would see the future outcome of their actions?

      How much must be done to make people understand the terms of an agreement they are signing? With that, how much of that is the responsibility of the lender?

      Should Chase be required to hire attorneys to dictate the terms of every contract to all of their clients?

      Should Capital One offer free credit counseling too everyone under the age of 25?

      I see your statement that the lenders have an advantage in the fact that people don’t fully understand their terms. But that advantage is one that people allow them by remaining uneducated about their own circumstances when there are means for them to further investigate the facts.

      It’s as if to say that a football team who knows the wind direction has an unfair advantage because the other team doesn’t look at the weather forecast. The information is there; they simply aren’t utilizing it. Is it the other team’s responsibility to point it out to them? Or to simply exploit their ignorance?

      Let me reiterate, before I look a real idiot, I think the credit card companies do some real disservices to people with their terms. They are absolutely not in the business of helping out anyone. But, I think you’re on a really slippery slope looking for ways to correct their advantages.Report

      • Avatar db in reply to Tyler
        Ignored
        says:

        “before I look a real idiot”

        Too late…

        “It’s unfortunate that people aren’t presented with upfront and direct terms that they clearly comprehend.”

        It’s not unfortunate; it’s paramount to fraud. It’s not a matter of us plebes being window-licking morons; it’s a matter of lies, damn lies, calumny, and then statistics.

        It’s me going in to the bank to complain about my free checking account suddenly having a $12 service charge per month, being told it would be fixed and it was all a silly mistake, seeing the damned service charge again, going back in, and being told that I must’ve misunderstood the first banker when she said that I could keep that account without the service charges, because unless I have my paycheck on direct deposit, they’re gonna charge me out the nose just for the priviledge of them holding my money in their slush fund. Meanwhile I’m out of more money than I could afford to be out of, considering I was never informed of the initial charges, was told I wouldn’t get the charges that I got afterwards, and oh, I have no chance of recouping any of it, and that’s not an insignificant amount of money to me–and the bank is doing this to hundreds and thousands of other people who don’t have the damned time to spend five hours on the phone or drive to the bank to contest the bullshit charges.

        Consider the people who’re working 60 hours a week, have kids, and have made the horrible moral failing of assuming the terms they were promised with their bank account aren’t going to mutate into a 30% interest rate overnight.Report

        • Avatar Tyler in reply to db
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          says:

          It’s not a lie and it’s not fraud because you sign up for these cards with the full ability to read through the fine print. Regardless of what the *person* tells you the terms are, the real terms are dictated by the piece of paper that you sign upon accepting the agreement and any attached documents.

          As I said, it’s unfortunate that every card doesn’t come with a massive bill-board sized list of simplified terms, but they are still available — you may have to look a little harder. Even the most unscrupulous ones like “If you miss a payment, we can make your APR 44%” — they’re all in there.

          Yeah, people lie, but the document that you sign saying that you have read and accept the terms cannot lie. Please don’t insult my intelligence by implying that I don’t comprehend the villainy of said lenders. I live in the same world as you and bank at the same banks and deal with the same credit card employees that are paid on a per-enrollment basis. I understand how it works. And that’s why I protect myself from getting into the “Oh GEEZ, you didn’t say that!” situation by reading and investigating the terms of the deals I enroll into.Report

  16. Avatar JohnR
    Ignored
    says:

    It was interesting to be part of this discussion, but I think I wasn’t as clear as I might have been. So, just a quick couple of points:
    1. Thanks to those who offered sympathy, but my little story was merely to be used, like Jaybird’s , to support a massive generalization upon its spindly shoulders.
    2. Those who feel that credit card suckers are simply wastrels and layabouts are, I think, allowing their ideology-based prejudices to blinker their vision. Of course many are greedy and dumb – most of us are (Barnum was right), but many also are simply naïve, or thoughtless, or desperately trying to stave off disaster for a little longer, or caught short by unexpected circumstances. The number of reasons for running up unsupportable debt on a card is legion.
    Let me repeat – most of my colleagues who got sucked into the card net in the early 1980s were not “Welfare Queens” – we were a fairly bright and educated bunch of kids. That didn’t help.
    3. The credit card banks are operating a system which has been honed for more than a couple decades to produce a single primary goal – to make the largest possible profit. The ‘best’ means to this end is to get as many people as possible to carry as much debt as possible so that the interest payments are a consistent, and the highest possible, source of revenue. Fees, penalties and what-not are the icing on the cake. As personal bankruptcy was a threat to this business model, it was minimized here in the US by act of Congress.
    4. The banks are simply not generously helping us poor folks to raise ourselves up using their credit cards – the standard business model is more akin to the Mafia than to the Lion’s Club.
    5. Credit cards, like guns, are a useful tool, but, like guns, they can cause serious problems if mishandled. Are we not our brothers’ keepers (to coin a phrase)? Or do we live in a libertarians’ dream world where “Screw you, Jack, I’ve got mine” is the operating ideal?
    6. The comma is the most desirable of punctuation marks; I try to use as many as possible at every opportunity – you should, too!Report

    • Avatar db in reply to JohnR
      Ignored
      says:

      My first serious credit card debt was racked up during Hurricane Gustav. I evacuated in my own vehicle–no use of public services. (Hey, can I get some approval from the libertarians, for doing it myself?) Then my car started rattling like a space shuttle on re-entry; it wouldn’t go faster than 40 mph. Also, gas prices went through the ceiling. Came out of it with a virulent stomach flu, was nearly assaulted in Pickens, Mississippi, and then the fucking government wouldn’t let me back into the city despite the national broadcast backing up the fact that my home was there, with running water and electricity, perfectly fine, without an inch of water anywhere.

      The only thing I trust less than the government is private enterprise. I’m at a total loss as to why so many otherwise rational people are willing to defend corporations for any possible wrongdoing while trying to tear govt. organizations to shreds.

      The government doesn’t get bonuses for fucking us over; they’re just mainly incompetent. The private sector is accountable to no-one, and the worse it screws us, the more cash their CEOs get. Yeah, let’s support the oligarchy. Totally libertarian.Report

  17. Avatar E.D. Kain
    Ignored
    says:

    I wanted to thank everyone for a pretty awesome comment thread so far. To those of you who (I suspect) came here by way of Rortybomb or perhaps on your from the Dish to Rortybomb and then here – thanks for commenting and I hope you come back again for future debates. Good stuff all around.

    I wanted to add that after contemplating on this a great deal, I think that the best course for credit card reform is to come up with new incentives and nudges to make failure on the borrowers part less profitable for the credit card companies. It simply has to pay less to bring in high risk customers – not so poorly that they won’t bring in the low income at all, but enough reduced to make them issue shorter lines of credit. I am not expert enough on the subject (yet!) to suggest specific nudges or rules, and of course they are all prey to clever businessmen who can find loopholes and ways around them. But if there’s one thing I’ve learned, it’s that no matter how suspect we should be of the ability of government to do anything right or to avoid capture, we should be just as wary to do nothing at all.Report

    • Avatar db in reply to E.D. Kain
      Ignored
      says:

      (I totally came here via Rortybomb, yes. I also read the Dish sometimes.)

      “I think that the best course for credit card reform is to come up with new incentives and nudges to make failure on the borrowers part less profitable for the credit card companies. It simply has to pay less to bring in high risk customers – not so poorly that they won’t bring in the low income at all, but enough reduced to make them issue shorter lines of credit.”

      I think I like you.Report

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