Credit Conditions In The Absence Of Consumer Protection

Even some of our most sophisticated commentators doubt a link between consumer protection and any macroeconomic outcomes.  Consumer protection, in this view, is microeconomics and quite different from macroeconomic issues (such as the speed and nature of our economic recovery).

Officially measured interest rates are down from their height in the Great Panic of 2008-09 and the financial markets, broadly defined, continue to stabilize.  But are retail credit conditions, i.e., the terms on which you can borrow, getting easier or tougher?

On credit cards, there’s no question: it’s getting more expensive to borrow, particularly because new fees and charge are appearing.  Of course, lenders have the right to alter the terms on which they provide credit.  We could just note that this tightening of credit does not help the recovery and flies in the face of everything the Fed is trying to do – although it fits with Treasury’s broader strategy of allowing banks to recapitalize themselves at the expense of customers.  

But there is an additional question: will these changes in lending conditions be reflected in the disclosed Annual Percentage Rate (APR)?  Historically, the rules around the APR – overseen by the Federal Reserve – have not forced lenders to include all charges in this calculation.  Why is this OK?

It’s not OK.  This would be like cereal manufacturers including only some ingredients on their labels.  Or makers of children’s toys not telling you that some dangerous chemicals are involved.

Why has this been allowed to happen?  Essentially, because nobody watches out for the consumer of financial products.  Our regulation of financial institutions is byzantine and completely out of date; our banks game the system with impunity (e.g., nationally chartered banks are not subject to state usury laws; see this BusinessWeek article, section on payday loans).

Historically, the most powerful overseers of the system thought that this kind of detail didn’t matter – or that any changes in what banks did were a form of “financial innovation” that must naturally benefit everyone.  But this is exactly the attitude that brought us to subprime, Alt-A, and other “exotic” (i.e., misleading rip-off) mortgages.

And it is, sadly, the attitude among existing regulators that still predominates today.  This implicit attitude towards consumers is in no way helpful, if we want an economic recovery, jobs, and a reasonably stable growth going forward.  But it’s what we appear to be stuck with.

Our financial regulatory system is a disaster.  The Obama administration should have called it by its proper name, proposed to close it down entirely, and argued to replace it with a more integrated and completely rationalized approach.  That at least would have moved the bargaining position of the regulators – they would now be too busy trying to save their jobs to oppose Treasury on substance.

If you think I am wronging credit card companies, lenders, or regulators in any way, post details below.  And if any representative of these institutions or their associated lobby groups is willing to debate these issues in public, just give me a call.

By Simon Johnson

80 responses to “Credit Conditions In The Absence Of Consumer Protection

  1. You won’t get an argument from me Simon. Although banks claim they need these charges to make a profit, all they are doing is targeting those folks who are least educated in financial matters and usually in the lowest income brackets and/or elderly. People who don’t know that banks will reverse these charges if you complain, particularly if they have monies deposited at the bank.

    I volunteer as a tax preparer for the elderly and lower income tax payers. It is so depressing to meet people who have worked all their lives in a factory only to lose their jobs and have nothing other than their homes to show for it and in some cases lose their homes too.

    I’m no economist but I complain about every charge and follow up if nothing is done about it.We can play their game but it takes knowhow and persistance.

  2. Business has no fundamental interest in transparency, perhaps the most valuable item an integrated regulatory agency could give us. I fully expect the institutions you list above to oppose and effective reform. They will oppose the proposed Consumer Protection agency also.

    I see this as a binary choice now. Either we reduce the size and complexity of lending institutions so that their failure cannot hurt us (or they cannot offer complex loans with hidden costs) or, we provide for effective regulatory bodies.

    Steve

  3. Re: “Essentially, because nobody watches out for the consumer of financial products”

    Where is the sense here and everywhere that protecting “consumers” is the RIGHT thing to do, not just from a technocratic viewpoint, but also morally?

    How did we get to such a sorry state?

    If no underlying sense of noblesse oblige exists, then these arguments are pointless, and we are well & truly screwed.

  4. playing their game is not getting you anywhere except of course improving an individual’s life

    “they” have to be up against masses
    – they listen only when they perceive a threat to the numbers of their cash cows to be available for milking

  5. As Steve and Sandy both noted, the system is designed for non-transparency, targeting those who are the least able to navigate is structures. As a general rule, businesses are more profitable in non-transparent markets, and will naturally resist transparency efforts. Consumers making informed choices is a prerequisite for free markets to work; this requires information being made available to consumers so they can comparisons.

    Competition does not necessarily generate this information availability, as there is generally not enough pressure on producers to compete in this area (I haven’t been able to formulate a good argument as to why this occurs, though).

    As a small aside, while transparency is important it needs to go hand-in-hand with simplicity, else there is a loss of usable signal in the information.

  6. ooops forgot organizing masses leads to Socialism, then Marxism, then Stalinism

  7. We seemed to have implemented a bailout program that “bends the curve” of consumer protection – further and further away from any protection at all.

    That Goldman continues to brag about making no changes to its business model since becoming a bank holding company, continuing to pursue risk with pleasure, profit – and the full blessing of the government – speaks volumes about whose interests we’re protecting – and it’s not the consumer’s by any stretch of the imagination.

  8. E. Barandiaran

    Simon,
    I hope you soon address the issue of political conditions in the absence of consumer protection. Maybe you can arrange a debate with the relevant politicians about the issues mentioned by Robert Samuelson in his column

    http://www.washingtonpost.com/wp-dyn/content/article/2009/08/09/AR2009080902090.html?hpid=opinionsbox1

    or those mentioned in this report

    http://online.wsj.com/article/SB124986067095218079.html

  9. Strangely enough, organizing the masses can also lead to this messy, disorderly political system named…dare I say it…the one Churchill once said it was “the worst system conceivable” (at the exception of all others) the one hated by any elitists on the surface of the planet.

    This “thing” called democracy.

    The Horror! :-D

  10. I’m not an economist, nor do I play one on TV but it seems to me that the basis of economic theory is rational expectations and equal access to knowledge. Therefore, a consumer has to have access to the same information as the companies in order for the economy to allocate resources efficiently.

    In other words, without full disclosures, companies that aren’t as efficient are staying in business when they otherwise may not be able to or they are taking money (resources) that could be used more efficiently elsewhere.

    Finally, as long as these companies are doing this, we (the public) are indirectly subsidizing them every time their fees drive someone to bankruptcy or welfare.

    For all of those reasons, I think the “underlying sense of noblesse oblige” does exist.

    I hope I haven’t done a disservice to the blog or the regular commenters by my sophomoric ramblings.

  11. I’m not defending the banks but why is anyone habitually overdrawn when you can easily monitor your checking account using the internet or phone.

  12. Ever had automatic withdrawls on your checking account? When your phone bill, gass bill or other bills are taken out automatically, and the amounts vary each month – some times wildly – then other checks that have written may bounce when an unexpectedly high electric bill is paid.

    Many low income people with bad credit are made to do auto-pay agreements. I’m no expert, I know this because I’m one of them and have been made to do it myself.

  13. Also,

    When $10 means the difference between being able to eat and not at the end of the month, and your bank charges you that much for being under the $100 limit on your account, you will often go into over draft.

    Here’s the gist of what it’s like being poor and dealing with banks by comedian Louis CK:

    “You’re rich, here take some more money. Here, take this guy’s $15, f*ck him, he’s poor.”

  14. Geoph
    do you mean the companies whom you allow automatic withdrawals to do not inform you beforehand by sending proper old-fashioned detailed invoices on how much you have to pay?
    sounds medieval to me

    just read today a piece somewhere that banks have increased their overdraft fees (first time that’s happening in a recession ever the piece said) the amount mentioned that was charged by them to customers sounded absolutely outlandish to me. Previously I had read a post by an English university don whose son had been charged due to a mistake similarly outrageous fees many many times of what it could possibly cost in GErmany – as of July 1 I would pay 12,75 % on allowed overdraft and 17,25 % on the amounts exceeding the allowed one, both of course per year. I have perfect credit but so did the son of the English Don.

    example from Germany for automatic withdrawal – just to make it clearer:
    I have my monthly fixed amount down payment of the electricity bill withdrawn and there is a yearly reading of the meter with possibly a very high withdrawal. But before that happens I get a very old fashioned invoice which I can check against my meter myself and if they have made a mistake and I want to be unfriendly or do not have an invoice I can reverse the withdrawal without any cost to me and without the electricity company being able to throw me off the grid for it i.e. they only have a right to their money if I have been properly billed.

    could it be that our often mourned sluggish way of doing economy provides for a lot of everyday comfort?

  15. According to the link, the banks argue that some of the fees cannot be included because they are conditional fees; that is, including the fees in an “all-in” APR would involve the banks making assumptions about consumer behavior. (Presumably they make these assumptions anyway… It is not like the fees are completely arbitrary, right?)

    This seems like an easy problem to solve to me. The banks could just quote two APRs – a standard APR that assumes none of the conditional fees apply, and a non-standard APR that assumes they all consistently apply. (This would be similar to quoting bonds involving options, with a yield-to-maturity and a yield-to-worst, with the “worst” being if the conditional event actually obtained.) The only fee I can think of that this would not apply to would be if the bank charged for not using the card.

    The banks would argue that it is unlikely that someone would meet all of the conditions necessary to meet the highest APR, which is probably true, but at least it would sort of give consumers an idea of a worst-case scenario.

  16. I completely agree that more transparency is needed. However, your cereal analogy makes zero sense. Everyone who eats the cereal ingests everything that’s in there. Not everyone who has a credit card pays all (or even any) of the fees. If I pay off my credit card balance in full every month, I pay zero for my credit card. My effective APR is zero. As Bond Girl said, you could include a worst-case APR. That actually does make sense. Cereal? Not so much.

  17. You may be very sure that the banks know exactly what percentage of their customers pay credit card fees. In fact, they not only know that, they know what strategies to use to maximize their fees. Banks know more about consumer spending and payment behavior than most consumers know.

    It would be very easy to provide an estimate of actual consumer expenses to consumers and I would prefer that this was required.

    Until regulation improves, the best advice for most people is to use consumer credit as little as possible. One thing I don’t think the bankers fully realize is that the Friedman’s observation that rational expectations apply to broad public markets also applies here. Eventually, the knowledge that the consumer banks are taking advantage will become common knowledge, and many consumers will stop borrowing–may, in fact, already be doing so. Once that occurs it will be a generation, perhaps, before consumers start to trust the banks. (Consider the persistence of depression-era spending habits.) This is probably not desirable from the viewpoint of the bankers.

    BTW, student loan rates are also up.

    Krawk!

  18. Whose money are the big banks using to lend – upon which they charge all those hidden fees? Other peoples money (OPM). What happens if those “other people” – us – stop giving their money to the big banks & give it to the smaller banks? Can we shut the big banks down?

    My youngest daughter called me several months ago & suggested we switch our checking & savings accounts out of Bank of America to a small local bank. She was sick of the big banks screwing us. And we did. No more hidden fees & unbelievably better service. Small local branches with very friendly people & no lines. And no hidden fees. We use debit cards that are also credit cards – all in one. I’ve put my IRA’s – a tidy sum – in small bank CD’s several years ago.

    Let’s shut the bastards down!!!!!!

  19. Eric Dewey, Portland, Oregon

    Bond Girl, good thought, but one that’s been on the rule books for decades in Regulation Z for credit cards, and did not work out as the regulators hoped, so is being phased out in the amendments to the regulation that are effective next July (unless Congress steps in again to change that).

    Simon’s got a very good point, but may not realize that the concept of APR itself may be part of the problem. Since Regulation Z codified the use of APR as a standard comparison tool for consumers, all credit products have marketed themselves based on APR – which is an incredibly complex calculation (see sections 4, 7, 14 and 16 and Appendices F and J of Regulation Z, found at 12 CFR 226).

    This is one way that the regulations themselves have utterly failed at consumer protection.

    In addition, partly as a result of the APR rules, good innovation within the banking industry has not flowered as it might have. When I was with a major credit card issuer a few years ago, they had a brillian idea for a “flat-fee” credit card that did not use APR concepts to market itself – basically the pitch was that the consumer would pay $X.XX per $100 on their balance, a simple and intuitive way to explain the costs of their credit. Although as their compliance guy I tried to help them get their required disclosures done according to Regulation Z, there were some aspects of the product that simply could not conform to the regulation, and so management dropped it as being too complex.

    In my view, this was a big failure of consumer protection…

  20. Eric Dewey, Portland, Oregon

    Simon this is a very good point, but you may not realize that the concept of APR itself may be part of the problem. Since Regulation Z codified the use of APR as a standard comparison tool for consumers shopping for credit, all credit products have marketed themselves based on APR – which is an incredibly complex calculation (see sections 4, 7, 14, 16, 18, 22, 26 and Appendices F and J of Regulation Z, found at 12 CFR 226).

    This is one way that the regulations themselves have utterly failed at consumer protection.

    In addition, partly as a result of the APR rules, good innovation within the banking industry has not flowered as it might have. When I was with a major credit card issuer a few years ago, they had a brillian idea for a “flat-fee” credit card that did not use APR concepts to market itself – basically the pitch was that the consumer would pay $X.XX per $100 on their balance, a simple and intuitive way to explain the costs of their credit. Although as their compliance guy I tried to help them get their required disclosures done according to Regulation Z, there were some aspects of the product that simply could not conform to the regulation, and so management dropped it as being too complex.

    In my view, this was a big failure of consumer protection…

  21. On February 18 this year I wrote the following letter to the Financial Times (not published, of course, as I have been blacklisted by an ego)

    “Sir Martin Wolf writes “When interest rates fell in the early 80’s, borrowing jumped. The chances of igniting a surge in borrowing now are close to zero”, “Japanese lesson for a world of balance-sheet deflation” August 18.

    He is wrong the world has not changed that much, if the interest rates fell borrowings would still jump. The problem Wolf has is that he is looking only at the Federal Reserve’s intervention rate which is close to zero and cannot fall much more, and not at the rates that really do matter, for example the interest rates on credit cards. The interest rate on a credit card in the US for someone like me that has a substantial credit line available and has never defaulted on any payment is currently 17%.

    With a rate of 17% low inflation expectations, for now at least, and cash being king, I would have to be an absolute nut to borrow even if I most fervently wanted to help stimulate the economy.” http://bit.ly/UskNf

  22. There’s a usury law campaign back on, btw. There’s a short post about it at NewDeal2.0 (http://www.newdeal20.org). The debate here seems to me to be part of the trouble–what consumer behavior gets us an optimal scenario? Is it running up balances, which runs up credit scores and gets us more credit? Or is it what Nick seems to suggest, that if you use “responsibly” you can avoid the fees that others (and by implication less responsible others) have to incur? I wouldn’t have any idea.

  23. I don’t think I’ve ever read a SJ post with that tone. He’s getting really angry. With good reason I might add. I find it pretty incredible that regulators who have a large responsibility in the mess we’re in, now have the cheek to oppose common sense regulation.

    The Economist sometimes organizes debates on their website. For instance there was one on financial regulation a few months ago between Joseph Stiglitz and Myron Scholes:

    http://www.economist.com/debate/overview/134

    If some credit card company representative or regulator are bold enough to accept SJ’s challenge such a format could be adopted here.

  24. The problem (from the standpoint of people who profit from the current system) with reinstituting usury laws is that then you need to reinstitute welfare and fair labor practices. People use credit cards as a kind of welfare system and usurious interest rates allow credit card companies to extend credit based on the existence of a pulse. Stricter regulations would necessarily lead to the need for real social welfare and paying people a living wage.

  25. Lavrenti Beria

    “… although it fits with Treasury’s broader strategy of allowing banks to recapitalize themselves at the expense of customers.”

    Isn’t it just remarkable that our own government actually has a strategy that involves picking our pockets so as to enrich the financial interests? Mike Whitney’s latest at Counterpunch deals with this very same kind of wealth transfer:

    http://www.counterpunch.org/whitney08102009.html

    One day, perhaps after the full effects of the present crisis have ground down the material and spiritual well being of the American people to the point of utter desperation, the thieves in Washington D.C. might wake up to look out on a sea of angry faces. Then we may experience a wholly different kind of wealth transfer.

  26. Ten thousand thanks Simon Johnson for shining hot lights on these abuses, and the usury issue particularly. The core issue is the function of government. If government is designed and operated to enhance, protect, shield, advantage, and support oligarchs and the predator class, (our current system of government) – then in effect there is no such thing as consumer protection. There may be tepid laws to prohibit or discourage ruthless abuse, but the reality is (and our current system is a glaring example) that government operates to enhance and advantage, shield, protect and support the wanton profitmaking or profiteering (depending on perspective) of oligarchs and the predatorclass. Consumer protection is stealthfully, or covertly undermined by the government.

    If on theotherhand, government is designed and operated to enhance, protect, shield, advantage, and support the best interests of the people, – then government will enforce harsh restrictions on industries and oligarchs to protect consumers and labor, and to enhance, protect, shield, advantage, and support the best interests of the people.

    It is a question of government advantaging and protecting thefew at the expense of themany, or government advantaging and protecting themany, at the expense of thefew.

    Our current government is a government of, by, and for the oligarchs and the predatorclass exclusively, as this usury issue, the banks flaunting billions of dollars in profits from deceptive or abusive, and shadowy fee’s.

  27. “Then we may experience a wholly different kind of wealth transfer.”

    tell me one instant only one when that has happened in history

    where, when the storm fo the rebellion had blown over, things emerged in different clothes and maybe with different players but otherwise pretty much the same

    and I will consider no example legitimate that was just a short triumph

    travel through the castles of the Loire and see for yourself how they were plundered during the French Revolution and how was that wealth spread? were there buyers for it, thereby lifting the plunderers out of poverty? – even the beheading frenzy didn’t help – next came Napoleon and then Napoleon III and then another revolution and then Republic after Republic and today you have Sarkozy who is trying to resurrect La Gloire kind of imitating Putin who would love to be called Tsar.

    as I see it the only intervals when people were not robbed bare by their elites was when they were needed as willing self-exploiters, creative, ingenious, industrious – whenever a surplus of labour was available the “elite” looked at their own pockets and realized these needed filling (in my dark way of thinking the abolitionist, truly dedicated and honest though they probably were, could only be successful because slave labour was not suitable for factory work – factories needed more willing ones they cannot function with a work force disciplined by an overseer with a long whip. And factories want a surplus of workers to keep wages down. And today more and more of another worker suitable for our time is emerging, the robot. “they” will soon need in manufacturing only the best of the best for managing the robot, for the rest they have tireless 24/7s – only who is going to have the money to buy the stuff? – so maybe those gamblers are only the canard in the coal mine who know that it is urgent to provide for bad times.

    when you have governments where its representatives after their term can make huge amounts of money by peddling their insider know-how via any medium ever invented (the German ex-chancellor working for Putin) do you really think they do not have an eye on that while president? George Bush failed his after-presidency prospects because his war turned out not to be the glorious affair which was promised him by adventurers/dreamers. But imagine the Iraqis had been as willing as the Germans after the war, everything would be forgiven, hushed down, reasoned away.

    And to give fuel to your rage: did you know that the British invented aerial bombing in the 20s in Iraq because that was the only way they could hold the country at sustainable cost …

  28. To focus on the financial products industry alone misses the point. Information is power and it is easy to see how insurers, banks, phone companies and the like use language when communicating with perspective clients and clients. While requesting information from clients or perspective clients, the language used is often clear and easily understood. Any media used for the discussion is again, quite easy to understand. Upon communicating what consumers can expect, terminology becomes vague and cryptic bordering on comical. More than likely informed consumers would pass up many of the products they unwittingly sign up for today. The market should be free to offer risky products, unto the riskiest as long as they are compelled to stamp it ‘riskiest product known to man’. There needs to be the JDPower and Assoc. ‘ranked #1 in Easiest Contracts to Understand’. I hope the Consumer Financial Protection Agency is simply the start of a new expectation and thinking for consumers.

  29. When I was a child in the 1950’s/60’s there was a commercial jingle that went

    “Never borrow money needlessly
    But when you must
    Borrow with the extra confidence
    From folks you trust
    Barrr – ohhhhh CON-fidently
    From H-F-C”

    The credit companies get away with what they do because people have been so eager to jump into debt. The stats since 1950 are quite amazing – a substantial increase in personal debt almost every year since, that’s over 50 years! With so much demand, why not tack on every possible device for squeezing the consumer? This is why competition has not resulted in credit companies offering clearer, more meaningful terms; they don’t need to in order to sell money.

    If we had lived by the motto – “always live below your means” or even “never borrow money needlessly” as HFC (Household Finance) cautioned so long ago there would be no cry for consumer protection because the consumers would already have protected themselves in the best way possible, by having little or no debt.

    Personal indebtedness is now dropping at a rate we’ve never seen. Let this continue and watch credit companies begin to mend their evil ways. The last thing we want now is for people to increase their debt, that would be a faustian bargain that does not bring true economic recovery. We must pass through this period of de-leveraging tears to get on a solid footing.

    What them multitude of debtors must say is “never again” and not “I want easier, lower cost credit”

  30. Is it possible to elaborate on how it would not allow such a product?

    What were the problems with the existing regulation?

  31. This is a really good point. Going forward, we probably are going to see more of the issues related to poverty that easy credit temporarily masked.

  32. Roy,

    I opened an account for one of my sons to use for student loans. I told the bank when I opened it that I wanted an account that could be drawn down to zero and that I didn’t care about interest. The account was never overdrawn. Suddenly in January of this year they started charging $30.00 a month in fees. I complained but they kept drawing it out even when the account had $5,ooo. in it.

    We had a Coverdell account set up for grandaughter and when we tried to consolidate it with the rest of the funds in another brokerage account we were charged $145. on a $2,ooo. account for maintenance and termination fees.

    They will charge you a fee for almost anything. And this is a bank which I have dealt with for 26 years. By the way, I have never overdrawn any account at that bank.

  33. “Why has this been allowed to happen? Essentially, because nobody watches out for the consumer of financial products.”

    Didn’t Bernancke say the Fed had been doing that rather well?

  34. Bond Girl: “Going forward, we probably are going to see more of the issues related to poverty that easy credit temporarily masked.”

    I don’t think that a lot of poor people got a lot of easy credit, aside from pawn shops and payday loans. Barbara Ehrenreich tells of a woman who lives in a motel, even though an apartment would be less expensive, because she cannot accumulate enough money for a deposit on an apartment. A microloan would help, and, at least before the recession, she could have been expected to pay it off quickly from the difference between her housing costs.

  35. Dave, thank you for giving voice to those who really oppose consumer financial regulation. I believe you have accurately conveyed the attitude they truly possess – that consumers who fall prey to banks essentially deserve what they get. That those who are too dumb, or unwise, or uneducated, essentially deserve to be taken advantage of.

    They paint consumer regulation as “Paternalism” (the path toward a “Nanny State”).

    On the other side of the equation, we have Upton Sinclair’s Jungle. And the only ones who really do well in the Jungle are the Predators at the top of the food chain. (That is why it’s called ‘Predatory Lending’.)

    There seems to be a common sense middle ground, but any movement toward that middle ground is accompanied by histrionics among conservative idealogues (well funded by the financial sector).

  36. Part of the reason people so viciously argue over the causes of bankruptcy (it’s the debtor’s fault… no it’s not!) is that the causes are quite mixed:

    For example:

    or

    The latter data was from 2006… over the last year, unemployment has skyrocketed as a major cause.

    But, taking a guess, it looks like roughly 40% of bankruptcies are directly due to overexenstion of credit or financial mismanagement. 60% have other elements in them – health, accidents, new birth, divorce, involuntary unemployment, failed business, etc…

    So it’s probably easy for the press and advocates of different views to cherry pick stories in support of either narrative.

  37. Don’t tell Cleveland.

  38. Well, just happened to receive my NatWest MasterCard statement and see that the monthly interest rate is 15.74% on an annual basis, which doesn’t seem too bad. Not that I ever use the damn thing now.

  39. I am reminded that about 5 years ago I got involved in trying to unscramble a nephew who had really got himself in to trouble with the bank. Every time I wrote to them, each reply added £25 to his bill. Every time I called they said write to us and every time I wrote with an offer they ignored the letter but still charged £25. In the end he declared bankruptcy and let the bank stew on the £15,000 debt. G’rrr.

  40. The existing regulation absolutely requires certain disclosures, such as APR. However, in a flat-fee product, there really is no APR to disclose – because it is a flat fee.

    We did a lot of math to extrapolate the flat fee into an approximate APR, but it would never have been exact (because as the balance rises, the actual APR gradually decreases, and at some point the fluctuation exceeds Regulation Z’s .125% tolerable error ratio.

    This also affected the disclosure of the “effective” APR that Regulation Z requires putting onto the monthly statement, which includes not merely the interest rate but also certain fees associated with the card expressed as an annualized rate of interest.

    Our other problems were that the business had jumped headlong into the product without getting cleared by compliance, so there were numerous other issues with statements that we would have had to fix, all of which would have cost money. It was decided that the cost, combined with the lack of clear regulatory approval, made it too uncertain the the product would be profitable.

    However, my sense always was that a lot of the public would jump at the chance to obtain a credit card where it would be easy to calculate how much your cost of credit would be each month…

  41. some guy in a cube

    “what banks did were a form of “financial innovation” that must naturally benefit everyone. ”

    I’m surprised that you don’t see this kind of hogwash for what it is: ideological cover for a self-interested system that feasts off a nation of docile, hoople-headed consumers.

    Give me your tired, your poor, your indentured servitude for the next six generations!

  42. Simon, of course you got it right. The oligarchs of greed continue unabated ad infinitum, or until regulated into submission. Why would anyone selling anything want to tell the consumer about flaws or pitfalls in their products? Of course they don’t. Why do we accept this? Because the American consumer is a nebish of the highest degree, accepting in an act of blind faith what they are told by the voices of experts in the establishment. This will not change until Fox News and other media (even those far less blatant in arguing for their supporters and advertisers) start broadcasting the truth. Once that happens (unlikely scenario), voices like yours will be broadly understood and debated. The current system operates on widely believed falsehoods and half-truths that have penetrated every corner of our lives.

    My wife is Russian, and she says that in the five years she has been in this country, she has come to realize that America is little different from Russia, in that its major media is under complete iron fisted control of the ruling interests.

    We are the banana republic painted large. God save us and our amazing democracy, which has descended into the depths of ignorance on the grandest scale possible.

  43. mag on money

    Why anyone continues to use these mega banks is beyond me? Credit unions offer the same services, are local, and you are typically a member/owner. My CU offers, if you can believe it, 4.3% interest (up to 25k) on checking accts. When a CD I had matures, its going in that account. I’m with Chas here, look into local, small banks and CU’s.

  44. Well spoken Simon. The preditory card companies are a major road block to finacial recovery for the poor and working poor. They are just as bad as pay day loans and need to go away. There’s a market for crack too. Does it make it right?

  45. I see you know how this works.

  46. My use of the phrase “noblesse oblige” refers to the obligation of the elites, as in Medieval society, to look after the welfare of the commoners.

    Thus I was endorsing, not railing against, consumer protection.

    I don’t know if you were turning my argument against me, or otherwise being ironic, but I find it morally reprehensible to oppose protection of those who can not fend for themselves.

  47. Lavrenti Beria

    Silke,

    Egad, man, you’re all over the place here. And the point of your initial question is unclear. Sort this out, kindly, because the way you have phrased it seems to me almost certainly contradictory:

    “tell me one instant only one when that has happened in history where, when the storm fo the rebellion had blown over, things emerged in different clothes and maybe with different players but otherwise pretty much the same”

    While I’ll confess to being surprizingly good looking, I’m at my limit with such contradictions. Extricate us if you will. :-)

    “when you have governments where its representatives after their term can make huge amounts of money by peddling their insider know-how via any medium ever invented (the German ex-chancellor working for Putin) do you really think they do not have an eye on that while president?”

    Now there’s one I can follow. Frankly, I think these things can begin innocently enough, with the imbecile enthusiasms and idealisms of youth. One is perhaps inspired to enter “public service” out of an arrogance of privilege only to be swallowed up in the day-to-day filth of it all. Here a poorly understood sense of personal ambition clouds the truth of what’s happening and causes one to become the very thing one tells oneself they are out to eradicate. George Herbert Walker Bush was one such, an ostensibly decent man who took stands and engaged in unprincipled behaviors during his public life that would have had his butler in a confessional. Far more typically, however, its the insatiable upwardly mobile court house weasel that gets his
    start in local party politics and who slowly moves up the food chain to State Representative or State Senator, ultimately emerging in congressional office on some kind of pork generating committee. Do they aim for this outcome from the beginning and see retirement as something likely to follow a stint on K Street? You can bet on it. And vermin of both descriptions will be found populating the defense cages at the public trials they most assuredly deserve.

  48. Neither – I was just laying out the two extremes, and arguing for a middle.

  49. Worthwhile observations, as usual. Discerning causality in this context as in most others, is fraught with difficulty. One has to take into account endogenous and exogenous factors, but the direction of causality is hard to tell. The 40% appears to represent the former, and the 60% the latter. But how, for example, does one describe overextension of credit that is simply correlated with involuntary unemployment? Other mixed combinations suggest themselves.

    Much of what one sees in press accounts is some variation of a morality narrative. It is not that consumers do not benefit from access to credit, nor is it that lenders do not benefit from extending revolving credit on their own not infrequently onerous terms. Rather it is the mutuality or lack thereof of bargaining power in the relationship that defines the issue, bearing on reflective (as opposed to reactive) consideration of the rights and responsibilities on both sides. For starters, who is more sophisticated and presumed to be in a superior position to understand and manage risk?

  50. The banks don’t game the system. They created, owned, and operate the system. Any ostensible government control over the beast disappeared when it was unleashed in 1913. The rest has just been the government pretending to be in control till the beast charged in to congress last year demanding a $700 billion ransom.

    That’s when I realized that at least one set of conspiracy theorists was right; the bankers do in fact run everything.

  51. My comment on Bond Girl’s “Filling the Financial Regulatory Void” post –

    “Bond Girl,

    This all sounds great & all. But, I fail to see how you’re ever going to solve anything without naming some names.

    chas
    August 9, 2009 at 1:41 pm “

    Seems like a federal judge agrees with me – from SEC, BofA proxy statement proposed settlement.

    From FT –

    “A judge refused to accept a proposed settlement between regulators and Bank of America over allegations of misleading investors in a proxy statement and pushed the Securities and Exchange Commission at a hearing late on Monday night to identify who at BofA was responsible for the alleged mis-statements.”

  52. “the monthly interest rate is 15.74% on an annual basis, which doesn’t seem too bad.”

    It is a very high rate–the bank is probably making a 14% spread on the money borrowed–and that you don’t recognize it as a high rate a sign of the problem.

    Croak!

  53. well, Lavrenti, didn’t understand much of your description of a typical American party politician but the little I did, seems to indicate we talk about the same thing. I have only recently had the time to read much about the US*) and when I learned of the wealth Clinton has amassed since being out of office having started with nothing I went WOW – mind you I neither grudge him the money nor do I want to imply it is ill-gotten. I just wonder how much the certainty of it being within reach influences the behaviour of a normal fallible human being while being in office. It is such a huge jump up the social ladder that it must be hard for any human being to keep his/her self-image intact.

    As to my question about the history of rebellions/upheavals/pitchforks:

    Do you know of one such event where after the turmoil the society would not split again into the privileged few who determined what was beneficial to the masses?

    No matter how decent those who got hold of power were at the start either reality forced them to amend their ways or a competitor toppled them – the outcome for the masses was always back to business as usual.
    Also those getting hold of power after the turmoil subsides often have strangely familiar names. The ranks of the old elites may have been thinned but the rest is still kicking.

    and as to “different wealth transfer” – to the best of my knowledge this has at best never ended up in more than a trickle – if under the new regime business/industry gets a better deal more people may be able to grab a living income but wealth transfer – I do not remember having ever read of one except upwards of course

    *) the look abroad helps me understanding my own country better

  54. well, Lavrenti, didn’t understand much of your description of a typical American party politician but the little I did, seems to indicate we talk about the same thing. I have only recently had the time to read much about the US*) and when I learned of the wealth Clinton has amassed since being out of office having started with nothing I went WOW – mind you I neither grudge him the money nor do I want to imply it is ill-gotten. I just wonder how much the certainty of it being within reach influences the behaviour of a normal fallible human being while being in office. It is such a huge jump up the social ladder that it must be hard for any human being to keep his/her self-image intact.

    As to my question about the history of rebellions/upheavals/pitchforks:

    Do you know of one such event where after the turmoil the society would not split again into the privileged few who determined what was beneficial to the masses?

    No matter how decent those who got hold of power were at the start either reality forced them to amend their ways or a competitor toppled them – the outcome for the masses was always back to business as usual.
    Also those getting hold of power after the turmoil subsides often have strangely familiar names. The ranks of the old elites may have been thinned but the rest is still kicking.

    and as to “different wealth transfer” – to the best of my knowledge this has at best never ended up in more than a trickle – if under the new regime business/industry gets a better deal more people may be able to grab a living income but wealth transfer – I do not remember having ever read of one except upwards of course

    *) the look abroad helps me understanding my own country better
    BTW I love your blog!

  55. Nonsense.

    I live in Ukraine, and the Russian media (widely available and popular here, in Moscow and local editions) is far more even-handed than its American equivalent.

  56. You are absolutely right, especially with your comments 1) that the Treasury’s broad strategy is to let the banks recapitalize themselves at the expense of customers (more politically palatable than directly by the taxpayers; and 2) that the banks game the system with impunity.

    Once again, transparency and sunlight are the best disinfectants.

  57. What to me is most frightening in today’s economic environment is the ease with which Wall Street has resumed risky profit-making ventures (and the ability to bonus itself no matter what) in contrast to the stagnation of income outside of Wall Street seen in the last decade – combined with the precipitous rise in the unemployed.

    It appears that to policy makers, Wall Street/finance is THE economy in the US today.

    But it is not. A healthy financial sector is part of a larger economy. A financial sector that succeeds thanks in large part to a federal stimulus in the form of ongoing guarantees and the promise of a bailout when things go bad – that’s a huge recipe for disaster.

  58. Well as someone who has never owed interest on a credit card this is not an issue that keeps me awake at nights. The reason I said that it didn’t seem too bad was simply because I hear of typical rates being in the high 20s.

  59. Oh, don’t go croaking about how smart you are. The bankers got you, too–they got everyone. They just didn’t get you through credit card rates.

  60. You’re right that this is not just a conversation about credit, but needs to be a conversation about welfare and wages. There’s also this notion of a debt jubilee that Joe Costello is floating, as much out of principle as pragmatics. And Marshall Auerback seems to think that’s what’s going to de facto happen, even if we don’t choose it: people will get fed up and walk away from their debt, and then we’re right back where we were last fall.

    Would changing wages and welfare alter that enough? Or is the sense of manipulation and abuse so deep that even if our welfare and wage policies were more just, usurious banks are screwed by popular anger?

    (Here’s the link: http://www.newdeal20.org/?p=3827
    )

  61. Never thought of myself as smart! Lucky, perhaps.

    And , of course, you are correct. Just now I get ‘taken’ every time I transfer funds from the UK to the US. Approx. 40 bucks for the ‘work’ involved!

  62. what a crazy world …

    because
    now or not so long ago I can for the first time subscribe to US magazines get them delivered to my remote town in Germany at a price still considerably lower than what their German version costs and pay for it with my credit card at no extra charge whatsoever.

    maybe you should be debiting your credit card from the US and thus make the transfer free of charge

  63. I am afraid that, except for philanthropy and private charity, capitalism has pretty well done away with noblesse oblige, at least in the sense of economic empowerment. (Henry Ford was a notable exception.)

    Gregory Clark ( http://www.washingtonpost.com/wp-dyn/content/article/2009/08/07/AR2009080702043.html ) categorizes people into economic winners and losers. As Max Weber pointed out in “The Protestant Ethic and the Spirit of Capitalism”, success under capitalism is in the main regarded as deserved — as is failure. The poor are not simply poor, they are losers, and their economic failure is viewed as the result of personal failing. (The liberal view of the poor as victims is not particularly empowering, either, BTW.)

    This view also enters the debate about financial consumer protection. If the consumer is financially ignorant, and so enters into an unfavorable contract with a lender, the fault, according to this view, lies with the ignorant consumer for failing to educate himself (not with the lender who draws up the contract).

  64. Eric Dewey: “When I was with a major credit card issuer a few years ago, they had a brillian idea for a “flat-fee” credit card that did not use APR concepts to market itself – basically the pitch was that the consumer would pay $X.XX per $100 on their balance, a simple and intuitive way to explain the costs of their credit.”

    That does not seem as simple to me as a single percentage. Instead of a linear function you have a step function.

    Should I buy this? Well, I don’t know. If I do, I think that my credit card will have $99 on it, so my fee will not go up. But if I’m wrong and my card will have over $100 on it, it will cost me an extra $X.XX.

    “The existing regulation absolutely requires certain disclosures, such as APR. However, in a flat-fee product, there really is no APR to disclose – because it is a flat fee.”

    Well, it is not really a flat fee, is it?

    “We did a lot of math to extrapolate the flat fee into an approximate APR, but it would never have been exact (because as the balance rises, the actual APR gradually decreases, and at some point the fluctuation exceeds Regulation Z’s .125% tolerable error ratio.”

    Gee, my scenario showed why that regulation is not a bad idea. :)

  65. I just had to visit the bank to pay for my safety deposit box. Now, mostly I do my consumer financial business through credit unions, but the bank is local, and for some things, I need a bank. It was surreal. “Security theater”–cameras everywhere. Five people behind the counter, and one of them assuring the people in the line that they would be right with us, but the five people kept on doing…whatever they were doing. When I finally got to see a teller, she looked at the slip and the check and asked her supervisor what to do with it. & they decided to put it in the mail! Well, I saved the cost of a stamp. But this is no way to run a bank.

  66. Lavrenti Beria

    “… when I learned of the wealth Clinton has amassed since being out of office having started with nothing I went WOW – mind you I neither grudge him the money nor do I want to imply it is ill-gotten.”

    You’re charitable. In my view, one that experiences personal gain as a consequence of public service owes every dime of what he gains back to the public, period. There is no such thing as the amassing of private wealth “since being out of office”, as you put it, that is not ill-gotten. These snakes trade on what you did for them, its as simple as that.

    “As to my question about the history of rebellions/upheavals/pitchforks: Do you know of one such event where after the turmoil the society would not split again into the privileged few who determined what was beneficial to the masses?”

    There was a period at the very end of and shortly after the close of World War II that had the germ of what you’re talking about, I believe. The anti-fascist movements in Germany at the time had a very unique character, one that might have blossommed into something promising had mistakes not been made. I’d refer you to the work, The Making Of The GDR: From Antifascism To Stalinism, by Gareth Pritchard. I think you’ll be fascinated particularly by the early chapters.

  67. Again, as an outsider granted, my impression is that the changes will have to go truly deep, as I can’t just not understand how a society allows so much of their financial markets to be influenced by non-transparent credit scores, which are basically used as an excuse to open markets for lending to those you should not lend to… and to such an extent that I have even seen US parents more worried about their children credit scores than their school-grades.

  68. Lavrenti Beria said ““As to my question about the history of rebellions/upheavals/pitchforks: Do you know of one such event where after the turmoil the society would not split again into the privileged few who determined what was beneficial to the masses?”

    It has to be because a free society means allowing the freedom for anti-social behaviour and criminal elements.

    Society hasn’t broken down. It’s more a case of some changes to curb the excesses that we all see.

    But if there isn’t a political response to this need to curb the excesses then there may be a risk of seeing pitchforks on the streets of western countries. Who knows, maybe there are entrepreneurs out there designing new types of pitchforks!! ;-)

  69. Six is far too few.

  70. Lavrenti
    “had mistakes not been made”

    but that’s it: mistakes will always be made …

    the blurb to the book at Amazon just says it was Stalin’s fault – well my latest take on Stalin is that Stalin didn’t really want world-communism or even only European communism to triumph, because he was shrewd enough to know that he couldn’t remain Stalin the Supreme Ruler with the Italian and French communists in the fold – once they would have been in, they would have fought him about Dogma millimeter by millimeter and to have his thugs operating in those countries wouldn’t have been easy also.
    Germans were different and after what we’d done it must have been easy to offer us salvation through anti-fascism, nothing works better than the replacement of an old religion by a new one. Mind you it took decades before our neighbouring countries realized that some of their citizens had also been only too willing to assist in the mass slaughter – I don’t remember when the first research about that was published but it must have been at least the seventies

    at the beginning of my retirement I read through about a meter high of Stefan Heym (http://www.imdb.com/name/nm0382260/#writer), a German Jew who made it to the States, returned with the Army via the Ardennes and then opted for the GDR and later became the first President of Parliament after the turn-around (Wende) after 1989 but most of all a shrewd and decent man, firmly convinced that it must somehow be possible to get it working while always fighting the GDR.
    The books were about June 17, 1953 – 5 days in June, the uprising, Schwarzenbeck, the novelized but true story of a piece of land forgotten by both the Russians and the Americans while dividing the land between them which tried to stay sovereign. They had no chance but they sure used it. About the betrayal of their own in the interest of dogma and so on. Even though ever since reading Aldous Huxley’s “Island” I know that no “better world” can ever work I agree with Orwell who said something like “anybody who does not wish for socialism with all his heart is a bad person and anybody who believes it can be possible in practice is a fool”
    That’s why I always get furious whenever I read a wholesale condemnation of all these people – it’s as if they approve that Franco won the Spanish war.

    I’ll discuss the book’s theme with a friend of mine who had the full GDR-schooling for state service and was a believer till 1989 when he was in his late thirties and even though his head knows it never will his heart still hopes it might come – whenever we meet we rack our brains in the best tradition of Orwell and Stefan Heym

    and in the meantime: I believe that the GDR believed in its own anti-facism but Nazism was too ubiquitous too ingrown even with so-called “no Nazis” – the GDR claims to have managed to keep tainted figures out of high office but I have not yet found out how the vetting was performed, if there were at all trials etc. etc.

    and yes I agree “they” shouldn’t be allowed to cash in after their term in office out of their time in office and in such vast amounts
    but if we then still wanted somebody to go through the idiotic campaign movements, the chastity vows and all that other stuff we would have to pay them really good money while in office. Churchill sure was not perfect but at least he was “normal” – we’ll never get a “normal” again, might as well return to monarchy at least we’d get to see beautiful stuff, jewels and embroidered robes and golden cars and maybe even horses

  71. Min, good points all, and I certainly agree that it may not be as simple as I think for everyone.

    Keep in mind that the buying is not really what kicks the fee in – it is not paying off the purchase when the bill comes. So the time when you’d really be thinking about it would be when you get the statement, and that’s what makes it easier:

    “Flat” fee scenario (ok not really flat): Should I pay a smaller amount and be charged $XX finance charge, or a larger amount and be charged $YY” – where both XX and YY are quite simple to calculate

    APR scenario: Should I pay a smaller amount and be charged…no, wait, what WILL I be charged if I pay more rather that less?” The calculation can’t be done in advance, because it is based on any unpaid balance PLUS new charges, and we don’t know what those new charges might be, do we?

    I’m not saying the regulation is a bad idea – just saying it is one that has not worked out as well as the regulators expected, for a few reasons, such as:

    a. most cardholders are generally innumerate and can’t do the math to figure it out
    b. the card issuers have hired the best math and legal people in the world (literally) to figure out how to get more revenue under the rules while not really making it clear what they’re doing (e.g. double-cycle billing, onerous payment allocation rules, fees for balance transfers and overlimit events, etc.
    c. the regulators watched as all this was happening, and did almost nothing to stop the card issuers, even though they had the power to do so

    My point in using the example is simply to demonstrate that what the rules in Regulation Z HAVE done is to reduce the ability of the market from doing what it does best: allow an innovative start-up to offer consumer credit in a better way, because in order to create a new credit product, you HAVE to comply fully with Regulation Z.

    As an example of a startup that has taken a very new approach but still run afoul of the regulatory landscape (although not Regulation Z), take a look at Prosper.com. They avoided Regulation Z by setting up a peer-to-peer securitized lending model – but then got hung up on complying with SEC rules on issuing securities!

    Ultimately, the kind of innovation that Prosper is an example of is likely to end the dominance of banks in consumer lending – but that will definitely NOT happen if they get stuck trying to comply with rules that were written to address financial concepts that could not even have been imagined when the rules were written (Regulation Z was 1967, SEC Act was 1934).

  72. “Who knows, maybe there are entrepreneurs out there designing new types of pitchforks!! ;-)”

    They’re called “guns”. The tines on ‘em are a lot longer than the old ones.

  73. It’s hard not to throw around your economic clout when you get to print money.

  74. This will not change until Fox News and other media (even those far less blatant in arguing for their supporters and advertisers) start broadcasting the truth.

    Do you mean when hell freezes over?

  75. Ever see those sting operations the police put on? You know the ones, they put out police officers disguised as drunks with jewelry, prostitutes, johns or they’ll put merchandise in places and watch who comes to take them. Well, invariably someone comes along and, seeing no cop, goes for it. Now, to be fair some people pass on committing the crime because they are fair and honest and love their wives.

    The ethics in the current environmnet allow these banks to do as they will because there are no cops. Hoards of money will corrupt any but the most virtuous. The government over many years has pretty much said “Do what you want, we’re not going to check” and when the cats away, the mice play. Simple as that.

  76. Kelley
    it doesn’t need hoards of money to seduce the “normals”

    the challenge of having found or finding a way to game the system is to many of us irresistibly alluring

    only those of us who can resist the temptation of wanting to be the admired hero of whatever can call himself truly virtuous
    – ask anybody how he/she would like it to be Robin Hood, just to take a, if you regard it with a sober mind, definitely glamour-free example

  77. Lavrenti
    just remembered something that might warm your heart:

    my mother born in 1913 came from a family of social climbers exemplified by silver cutlery etc
    my father born in 1914 came from a family of probably not very literate workers pinching pennies to get for their little ones the best education possible (pharmacist was the shortest lasting university course at the time so all four except for my father became pharmacists, either he was not into learning or money was too short when he became eligible but he got a decent apprenticeship for a decent profession – his knowledge of how to cook shoe wax and soap at home gave us something to trade for butter after the war)

    but guess who was responsible for there being lots of books in our apartment and that the door to the Bücherschrank was never locked as was advised at the time in order to keep children clean of inappropriate thoughts … and who took care that I never ever was in need of a thrilling read after I figured out how to do it and even before

    you are right it was him and that is one of the old workers’ traditions I cherish and wish they had never left the public knowledge to be replaced by the image of the prol who is presented as being able to excel at tolerating more beer than the rest of us

  78. Even some of our most sophisticated commentators doubt a link between consumer protection and any macroeconomic outcomes.

    Us unsophisticated ones see clearly that by protecting consumers they would be much more likely to consume thereby driving the 70% of the U.S. economy that is consumption.