Sunday, April 26, 2009
Credit-Card Deform
Beware the unintended consequences of the "Credit Card Holders' Bill of Rights," which could pass the House this week. Even assuming the best of intentions, the proposed restrictions (like usury laws) would make it harder for lower-income people or those with weak credit records to use credit cards. This wouldn't reduce their debt; it would only encourage a switch to inferior forms of debt. I hate defending the banks since they are not free-market firms but rather part of a state-banking cartel. But this is no way to address whatever credit-card problems exist. Even in the current context, banks compete for credit-card customers, and people shop around aggressively. (I've transferred balances at zero-interest often in the past.) The alleged obligations attached to TARP money are irrelevant if the new regulations would harm people.
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I periodically hear from a public spokesperson for the payday lending industry (not a very attractive group of people, I admit) who points out the hypocrisy of the mainstream banking industry. When you count assorted fees charged for checking services, the real interest rate is often more usurious than those charged by any payday lender.
The real solution is to eliminate the ENORMOUS shackles on alternatives like crowdsourced microcredit, especially stuff on the boundary between LETS systems and microcredit. I believe, for instance, that Zopa was recently shut down.
What you're referring to needs to be written about prominently. People are locked into the big-bank model and can't see beyond it.
Kevin,Zopa did shut down their U.S. operations back in October, but they apparently made the decision because of economic conditions, not because of regulatory pressure. Unlike Zopa's U.K. site, the U.S. operation wasn't a true peer-to-peer lending site; when they paired up a saver and a borrower, what actually happened was that one of Zopa's credit union partners issued a CD to the saver and a consumer loan to the borrower, with the interest rate on the borrower's loan reduced proportionally to the amount of the CD. (The saver could also choose to receive a lower rate of return on the CD, in order to further reduce the interest rate on the borrower's loan.) Since the loans were all mediated by regulated and insured securities issued by an established credit union, the credit union rather than the saver bears the risk of default, but, correspondingly, the return for the savers wasn't much above the market average for CDs. (And would be less, if you chose to "help" your partner by lowering the interest rate on their loan.)
The case that you're more likely thinking of is Prosper.com, which the S.E.C. did force to shut down back in October. (With several state regulatory agencies nipping at their heels.) The charge was that they were selling unregulated securities, while Prosper maintained that they were just acting as a broker between individual lenders and borrowers.
Interestingly, I was pleasantly surprised to see that they came back online just last week, and are apparently resuming at least some of their operations, even though the S.E.C. is still hanging the sword of Damocles over their heads. (Right now they are apparently using an agreement with California regulators to raise money within the state of California, and then loan it out to wherever someone is willing to borrow.)
I guess it was Prosper I was thinking of. Thanks for the clarification and info, Charles.
I think the subject matter of your exchange with Jed Harris a while back, the way the implosion of capital outlay requirements for physical production are dovetailing with the potential for crowdsourced finance, is key. It's likely to have a revolutionary effect before it plays out.
5.20.09
The NBC pundits are dead wrong again. This is not the bottom of the recession. Its not the beginning of a true recovery. Its only a brief period of optimism or the beginning of that short and shallow revival. There will be some positive signs over the next year or so amoung the negative. But they will not lead to a true recovery. Our leaders may claim to end the recession in 2010. If that claim is made, it will be based only on that short and shallow (printed) revival. It absolutely will not last. I stand by my predictions made earlier this year. Obama's efforts are revolutionary but they are too little too late. He will have no choice but to acknowledge a severe US depression by the end of his first term or shortly thereafter. Every major economy in the world will be in depression by 2015.
The NBC pundits (Chatzky and Wong) are bound and determined (paid) to plug their coorporate sponsors and perpetuate the 'multiple credit card' lifestyle. Their claim is that you need more than one to build reasonable credit, finance a home, and be relatively secure financially. THAT IS ANOTHER FLAT-OUT LIE. The industry is simply too corrupt and predatory to deal with. It has been for at least 20 years. The use of 'multiple credit cards' is simply too risky, addictive, complicated (check that fine print), and ultimately expensive. In the vast, overwhelming majority of cases, the 'multiple credit card' user has ended up further in debt year after year after year. Their credit was built to some extent on a temporary basis and their ability to repay loans was diminished gradually right along with their bottom line. They ended up paying as much or more in finance charges as they did on principal. That is OBSCENE. Now, their net worth is way down. Their ability to get out of debt f#$&@#. That 'credit' didn't get them anything but F#$#@#. Still, those NBC pundits (liars) have the nerve to perpetuate that 'multiple credit card' lifestyle as if it were ever legit or necessary to begin with. It wasn't. Until two years ago, one could have built reasonable credit with a stable income, a checking account, a savings account, one secured credit card, one loan for a used car, one loan for a new car, and a reasonable downpayment. Until recently, that was enough credit to get a first home loan. Now, the economic boom is OVER. The majority are F#$&@#. Its only going to get worse. A LOT WORSE. The window for ordinary (decent) people to stake their rightful claim is closing fast. They better get out of debt soon and well prepared for the comming US/global depression. It will be catastrophic. Under these circumstances, it is downright reckless and irresponsible to promote more use of credit cards. Only a calculated PIG with an ulterior motive would have the nerve. The 'multiple credit card' lifestyle wasn't the only cause of this economic crisis but it was a contributing factor. Another vehicle amoung many to transfer wealth from poor to rich. Which again, is the single greatest underlying cause. IT WILL BE OUR DOWNFALL.
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