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May 4, 2008
The Con-Victim's Choice
Even conservatives may have difficulty finding fault with this
The Federal Reserve Board moved yesterday to place new regulations on the nation's credit card industry that would make it more difficult for lenders to raise interest rates and give consumers more time to pay their bills.If enacted, the regulations would be the most sweeping change in decades, offering consumers more protection against late fees and stopping lenders from making credit offers that regulators deem to be deceptive.
"The proposed rules are intended to establish a new baseline for fairness in how credit card plans operate," said Federal Reserve Chairman Ben Bernanke. "Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs."
Representatives of the banking industry are, of course, making an argument that I'd likely make in other contexts (meaning other industries):
"The Federal Reserve's proposal is an unprecedented regulatory intrusion into marketplace pricing and product offerings," said Edward Yingling, president and chief executive of the American Banking Association. "We are deeply concerned that these rules will result in less competition, higher consumer prices, fewer consumer choices and reduced consumer access to credit cards. In short, everyday consumers will bear the real cost of these proposals."
Frankly, "reduced consumer access to credit cards" would probably be a good thing. It would, of course, be preferable for credit card users to be adequately versed in their usage and, even better, habituated to live within their means. That being quixotic, however, boundary-type regulation seems more conducive to free-market activity than would be barrier-to-entry-raising regulations such as requiring extensive paperwork and education initiatives of credit-granting institutions.
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Privatizing gain, socializing risk
So it seems that the New York branch of the Federal Reserve is bearing the risk of a loan that JPMorgan is making to try and save Bear Stearns, an investment bank that specialized in mortgage-backed securities. What a travesty.
The bargain that the government struck with the banking industry in the New Deal was that deposits in commercial banks would be insured by the federal government, but that banks would then be restricted in what they could do with the money, just like any insurance company wants to make sure that it's really insuring someone against an unforeseen loss, rather than provide an incentive to engage in risky behavior.
The Washington Consensus of the '90s, however, held that regulation was bad and outdated, and the Glass-Steagall Act, which separated investment banking from commercial banking, was repealed with Bill Clinton's blessing.
While Wall Street was happy with the deregulation, this week's events showed that they're not prepared to accept the other consequences of a free market: that they may fail. Instead, they want to have it both ways: the deregulation to enable them to make as much money as possible, but government assistance to help them when the market doesn't go their way. Credit card companies are another good example. They want the market freedom to make all kinds of preposterous charges, which in theory should be protecting them against the risk of consumers defaulting, but they also lobbied for the government to protect them against the consequences of default with harsh bankruptcy legislation.
Of course, when you privatize profit and socialize risk, you create the incentive for the moneyed people to take on as much risk as possible and help assure this result. All at the same time that we're always told that it's unthinkable that the government can raise the money for universal health coverage, decent public transportation, or affordable higher education.
UPDATE - In case you want to get more outraged about this, here's a good article in today's Times.
http://honestpartisan.blogspot.com/2008_03_01_archive.html
Posted by: David at May 4, 2008 8:16 PM