Monday, February 1, 2010

I don't think this is helpful

There's an opinion piece in the Washington Post called "Five myths about America's credit card debt" that I think is pretty stupid, and I think it's a bad sign that legitimate concerns about the credit card industry are getting lumped together with (in my view) completely baseless claims.  The two problems that I see with this conflation of ideas are:
  1. It's hard to get serious support for potentially good ideas when they're peppered with stupid ideas.
  2. If you somehow get people to support your proposals, you could get really bad policy prescriptions based on the bad claims.
(In contrast, I think Mike at Rortybomb has done a really good job at targeting only certain aspects of the credit card industry rather than decrying the entire system.)

Anyway, some particular excerpts that struck me:
They're yuppie food stamps.
Blech, way to start off in the crapper.  What exactly is this metaphor?  I suppose that somehow yuppies are being subsidized by someone, but who?  The benevolent credit card companies?  For a stereotypical yuppie, I suspect that 2 uses predominate:
1. Buying things they would otherwise pay for in cash.
2. Buying things they can't currently pay for in cash, but will presumably pay for over time.

The first seems like a fairly convenient and relatively harmless choice.  It's what interfluidity refers to as transactional credit.  It's simply a way for people to avoid the transactions costs (time, literal ATM transaction fees, and risk of loss through negligence or theft) of carrying around large quantities of currency.  The second is perhaps more risky and perhaps encourages people to make suboptimal consumption choices (from what benchmark I'm not sure), but it's still confusing to think of for-profit credit card companies as simply gifting these amounts.
Middle-class American families have long depended on bank credit cards to manage their budgets.
This is myth #1 and I'm not sure why I care if it's true.  Middle-class American families haven't long depended on carbon monoxide protectors, anti-lock brakes, or the internet either.  But I don't think that speaks to whether the status quo is a good one.   I listened to a presentation by Raghuram Rajan a while ago where he pointed out that there's often a lag between increases in productivity and increases in consumption for developing economies.  I don't recall if the example was India or somewhere else, but the idea is that personal income rises with productivity but absent a financial system that provides credit, consumers can't translate gains in permanent income into gains in consumption, although most economists would say such a translation would be desirable.  So rather than saying, "I've got $75 more per year in income, perhaps I could purchase a refrigerator now", they're saying "I've got $75 more per year in income, I guess I'll be able to buy a refrigerator in 3-4 years."  Is Manning really arguing that we should go back to an across-the-board environment of "if you can't pay for it in cash, don't buy it"?  Is he just another manifestation of Dave Ramsey?
More people have credit cards because companies got better at managing risk and began marketing to lower-income customers.
Responsible cardholders will have to pay more to make up for the defaults of irresponsible consumers.
Myths 2 and 3.  I don't particularly understand why it's important that they're false.  Are people really concerned about credit cards from the supplier side?  That we should revamp the system because credit card companies may not, after all, have gotten better at managing risk?  As far as #3 goes, it seems like a good thing if that's a myth.  If I'm a responsible cardholder, I don't think I should have to pay more to make up for the defaults of irresponsible consumers.

The real laugher is in the follow-up to point #3:
Although credit card companies are experiencing record default rates, irresponsible consumer borrowing is not the main culprit behind soaring interest rates and fees. Banks have suffered far more from mortgage foreclosures and home-equity loan defaults.
I don't know Robert Manning, but I have no idea how anyone could write these lines consecutively (I didn't splice them together) and not experience life-threatening cognitive dissonance.  To be clear, he is saying that mortgage foreclosures and home-equity loan defaults are orthogonal to irresponsible consumer borrowing.  This blows my mind.  Let's suppose there is some population of consumers that have experienced financial difficulties for "acceptable" reasons (say, extreme medical events or job loss) - let's just assume this point.  That still leaves an enormous population of people who overconsumed via:
  • purchase of too much house through a willing lender
  • consumption of too much something (whether it's actually home improvements or more straightforward consumption of vacations, new cars, etc.) via a home equity loan
  • consumption of too much something via credit cards
Isn't the overconsumption the underlying problem?  Why would it matter whether the particular weapon was a mortgage, a home-equity loan, or a credit card?  

Myths #4 and #5 seem ok (if you stipulate the proper identification of abusive practices):
The credit card industry is so competitive that regulation is unnecessary.
The CARD Act finally protects consumers against the credit card industry's most abusive practices.
But if there are abusive practices that should be addressed (an argument that rortybomb makes especially well in both the credit card and mortgage (and here) settings), the arguments are being clouded by noise in opinion pieces like this.

Hat tip:  Felix

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