President Obama’s promising to work on the next looming financial crisis – credit card debt. As Americans face the finanacial hardships from crisis ONE it appears we may have crisis TWO coming right up, which is unsustainable levels of consumer debt for people who are already starting to lose jobs. I don’t envy the president’s team in this era where they need to work to support the banking structure, get them profitable, and get them loaning money while at the same time reign in the excesses, poor regulation, profiteering, and illegal banking activity that got us here in the first place.
However quality solutions are often simple ones, and I think we could go a long way towards recovery and solvency by taking a lesson from the council of Nicea which sought to regulate interest rates in more reasonable ways than we do now (although I think we’d need to remove the religious discrimination parts of those rules). Usury in history. In simple terms let’s just end the outrageous top interest rates charged by the banks on their credit cards, which often top 25%. I’d have to say these usurous rates have never had much of an impact on me because I generally pay off my balances before I get charged any interest. Also, I used to take advantage of introductory rate schemes (where you pay a few percent until an unclear time limit after which you pay a huge percent). If you monitor the dates and rates closely these are often a very favorable short term loan. However if you make the mistake of doing this without resources to pay them back at the expiration of the introductory rate you’ll be hammered to pieces with rates often as high as 20% or more.
Note that the introductory rate offers seem to be worse than they used to be and more misleading due to extra fees and also note that a single month at 24% can wipe out the savings you’d enjoy from a full year at 2%. As a general rule I’d say it’s best to avoid the “special offer” interest deals and in my opinion the Government should be requiring the banks to disclose the real APR on these offers rather than the fake number which does not reflect the fees. If, for example, you pay a 3% fee to borrow 10,000 at “APR 3%” for a year your actual interest rate on this is 6%, often more than a home equity line which is also more likely to be tax deductible.
A big part of the solution is to cap interest rates at levels that are less likely to financially ruin people. This in turn will lead to more responsible lending by banks who can no longer count on bait and switch and fake APR games to beef up penalties and fees (which are about 25% of all bank revenues!). Free markets suggest we should not over-regulate, but I think even Adam Smith would have said that the free hand starts to break down when people’s bad luck or ignorance traps them into paying 30% interest. I think much of the current banking game is based on assumptions of a lot of defaulting, and this becomes self – fulfilling as the rates skyrocket for those not paying. You wind up with a more predatory style system where you are trying to build fees and interest rather than load responsibly.
Joe Duck 
Joe you seriously think the credit card rates are the problem?
The problem is that our country is out of control with spending and has been for years. It is reckless and irresponsible and no one wants to be accountable.
They just need to apply prudent analysis on selecting how much credit people get. I think the high rates are outrageous but if you have a debit card, you don’t need a credit card. Dump the cards live within your means and ride this storm out.
Obama is trying to incite people into reckless spending again and the reason is because our country’s economy is based on our consumer spending…I think it is like 70% of our economy is based on our spending. So to fix the current problem they want to encourage reckless spending once again…it’s crazy…let’s trade the current debt for future debt. We don’t produce anything anymore…so the economy does not have a strong manufacturing sector to fall back on and why is that? We have the highest corporate tax rates in the world…why would anyone want to run a company here?
Good rule of thumb…if you can’t pay your credit card balance by the end of month…don’t spend the money.
Let’s get some common sense back into our lives.
Please be quiet. I am paying bills on time but the rates keep going up and they are too high. The credit card banks are usurers and profiteers. The solution is to cap interest rates, prime rate plus 2%. (currently 5.5%). We are talking about fairness. You can borrow, but with reasonable fees.
Glenn, I think it’s too late to inject common sense into the situation, we’re way past that point. Look for a huge thud in the stock market, massive unemployment and a crime wave like we’ve never witnessed in the U.S. The thing to do now is attempt to anticipate the future and prepare as best we can. We hope for the best, but we all know, hope is not a plan.
Irrespective of general rates of consumer spending or consumer savings the real problem with credit cards is simply that the banks are able to charge higher rates than loansharks charge while writing off their bad-debts and dumping the fraud losses onto the taxpayers.
Credit card frauds would not be so prevalent if they were not so profitable for the banks. Charge the banks for all the taxpayer funded investigations and prosecutions and the banks will suddenly develop better screening techniques.
The mortgage mess arose in part because funding mortgages was so profitable and mortgage companies were springing up right and left.
Banks give special deals and teaser rates so as to capture college students and retain them as life-long customers. Those students who get into too much financial trouble are written off and are barely noticed by the bank’s accountants. The profits in issuing credit cards are so huge that there is little incentive to tighten up the controls or deal with problems.
Just because there is crack available in your neighborhood doesn’t mean you need to smoke it.
If consumers didn’t spend out of control and our country didn’t have stupid tax policies that has driven manufacturing out of this country we would need to have consumers spend so much money they don’t have.
We have the government spending our great grandchildren’s money and with all of the debt and obligations this country has including social security, medicare, etc…the grand total is now $1.25 quadrillion dollars.
And now the government wants to create even more debt directly on our backs…
Who is going to bail that out when it collapses? The collapses are going to happen more frequently and it is going to take a lot less time now for these artificial bubbles to be created and then pop and each time we slide deeper and deeper into the abyss.
We are being set up for a massive failure of our economy and ultimately our country.
Are there any sensible people that read this blog that can now see TARP is a total failure and it never had a chance to work? The same thing is true for their other stimulus plans…they will not fix any problems nor will the have any sustainable positive impact on our economy but we will have to pay the bill and that is where the real trouble begins.
The insiders are trading 20:1 right now bears to bulls the sentiment is very clear what they think about the market. We are in for a long-term continued downward position.
When the healthcare and immigration reform get shoved down our throats and we add another $2 trillion in just ongoing costs per year to the mix – how are we going to sustain that?
Right now we are spending $50 million an hour on debt service – think about that…that is complete and total waste. What could we be doing with that money?
If you take the ratios of spending, debt service and revenue that our government is currently working under a person that makes $50k a year would be spending $58k a year just on debt service – how long could that person survive?
There is no magic here…it is basic and clear economics we cannot survive financially if we keep on this path. This idea that our country is just too big to fail is very foolish – we can fail and currently we are on the fast track to do just that.
We deserve better and certainly our kids deserve better.
Glenn, what anyone assumes they or future generations deserve will have little effect on what plays out in the near future. As far as this country being too big to fail, it actually is too big to “fail” seeing how our currency is fully backed by the military. Maybe you mean failure in some other sense?
(5) Yeah but backing our currency with our military means we would end up in direct conflict with China. If we had a direct conflict with China, Russia would jump in (not on our side) and the possibility of failure would be pretty high.
China holds a huge chunk of our debt now and they are trying to shed it in fact if a new world wide reserve currency is created to shed the USD…well let’s just say that wouldn’t be good and it would pretty much be the total failure of the USD as a currency.
At the rate we are printing money hyper-inflation is sure to follow. We have seen this before in history and this combination of events and actions has NEVER resulted in a positive result and quite frankly it has caused the FAILURE of every other country that was in this position.
Of course no one put this much money on red before…so if it comes up black…well hasta lavista USA…
A big part of the solution is to cap interest rates at levels that are less likely to financially ruin people.
I agree. Creditors, whether visa or the pawn-shop, often function as sort of poverty-pimps. The people with little income, or bad credit pay out more in interest than those who lucked out, or maybe had the right connections, via family or fraternity house (some might scoff, but examine the CV of most successful CEOs/execs and you will discover they are nearly all frat-dweebs).
In effect, the free market tends to penalize the lower and middle class with poor credit ratings (or Osiris forbid, bankruptcy), and I suspect even Adam Smith would argue that in some cases the “social good”–not to say preventing outright socialism–would require that credit companies lower rates–or make loans forgivable–even to those humans with not the greatest credit (and really, the market also depends on consumers with enough shekels to buy goods, so in many cases, easing credit would mean more money freed up for purchases).
Poverty pimps is a great term! We tend to think of pawn shops and instant loans as the sort of trailer trash of the financial world but the biggest banks are often doing equally exploitative and junky manipulations with “O% APR” shenanigans, hidden fees, and junk offers to customers not to mention the major mayhem with CDOs and other derivatives that continue to keep the entire global financial system in great peril.
I should say though as one who remains a strong proponent of free markets that regulations only go so far in these matters. David Brooks – one of my favorite thinkers – was noting that we are in something of a battle …. continued in blog post…..
So i seem to be in this debt trap, i was laid off and can’t pay back my card atm, my limit was $500. it went over with financing charges. now im getting charged a monthly past due fee $25 and Overlimit fee $25 dollars on top of the 19.8% annual interest. which puts the total charges a month at $58.25 which adds up to 139.8% annually!@#$%% ahhhhhhhhhhhhhhhhhhhhhhh
my debts nearly doubled already
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