THE CURMUDGEON CHRONICLE - #261

THE CURMUDGEON CHRONICLE ©

AN IRREVERENT VIEW


Time Line: July 3rd 2009
Date Line: Flemington NJ

Outsourcing has had an awful impact, but the credit card industry will destroy the US economy unless checked at once.

There is no justification for borrowers to pay interest rates of 25% or more. There is no reason in law or morality for one party to a transaction to be able to change long standing arrangements for payment terms, interest rates, and penalties.

If there were a reasonable basis for such a right, it would work both ways. A borrower could determine (based on his or her income) that the interest charged was too high; that the penalties requested were confiscatory, and that the terms of repayment were too onerous. The likelihood of that is nil and that should work both ways as well.

Let us consider the lending bank that is protected in this usurious and confiscatory practice. It borrows money from the Federal Reserve Bank at 2% and takes deposits on which it pays out interest at the rate of 1%. It lends those funds (at 20% or more) to its depositors and to taxpayers who made the Federal Reserve Bank’s loan possible.

Fairness would dictate that the Federal Reserve Bank funds should be directly available to the credit card borrower. But fairness is not the test applied to the treatment of the man in the street. He has no lobbies; no clout except for a single vote at infrequent intervals to select who will pick his pockets for the next two, four, or six years.

The moral is that there is no morality in a Legislature that refuses to recognize the sound of the tocsin. The Senate is about to break its arm patting its back because it passed a law that makes banks give notice of changes in credit card terms. Let’s think about how useful that is to Mr. Jones who has income of $45,000 per annum; two children; living expenses of $3,700 per month, and credit card debt of $15,000. Mr. Jones has $600 per year of discretionary income.

He pays his credit card lender 2.5% of principal monthly, and his interest rate is 18.5%. He has never been late, missed a payment or exceeded his limit. The lender says that the new interest rate is 22% and the repayment schedule is 7% of the debt. Mr. Jones has an increase in pay out of $750 per month; has added five years to the time to pay off the principal, and has no added income to make the payment with.

If there is anything more destructive to an economy than a population unable to pay its bills I would like to know what it might be. It is simple enough to cure the circumstance.

Legislation can limit interest a borrower can be charged to the cost of Federal funds to the lending bank, plus 4.5%. There might be a lower limit of 6% and an upper limit of 12% in interest charged to the borrower. In times of stress and cheap money the rates would go down; in times of plenty and costlier funds rates would go up. The parameters are clear; both parties know what they are getting. There is incentive for lenders to be careful about whom they lend to: the better their credit selections the lower the losses and the more they earn. There is an incentive for borrowers: affordable debt that can be paid on time. We put an end to the public paying for a bank’s lax lending rules and unnecessary losses.

If there is a better way to end credit card abuse and save our citizens’ purchasing power and dignity, please let us know.

Howard Stamer