Deserving creditors demand to be rewarded for such reliability, and competition (via low interest rates, cash-back rewards, etc.) is the vehicle that delivers these rewards. FULL ARTICLE by Jeremiah Dyke
Source link: http://archive.mises.org/11513/the-unforeseen-consequences-of-credit-legislation/
The Unforeseen Consequences of Credit Legislation
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My solution to all of this credit card problem is simple: Just make all credit card companies pay everyone $5 they send a card offer to.
All this stuff about capping rates is just ridiculous. If it’s good to cap a rate at, say, 15%, why not cap it at 1%? How can they know where to stop? It’s kinda like with the minimum wage suggestions: if $10 is such a great minimum wage, why not $100/hour?
The government is so stupid it’s not even funny.
What if I, as someone who might some day decide to get a credit card, would like to contract with a company to give me a card with a policy that this legislation is against? Would that be illegal? If so, how is restricting what I can do helping me? It’s not helping the credit card companies.
Can someone please explain to me why anyone with even a fundamental understanding of Austrian economics would even have a credit (debt) card?
Terri,
Whether or not an individual should have a credit card is inconsequential to Austrian theory. It is a question of personal finance.
Let’s say that I want to buy a PS3, and I make $1,200 a month. Let’s say that $600 must go towards necessary expenditures (gas money, food, rent, et cetera). So, I have $600 left. A PS3 costs $300, or half of my expendable wage. It’s affordable, but perhaps I rather pay more over a longer period of time in exchange for the ability to buy other goods presently. It is almost like foregoing present consumption for future consumption, but in this case the structure of production is actually flattened and you’re foregoing future consumption for present consumption.
The problem with debt is not debt within itself, but the accumulation of debt to the point where it is beyond your means to pay it. It becomes a question of individual responsibility.
Of course, there should be no “bail out” for the person accumulating debt, and that person should have to meet the terms of the contract signed with the credit card company. In other words, everybody should be liable for their debt. Companies extending the credit should be liable for their poor credit distribution, if that’s the case, as well. I think that if these things were honored then the case of credit card debt would be less frequent than it is in today’s regulated and consumer welfare-minded credit market.
Yes, Terri, as far as I can tell Austrian economic theory does not criticize the existence of credit, only the existence of government-subsidized credit. In fact, time preference seems to be a cornerstone of praxeology, and (market-based) interest rates critical to a healthy society.
Jonathan and Vanmind,
Thank you for your answers. Jonathan, I do completely agree with the individual responsibility aspect.
Forgive me if this sounds stupid but I’m pretty much a n00b and am trying to understand.
I was thinking in terms of money supply and how a credit card with a limit of $X might influence human behavior, and specifically as it applies to Real Life and the past couple of years.
Doesn’t the overuse of credit cards have the same effect as fractional reserve banking (albeit on a smaller scale), amplifying or distorting the money supply?
Haven’t we just been through a credit card bubble (that burst)? If so, wasn’t the origin the unusually low interest rates set by the Fed, causing banks to issue credit cards to everyone and their dog?
Jonathan, in your example above, you anticipate future wages sufficient to pay your debt. But suppose you lose your job, even if you’re the most responsible person ever, and can’t find a new source of income?
If someone holds a credit card with a $X limit, doesn’t that have the hazard of that person thinking that they actually have $X to spend?
And finally, since most credit cards are issued by Big Gigantic Banks, why would anyone want to play their debt game?
This is only tangentially related to the topic, but I couldn’t think of a better place to ask. Sorry.
Does anyone here understand what Obama’s bank plan, that has the stock market in such a tizzy, involves? Is he saying that the Federal gov’t should tell banks how much of their own money they can invest in the stock market, etc., after they have already met their reserve requirements? Is this because he is trying to push the banks away from the stock market and towards traditional lending, to unclog the “liquidity trap”? What’s he going for here (besides panicking Wall Street)?
Terri,
Like a loan for long-term investment, credit card loans can come from savings, and is not necessarily fed by fractional-reserve banking. Credit cards create what is referred to as “consumer credit”. I touched upon the idea in the above post a little bit.
While a loan to an entrepreneur would lengthen the structure of production, as present consumption is being foregone for future consumption, the case of the consumer is the opposite. The debtor is foregoing future consumption for present consumption, as the loan is being used to buy present goods. What occurs is a flattening in the structure of production.
So, credit cards is just the extension of credit to consumers. It can come from a pool of real savings. In a banking system with “100%-reserves” whether or not credit cards would be as extensively used is another question, entirely. Whether this credit can be extended to the same degree it is today, is an interesting topic to consider.
Russ,
It just seems like a political ploy to make it seem as if Obama is interested in protecting peoples’ demand deposits.
Assuming a responsible approach to personal “money management”, credit cards provide a nice alternative to fiat FRNs. As a “convenience user” of credit cards, I am able to use the card’s float and purchasing power to conduct exchange in the increasingly “cashless” economy. Now the biggest challenges to this mode of value exchange are the ever changing rule sets lobbied for by the banks and legislated in Congress.
By agreeing to use the cards, I am forced to spend some of my time (figure $50/hour) staying ahead of new rules promulgated via laws enacted at the clown show in D.C.. So over the course of a year, I am obliged to spend, let’s say, 12 hours ($600) to remain clear of additional costs of use. If I hold 6 cards, then the use fee costs $100/card or about $50/month. I’m good with that.
Since I can comfortably carry (aka responsible use) zero balance, month to month, I really see little downside to using credit cards; as a matter of fact, from my perspective, credit cards satifactorily meet the requirement of “money” as an agreed upon medium of exchange for many ordinary transactions.
On the downside are the indirect consequences of actions by my less than responsible fellow citizens. Their inability to responsibly manage their own personal finances may, in the large, negatively impinge upon my desire/ability to use the credit cards, based upon rule changes.
These rule changes eventually wind up hurting responsible users through explicit annual fees and draconian terms and conditions regarding billing cycles, average daily interest and a plethora of other enforceable “conditions of use”. My true worry is the continuation of the rule changes making it as costly to use credit cards as it is to carry fiat FRNs or using debit cards.
Interesting to note senator Dodd’s decision to “head for the hills” in the context of a lot of this rule making responsibilities, on behalf of the banks. That is one nefarious SOB!; and the “Chosen One” is equally skilled in deception of the masses of citizens.
I would fully agree with everything in this article in a sane world. Problem is…you know how it goes. So what’s my point? It’s jarring to read, in the current context, an article about how credit card companies (read: banks) are not dishonest or manipulative – while they’ve managed to crash the economy and socialize their losses!
Credit cards are fantastic ways of paying in lieu of cash or via bank drafts, etc. Even for people who eschew credit in favor of debit transactions, a credit card may be the only way to make many purchases either internationally or online. And in that case it is pretty much irrelevant what the entry conditions are.
People who carry a balance forward are not “deserving.” Better they should pay the banks than the Mafia.
We run about $30k a year through American Express/ Costo and they kick back about 2% in cash. Better than a kick in the pants.
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