People have been complaining lately about the way Credit Card Companies have been jacking up interest rates.
Why should they be surprised? Credit card companies are in many ways an example of just what has gone so wrong with the United States economy. They no longer actually make money lending you money, but in fees and charges and outrageous interest rates.
And it's no surprise that along with that, comes an ever more relaxed attitude towards issuing cards, or at least it did before this current recession.
See, back in the 1980's credit card companies began a great exodus to a new land of Milk and Honey, South Dakota. (Delaware is also a state of Milk and Honey for similar reasons.)
Why? because of two factors. First of all SD has no limits on what interest a credit card company can charge. Secondly, the Supreme court in Marquette V. First Omaha Service Corp ruled that banks only have to follow the legal restrictions of the state in which they are based and do not have to follow Usury laws of other states. In other words, a credit card company in South Dakota can "export" that states lack of regulation to any other state and override their regulations. This has only increased in recent years as the Federal Government in the form of the OCC has become ever more reluctant to permit states to regulate major national banks, and in January 2004 declared themselves to sole regulatory authority over these banks, freezing out state authorities. What is impressive, given the rhetoric of the party in power at the time, is that this probably was one of the greatest expansions of federal power at the expense of state's rights in recent history.
Well, the natural outcome was an increase in people getting credit as the interest rates rose to levels seldom seen before, save from shady guys who sent men named "Vinny" to your home to discuss repayment options when you fell behind.
It got worse in 1996 when Smiley V. Citibank resulted in the Supreme court confirming that late charges were also considered interest and therefore the home state of the corporation trumped local regulation.
If Marquette had opened the door to the wolves, this put the cows in the front yard with a knife and fork stuck in their back. At this point, essentially credit card providers found themselves in the enviable position of only answering to the least regulated state and a federal agency that was not very interested in restricting their actions.
Of course, the people borrowing the money, for a time, weren't that upset-- getting trapped in a never ending cycle of debt sounds bad, but as long as you can keep paying the minimum, and you keep getting balance increases, it's all good. Or at least it was until the mortgage collapse. Now suddenly banks don't have money to loan out anymore and those credit line increases are no longer coming. Suddenly people find that it's a choice between mortgage and credit card, or worse, having to use the credit card to pay the mortgage and find themselves trapped between increasing interest rates, late fees and decreasing real income. The piper must now be paid, with a vengeance.
However abusive the credit card companies were, the people of America were full participants in this disaster. The fact that the rate of saving, for example in 2006 was -1 percent shows that people had come to depend, voluntarily or otherwise, on the presence of easy credit, which was fueled by the ability of credit card companies to charge high levels of interest.
But now, with the oncoming regulations, that easy credit will likely be a thing of the past. Make no mistake-- you cannot have it both ways. If a bank faces restrictions on how it may increase interest rates, or as might very well occur, how high those rates can be at all, it suddenly has to start looking much more closely at your long term reliability in terms of paying that loan back. Suddenly, we face the possibility of a return to the days where the long term health of the loan, not how much you can make in late fees of interest rates, becomes the main determining factor in whether or not an applicant will get a loan, be it in the form of a credit card or some other form.
In the long run, that might very well be the best thing that's happened to our economy, but in the short run, we may be facing in the next few years, shocks to an economy that is driven by consumer spending, and has gotten used to being able to fuel that consumer spending via credit, often with little care to whether or not the credit card users can actually pay off their tab, of the like that we haven't seen in decades.
Saturday, August 22, 2009
When a Recovery Isn't.
We're beginning to hear the drumbeat of pundits tellingus the recession is coming to an end.
Technically-- technically they might be right.
Unfortunately in every real sense, not only is the recession not ending, it is actually likely going to get worse.
See, the problem is, as Paul Krugman notes, is that since 1990, we've faced a remarkable phenomena-- the recovery that adds no jobs. in his most recent post he makes the point that:
However there are two points that I feel he has failed to fully explore. The first is the fact that any governmental stimulas plan is, by definition, finite. Cash for Clunkers has ended, and absent increased consumer spending, that means that the economic gains are both transitory and to some degree illusory. In absense of a restoration of employment, no stimulus plan will in the long run, be effective.
The second issue is much more serious, and one that requires more analysis, but fundamentally the mortgage bubble has insured that this recession-- in real, not academic terms will be closer to the Japanese "Lost Decade" than a traditional image of a recession, simply due to the tremendous amount of "spending power" that the US and indeed world economy got used to over the last ten years, which now quite simply no longer exists.
Technically-- technically they might be right.
Unfortunately in every real sense, not only is the recession not ending, it is actually likely going to get worse.
See, the problem is, as Paul Krugman notes, is that since 1990, we've faced a remarkable phenomena-- the recovery that adds no jobs. in his most recent post he makes the point that:
And the current situation is no better — actually, worse — that I thought it would be when arguing that the Obama economic plan was inadequate. Read this, and bear in mind that the unemployment rate is now 9.4%.
The stimulus has helped, and the conventional recession is over. But the economy is not recovering in the most crucial area, job creation, and the stimulus won’t be enough to restore prosperity.
However there are two points that I feel he has failed to fully explore. The first is the fact that any governmental stimulas plan is, by definition, finite. Cash for Clunkers has ended, and absent increased consumer spending, that means that the economic gains are both transitory and to some degree illusory. In absense of a restoration of employment, no stimulus plan will in the long run, be effective.
The second issue is much more serious, and one that requires more analysis, but fundamentally the mortgage bubble has insured that this recession-- in real, not academic terms will be closer to the Japanese "Lost Decade" than a traditional image of a recession, simply due to the tremendous amount of "spending power" that the US and indeed world economy got used to over the last ten years, which now quite simply no longer exists.
Tuesday, August 4, 2009
D-day for California Prisons?
Well it's coming. A three judge panel has ordered that the California prison system must cut its inmate population by 40,000 prisoners.
There will be a lot of wailing about this, but nobody can claim it was a sudden development or nobody could see it coming. California has protested, delayed and in some cases simply ignored previous federal rulings, even when the judges have tried to make allowances for the states permanent basket case of a budget.
Perhaps the most damning example of this is the following fact:
So while the government will cut the budget, any moves to reduce the population died by the same special interest knives that have so handicapped every other aspect of California governance. One cannot blame the judges for being, at this point, beyond suspicious about California's good faith in this affair.
There will be a lot of wailing about this, but nobody can claim it was a sudden development or nobody could see it coming. California has protested, delayed and in some cases simply ignored previous federal rulings, even when the judges have tried to make allowances for the states permanent basket case of a budget.
Perhaps the most damning example of this is the following fact:
Governor Schwarzenegger recently proposed reducing California’s budget gap by $1.2 billion through a combination of changes to corrections, including parole reform and early releases. But law-enforcement organizations and victims rights groups attacked the plan, and while the corrections cuts are still part of the state’s official budget, the reforms are not.
So while the government will cut the budget, any moves to reduce the population died by the same special interest knives that have so handicapped every other aspect of California governance. One cannot blame the judges for being, at this point, beyond suspicious about California's good faith in this affair.
Pixie Dust improvements
Right now, the powers that be are telling us the recession is bottoming out, spending is up and good times are coming back....
But wait
The New York Times has some sobering news that increased consumer spending isn't due to buying more items, but spending more for necessary items.
So we don't have a return to good times-- what we have is a false rise in spending created by the fact that it takes more to purchase a gallon of gas or a dozen eggs-- and this is coupled with the fact that the amount of money available to consumers is going down.
So, the outcome of this will likely lead to more defaults on credit cards and other debts as consumers have to keep spending more for vital goods (because eating and having gas to get to work are expenses you can't do without), and must make the choice to abandon credit card and other debts.
Eventually, unless there is a change, reduced wages and increased costs in vital goods will lead to some consumers being no longer able to "rob Peter to pay Paul". The consequences of that are left as an exercise to the reader.
But wait
The New York Times has some sobering news that increased consumer spending isn't due to buying more items, but spending more for necessary items.
The broader economy may be testing the bottom, but for American consumers, there appears to be no end yet in sight for falling wages and higher living expenses.
That was the picture painted Tuesday by the government’s monthly report on personal incomes and consumer spending. While consumers spent more in June, they did so because prices of food and energy were rising, and not because they were ready to spend freely again.
Personal incomes sagged as employers continued to cut wages and reduce working hours. And the personal saving rate, which had been rising, dropped sharply from a month earlier as one-time transfer payments from the government stopped arriving in people’s bank accounts.
So we don't have a return to good times-- what we have is a false rise in spending created by the fact that it takes more to purchase a gallon of gas or a dozen eggs-- and this is coupled with the fact that the amount of money available to consumers is going down.
So, the outcome of this will likely lead to more defaults on credit cards and other debts as consumers have to keep spending more for vital goods (because eating and having gas to get to work are expenses you can't do without), and must make the choice to abandon credit card and other debts.
Eventually, unless there is a change, reduced wages and increased costs in vital goods will lead to some consumers being no longer able to "rob Peter to pay Paul". The consequences of that are left as an exercise to the reader.
Friday, July 31, 2009
Education: Tinkering with the engine.
There are a lot of problems in California schools-- bad test scores, systems that reward trying to teach to the aformationed tests rather than measuring true achievement, a system that on the one hand can be tremendously stressful on teachers and yet on the other hand rewards simple seniority... suffice it to say, our school system has a number of issues.
And this is a vital problem, because California can only compete with other states and nations by remaining on top of the tech curve and providing a skilled workforce that motivates companies to move here even if they might have higher expenses because the work force is just that good.
But right now, this is hard to do-- the sad fact of the matter is the time to make changes like this is when you have the money to do it right and do it without raiding the piggy bank-- and California has not been in that position for some time.
So what to do? Well, as much as I'd like to shout out "burn the edifice" that's not going to happen, nor should it. However, we should be looking at what sort of minor tweaks we can make that might produce a more effective use of school time, without requiring the upfront investment of money that the state simply cannot afford right now.
And from Japan, we have one, a very good one. It's one of those ideas that is so simple that you almost wonder why you didn't think of it yourself.
In Japanese high and junior high schools, between class periods the students don't move-- the teachers move between classes. So instead of having hundreds or even thousands of students in the corridors, you have a few dozen teachers moving from room to room.
Anyone who has ever been in that tide of humanity called "between periods rush" in a high school can attest to just how much chaos occurs. It's a period that makes it hard to supervise students, easy for students to skip school or be disruptive and of course involves the joy of having to take roll call again. Even in the best organized school, often it means that better than ten minutes of a 50 minute class period are occupied with taking roll, getting everyone settled down and then finally getting started with the traditional disruptions of the fashionably late arrivals.
Having the teachers move, instead of the students, ends most of those issues. It does not cost anything more, and requires no changes to the lesson plan, and in fact can be done with a simple change of schedule.
Given our money problems now, it is criminal to not try and make the absolute best use of every minute of educational time we have, and this is one way to do that. Later on, I'll talk about some others.
And this is a vital problem, because California can only compete with other states and nations by remaining on top of the tech curve and providing a skilled workforce that motivates companies to move here even if they might have higher expenses because the work force is just that good.
But right now, this is hard to do-- the sad fact of the matter is the time to make changes like this is when you have the money to do it right and do it without raiding the piggy bank-- and California has not been in that position for some time.
So what to do? Well, as much as I'd like to shout out "burn the edifice" that's not going to happen, nor should it. However, we should be looking at what sort of minor tweaks we can make that might produce a more effective use of school time, without requiring the upfront investment of money that the state simply cannot afford right now.
And from Japan, we have one, a very good one. It's one of those ideas that is so simple that you almost wonder why you didn't think of it yourself.
In Japanese high and junior high schools, between class periods the students don't move-- the teachers move between classes. So instead of having hundreds or even thousands of students in the corridors, you have a few dozen teachers moving from room to room.
Anyone who has ever been in that tide of humanity called "between periods rush" in a high school can attest to just how much chaos occurs. It's a period that makes it hard to supervise students, easy for students to skip school or be disruptive and of course involves the joy of having to take roll call again. Even in the best organized school, often it means that better than ten minutes of a 50 minute class period are occupied with taking roll, getting everyone settled down and then finally getting started with the traditional disruptions of the fashionably late arrivals.
Having the teachers move, instead of the students, ends most of those issues. It does not cost anything more, and requires no changes to the lesson plan, and in fact can be done with a simple change of schedule.
Given our money problems now, it is criminal to not try and make the absolute best use of every minute of educational time we have, and this is one way to do that. Later on, I'll talk about some others.
Wednesday, July 29, 2009
When will the good times return?
When will the people be able to borrow on their house, buy that Big Screen TV and live the life they wanted? When will our current belt tightening era go away?
Well, according to the various politicians out there, "soon", or maybe when the stimulus goes through, or perhaps once there's a rebound in housing prices, or maybe the magical pixy fairies will deposit economic fairy dust on our bank accounts.
The answer is: They won't. At least not like we've had them over the last 10 or so years.
The problem, just as the Japanese found out when their bubble collapsed was that this is imaginary money. Your house really isn't worth 250,000 dollars, not until someone buys it for that. The banks were handing out easy credit based on the fond belief that the perpetual motion machine would keep driving prices up, and so people would just keep refinancing and would never, ever have to actually make good on these debts.
Don't blame the banks alone. Yes, they bear much of the blame for the situation, but honestly, how many people said: NO! when they were told they qualified for that loan? There needs to be far more regulation of these markets, that's obvious, but remember that nobody was forced to take these loans.
Today we have billions and billions in bad loans. Homes that are likely going to be sold for pennies on the dollar at auction. Unless you're very lucky, you probably have at least one house in your neighborhood becoming a weed trap after the occupants left.
And so, even after we create some stability in the economy, it's very, very unlikely that banks will be so eager to hand out these loans. Get ready to prove your income, to prove your financial worthiness to prove that yes, you are good for this loan. The same thing is happening in the credit industry, especially now that Congress is moving to end some of the nastier practices that have traditionally made much of the money for the credit card industry.
That means that the coming economy, even if nothing else goes wrong, will likely be far less tolerant of amassing large amounts of debt.
Is that bad? In my opinion, no. But it will mean that a great deal of consumer spending will either be scaled back or cease. A large number of people who have been disguising a lack of actual work based income via the use of various sorts of credit dodges will now have to confront the fact that no, they don't have enough money to "live the dream."
And that's why the good times are not going to return-- over the last ten or so years we've enjoyed the mother of all New Years Eve Parties. However, now, it's the next morning, we have a hang over, the living room is trashed and now comes the very hard job of cleaning things up, and explaining to the police why there is a goat tethered to our mail box.
Well, according to the various politicians out there, "soon", or maybe when the stimulus goes through, or perhaps once there's a rebound in housing prices, or maybe the magical pixy fairies will deposit economic fairy dust on our bank accounts.
The answer is: They won't. At least not like we've had them over the last 10 or so years.
The problem, just as the Japanese found out when their bubble collapsed was that this is imaginary money. Your house really isn't worth 250,000 dollars, not until someone buys it for that. The banks were handing out easy credit based on the fond belief that the perpetual motion machine would keep driving prices up, and so people would just keep refinancing and would never, ever have to actually make good on these debts.
Don't blame the banks alone. Yes, they bear much of the blame for the situation, but honestly, how many people said: NO! when they were told they qualified for that loan? There needs to be far more regulation of these markets, that's obvious, but remember that nobody was forced to take these loans.
Today we have billions and billions in bad loans. Homes that are likely going to be sold for pennies on the dollar at auction. Unless you're very lucky, you probably have at least one house in your neighborhood becoming a weed trap after the occupants left.
And so, even after we create some stability in the economy, it's very, very unlikely that banks will be so eager to hand out these loans. Get ready to prove your income, to prove your financial worthiness to prove that yes, you are good for this loan. The same thing is happening in the credit industry, especially now that Congress is moving to end some of the nastier practices that have traditionally made much of the money for the credit card industry.
That means that the coming economy, even if nothing else goes wrong, will likely be far less tolerant of amassing large amounts of debt.
Is that bad? In my opinion, no. But it will mean that a great deal of consumer spending will either be scaled back or cease. A large number of people who have been disguising a lack of actual work based income via the use of various sorts of credit dodges will now have to confront the fact that no, they don't have enough money to "live the dream."
And that's why the good times are not going to return-- over the last ten or so years we've enjoyed the mother of all New Years Eve Parties. However, now, it's the next morning, we have a hang over, the living room is trashed and now comes the very hard job of cleaning things up, and explaining to the police why there is a goat tethered to our mail box.
Tuesday, July 28, 2009
Paul Krugman nails it on health reform
http://krugman.blogs.nytimes.com/2009/07/28/676/
I don't always agree with him, but Krugman knows what he's talking about and has his facts down, so agree or not, you could do worse than to follow his column.
I don't always agree with him, but Krugman knows what he's talking about and has his facts down, so agree or not, you could do worse than to follow his column.
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