Your friendly Credit card company.

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.