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Thursday, May 21, 2009

New Federal Credit Card Rules Won't Kill Jobs, Will Restore Fairness

So Bill Janklow, a Harvard prof, and the Madville Times walk into a bar....

The Credit Cardholders Bill of Rights, which is headed for the President's desk, may be a bigger deal than I thought. No, not because it will kill thousands of South Dakota usury jobs, but because it will restore fundamental fairness to the credit industry, and maybe even help the free market.

Former Governor Bill Janklow, the man who brought South Dakota the credit card boom, doesn't see any job losses coming. He apparently disagrees with current Governor Rounds's assertion that Premier BankCard et al. won't be able to compete without their current preadatory lending practices:

"I don't think the people in this state are going to have any trouble. Citibank is an honorable credit card company this mothership they have in Sioux Falls is the best in the world. The same thing is true with First Premier and First National in Yankton," Janklow said.

The former South Dakota Governor says this bill levels the playing field for all the companies across the country.

"So, as long as everybody in the NFL, everybody in Major League Baseball, or everybody in the credit card industry have to follow the exact same rules I don't think it makes any difference. It's when you have an un-level playing field where they give an advantage to one player, or one set of players over another, it becomes a problem" [Ben Dunsmoor, "Janklow: SD Credit Companies Will Adapt to Rules," KELOLand.com, 2009.05.20]

Speaking of a level playing field, Tony Amert rightly directs our attention to Elizabeth Warren. She's a Harvard law prof and overseer of the Troubled Assets Relief Program. She emphasized the need for a level playing field between lenders and borrowers in a Frontline interview in 2004:

[Question]: So the credit card industry says ... "We provide the credit, in many cases, for people to start businesses ... to buy more, to live a better life, to do things that they could never do any other way." So what's the problem?

[Warren]: There is no problem if they would do it on terms that are fair and if they would make their contracts transparent so that the person who's borrowing the money is borrowing it in a way that he or she understands and appreciates the risks.

I believe in free markets. I teach contract law; I believe that value is created when two people come together, and they understand a contract, and they say, "I think if I borrow this much money at this interest rate, I can do better than that; I can start a business; I can buy something I want to buy that's going to be important to me, and I can make money out of this proposition." That is a good use of credit. It's a use of credit we've had in the United States since colonial times.

What's changed is [that] when credit was deregulated in the early 1980s, the contracts began to shift. And what happens is that the big issuers, the credit card companies who have the team of lawyers, started writing contracts that effectively said, "Here are some of the terms, and the rest of the terms will be whatever we want them to be." And so they would loan to someone at 9.9 percent interest. That's what it said on the front of the envelope. But it was 9.9 percent interest ... unless you lost your job, or 9.9 percent interest unless you applied for a couple of other credit cards, or 9.9 percent interest unless you defaulted on some other obligation somewhere else that doesn't cost me a nickel. And at that moment, that 9.9 percent interest credit suddenly morphs to 24.9 percent interest, 29.9 percent interest, 36.9 percent interest. Well, you know, ... nobody signs contracts to buy things that say, "I'm going to pay you $1,200 for the big-screen TV unless you decide, in another month or two months, that it should really be $3,600 or $4,200 or $4,800." But that's precisely how credit card contracts are written today.

...But [the credit card companies] would say they're just making capital or money available to people in a convenient way.

Well, in a convenient way, and changing the price after people borrow it. You know, that's a heck of a deal. I don't know any merchant in America who can change the price after you've bought the item except a credit card company. After you have borrowed the $5,000, they can change the interest rate from 9.9 percent to 29.9 percent. I just don't know anyone else who can do that.

Contrary to the curmudgeonly (and implicitly self-righteous?) grumblings of various arch-conservatives, the new credit card rules aren't about giving handouts to irresponsible borrowers in the name of wimpy liberal "fairness." They're about making credit card companies play by the rules of the free market that we expect every other player to follow. Transparency and honest dealing—not so novel concepts.

(Tony also points to a couple of intelligent videos with Prof. Warren's insight: This 2007 lecture at UC Berkeley on "The Coming Collapse of the Middle Class," and this 2007 NightLine feature. Warren is an engaging and passionate speaker about economic topics that many folks would consider dry.)

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