While the markets are focused on the next bull market of the coming years, the groundwork that sustained economic growth in the past decades is being dismantled by new regulations and increased risk aversion on the part of investors.
This is not surprising, as the era-changing events of last year will have a long-lasting impact on the way business is done in this country and elsewhere for many years to come, a fact which appears to be disregarded by the markets so far.
At this difficult moment, nobody wants to deepen or lengthen the crisis. Both private savers and the regulators assume to be doing what is best for the economy, and in many cases what is being done is right from a long-term perspective. That these actions will bear their fruit in the long term, and that their results have little relevance to the short-term development of the crisis, are the main causes of the misunderstandings which plague analysts and officials at the moment.
The impact of the latest regulation on credit cards, the so-called credit card bill of rights, should be seen in the same light. While authorities are trying to curb abusive and reckless practices that led us to where we are in the first place, the timing of their actions is more in line with panic than prudence.
At this stage, no one should expect the American consumer to be saved from bankruptcy through tighter standards imposed by the government on the banking industry, since no one can save the consumer from the massive debt load, and the huge burden of mistaken financial decisions of the past decade.
But politicians have to be seen to be doing something, and the weakest victim of their efforts is the banking industry, for reasons well-known to everyone at this stage.
As with most issues these days, the divisions on the bill are powerful and deep. But a careful examination of the details shows that it is neither as radical nor as weak as it is made to be by those on the edges of the aisle. The bill was approved last week, but it will not go into effect until February next year, which means that its full impact will be felt only around summer-autumn of next year.
In addition, it will mostly help new borrowers, and those who are already paying the maximum interest on their cards will keep doing so. They are, in essence, still beholden to the willingness of their lenders to renegotiate the terms of their credit card balances.
Since the bill makes it harder for banks to charge higher rates for less creditworthy consumers, it is argued that they will respond by shrinking their balance sheets even further, leading to greater troubles for the US consumer. Critics argue that the contraction in credit that will be caused by the legislation contradicts the letter and spirit of government actions aimed at jump starting the economy.
But no one seems to ask the pertinent question on the impossibility of jump starting an economy that is likely to suffer from double-digit unemployment for quite a while to come.
Eventually, when the issue is consumer’s solvency, terms of consumer credit lose much of their significance. It is irrational to expect that banks can keep lending to the jobless in America on the same terms and conditions as they did during the past decade, with or without legislation.
Consequently, the impact of this bill is mostly about cosmetics: it is the rubber-stamping of a process that was already underway.
Ultimately, the legislation is another example of the right thing being done at the wrong time, and the right time would have been years ago, when bank credit was multiplying through meiosis. Since the beginning of this crisis in the summer of 2008, we have seen a patchwork of solutions improvised in response to shocks and turmoil in the markets, without any consideration given to timing.
Such haphazard efforts at managing the symptoms of the crisis have since proven to be incapable of resolving the deep and complicated root issues such as the profligate consumer culture, and the lack of financial discipline at all levels of the American economy. The credit card bill, restrictions on the salaries and bonuses of high-level corporate officials, and the numerous other attempts at restraining the freedom of Corporate America should all be regarded in the same light.
These changes are unpleasant for the banking industry, ill-timed for the economy, and confusing for economists, but are unavoidable in this period of soul-searching and self-incrimination following the massive turmoil of the past two years. The short and medium benefit provided by them will be minuscule due to a lack of vision on the part of authorities.
Yet their potential harm to the recovery effort is also insignificant, as the dismantling of the economic culture of the past decades is bound to do its harm through deleveraging anyway, regardless of the feeble actions of government.
