Why Isn't the Government Capping Credit Card Interest Rates?

Bowing to the dictates of Wall Street, the U.S Fed has now twice cut the federal funds rate to demonstrate that it is listening to the markets. But to us, such policy is one part delusional pandering and one part wishful hope that demonstrates a scary arrogance of the financial problem at hand.

Indeed, lowering current mortgage rates by an extra percent point does little to address the quandary ravaging the U.S housing market. The fact is banks made exotic loans with no down payments, required inadequate proof of income, offered low debt servicing requirements, all done based on inflated appraised housing values. Now when it's time to reset the loans to conventional terms homeowners are faced with negative equity and inadequate collateral values. These double-negative factors are driving the foreclosure rate and make a workout impossible for banks and homeowners alike. The unfortunate owners simply can't come up with the extra cash to satisfy traditional loan to equity ratios. This means that banks have quite a huge inventory of houses to foreclose on and re-sell. As each house is foreclosed, the banks themselves are put in a more perilous financial condition, since they ordinarily leverage each loan at a ratio of 20:1 for deposits held. Before long, with deficient asset-liability ratios, banks are short of capital reserves. They must get loan-shark deals or shut down lending.

Little can be done to prevent loss in this over-built, excess inventory, deflationary environment. Moreover the public has made it clear that they do not support a bailout. So why hasn't the Fed or Treasury gotten the message and initiated policies to expedite the losses so that the free markets can work? Instead of cutting the federal funds rate, why hasn't the Government capped credit card interest rates to instead help stimulate consumers spending? Doing so would have far greater impact creating up to 15 times the spending multiplier effect if credit card interest rates were fore example capped at 12-15%.

The answer is that the banks are looking for a bail out. They have jacked-up credit card interest rates to usury levels to offset losses in their housing loan portfolios. The Treasury and the Fed are more focused on saving banks that made ridiculous loans and gouging the public than averting recession. They prefer to have the public bail out their constituent brotherhood while fulfilling their role as pimp and proxy.

The Congress, embodied largely by lawyers, is inept to economic reasoning. Greenspan wrote about them in his memoir and none of them apparently understood those comments either. Members fail to understand the crux of our problems and blame homeowners and speculators ignoring, and fail to see the international ramifications of this complete breakdown in regulatory oversight.

The fact is, consumer spending makes up two-thirds of U.S gross domestic product. High energy prices and high consumer debt levels combined with a general housing deflation almost certainly assure a recession is eminent. The U.S must stimulate GROWTH. The world has given us the answer in GREEN ENERGY demand that could be our saving grace. It could at once realign our interests with the world community (Kyoto & Bali) and foster new technologies to market around the world. Unfortunately, because Al Gore (a Democrat) is associated with the idea, the Republicans spurn it and instead are pushing a war on terrorism, failing to recognize the irony of it all - that these discordant policies mean we will fight a war in the future, but it will be against rich terrorists.

Comments

[flow5]

Well said. Thomas Jefferson said that there ought to be a revolution every 20 years. We're overdue.

[Tim Eriksen]

Your analysis is stunningly off base. Little of what you say is accurate, and your suggestions would do little to help.

[goldenhinde]

Lawrence: Your comments are perfectly on target. This Spring I was asked by the Board of Governors of the Federal Reserve to construct a training program for bank auditors to audit fiduciary accounts within the US banking system. Our expertise in fiduciary governance is what had them call me in the first place. I didn't seek them out.

I was able to get four of the most senior partners involved in regulatory affairs from White & Case in New York to jointly do the proposal with me. We submitted it and were turned down.

In spite of the fact that a couple trillion of fiduciary assets are under the jurisdiction of the banking system, the Fed chose to hire an organization of people from financial services who train financial service organizations.

I was flagergasted and wrote to the woman in charge of the RFP process.

The Fed is nothing more than a lobbyist for the banking system and this was also evident in their willingness to allow the brokerage community to engage in "tying" relationships. Though against NASD regulations at the time - the Fed again bailed out the banks to the detriment of the beneficiaries of fiduciary Trusts who count on the integrity of the system and the regulatory imperative to have some measure of decency.

Our system is thoroughly corrupt and morally corrupt and this it is from these seeds that we sow our own destruction. We have nothing to fear but our collective unwillingness to face the consequences of our collective actions.

I do a lot of work in the Arab world. They know this about us. So does everyone else.

Respectfully,

Wayne H. Miller
Chief Executive Officer
Denali Fiduciary Management

[kurt walter]

The govt. has no business setting credit card rates.We have enough entitlement, socialist policies already. If you don't like credit card rates then don't accumulate credit card debt. That lousy debt is for people that live beyond their means. Letting your credit card balances roll from month to month is for fiscal fools.

[REBEL]

The Federal Reserve was set up to funnel U.S. wealth to the international bankers. Americans, (at least 95% of them), simply will not admit they are silent partners in the raping of America. Maybe when they are homeless and starving they will at least admit they are getting screwed without so much as a kiss. But I doubt it. What WILL happen is that the federal government will set-up some innocent sector of the economy as the fall guy for the ruinous devastation to the U.S. economy. And the sheople will nod knowingly, (or so they think), at each other and go on living their lie.

[MichaelLofrano]

Yeah, just what we need, more inducements for Americans to take on more debt.

Green energy is a great idea but not for the reason Al Gore says it is. Al Gore is riding a wave of a populist delusion. Soon enough--in geological time, that is--the climate will swing back in the opposite direction (and it will) there will be a different bunch of hysterics to warn us about global cooling.

Oh yeah. Thee world is coming to an end, just as it has been predicted 20 other times in my lifetime. Hurry. Everyone in to the cave. The sky if falling.

[Tim Eriksen]

To be more specific on why your post is so off base. You wrote, "As each house is foreclosed, the banks themselves are put in a more perilous financial condition, since they ordinarily leverage each loan at a ratio of 20:1 for deposits held." Please name which banks have a 20:1 leverage on deposits. You would be in the ballpark if you said equity, but deposits, give me a break. Only a few banks have more loans than deposits, and they would have borrowed through fed funds which are not much different than CDs.

You do realize that if you capped interest rates on credit cards that finance companies would earn less money yet see little decrease in write offs and they would likely quit issuing credit to higher risk borrowers.

[flow5]

Wayne Miller:
"The Fed is nothing more than a lobbyist for the banking system" Yes, Yes, & Yes

The Fed, though intended to be an “independent” agency has, like the Supreme Court, “followed the elections”.

We don't have captialism, we have regulated capitalism.

We have an “elastic” currency “aided and abetted” by “elastic” legislators. We have perennial Walter Wriston caricatures pressuring the House Committee on Financial Services & the U.S. Senate Committee on Banking, Housing, and Urban Affairs. We have a conspiratorial organization that goes by the name of the American Bankers Association - with its well funded lobbyists.

The Board of Governors is self-described as: “subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute” Even so, the Fed is “connected at the hip” with Congressional allies, a la Greenspan, who the New York Times called a “three-card maestro”.

The Fed’s research is politically coordinated, targeted to justify its monetary policy objectives - those that appease the banking community. It’s as the university professor said: “innovate away from home”. Academic freedom has become the “barbarous relic”.

The great German poet and playwright Bertolt Brecht would have agreed and once said it was "easier to rob by setting up a bank than by holding up (one)."

[SeriousBull]

Kurt Walter
I agree with you that the government should not set credit card interest rates as they shouldn't seek to set any interest rates in a free market. The fact of the matter, and the point of my commentary, was that the Fed is purportedly lowering rates to help homeowner keep their home. Indeed, if they intend to have an effect they should rather get the multiplier effect of a cut in credit card rates and actually have an impact. Like it or not the data say America by and large is a fiscal fool.

[flow5]

Yes the FED should control - indeed eliminate interest rates on commercial bank liabilities...What should be done? As a long-term proposition, the Federal Reserve should re-apply and then gradually lower REG Q ceilings until the commercial banks are out of the savings business. Outside of the commercial banks, interest rates would be left to the market place. What would all of this do? The commercial banks would be more profitable - if that is desirable. Why? because the source of all time deposits is demand deposits directly via the currency route or through the commercial banks undivided profits accounts. Money flowing "to" the intermediaries actually never leaves the commercial banking system as anybody who has applied double-entry book-keeping on a national scale should know. The growth of the intermediaries cannot be at the expense of the commercial banks. And why should the banks pay for something they already have? I.e., interest on time deposits

[Jakob Zook]

The Credit Card Companies are now run by the Mafia and the Corporate Fascists that are now taking complete control of this country. It amazes me that anyone would vote Republican in the Fall considering all the current crisis. It's like your on a sinking boat and most of the people aboard are cheering the guy on who is poking holes in the ship. The right wing "mind controlled" voters would vote for a monkey as long as they say "I'm a Conservative." As far as a free market? Free markets such as rich Corporations and Politicians taking taxpayers money and Companies like Washington Mutual jacking their rates up to 30% on people who great credit scores for their Bailout? Why not give the people paying 30% interest a Bailout. There's gonna be a revolution soon if this keeps up and I don't think the outcome will be pretty. Remember Nazi Germany and Corporate Fascism lost in the 1940's and I suspect the new fascism in America will be defeated.