The American Bankers Association as a Debt-Pushing Brigade
Is it really wise to open the credit spigot to those who can’t afford it?
- The financial losses incurred by banks on poor credit risks are ultimately paid for by all credit card consumers in the form of higher rates.
- In the classic canon of conservative thinking, the maintenance of sound household finances is very much considered a virtue.
- The flip side of the noble-sounding "provision of credit" is the creation of debt.
The U.S. banking industry wants to maintain the ability to charge as high interest rates as it sees fit as it provides credit to willing takers. Viewed in the abstract, that position seems entirely rational.
After all, poorer people are riskier borrowers because their income is lower — and they may have a harder time paying back debt they incur. As a result, interest rates imposed on them need to be higher.
This pure-market logic leaves out one pivotal question — the mere consideration of which is largely cast as un-American by the credit card industry and many conservatives in the U.S. Congress alike. The question is this: Is it really wise to open the credit spigot to those who can’t afford it?
Mind you, the flip side of the noble-sounding "provision of credit" is the creation of debt. As many willing "credit" takers acknowledge with the benefit of hindsight, they would have been better off if they had been denied the further extension of credit — so that the debt hole they find themselves in would not be as deep.
For most non-Americans, it is indeed curious to see that granting ample credit (until the current recession) was seen as a basic human right of being an American. Only nanny-state economies, such as Europe, would have institutions that might keep individuals and households from borrowing further.
Credit card companies are in the business of systematically indebting people to create more business volume for themselves. It is a peculiar American illusion to think that these firms do people a favor if they up their credit limit at a point when they already carry an unsustainable debt load.
Preventing national parliaments from imposing limits on such continued self-indebtment — as is currently the case in the U.S. Senate — is a peculiar move because doing so really is a very un-conservative stance. In the classic canon of conservative thinking, the maintenance of sound household finances is very much considered a virtue.
This entire battle is very much in the headlines once again now that the U.S. Senate is debating the banking reform legislation in the aftermath of the disastrous economic crisis generated by an out-of-control financial industry.
As part of their efforts to strengthen the consumer-protection dimension of the legislation, some U.S. Senators are seeking to put a cap on the level of interest rates that can be charged to consumers. At a superficial level, the banking industry lobbyists are correct in saying that such limit would restrict the availability of credit to consumers.
What is left unsaid, however, is who all would benefit if those limits were imposed: First, people who are poor credit risks — because the odds of them handling more credit responsibly are low. Second, good credit risks — because the financial losses incurred by banks on poor credit risks are ultimately paid for by all credit card consumers in the form of higher rates than their own risk profiles would warrant.
Ultimately, the ABA and the credit card industry at large need to come to terms with the truly unsavory character of their business practices. Under the pretense of promoting "consumer freedom," they are in effect behaving like a bunch of irresponsible, unrestrained debt pushers, preying on the economically feeble.
Their business practices are tantamount to pushing high-interest rate loans onto the poorest of developing countries. It’s not done there, so it shouldn’t happen here. Unless they have a very good reason to incur that debt, it only increases the degree of human bondage.