December 22, 2008

Forcing Opportunity into the Mix

Justin Katz

My emphasis is always on increasing opportunity. Because it's the situation in which I find myself, for example, I believe that many (maybe most) of the people with credit card problems didn't sink into debt living lavishly with their few thousand dollars of Monopoly credit, but rather because life has continually thrown obstacles at them, keeping the monthly bills from being paid. Given opportunity, and seeing clearly the trap of high interest rates, people will work hard and strive to be debt free, and government meddling tends to result in less opportunity — often for unpredicted reasons.

The urge to reach federal fingers into the credit industry and dictate the terms governing credit cards has therefore been suspect, in my estimation. Doing so would decrease access to credit at the low end, and credit schemers would probably find some other way to manipulate the system to their own iniquitous ends, harming those who've avoided pitfalls thus far.

I'll say, though, that Ed Fitzpatrick's presentment of Mr. Potter from It's a Wonderful Life as the poster villain for the credit card industry softened my view a little:

... credit card companies are making the most money when they get consumers in the "sweat box" of credit card debt, Lawless said, borrowing a phrase from a law review article by Columbia Law School Prof. Ronald J. Mann.

In that sweat box, "People are not in good enough shape that they are paying on time but they are not in bad enough shape that they can file bankruptcy," Lawless explained. "They are piling up the huge interest rates, piling up the big penalty fees, and the longer the credit card companies can keep people in that sweat box, the more money the credit card companies are going to make." ...

"Once a debtor falls into the trap of exponential debt growth, can such a person ever climb his or her way out?" Chung asked. "I highly doubt it. Perhaps we are witnessing the 21st-century equivalent of the company store where the debtor is just another day older and deeper in debt because he has sold his soul to his credit card issuer."

Surely there are changes of policy that could benefit credit card users, but it's not clear that those who would "solve" the problem won't make it worse. Consider Fitzpatrick's brief history of the problem, which has left credit card companies able to use Nevadan interest laws to snare Rhode Islanders with higher rates and fees than Rhode Island would allow. Conspicuously, none of the proposals listed from Sen. Sheldon Whitehouse address the laws and court rulings that made the practice of interstate usury possible; they all federalize rates and such.

Moreover, it seems to me that representatives who truly wished to help families who've become ensnared in the plastic trap could find creative ways to shift the end results of fees and punitive interest rates. Rather than capping interest rates, for instance, the law could require a formula that would boost minimum payments to outpace the heightened interest. That would put creditors in the position of having to judge the profitability of forcing their customers into bankruptcy, and it would give imprudent borrowers a more immediate lesson in wise practices.

Surely, too, some portion of fees could be required to go toward some mechanism or other that would actually help families to get out of debt. The point is that the "just do something obvious" strategy of mitigating the consequences of past policy changes will only ensure more dire consequences in the future. The Mr. Potters of the world have made it their business to push regulations in their favor, and the predictable noises of activist representatives seem likely to play into their hands, one way or another.