More about credit cards, debt, pyramids, and eschatology

My recent post “Why I’m canceling my Bank of America credit card” brought a comment pointing out that cancelling credit cards can adversely affect one’s credit score, perhaps making it difficult to borrow for cars and houses. That may well be true, but it seems to spring from a view of credit and debt quite different from mine. Rather than dump this on the hapless commenter as a reply, I’ll say it here.

First, the companies have no incentive to restrict credit, and I expect they’ll soon be back to sending out credit apps to dogs and kindergartners. When the banks lose money through extending credit unwisely, they raise rates on the rest of us to recoup. Worst case, as now, the taxpayers bail them out, they buy each other up, write off debt, get tax breaks for losses. So I think people can safely cancel all but one or two cards, and still be able to use credit to make major purchases.

Second, I’m hoping that ordinary people, who DO have an incentive to learn from the present debacle, may start restricting their debt to large necessary items. Cars and houses usually do require going into debt. But I’m old enough to remember life without credit cards; my mom had a metal “charge-a-plate” for Macy’s, and there was layaway at some stores, but no credit cards. If you wanted something you saved up for it. If you couldn’t afford to go out to dinner, you didn’t go. To those accustomed to incurring chronic credit-card debt for indulgences, such a life may seem a bleak prospect. But actually I recall very few people growing despondent for want of cruises, concert tickets, and designer handbags.

Back in the 1980’s when I saw items at an Oregon department-type store bearing tags that said “Want me? Buy me!” and a credit card logo, I viewed it as a dangerous & selfish attitude to cultivate. Along with it came the re-definition of human beings as “consumers”.

The present economic system is a pyramid scheme because it is predicated on continual growth. We do not live in a world of infinite resources and space, therefore neither population nor consumption/production can continue to increase forever. Business interests, and even the administration, expect increased consumption to get us out of this depression. If it does, it can be only a temporary fix.

I know there are a lot of optimists out there who say not to worry about dismal stuff like the economy, climate change, and all that, because the world is going to end in 2012 (Mayan Calendar theory) or “soon” (some Christian fundamentalist theories). But I just can’t be that optimistic. Call me crazy, but what if we’ve got those Mayan numbers just a little bit wrong? Or some translator introduced an inaccuracy into the Book of Revelations? What if God has changed His mind, and now thinks it might be amusing to see how His little creatures manage with these challenges? We just can’t know. Better to keep our eyes on the ball, as it were (in this case the planet & its inhabitants) and not count on the Umpire calling the game on account of End of Time.

Why I’m canceling my Bank of America credit card

Going through a pile of mail last week I came across two items related to Bank of America.

First, the AARP newsletter had a short article about a guy collecting unemployment in (I think) New Mexico. The state issues the monthly amount via B of A debit card. When this fellow had questions, he was charged for the phone call to the bank; when he makes more than one withdrawal in a day he is charged a service fee. The amounts are small––but then, so are unemployment benefits. And whatever the amount, the fact that the bank levies these charges on unemployed people (who also have to pay taxes on their benefits) is appalling. The state also should take action, should have negotiated a different setup, but it is the Bank of America that is profiting from people for whom every dollar is precious.

Second, I received a tender missive from Bank of America, announcing that the interest rates were being raised. “The standard rate for new and outstanding balance transfers is increasing and will use the Variable Rate formula with a margin of 11.72 points” yielding an annual percentage rate (as of Feb. 2009) of 15.72%. New and outstanding purchase balances will have the same rate, and the rate for cash advances will go to 25.74%.

They calculate this rate by using the highest US Prime Rate over the preceding 3 months, as published in the Money Rates section of the Wall Street Journal. Can anyone say, “The odds always favor the house”?

Yes, banks perform a service. They must make a profit. But this is far beyond a fair profit. Banks now levy multiple charges, at least one on every stage of a transaction. Businesses pay a percentage of each transaction for the credit card processing. Every credit card user pays interest on amounts owed, sometimes even when paying the balance off in full each month. There are big late fees. Some banks (Chase, for one) have started charging a monthly maintenance fee for “processing payment and statements” [Wisebread blog].

Our local credit union issues us a VISA debit card, with no fees unless we get cash advances from an unaffiliated ATM. The credit union covers overdrafts (checks) for us by charging a line of credit so that we never will pay a bounced check fee. The credit union was not part of this reckless orgy of greed on the part of financial institutions, which has caused our economic crisis, and for which we ordinary folk are paying at every turn: taxpayer bailouts to the institutions who profited, massive unemployment, foreclosures, blighted lives as families become homeless and food pantries empty their shelves to gobsmacked crowds of the nouveau poor.

Screw the banks. Use cash, join your local credit union (credit union membership is now usually based on locality; you don’t need to work for a school, a certain corporation, or belong to a certain union, to join). And if you close an account or credit card, be sure to let the bank know exactly why. We are already paying plenty for their dishonesty and incompetence.

B of A.jpg

“Bank of America helps build strong communities by creating opportunities for people — including customers, shareholders and associates — to fulfill their dreams.”
Kenneth D. Lewis
Chairman, CEO and President 1

What should happen at the International meeting on the economic crisis?

On Nov. 14 and 15, leaders from around the world (the “Group of 20”) will meet in Washington DC to negotiate a response to the continuing economic crisis. An article from the Washington Post on Nov. 2nd gave some good background to this meeting, for those of us who are not versed in international finance. An article yesterday at bloomberg.com gives more detail.

Discord on Economies In a World Of Trouble––
Conflicts Emerge as Nations Seek Solutions

By Steven Mufson, Mary Jordan and Edward Cody

Washington Post Staff Writers

Presidents and prime ministers from major countries around the world will gather in Washington in two weeks to begin heated negotiations over the shape of global financial regulation as they scramble to avoid a deep worldwide recession and restore confidence in markets.

Key European allies are pushing for broad new roles for international organizations, empowering them to monitor everything from the global derivatives trade to the way major banks are regulated across borders. But the Bush administration has signaled reluctance to go that far. In the past, it has resisted similar proposals as potentially co-opting the independence of the U.S. financial system or compromising free markets.

Some economists and policymakers say the summit could launch important reforms. But others predict it could turn into an economic tower of Babel, with weak political leaders promoting solutions fundamentally at odds with one another. And if leaders cannot bridge their differences, they could risk another bout of financial disarray.

There are also differences of opinion on the issue of timing. French President Nicolas Sarkozy, who pressed for the 20-nation summit, says it must produce concrete and immediate results. But the host, President Bush, is a lame duck who says the meeting will be “the first in a series” and should focus on principles even though “the specific solutions pursued by every country may not be the same.” Emerging proposals to sharpen existing regulatory tools appear to conflict with plans to create entirely new ones.

What is clear is that expectations for the summit among many observers are high.

“At the moment, I don’t think it would be acceptable for the major leaders to come back from this conference and to go to their respective parliaments or whatever and say, ‘Yes, we rearranged the deck chairs a little bit.’ Because this is genuinely a Titanic crash,” said Howard Davies, director of the London School of Economics and former head of Britain’s financial regulator, the Financial Services Authority.

But no matter what parliaments and people may think about the need for prompt and effective action, it seems to me unlikely that the meeting will succeed in doing much more than talking; the establishment of a new global economic monitoring agency with “teeth” faces too many obstacles: lack of preparation, lack of a precedent or foundation for such a global regulatory institution, too many parties who must agree, Chinese insistence on unfettered national sovereignty.

The summit does have a precedent, one reaching back more than six decades. At the 1944 Bretton Woods conference, world leaders gathered to design the current international financial architecture, laying the groundwork for the International Monetary Fund and the World Bank. The Nov. 15 summit has been popularly referred to as Bretton Woods II.

But this time is different. Two years of preparation went into the 1944 summit. And whereas the United States and Britain largely shaped the postwar financial system, financial regulation and coordination will now require the participation of a broader and more unwieldy group, including emerging economies, many of them loaded with foreign exchange reserves, foreign debts and influence over global financial markets.

Those emerging economies, far from being “decoupled” from traditional industrial powers as many analysts believed just a few months ago, have found that they and more developed nations need one another.…

Bush, meanwhile, has been reserved. “We need to proceed with caution and care but also with all due speed,” White House press secretary Dana Perino said recently. “The president is concerned about moving too far too fast and wanting to avoid unintended consequences.”

Locking In Allies

World leaders are already maneuvering for position. Sarkozy, in particular, has methodically sought allies.

He won a key, although carefully worded, endorsement for action from China on Oct. 25 in Beijing, where a Europe-Asia economic cooperation summit called for more regulation of global financial markets.

“Each of us perfectly understood that it was not possible to meet [Nov. 15] just to talk,” Sarkozy told reporters at a closing news conference.

“This is about no less and no more than the creation of a new financial constitution,” German Chancellor Angela Merkel said.

Sarkozy has also called a Nov. 7 summit of the European Union’s 27 heads of state and government in hopes of winning a Europe-wide mandate to demand swift action in Washington. Recognizing Britain’s special contacts with the United States, Sarkozy invited Prime Minister Gordon Brown to a strategy session Tuesday at a presidential retreat in Versailles.

Still, despite all the posturing, there are different views on what concrete action would mean.

Sarkozy and Brown have voiced support for a new international regulatory body to supervise large transnational banks. Brown has called for strengthening the Financial Stability Forum, created after the Asian financial crisis of the late 1990s. The group of central bankers, finance ministry officials and international financial institution representatives produces important recommendations, Brown said in a speech this week, but, he added, “It never had enough teeth.”

Merkel, who has been more conservative in dealing with the crisis than the hard-charging Sarkozy, favors a stronger International Monetary Fund, giving it a supervisory role in international finance and making it a “guard” of financial stability. Brown, too, has proposed making the IMF “an early-warning system” for financial problems, singling out low bank capital ratios or wildly mispriced securities.

IMF officials have embraced the idea that the fund could take on a larger role, perhaps as part of a secretariat involving other multilateral institutions.

Sarkozy has also sought support for proposals to curtail tax havens with new international investigative powers; require increased transparency on high-risk hedge fund investments; and regulate financial traders’ compensation packages in a way that would reduce the incentive to make risky investments. But a French analyst said Sarkozy may scale back some of those ambitions given U.S. opposition. “He may have overreached a bit,” said the analyst, who spoke on condition of anonymity so that he could speak candidly.

Japanese Prime Minister Taro Aso, in power just five weeks, spelled out in a nationally televised speech Thursday night what he wants from the summit: international regulation of financial institutions and of credit rating agencies as well as standardized accounting for international business and markets.…

China may prove more cautious than any other nation. Wu Xiaoqiu, director of the Institute of Finance and Securities, said he thinks Chinese officials, while joining their European counterparts in calling for an overhaul of current regulatory systems, would stop short of supporting a proposal for a worldwide organization with significant power.

“It is important to have an agency which can coordinate the global market and policies of different countries,” Wu said. “But China doesn’t like the idea of having a global SEC since no organization should affect the sovereignty of countries.”

Prospects for Politicians

For some leaders, the financial crisis offers a political opportunity at a time when electorates are deeply concerned about the future. Brown, Merkel and Sarkozy are all facing low approval ratings.

“I think all of the governments are uncomfortably aware that they have got very, very nervous electorates. Point one is just to show that somehow there is an agenda which can allow people to feel that something’s under control,” said Davies, the director of the London School of Economics. “People like Sarkozy, in particularly, and Brown know that their future depends on it appearing that they are responding adequately to this crisis.”

There are dangers, though. The pressure to be seen as taking vigorous action could lead to overregulation, say many business leaders, especially in London, where the financial services sector plays a key role in the economy.

Willem Buiter, a professor at the London School of Economics and a former Bank of England policymaker, said he feared “we will . . . end up regulating so tightly that a lot of financial institutions will be untenable and unprofitable and we will spend the next decade slowly chipping away at over-regulation.”

Disunity is another risk. If world leaders fail to coordinate, the consequences could be severe. Their staggered responses to the financial crisis in September contributed to bank runs and currency fluctuations, as money fled to whatever country was promising the most generous guarantees.

“If we forbid alcohol in two pubs only, everyone would just go to the other pubs,” said Dimitrios Tsomocos, professor of financial economics at Oxford University and a consultant to the Bank of England, who added that one nation’s regulatory scheme must not be more attractive to business than another’s.…

Robert Hormats, a vice chairman at Goldman Sachs and former National Security Council staffer, said that the November summit would be valuable if it became the first in a series of G-20 meetings, widening economic coordination.

“We’re at a point of time where the role of emerging economies has become very apparent and where the G-7 does not have the capacity in the eyes of many people in the world to solve this problem alone,” Hormats said.

“We’ve learned from this crisis that you can’t conceivably in the future try to pretend that the global financial system can be run by the occasional phone call between the Fed, the Bank of England, the SEC and the FSA,” Davies agreed. “That’s not going to work anymore.”

Brown, in a speech to business leaders in London this week, said, “We have got to . . . involve China, India and all the emerging market economies because the world economy is changing before our eyes, and the system that is just built on Europe and America will not survive the test of time.”
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credit app offer

So here I am just now, reading on the Washington Post site about the credit card companies all reducing their unsolicited offers of credit:

The fourth-largest U.S. credit card lender [American Express]has already announced this week it would cut about 7,000 jobs, or 10 percent of its worldwide work force, in order to save $1.8 billion in 2009.

The article also says that American Express in particular is being investigated by the Justice Department for potential illegalities in merchant surcharges.

And right then, guess what happens? I get a popup window from American Express inviting me to take advantage of 0% interest for up to 12 months.

amexad.jpg

This is crazy but not surprising. I have to say that I’ve been waiting for the economic crash we are having since sometime before 1996, after I saw two things:

First, a tv ad for a bank showing a car being driven through one of those straight-line courses where you have to weave around cones–but the car drove right over the cones, scattering them. The bank’s pitch was, and I quote from memory, “We break the rules for you.” My immediate reaction was “No! Who wants a bank that breaks rules, that is out of control careening down the road? We want our banks to be serious believers in and observers of financial rules & laws. We want our money to be safe!”

Second, merchandise at a local chain marked with tags that said, “Want me? Buy me!” and the picture of a credit card. Great, go in debt with impulse buying, over and over.

I remember seeing both of these things before we moved from Portland in 1996, years before President Clinton signed the Gramm-Leach-Bliley Act in 1999 which is so often referred to as the start of the deregulation which permitted banks to act like carnival hucksters and drunken sailors, throwing our money around. The irresponsible financial behavior of institutions really did begin before 1999, as a December 1992 NY Times opinion piece shows when it quotes a bank promotion:

Apply for a loan now, and you’ll automatically be entered in our FREE LOAN GIVEAWAY. You could win a FREE LOAN — borrow up to $15,000 and NEVER pay it back!

The NY Times piece was occasioned by banks pressing Clinton for deregulation at an economic conference earlier in December 1992. According to the author,

Bankers promised to pump billions of dollars of new loans into the economy if only you [Clinton] would ease the amount of reserves banks are required to hold and waive other costly regulations. The new loans, they argued, would jump-start the sluggish economy — and not cost Congress a dime.

Does this sound familiar? Now it is the taxpayer and future generations of taxpayers who are “pump[ing] billions of dollars” into the banks emptied by lending out the money they had, to people who can never pay it back. And again the motivator, the political justification, is that it will “jump-start the sluggish economy” (although now “sluggish” has been replaced by even scarier words).