Denying Credit Where It Isn't Due

by Don Boudreaux on April 24, 2009

in Regulation

TO: Anyone who endorses government
restrictions on the terms on which credit-card customers can contract
with credit-card issuers

FROM: An economist

Trusting that you have the best interests of consumers in mind, I gather that you believe that current credit terms — the terms to which you object and want government to restrict — serve only to inflate
issuers' profits rather than to expand the supply of consumer credit.  (If you believed instead that these current terms are what give issuers the incentives to extend more credit than they otherwise would to consumers, especially to low-income consumers, I trust that you would not support the restrictions that you now call for so loudly.)

Because the credit-card-issuing business is quite competitive, I don't share your belief about current credit-card terms.  My strong sense is that the terms to which you object increase the supply of consumer credit.  But if I am mistaken and you are correct, then the best way to help
consumers is for you (along with Pres. Obama, Rep. Carolyn Maloney, Sen. Chris
Dodd, and other proponents of these government restrictions) to quit
your current jobs and start a bank that issues credit cards.

When you
more-enlightened and responsive issuers enter the market and offer
clearer and more-attractive terms to credit-card users, customers will
flock to you!  Other credit-card issuers will either go out of business (assuming, of course,
that they're not bailed-out!) or be forced by competition to match your
clearer and more-attractive terms.

Unless and until you take this step that puts your own money where your mouths are, I see no reason to credit your claims.

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{ 50 comments }

kingstu April 24, 2009 at 11:20 am

I found a great way to avoid confusing language, hidden fees and sudden increases in interest rates. I pay the balance on my credit cards every month.

MnM April 24, 2009 at 11:41 am

Nice.

Bret April 24, 2009 at 11:54 am

So no (government) restrictions whatsoever? How about if you agree to be executed if you default on your credit card debt?

Methinks April 24, 2009 at 11:56 am

It's only logical that once government bastardizes the banking system to the point that it collapses and is nationalized in all but hame, it must then do the same to the credit card industry.

Makes perfect sense and is perfectly in keeping with the Obamessiah's belief that he is a saviour who can magically deliver fairness and prosperity by killing every institution that actually delivers fairness and prosperity.

Don Boudreaux April 24, 2009 at 11:57 am

Bret,

First, well- and long-established rules of contract law protect consumers from being harmed by boilerplate in contracts. Second, and more importantly, do you really think that consumers would agree to such terms even if — or, especially if — courts would enforce such terms?

Sometimes reductio ad absurdums are useful and revealing. Other times, they are simply absurd. Yours falls into this latter category.

Sam Grove April 24, 2009 at 11:57 am

So no (government) restrictions whatsoever? How about if you agree to be executed if you default on your credit card debt?

They want to attract customers.

There is one "creditor" that offers this threat however.

Don Boudreaux April 24, 2009 at 12:01 pm

Great point, Sam.

Chris April 24, 2009 at 12:16 pm

As to Don's parenthetical:

Here's a paraphrase of that argument: "If we don't allow banks to mistreat low-income consumers, then they won't lend to them at all."

If a bank extends credit to a low-income consumer based on tricking that consumer into accepting terms that he would not knowingly accept, then I have no problem with not having that credit extended at all.

Randy April 24, 2009 at 12:17 pm

If I didn't know better, I would think that this administration is doing everything it can to dramatically restrict lending. Then again, I really don't know better… Is there a strategy that would make this make sense?

Don Boudreaux April 24, 2009 at 12:21 pm

Chris,

If I understand what you're saying, I agree. But well- and long-established tenets of the common law of contract protect parties to contract from fraud.

Bret April 24, 2009 at 12:21 pm

How about answering the question? Whether or not you think it absurd, it's a simple yes or no question. Is the answer yes or no?

Don Boudreaux April 24, 2009 at 12:28 pm

Bret,

I think your hypothetical is absurd. Yes. Your hypothetical is absurd.

Because, no, I do not for a moment believe that such a term would exist in reality.

Your hypothetical is as absurd — and, hence, as pointless — as is this one: suppose a majority of voters vote for candidates who threaten to execute all citizens if tax revenues fall below some minimum level.

Just because a sufficiently frenzied imagination can conjure up the image of such an occurrence is no reason to ask persons who believe in democracy to defend their belief against THIS particular possibility.

Bret April 24, 2009 at 12:35 pm

It's not absurd at all since in non-legal lending organizations (i.e. the mob's loan sharks) the threat of violence and death is indeed often part of the implicit contract for non-repayment and even with those "terms" people still take those loans.

Veritas April 24, 2009 at 12:46 pm

An increase in risk results in an increase in penalty.

Credit cards are unsecured credit. Of course they are going to have incredible penalties in interest and fees.

Consumer friendly alternatives exist WITHOUT the government meddling:

home equity lines of credit carry much lower interest rates

collateralized loans

surety bonds

intelligent use of savings and debit accounts

The "bad credit card company" is as much a myth as global warming boogeymen.

Paul April 24, 2009 at 12:47 pm

Bret–I don't think anybody is arguing for no government restrictions whatsoever. There is a very good argument that the restrictions we had in place for hundreds of years, i.e., contract law, provide adequate protections to consumers. Likewise, the criminal law provides protections against loan sharks. Your analogy to loan sharks who violate criminal laws by physically harming borrowers sets up a straw man argument that seems to assume that you either let gov't set all the terms of a lending contract or none at all. That's a false dilemma. Do you really equate Visa with a loan shark?

CRB April 24, 2009 at 12:49 pm

There has to be a middle ground between allowing credit card companies to change the terms of existing loans and government forcing restrictions on the lenders.

How about making interest rate increases and fee changes applicable only on increased loan balances, not the balance at the time of the change. That way the card holder would have a choice whether to accept the change and continue to spend or to stop spending and pay off their account without being subject to higher interest or penalties.

Methinks April 24, 2009 at 12:53 pm

Bret,

What court would uphold such a contract and what criminal justice system wouldn't prosecute the enforcers of such a contract for murder?

It's clear from your own comment that you understand such mafia contracts exist outside the law. What makes you think Citibank's credit card contracts will follow the mafia model?

By the way, if you want more people to be pushed toward loan sharks who offer the terms you describe, let government put more restrictions on credit card companies so they have less incentive to extend credit on terms that don't threaten your life. That's the best means toward the end you don't like.

Don Boudreaux April 24, 2009 at 12:54 pm

Bret,

It is inconceivable to me that any credit-card company would propose death for its defaulting customers. And its inconceivable to me that a large number of persons customers would accept such terms if they were offered.

I don't have time now to go further into this matter, but much loan-sharkery takes place precisely because government-imposed restrictions prevent those transactions from being above board. So if you're really concerned about people having their lives threatened if they default on their consumer-credit loans, then you should oppose all government restrictions on such loans.

Consumers unable to borrow legally, from an above-board bank, will be more likely to turn to loan sharks. When government restricts what borrowers can offer legally as collateral, then it becomes more likely that their physical persons will be put up as collateral.

Your hypothetical remains absurd — just as absurd, for example, as this one would have been in, say, 1925: "So, Mr. Mencken, you want government to remove all restrictions on the sale of alcohol to adults! How naive. Are you willing to tolerate the violence that mafia-suppliers of alcohol routinely inflict upon each other? Are you willing to tolerate the deaths that people now regularly suffer because the alcohol they drink is tainted?"

Mencken surely would have responded that that violence and the tainted alcohol, although very real, were artifacts of alcohol prohibition rather than likely realities that would persist if prohibition were eliminated.

Methinks April 24, 2009 at 1:00 pm

CRB,

You don't have to accept interest rate increases and fee changes on existing loan balances. These things are all spelled out in the credit card contract. So, you can either negotiate with the company before you take the line of credit, not take the credit line if you don't like the terms or be prepared to pay off your existing balance to avoid the additional fees.

The ability to change fees and interest rates based on changes in your creditworthiness is baked into your initial fee. If you force them to change that policy to what you suggest, then the fees on and interest rate on unsecured credit will go up. That's unavoidable if you want credit provision. Why is the credit card company obligated to take on the additional risk without additional compensation?

David Z April 24, 2009 at 1:03 pm

Can we hypothesize arrangements facially similar to credit cards in a truly free market? Of course we can, but that's not what you're doing with this post.

The credit-card market is *far* from free, and it's silly to go about defending this industry or rationalizing its actions. IMO, credit cards are one rung below central bankers and politicians. Defending any of these institutions gives free-market-supporters a bad name.

Matt April 24, 2009 at 1:06 pm

It's also hard to imagine how–if someone agrees to be killed in the event of a default–government regulation against default-motivated executions would actually help. Regulation doesn't have to mean compliance, and if you need a credit card that bad all the regulation in the world ain't gonna help… I guess this plays to Dr. Boudreaux's point about the level of absurdity here.
Let me offer an alternative thought experiment: wouldn't Dr. Boudreaux be in favor of the strictest regulation on credit card companies if the world was going to expolde into 6,799,902,456,098 pieces if four (or more) people defaulted?

BoscoH April 24, 2009 at 1:22 pm

There has to be a middle ground between allowing credit card companies to change the terms of existing loans and government forcing restrictions on the lenders.

Ah yes, the third way. It will simply drive fees and rates up. Where credit card companies now use a variable rate structure to cover default risk, they'll simply shift those costs to fees and fixed rates. Good luck getting a credit card under 20% if you have any blemishes.

The funny thing here is that the credit industry as a whole will get much more competitive soon anyway. People are reluctant to take on more debt now, with lingering debt and future uncertainty weighing on them. There are plenty of people with good enough credit to buy cars, houses, consumer goods, etc. And they're holding back.

Crusader April 24, 2009 at 1:28 pm

Bret is insane, no need to talk to him.

Crusader April 24, 2009 at 1:30 pm

If a bank extends credit to a low-income consumer based on tricking that consumer into accepting terms that he would not knowingly accept, then I have no problem with not having that credit extended at all.

Posted by: Chris | Apr 24, 2009 12:16:01 PM

If these low-income people are too dumb to read the fine print, they deserve whatever calamity befalls them. It's safe to say that being born dumb is a natural handicap in this world.

TrUmPiT April 24, 2009 at 1:41 pm

One thing to look at is whether the credit card companies are making excess profits. That is a judgment call of course, but so what, many things in life are.

If the banks are hiding their profits in offshore tax havens, we have another problem of tax evasion as well as how to determine if they are "gouging" the consumer at a time of extreme national economic distress. And which consumers are they? Most likely the poor, who are suffering the most as a result of the actions of the thieving rich on Wall St. and their "bail out" accomplices in high places in government, Democrat and Rethuglican alike.

No, market transactions need an ethical helping hand, from an impartial government and the impartial legal system that is supposed to be a part of it, as Bret suggests. The reductio ad absudum ball is in your court, which leads one to conclude that many of your principles are contradictory and therefore absurd. Cultural factors are relevent as well. Should one be allowed to sell dogs for food in the U.S.? I say no, no, no, but a Korean might say yes. That's a reason to restrict Korean immigration in my opinion. That was a tiny joke, btw.

Another example would be the selling of kidneys or other vital organs. I believe in allowing this, because it can save lives. But just because you have 2 kidneys doesn't mean we should allow a wino who is in the midst of delirium tremens to sell his kidney for the price of a bottle of whiskey. One hundred thousand per kidney sound about right off the top of my head. We can fund these transplants with the excess profits made by companies that issue credit cards and by the oil companies, and other corporate pillars of society.

Did you hear the latest from the New York Times that many company have been spreading disinformation about the global warming that they are contributing to? The lies they are spreading is in direct opposition to the disturbing facts about globing warming that their own scientists are saying. These corporate lies must be stopped and massive fines imposed and managers put in jail, and their illegitimate profits disgourged from them. Why? Because right-wing gullible people on this blog and elsewhere believe the corporate lies spewed by the likes of Rush Limbaugh and Sean Hannity, hook, line, and sinker that global warming and its ill effects are some kind of liberal conspiracy to hurt Joe Six-Pack by making the cost of his beer and cigarrettes go up. They have to be trucked from somewhere spewing actually pollutants and greenhouse gases into the air. This would all be very funny if it weren't so serious.

Bret April 24, 2009 at 1:53 pm

Paul wrote: "I don't think anybody is arguing for no government restrictions whatsoever."

I'm very glad to hear that nobody is arguing for no government restrictions whatsoever.

Now that we've determined that, we've (a) at least partially refuted the article since we're all guilty of "endorsing government restrictions", and (b) to paraphrase the well known joke, now that we know what type of people y'all are, the only thing left is to haggle over the price (i.e. which restrictions its okay to have the government impose).

Methinks April 24, 2009 at 1:59 pm

Well, You can haggle with your imaginary "we" all you want. The last time I checked, Paul didn't speak for me.

Bret April 24, 2009 at 2:03 pm

So, Methinks thinks there should be absolutely no government restrictions whatsoever?

The Dirty Mac April 24, 2009 at 2:08 pm

"One thing to look at is whether the credit card companies are making excess profits. That is a judgment call of course, but so what, many things in life are."

I suspect in fact that these companies are taking unprecedented amounts of write-offs. The amount of write-offs that are justifiable are a judgment call of course, but so what, many things in life are.

Methinks April 24, 2009 at 2:09 pm

No government restrictions. Contract law is sufficient. I favour that because I don't like loan sharks. In other words, Methinks thinks that Don Boudreaux is correct and you're spinning yourself into a tizzy. What I can't figure out is why you're doing that.

Randy April 24, 2009 at 2:10 pm

I'm for no government restrictions whatsoever on the terms of a loan. If I choose to sign a loan agreement in which the penalty for non-repayment is slavery or death, then I should be free to do so. I'm a grown up. I don't need a nanny state to tell me its a bad idea.

indiana jim April 24, 2009 at 2:11 pm

TrUmpit wrote: "right-wing gullible people on this blog and elsewhere believe the corporate lies spewed by the likes of Rush Limbaugh and Sean Hannity, hook, line, and sinker that global warming and its ill effects are some kind of liberal conspiracy to hurt Joe Six-Pack"

This is stupid on so many levels that the only thing to do is to post this:

http://www.youtube.com/watch?v=qJUFTm6cJXM

(Minnesotans for global warming); enjoy

MnM April 24, 2009 at 2:13 pm

IJ,

Please don't feed the troll.

indiana jim April 24, 2009 at 2:19 pm

MnM,

Shucks, I was just funn'in; its Friday!

MnM April 24, 2009 at 2:25 pm

:D

Bret April 24, 2009 at 2:28 pm

Methinks wrote: "What I can't figure out is why you're doing that [spinning yourself into a tizzy]."

I've been trying to characterize just how rigidly dogmatic this group is (i.e. putting the importance of "liberty" so far above all else as to render any other considerations moot) and this particular post was a good opportunity to do so. The responses by the frequent commentors have provided the information I sought, and in an entertaining way. I appreciate that.

And don't worry, I'm not the least bit "tizzied", or even insane for that matter.

TrUmPiT April 24, 2009 at 2:33 pm

Industry ignored their own scientists on climate:

http://www.nytimes.com/2009/04/24/science/
earth/24deny.html?hpw

Methinks April 24, 2009 at 2:45 pm

I've been trying to characterize just how rigidly dogmatic this group is (i.e. putting the importance of "liberty" so far above all else as to render any other considerations moot)

So have you achieved your goal, Bret? Concerns that more people will be denied credit and will end up the worse for it is hardly "liberty at all cost", I think. I think we still haven't heard from you why you think existing contract law is not sufficient to deal with credit card contracts. I'm just curious.

Curious April 24, 2009 at 2:48 pm

Bret,

the answer to your original question is YES. If someone signs a contract agreeing to being executed in case of default, then he/she should be.

Why treat it any differently than any other terms of the contract. I don't understand why is everybody so afraid to say it.

Crusader April 24, 2009 at 2:49 pm

How about let's turn it around on the trolls? Why do they hate liberty so much?

Randy April 24, 2009 at 3:00 pm

Crusader,

Seems obvious to me. If you were a parasite, granted, an intelligent parasite, would you want your host to be thinking about being free of you?

Crusader April 24, 2009 at 3:01 pm

Curious – the socialists would say that it's always the poor signing such contracts and that's the kind of exploitation that needs to be regulated out of the system.

Crusader April 24, 2009 at 3:04 pm

Randy – that's true. People who desire liberty have a stake in it. Those who suck at the public teat have no interest in liberty because they're losers in the free market.

Bret April 24, 2009 at 3:21 pm

Methinks wrote: "So have you achieved your goal, Bret?"

I've succeeded in gathering more data,thanks.

"I think we still haven't heard from you why you think existing contract law is not sufficient to deal with credit card contracts."

Wouldn't you agree that existing contract law includes many government restrictions (such as disallowing a "death upon default" clause)? I certainly think that with some set of such government restrictions, that contract law can handle credit card contracts. But by thinking that, I am endorsing at least some government restrictions on what can be put in the contract.

Crusader April 24, 2009 at 3:29 pm

Bret – have you ever run a business?

Bret April 24, 2009 at 3:35 pm

"Why do they hate liberty so much?"

Oh, I think we all like liberty just fine. It's just we don't think it is as important as you do. It's completely subjective.

I've found through the years that most people (though not me) put their top priority on feeling like they belong to something, especially if the something seems somehow noble or important. Eric Hoffer does a great job writing about this in "The True Believer".

Belonging is a two-sided coin. The first side is in the developing an attachment to and then joining the group. That side of the coin doesn't conflict much with Liberty (for others, anyway).

The other side of the coin is that the True Believer tends to have a strong need for everyone else to join and believe the same group. That, of course, conflicts with Liberty.

But that's what the vast majority of people want. There's only a tiny, tiny fraction of people who value Liberty above Belonging (including the forced Belonging of others).

Again, it's not that all the "trolls" hate Liberty, it's just that it's not particularly important to them, at least not after a certain minimum level of Liberty is achieved.

Crusader April 24, 2009 at 3:39 pm

Bret – it's fine that you want to belong to the Borg collective, just don't force me.

Randy April 24, 2009 at 3:40 pm

BS, Bret. I'd be willing to bet that everyone of us here "belongs" to several groups of our own choosing. What the anti-libertarians demand is that we be forced to submit to the will of their group.

wintercow20 April 24, 2009 at 3:41 pm

It is not clear the trolls know what contract means. It is not clear the trolls even know what government means. It is not clear the trolls even know what government means. And it is certainly not clear the trolls know what principle means and what liberty means. Why have a food fight? Ask them what their guiding moral principles are. After all, if you allow them to be pure utilitarians, most of us would find ourselves (justifiably) executed.

Bret April 24, 2009 at 3:52 pm

Crusader asks: "…have you ever run a business?"

Yes. For example, I currently own and operate this one which I founded about 10 years ago.

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