Both Oars In Credit is not so much a Right as it is a Discipline

May 22, 2009

A quick Google search of just about any noun followed by the words ‘Bill of Rights’ yields a hit. There are the Student Bill of Rights, the Animal Bill of Rights, the Taxicab Rider Bill of Rights and the Airline Passenger Bill of Rights. There is even the Physicist Bill of Rights; although, I don’t think that one was actually passed by Congress. The Credit Card Holder Bill of Rights is the latest mundanization of our hallowed national document.  

Every list of gripes, however justified, does not merit the status of the actual Bill of Rights.  In fact, suggesting that the current credit problem is about rights is arguably harmful—harmful like suggesting college binge drinking could be cured by forcing bartenders to lower the cost of drinks.  Furthermore, framing the necessary regulations as rights wrongly makes targets out of bankers. It also makes it easy for critics of government regulation to suggest erroneously, but convincingly, that those requesting greater controls are asking that bar owners, to stretch a metaphor, not only be forced to call cabs for perpetually drunk patrons, but pay the fare as well.  

At the very least, suggesting that the current credit problem is about fair access obscures the real problem, which is the lack of discipline on the part of lenders and borrowers.  The truth is that bankers and borrowers have gotten drunk together and we are suffering the hangover together.  It would be nice to call the lenders rapacious and the borrowers, victims, but that would be a politics, not economics. It always takes two to dance in the market place.    

I do agree wholeheartedly that the regulation of revolving credit is overdue.  There is a need for change in the way credit cards are handled and handed out. However, real solutions to the national credit card problem will not be delivered by politicians masquerading as protectors of the oppressed against an oppressor, but by those who call for more rational behavior by both the lender and the borrower. Fixing the credit problem requires embracing reality. It is about discipline, not rights.  

I am proud of CNN for putting reality in the face of America. In a segment on the new credit card regulations, CNN reported that the average US citizen has roughly $10,000 in credit card debt. The report went on to point out that a person with this level of debt who pays the monthly minimum and holds a card with 18% interest will pay three times the borrowed amount in interest over the course of the loan—just over $28,000.  To continue on a theme, that’s sobering news.  

This information should not incite cries for rights, but awareness for the compounding power of interest. It should make us stop and think, “If I delay a purchase until I have the cash, I can have it for a quarter of the price.” The choice is to wait awhile to buy that big screen TV and own it outright or to buy it today and pay for it more than once. Thankfully, the new regulations will put this reality clearly on the front of every credit card bill making it easier for us to be disciplined.  

Usury is wrong. Lending tends to enslave when rates go north of 20%.  [One out of five card holders in the US has a higher rate.] Common sense should dictate that borrowing money at a rate which all but guarantees you will be paying twice or four times for what you bought is crazy. The same is true for driving over 55 miles per hour on most of our rural highways in SC.  However, since common sense is just not that common, it helps to have a speed limit.  Even Adam Smith advocated for interest rate ceilings to insure adequate pools of capital for low risk borrowers. Limits on increases to interest rates, mandates that payments be applied to balances with the highest interest rate and parental controls for minors are three more good things created by the new regulations.  

Some will say that the new regulations will lessen available credit—good! Not everyone should be offered credit or take it when it is offered, especially at high rates. Equal access to credit is a right, but guaranteed access isn’t. It is unconscionable to accept write downs in the billions [eighty-two billion was the latest forecast] in the pursuit of elusive profits from lending to riskier clients at higher interest rates. When it comes to high interest rates, those who pay pay a lot and those who do not pay—which is a lot—make the rest of us pay. In the end, someone pays and the economy is weakened. Where is the right in that?

The proper use of credit requires discipline on both sides. Greater discipline in lending and borrowing, not the elevation of the rights of one party over the other, will bear the most fruit in this matter.