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Wednesday, April 9, 2008

Hulk Mad, Hulk want Crunch Credit

So I was sitting on my couch, innocently reading this week's New Yorker when I was viciously attacked by yet another article on credit. How many f*@%ing "credit crunch" pieces am I going to need to read? Well, Aaron, I'm glad you asked that. A quick google news search returns a healthy 40,000 articles matching "credit crunch", not a single one of them pertaining to the more palatable subjects involving the words "extra" or "captain". Anyways, there's a lot of shit written about this credit crunch we're all apparently in. The problem is, as consumers, we aren't in a credit crunch. We're swimming in a proverbial sea of credit card offers. Even as everyone and their destitute cousin are defaulting on their mortgages, we can all still convince someone to extend a few thousand dollars of credit. And yes, if you have poor credit already, it's tough to get a card, but you can. That's the problem. It's not in the bankruptcy laws, and it's not the fiscal irresponsibility of the general public, it's the fact that it is still profitable for a credit card company even when people default. Actually, thanks to Bush, it's even more profitable now because traditional bankruptcy (involving complete absolution of debt) is 40% more difficult to file.

I'd like to look at how our country has handled two other evils, drugs and file sharing. In both instances it is illegal to engage in that particular evil. However, in each case, in order to curtail their use, the government has focused on stopping the supply. Why? Because there are fewer distributors than users, and if there is no crack, no one can smoke it. Okay, there's some solid logic. We don't make life tougher for the millions of users, we make life tougher for the thousands of dealers and the people hosting the files (a la napster, P2P is another issue.)So, cut off the supply, good idea. And how do they handle the consumer credit crisis? Obviously they punish the consumer, make it difficult for him to forgo his debts and once he does sort everything out, make it difficult for him to get credit at a reasonable rate for the rest of his life. Like many Nash equilibria, that strategy is not pareto optimal. The credit card company doesn't get its money and the consumer is effed. Wouldn't it be nice to make it all work out. In an ideal world couldn't I just borrow money from the guy next to me and pay him back? Why can't real life be just a bit more like that? Why can't we prevent these credit card companies from making predatory offers of 0% balance transfers and low initial financing rates? Why isn't there a law on the number of credit cards one can use? There are laws on how much corporations can borrow, why not extend those to consumers? Why can I get a new credit card and transfer my delinquent balance from the old card to the new one? Much like crack to a crackhead, people are going to always want stuff, and they will buy stuff as long as they have a capability to get it. So cut off the enablers, cut off the credit card companies. Don't make it tougher to get out of debt, make it tougher to get into debt.

Many people would argue that competition in the consumer credit market reveals the optimal interest rate for consumer credit, which limits the use of the instrument, much as it does in any other market. However the consumer situation is not parallel to most markets. If the only way IBM will finance a new project is to issue bonds with a 20% yield, they simply won't do the project. If the only way Joe Johnson will get his new tv is to put it on a card that charges him 0% interest for the first three months, he'll do it in a heartbeat. Then when the interest rate is around 20% three months later, he'll switch cards and do it again. Eventually he will overload himself and the 20% will kick in and Joe is stuck with a bunch of new stuff including a healthy amount of debt. So why don't we just change that new bankruptcy law and enact some consumer protection measures? Make it difficult to get into debt by either making it less profitable for the credit card companies to extend predatory credit or by passing laws against such practices. It's a fairly simple solution that we've employed elsewhere. And if that fails we can always just root out consumerism in America.

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