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Better rules for a better market

"In 1980, Bank of America's credit card agreement was 700 words. If you write big, that's a smidge over one page long. Their credit card contract today? Thirty pages by the time you add up the inserts. And 30 pages of dense, unreadable legalese. We've got to get rid of that, because markets can't work with it."

I strongly encourage people to watch Elizabeth Warren give this speech. It's only 10 minutes, and it's time well spent.

Elizabeth Warren on Consumer Protection (MMBM) from Roosevelt Institute on Vimeo.

By Ezra Klein  |  March 17, 2010; 11:50 AM ET
Categories:  Financial Regulation  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: Sometimes you have to burn a village to rule it
Next: We won't get another chance at FinReg



and regulation has a LOT to do with that. But regulation is a necessity so we can't do away with that. Its regulation piled on top of regulation piled on top of . . . well you get the point.

Simplification is easy but don't complain when the system gets abused because simplification leaves loopholes you can drive a truck through.

Any comment on Lawrence O'Donnell on Morning Joe btw? He's agreeing with AHIP.

Posted by: visionbrkr | March 17, 2010 12:08 PM | Report abuse

Let's all remember that the use of credit cards is voluntary.

Don't like the deal? Don't use the product.

Posted by: WrongfulDeath | March 17, 2010 12:50 PM | Report abuse

"Let's all remember that the use of credit cards is voluntary."

And if you don't want to be considered a terrorist, remember that buying airline tickets with cash is voluntary. You can always just swim to Europe.

Posted by: slag | March 17, 2010 12:55 PM | Report abuse

"You can always just swim to Europe."

I would avoid Europe if I were you

Posted by: WrongfulDeath | March 17, 2010 1:03 PM | Report abuse

Let's all remember that the starting or running a credit card business is voluntary.

Don't like the new consumer regulations? Don't start or work for the company.

Posted by: MyrtleParker | March 17, 2010 1:10 PM | Report abuse

@ WrongfulDeath : Unfortunately things that really affect your financial life like your credit report are determined in large part by whether you have and use credit cards. Even cancelling a credit card (if they say impose annual fees or penalize you for not using your card enough) can damage your credit report. So I suppose if you never want to buy a house or a car or get a job (companies regularly check credit reports of potential employees) or start a business, then credit cards are optional. If you want to function in the modern financial and business world, credit cards are pretty much a necessity.

Posted by: srw3 | March 17, 2010 1:10 PM | Report abuse

Not that I completely love everything credit card companies do, but if you pay off your balance each month you typically don't have problems. That new annual fees are popping up is annoying, but from what I've heard that was prompted by the recent credit card legislation.

More education might be the answer, not more regulation.

1. Don't hold a balance on your cards - pay them promptly each month. Make it easy on yourself and don't have too many cards.
2. If you feel you're the type which lacks self control when it comes to credit, or you just don't like the current culture of credit, use a debit card for regular purcahses. You can use other types of debt if you want to build credit (e.g. pay for part of your next car with an auto loan - better rates than with credit cards).
3. Don't get walked on. If you wind up getting hit with a new fee you don't like, complain. If you can't get the fee waived, feel free to end the relationship with your bank and go elsewhere. The short-term negative impact on your credit, provided you've been responsible thus far, is more annoying than a serious problem.
4. If you're fed up with banks entirely, consider using a credit union to get a credit card, or consider starting your own banking company and create a better product (note, risk of failure here is high).
5. If a friend or family member is having trouble, or looks likely to end up in trouble, try to nudge them onto a better path.

Posted by: justin84 | March 17, 2010 2:25 PM | Report abuse

That being said, I agree with Warren's overall point, that its inefficient to have 30 page documents that hardly anyone reads. However, as we simplify we might need to consider visionbrkr's point - simplification might create unwanted loopholes.

Posted by: justin84 | March 17, 2010 2:28 PM | Report abuse

@justin84: credit card companies have a name for people like us who pay our balances every month: deadbeats. We're free-riding on the backs of the profitable customers who actually pay for their money by accruing interest and fees. If everyone follows your advice the issuers will go out of business or we'll go back to 1980 and pay up front fees for our revolving credit accounts. As it is, issuers make their profit from their customer's not knowing the cost of the product.

You prefer self-regulation to regulation: that's fine. But recognize that you're cheap credit is not due to your good behavior but rather to the profitability to your issuer of other's failure to control their behavior. You're a deadbeat. As am I.

Posted by: raisedbywolves1 | March 17, 2010 3:10 PM | Report abuse

"More education might be the answer, not more regulation."

True...unless you subscribe to the "nanny-state"

Posted by: WrongfulDeath | March 17, 2010 6:08 PM | Report abuse


I actually do pay the issuers. The issuers receive a transaction processing fee, typically 2%-3% of the transaction from merchants, so that every $10,000 of purchases generates $200-$300 in revenue. I pay for a portion of that amount through higher retail prices, the precise amount dependent on the elasticity of demand vis-a-vis supply. The issuers might want more money, but it's hard to say I am a deadbeat. If they are actually losing money on net with my business, then more fool them for crafting and offering me a deal which lost them money.

My credit (and your credit) is cheap precisely because of good credit behavior. The reason credit is cheap, is that it doesn't provide us with much value. For each of us, credit cards are basically a convenient way to pay with somewhat better consumer protections than debit cards. In my case, card issuers can either take 2%-3% of my transactions (well, 1%-2% after rewards), or nothing. If they charge an annual fee, they will lose me (and many others) as a customer. In order to earn more of my money, they need to create more value for me.

People who are carrying monthly balances are receiving unsecured loans from the issuer. As of right now, the default rate on credit cards is about 11% - if half of credit cards have balances on them, that means 22% of cards with balances on them have defaulted. Not only is that an obscene default rate, but these loans have no security. Also, defaults tend to occur on those who have maxed out cards, whereas lots of people who carry a balance only a proprtion of the limit. That would imply that 20%+ interest rates and late fees are necessary just to cover the costs imposed by the credit risk of those who carry a balance (actually, that isn't enough since a lot of issuers have lost money recently). The credit card companies can call me a deadbeat, but they're actually making some money off of my business, whereas they're losing a ton on the guy who ran up a $10,000 balance and then defaulted. I think the whole 'deadbeat' meme was created in order to get people like you and I to feel sorry for those who do carry balances, and thus be willing to accept things like minimum fees out of a concern for social justice.

Posted by: justin84 | March 17, 2010 6:50 PM | Report abuse

So people who carry balances, while creating a lot of profit in most years for the issuers, are paying such high amounts not because we are getting an unfair deal, but because their unsecured loan is a large risk for the issuer and in order to take risk issuers require a high expected rate of return. You and I aren't free riding with regards to credit cards anymore than people who never get into an accident are free riding with regards to auto insurance.

I do agree that if all people (or most people) had good credit behavior, the credit card market would be different. I doubt annual fees could be used on every card, since a lot of people would shift to debit cards and undermine the whole system. Credit cards don't add a whole lot of value vis-a-vis other options. However, with lots of credit cards in play, retailers basically have to accept credit cards or risk losing a lot of business - that suggests that in a good credit world, there would be higher transaction processing fees, with consumers paying part of those indirectly through higher retail prices.

Posted by: justin84 | March 17, 2010 6:50 PM | Report abuse

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