Floyd Norris observes how credit-card companies lobbied themselves right into a tight, greedy little corner. Remember in 2005 when they convinced Congress to make it harder for borrowers to get credit-card debt discharged during bankruptcy? Take it away, Floyd.
The law encouraged banks to relax credit card lending standards. If consumers would have to pay even if they did go broke, then you don't need to worry so much about whether they will go broke.
Now credit-card defaults are rising, and the banks have responded by jacking up interest rates and fees on anyone they don't much trust. Higher rates make defaults more likely, of course, but if you get enough fees from holders that do pay, you can offset a lot of defaults.
... By giving the banks the law they wanted, the Congress made it likely the banks would lose more money. Those losses led the bankers to try to squeeze more dollars out of overextended customers, which led Congress to turn on the banks.
You could probably tell similar stories about the investment banks that lobbied the SEC to relax leverage limits so instead of making 12 to 1 bets, they were able to make 40 to 1 bets, which must have been nice at the time but becomes problematic once you start losing those bets, er, deleveraging. Which makes an important point about regulation: it doesn't just protect consumers from predatory companies; ideally, it also protects companies from letting their short-term interests completely undermine their long-term stability.
These firms are like a child who won't heed warnings that eating an entire chocolate cake is going to make her sick. Unfortunately, in this analogy, the child can afford to buy off its parents and purchase as much chocolate cake as she pleases. How do all of the people who got taken advantage of by credit-card companies and predatory lenders fit into this little metaphor? They're the guests at what is about to become a very messy birthday party.
-- Tim Fernholz
