7
Morning Reading
Good morning. Does Congress need a bonus system? Plus, why we don't hate Wal-Mart anymore, among other items:
Dodd seeks to freeze credit card rates (WSJ):
Sen. Christopher Dodd of Connecticut, who heads the Senate Banking Committee, introduced a measure that would freeze rates on existing card balances until February, when tough new rules for the industry are slated to go into effect.
Mr. Dodd said he was making the move because companies are using the delayed implementation of the new standards, passed by Congress in May, to push through aggressive rate and fee increases. "No sooner had it been signed into law, but credit card companies were looking for ways to get around the protections," Mr. Dodd said in a written statement.
Maybe Congress needs bonuses? (Washington Times):
Could it be that one reason Congress has performed so poorly is because, for 100 years, its members' compensation has been totally unrelated to their performance?
I do not claim to know what the "right" pay is for members of Congress, but I do know their present compensation system makes no sense. Without getting into the complexities of how they have decided to reward themselves, it essentially comes down to a system in which they compensate themselves for any loss of income caused by inflation and devise numerous nontaxable and hidden perks for themselves.
Why we don't hate Wal-Mart anymore (Fortune)
Why everyone's depressed about the economy (New York Post)
What happens when a currency collapses (Bloomberg) McDonald's up and leaves:
McDonald's in Iceland, which imports most of the ingredients it uses in its meals, will shut after costs doubled over the past year, Lyst said in an e-mailed statement today. The franchise holder said it doesn't expect the situation to change in the short term.
"We would have to raise our prices by 20 percent to get the margin needed on our products," Magnus Ogmundsson, Lyst chief executive officer, said in a phone interview. "That would have sent a Big Mac to 780 kronur" ($6.36), compared with the 650 kronur it costs today, he said.
Reid to include public option in Senate Bill (PBS NewsHour):
After days of negotiations, Senate Majority leader Harry Reid, D-Nev., announced Monday that he will include a government-run public health insurance option in the health care reform legislation he plans to bring to the Senate floor.
This version of the public option will have an "opt out" provision for states that do not want to be a part of the new public insurance system. States would have until 2014 to opt out, Reid said.
Ned, I think you are spot on about the credit card companies spreading their losses to current card (debt) holders, and distributing the risk to them (me). The more I see and hear about the bail outs, the more I see we should have let them fail. They took the risk, paid themselves bonuses for looking like smart guys in the short term, and we covered the risk. I applaud Dodd for this bill to stop them from raiding the coffers before the window closes. Though how he missed that this would happen, I don't know.
Yes, I agree.
Also, when the credit card companies pass off bad loans onto credworthy folks like you and me they just end up increasing the number of defaults because a lot of good borrowers are getting hit with anticipated increases in borrowing costs that they did not anticipate.
They have to stop this if for no otehr reason than to stop the spiraling rate of failures.
I think that because the economic downturn has increased defaults on credit cards, that the credit card issuers are rushing to pass-off the losses onto their still-paying customers.
This is not how the system is supposed to work. I don't think a borrower is supposed to take the risk for other borrowers. The lender is supposed the one risking capital for lending. This is not an insurance system with distributed risk.
The sooner they get these reforms in place the sooner we can shut down bad lending practices. I think this will free up capital to go into other, more worthy investments and will help get the economy going again.
The more I look at it, the more I think this current economic crises is the result of a systematic de-capitalization of new businessess investment.
I go to many technology conferences where people present new technologies that do great things and show great potential for a new business and everyone says "Wow, that's great!"
... but the presentations always end with: "And all we need to get going is some investment" and everyone just sighs and says "Aw, that's too bad.."
It would be interesting to truly look into credit card earnings and such. I'm not sure I buy the whole, "we're raising your rate to 30% because you've become a riskier client". That might hold for someone who's applying for credit and has a high risk profile.
It seems like it can backfire when applied to someone already carrying a balance. If I'm barely making my payment on a card with 12% rate and that rate is doubled (or more), increasing the payment substantially, you've increased my incentive to default. After all, a credit card by definition is unsecured. The card company is driving me towards the rational decision of paying my basic living expenses (food, shelter, utilities, etc.) and defaulting on the now higher rate card. This doesn't even count the psychological factor of feeling ripped off by a sharply increased interest rate.
Perhaps I'm not seeing the whole picture of credit card defaults and such, but it seems like a company would be better off earning a reasonable interest rate (8-12% is pretty good when you're getting your funds to lend at near 0%) and getting continued payments towards retiring the debt. Particularly since many people have now seen the light and stopped running up excessive debt.
At this point, capping the rates will only deny people credit. The banks are in desperate need of capital. If rates are capped, they will be less likely to loan money out to people with decent credit scores because of the likelihood of loss.
If they do inhibit the banks ability to raise capital, then it could push some of the bigger, TBTF banks into needing more bailout funds or actually collapsing after we have infused billions into them.
Either way, we aren't getting our money back, so congress can do whatever without risking money...
Your points are sound but you cannot deny that not capping the rates could potentially lead to a spiraling increase in defaults, can you?
I think what they need to do if a big bank is going to fail because of credit issues is to dismantle the bank and separate the good accounts from the bad. Transfer the good accounts to a new bank.
This is better than creating even more bad loans, which could happen if they let rates on good loans continue to spiral upward.
And another consequence of this is that we will stop using our credit cards, and switch to pay as we go which will reduce consumer spending, starve the economy, and require jobs and incomes to recover first in order to save the economy. And that will be next to impossible. The economy is so toast.
