SeriousBull

Why doesn’t the Government cap Credit Card Interest Rates?

Tags: Banks + credit crunch + Economy + FDIC + GAO + Green + Markets + Treasury

Bowing to the dictates of Wall Street, the US Fed has now twice cut the Federal Funds rate to demonstrate it is listening to the markets. But to SB such policy is one part…

delusional pandering and and one part wishful hope that demonstrates a scary arrogance of the financial problem at hand. Indeed, lowering current mortgage rates by an extra percent point does little to address the quandary ravaging the US housing market. The fact is banks made exotic loans with no down payments, required inadequate proof of income, offered low debt servicing requirements, all done based on inflated appraised housing values. Now when it’s time to reset the loans to conventional terms homeowners are faced with negative equity and inadequate collateral values. These double-negative factors are driving the foreclosure rate and make a workout impossible for banks and homeowners alike. The unfortunate owners simply can’t come up with the extra cash to satisfy traditional loan to equity ratios.  This means that banks have quite a huge inventory of houses to foreclose on and re-sell.  As each house is foreclosed, the banks themselves are put in a more perilous financial condition, since they ordinarily leverage each loan at a ratio of 20:1 for deposits held.  Before long with deficient asset-liability ratios, Banks are short of capital reserves. They must go get loan-shark deals or shut down lending.

Little can be done to prevent loss in this over-built, excess inventory, deflationary environment. Moreover the public has made it clear that they do not support a bailout. So why hasn’t the Fed or Treasury gotten the message and initiated policies to expedite the losses so that the free markets can work? Instead of cutting the Federal Funds rate, why hasn’t the Government capped Credit Card interest rates to instead help stimulate consumers spending?  Doing so would have far greater impact creating up to 15 times the spending multiplier effect if Credit Card interest rates were fore example capped at 12-15%. 

The answer is that the banks are looking for a bail out. They have jacked-up Credit Card interest rates to usury levels to offset losses in their housing loan portfolios. Treasury and the Fed are more focused on saving banks who made ridiculous loans and gouging the public than averting recession. They prefer to have the public bail out their constituent brotherhood while fulfilling their role as pimp and proxy.

The Congress, embodied largely by lawyers, are inept to economic reasoning. Greenspan wrote about them in his Memoir and none of them apparently understood those comments either. Members fail to understand the crux of our problems and blame homeowners and speculators ignoring, and fail to see the international ramifications of this complete breakdown in regulatory oversight.

The fact is consumer spending makes up two-thirds of US Gross Domestic product. High energy prices and high consumer debt levels combined with a general housing deflation almost certainly assure a Recession is eminent.  The US must stimulate GROWTH. The world has given us the answer in GREEN ENERGY demand, that could be our saving grace. It could at once realign our interests with the world community (Kyoto & Bali) and foster new technologies to market around the world. Unfortunately, because Al Gore (a Democratic) is associated with the idea, the Republicans spurn it and instead are pushing a war on Terrorism.  Failing to recognize that we are actually in an Economic the irony of it all is that these discordant policies mean we will fight a war in the future, but it’ll be fighting Rich Terrorists.

December 18, 2007 - Economy