Credit Conditions in the Absence of Consumer Protection

Even some of our most sophisticated commentators doubt a link between consumer protection and any macroeconomic outcomes.  Consumer protection, in this view, is microeconomics and quite different from macroeconomic issues (such as the speed and nature of our economic recovery).

Officially measured interest rates are down from their height in the Great Panic of 2008-09 and the financial markets, broadly defined, continue to stabilize.  But are retail credit conditions, i.e., the terms on which you can borrow, getting easier or tougher?

On credit cards, there’s no question: it’s getting more expensive to borrow, particularly because new fees and charge are appearing.  Of course, lenders have the right to alter the terms on which they provide credit.  We could just note that this tightening of credit does not help the recovery and flies in the face of everything the Fed is trying to do – although it fits with Treasury’s broader strategy of allowing banks to recapitalize themselves at the expense of customers.

But there is an additional question: will these changes in lending conditions be reflected in the disclosed Annual Percentage Rate (APR)?  Historically, the rules around the APR – overseen by the Federal Reserve – have not forced lenders to include all charges in this calculation.  Why is this OK?

It’s not OK.  This would be like cereal manufacturers including only some ingredients on their labels.  Or makers of children’s toys not telling you that some dangerous chemicals are involved.

Why has this been allowed to happen?  Essentially, because nobody watches out for the consumer of financial products.  Our regulation of financial institutions is byzantine and completely out of date; our banks game the system with impunity (e.g., nationally chartered banks are not subject to state usury laws; see this BusinessWeek article, section on payday loans).

Historically, the most powerful overseers of the system thought that this kind of detail didn’t matter – or that any changes in what banks did were a form of “financial innovation” that must naturally benefit everyone.  But this is exactly the attitude that brought us to subprime, Alt-A, and other ”exotic” (i.e., misleading rip-off) mortgages.

And it is, sadly, the attitude among existing regulators that still predominates today.  This implicit attitude towards consumers is in no way helpful, if we want an economic recovery, jobs, and a reasonably stable growth going forward.  But it’s what we appear to be stuck with.

Our financial regulatory system is a disaster.  The Obama administration should have called it by its proper name, proposed to close it down entirely, and argued to replace it with a more integrated and completely rationalized approach.  That at least would have moved the bargaining position of the regulators – they would now be too busy trying to save their jobs to oppose Treasury on substance.

If you think I am wronging credit card companies, lenders, or regulators in any way, post details below.  And if any representative of these institutions or their associated lobby groups is willing to debate these issues in public, just give me a call.

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