Moody’s reports that credit card charge-offs by financial firms hit 10.56% in November. This represents sums that lenders feel they will not be able to collect .The credit rating agency expects that figure to grow to perhaps as much as 13% by the middle of 2010. That would make sense given the direction of unemployment and the falling wages of many people who do have work. Moody’s also noted that yields earned on credit cards rose to 21.09%, which may not constitute usury on a legal basis but would by any common application of the term.

The irony of the charge-off problem is that if interest rates on cards were lower, the number of people who could keep up with their obligations would be higher. Credit card companies counter with the argument that the interest that they charge must be high to offset the risk posed by rising default rates. It would be hard to define a vicious circle any better.

The federal government is forever looking for ways to turn the economy around. It has failed to a very large extent, to modify monthly home loan payments to keep people in their houses. The economic stimulus package has not visibly helped unemployment, although the Administration would argue that the jobs situation would be worse without its intervention. The fact that the effort is costing $787 billion is almost always left unsaid by the Administration.

There are more credit cards in America than there are homes or able-bodied adults. Nielsen reports that the top ten credit card issuers which include JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), and Bank of America (NYSE:BAC) had 538 million cards in circulation in 2008. Outstanding balances on the cards issued by the ten firms with the largest amounts owed to them totaled $690 billion. Clearly, if the government wanted to help people with their financial burdens it would look at credit cards as seriously as home mortgage payments.

The most damning criticism of government assistance programs meant to push back the blight of the economic downturn is that they are almost all  set up to work indirectly. Stimulus packages are meant to improve sectors of the business world like highway and bridge infrastructure. That may put money into an industry, but it does not guarantee an increase in jobs in the sector. Attempts to modify mortgages have to go through banks and other lenders. The incentives for these institutions to help homeowners are not clear. A bank often makes more by charging late fees on a mortgage than it does changing its terms to favor the homeowner. None of the government programs change the total balance of home loans, so mortgage holders are still left with a house that may be worth much less than its mortgage. That is hardly an incentive for people to stay in their homes.

Congress has passed a series of bills that will “save” credit card holders from the companies that they do business with. The idea of a “Credit Card Holders Bill of Rights” has been around for years. Among the new provisions of the proposal are restrictions on when rates can be raised and what late fees consumers can be charged. But, credit card interest rates are already over 20%, so the effort by Congress is too little, too late.

Financial firms would reasonably argue that they cannot be forced to forgo profits from the interest that they charge consumers for credit cards. People who are already faced with job losses and very modest chances for an improved economy are additionally burdened by both their credit card balances and the monthly interest they must pay on those balances. The government would help both banks and card holders by pushing interest rates on cards down to 10% and putting into place a program where the Treasury would make up the difference between what the banks collect at a 21% interest rate and what they would collect at a temporary reset to a level of half that. Many economists and politicians would argue that a program to make these adjustments is socialism. If so, then it can be added to the government’s ability to restrict the pay of bankers and efforts like “cash for clunkers” that used federal money to encourage consumer behavior that is supposed to help the both the economy and the auto industry which taxpayers have supported to the tune of nearly $70 billion.

The credit card default and charge-off problems share characteristics with the problems of housing and unemployment.  Each of these can be allowed to take its own course with passive government actions that attempt to keep the problems from getting worse, or the government can take the position that the economy is still at grave risk and passivity is no solution at all.

Douglas A. McIntyre

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