http://tpmcafe.talkingpointsmemo.com/talk/blogs/robert_reich/2009/04/the-great-credit-card-battle-t.phpThe Great Credit Card Battle To Come
April 23, 2009, 10:13AM
The next front in the banking wars will be over credit cards. Some of the nation's biggest bankers -- including representatives of Citigroup, JP Morgan Chase, and other recipients of billions of taxpayer dollars -- are meeting today with the President to ask him back off his move to reform credit-card lending practices.
What's happening to credit card lending is a smaller replay of what happened to mortgage lending. For years, banks used every gimmick possible to get the public to use their cards -- regardless of the credit worthiness of the customer. They lured borrowers with low "teaser" rates. They told borrowers they could get by paying minimum balances.
And now that tens of millions of Americans are poorer than they used to be, the credit-card bubble is bursting. Credit card delinquencies are soaring. At the Bank of America, the largest U.S. lender by assets, 7.8 percent of credit-card accounts were delinquent in February by more than 30 days, up from 5.9 percent last August. Yesterday, Bank of America reported a $1.8 billion first-quarter loss in its credit-card services unit.
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Enter Obama. The Treasury holds lots of cards given how dependent the big banks are on its solicitude. Meanwhile, the public has grown weary and suspicious of the bank bailouts. Knowing how unpopular the bailouts have become, the Administration is considering how to get additional capital to the banks without going back to Congress for the money. One big idea is to convert taxpayer-provided bank loans into bank equity -- even though the swap puts taxpayers at greater risk (after all, loans have to be repaid, but equity can continue to fall).
That's why getting tough on the banks' credit card lending practices has such appeal for the Administration, politically. It puts the White House on the side of the people rather than Wall Street, on an issue that the public is becoming more and more upset about. And the Administration's push could be enough to get reform legislation through Congress.
The bankers will tell Obama today that any new contraints on credit card lending will cause the banks to reduce the amount of credit card lending they do, which will hurt the economy. But it's a weak argument because it presupposes that any lending is good for the economy -- even lending to people who don't know what they're getting into and can't repay the loans. It's the same argument banks used two years ago, when precient observers warned that constraints had to be placed on mortgage lending practices. What may hurt the economy in the short term, we now know, may save it from even larger pitfalls to come.
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