Who’s Subsidizing Whom?

Historically, it’s been a truism that banks don’t make money on credit card customers who pay off their bills every month. Instead, revenue has been raised disproportionately from the banks’ more feckless customers, in the form of fees, penalties, and–most important, presumably–the high interest rates credit card companies charge on balances. Of course, that is not necessarily unjust, as these same feckless customers cause the most trouble and expense to credit card companies, not to mention the most losses when they can’t pay their bill and default.

All of that is about to change, as Congress has just enacted new credit card regulations intended to limit banks’ ability to collect money from distressed or incompetent customers. The New York Times explains the consequences:

“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”

The competent subsidizing the careless–that’s classic Democratic Party policy. Of course, the new rules will cause banks to lose interest in extending credit to the feckless:

The industry says that the proposals will force banks to issue fewer credit cards at greater cost to the current cardholders.

That’s the inevitable consequence, of course. But how long do you think it will be before Congressmen are demanding investigations into whether credit card companies are engaging in race discrimination because they won’t issue cards to all comers?

This nugget provides insight into where the Obama administration is coming from on the issue:

Austan Goolsbee, an economic adviser to President Obama, said that while the credit card industry had the right to make a reasonable profit as long as its contracts were in plain language and rule-breakers were held accountable, its current practices were akin to “a series of carjackings.”

“The card industry is giving the argument that if you didn’t want to be carjacked, why weren’t you locking your doors or taking a different road?” Mr. Goolsbee said.

This is stupid to an unusual degree, even by Obama administration standards. Does Obama’s economic adviser actually believe that charging fees to credit card borrowers who don’t follow the rules is the same is stealing a stranger’s car at gunpoint? Maybe so; it’s hard to say what this administration could do or say that would surprise us.

The least offensive aspect of the new statute is its various provisions requiring disclosure. I’m not optimistic, though, that such requirements will make much difference. A couple of decades ago, at least, our biggest local bank–now part of Wells Fargo–was curious as to how many of its customers read the legally-mandated notices that it mailed out monthly. So it inserted these words amid the legalese: “If you call (612) xxx-xxxx, we will give you $50.” As I recall, they sent out tens of thousands of notices and got five or ten phone calls.

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