Posted on 10/14/2014 7:50:13 AM PDT by Academiadotorg
The Obama administration is pushing Americans away from credit cards and regular lines of credit in the financial market and pushing them toward loan sharks and other lines of credit, a panel of professors noted at the libertarian think tank Cato Institute. credit cards
Todd Zywicki, law professor at George Mason University and the author of a new book entitled, Consumer Credit and the American Economy, and Anthony Yezer, an economics professor at George Washington University, were on the panel.
Zywicki said, “We’ve had…the most unbelievable assault of economic regulation in my life” under the current administration. Rules put into place by the Durbin Amendment, post-2008 financial crisis, have “driven people out of the mainstream financial system” and said the administration’s next target is payday loans. Without the normal lines of getting credit, Americans are going to learn, “painfully, the lessons of history,” Zywicki said.
The Durbin Amendment, as Zywicki referred to it, was part of the Dodd-Frank 2008 law where it limited the amount of “swipe fees” that debit card companies could charge consumers and affected banks.
Consumer credit and lines of credit are not new issues, Zywicki said, and gave several examples of newspaper headlines from the 1800s from the likes of The New York Times. pointed out how credit is used for necessities such as washing machines, stoves, televisions, and the like. Americans use credit on investments like these, and America has seen its “credit card ownership has risen dramatically… [and its] credit card debt has risen dramatically.” But, Zywicki said that is not the complete story, because credit cards have replaced opening lines of credits at appliance stores and the like. Instead, “the debt service ratio remains constant over time” and “overall debt service ratio today is the same as it was in 1982,” Zywicki said. “A rise in credit card debt is a perfect substitute for installment debt,” or in other words, you put debt on your credit card rather than putting an IOU on a paper with a store clerk or owner. “It replaced the various forms” of credit from the past, he said.
Zywicki argued, “Credit cards are better, a more efficient and less expensive way to borrowing than a finance company, or a bank loan.” This is why the debt ratio has remained constant since the 1980s, he said.
“The way people use credit is rational,” Zywicki added, and credit cards have “unleashed competition in the retail sector.” Where else can consumers be in a situation where “four people [or companies] want my business so bad they’ll give me a subsidy” like rewards on credit cards. When credit cards are not allowed or used, we have to go back to other inefficient lines of credit like in the past. An example is the state of Arkansas, the “pawn shop capital” of America, where there are strict laws against credit cards and this ends up driving Arkansans to other states to purchase goods on credit cards.
Yezer added, “Poor people used to shop in different types of stores” because America used to be “a peddler economy.” With credit cards, people of all socioeconomic classes can shop at a variety of stores. But, he said, “that [peddler] economy is coming back, maybe, we have resurrected it [because] there’s no credit, there’s no interest rate.” He criticized opponents of credit cards, who contend those who do not qualify for credit cards will save their money instead. Yezer said, “Do you really think passing a law stops it?” Instead, consumers will not have lines of credit for purchases and they will most likely not save their money if they don’t have access to credit cards.
He pointed out, as a professor at George Washington, “We are teaching remedial algebra at GW, we’ve had to throw out kids, and we’re not the only ones.” He continued, “A lot of the most selective institutions now have tests to go into the math field because they can’t do the basics.” Yezer lamented, “This is a major problem…especially with consumer credit.”
To what end?
Pushing them towards handling cash that may or may not have been handled by ebola or D68 carriers?
I have two rental homes and a friend has 23. We’ve both noticed that renters no longer have bank accounts. They either pay cash or they get money orders.
They don’t have the $5,000 or so to leave in checking accounts so they can have them for “free.” For both of my rentals I had to adjust the pay date to when they got their paychecks. These people are literally living paycheck to paycheck.
Do they have credit cards? I don’t know. But my guess is yes. I wouldn’t be surprised if their credit is maxed-out too.
Incidentally, my friend, who has been in the game longer, says this cash-only trend is relatively recent in just the last several years. I’d guess that it coincides closely to when Obama took power.
I think that if people started to see how much they were spending instead of looking at a purchase as how much the monthly payment would be, it is a beginning of the end of indebtedness as a way of life.
It could even change their way of thinking about who they vote for and how the person in office impacts their way of life. If the administration continually raises taxes, it will no longer be “only” a few more cents on the dollar, but an onerous burden that really benefits no one.
I would like to see income tax holding done away with. If people had to write a check every quarter or every year, they would pay more attention to the issues and the politicians when it came time to vote.
Taken with a grain of salt, because Credit is always BAD, not only does it allow you to buy something you cannot afford, it pulls forward demand for goods and services. WHich means you must keep expanding credit to keep the ball rolling.
Learn to Live within your means, if you do not have the FULL amount necessary to pay for the product, DONT BUY IT.
Another possibility that comes to mind is that people have had checking accounts in the past, and got into overdraft trouble. Once that happens, if they aren’t able to pay off the hefty fines - some banks charge $8 a day if an account is overdrawn - then they go into a chex system - which prohibits them from opening a checking account at another bank. This might be one reason your renters pay cash or with a money order.
“if an account is overdrawn - then they go into a chex system “
So you are saying the banking industry conspires to screw consumers too — maintains a common database. These credit reporting agencies are the scourge of commerce.
Can a consumer even go to a credit union and specifically get an account and deny all outside interaction with third parties ? What happened to simply two party contracts? You and institution, nobody else?
Whatever. I use cash whenever possible anyway. Both inbound and outbound.
“Taken with a grain of salt, because Credit is always BAD...”
Not true. If you can make enough money through the purchase of something on credit to cover all the costs and make a profit, then it can be a wise investment.
I had a rather interesting surprise recently. I want to re-fi my home to get my payment lower and the life of the loan shortened. I did not qualify. Even though all my payments are on time, etc..etc. Reason? I had no credit cards. I subscribe to your belief; if you want something, save up for it. So, now it is going to take me 3-5 months to “build” credit because I had been living credit card free for many, many years. I chose to open up pre-paid cards that show up like revolving credit report. My credit score leaped by 30 points after my first “payment” on these two pre-paid cards.
It disgusts me that companies (even our government) want us living in debt, we are (by and large) slaves to it. Once I am done re-fi’ing, I am withdrawing my funds from said cards and closing the accounts.
Perhaps the people could suggest taking away all the credit cards in government and go back to issuing checks for purchases, look at all the misuse, I mean, downright theft perpetrated by those holding those government gold cards! Every day, a new example of how government minions are looting our treasury, and we all know we’ve seen only the tip of that iceberg! Government has grown so leviathan it cannot account for every penny spent, how far would that fly in the private sector?
The chex system has been in place for many years now. My X was on it at one point, got her out of the system by paying off her overdrawn account and she’s right back on it again. Part of the reason she is an “X”. But as you alluded, the chex system will prevent people who are on it from opening checking accounts at other institutions. Some banks are offering debit cards directly tied to savings accounts now as opening savings accounts is outside the chex system. I expect people will find a way to overdraw their savings as well.
I was in grocery story yesterday and young couple with their 4 or 5 year old daughter in front of me in line. Seemed like a really nice family. Their bill was around $35 and they paid with a credit/debit card. The card was rejected and the guy took out a $3 package of cheese and swiped the card again and it took. Cashier told me she sees that all the time.
Sad state of affairs.
what a great experiment that would be, and progressives love great experiments, don’t they?
Respectfully, I disagree with your statement. The most obvious example is home ownership or buying a car to commute to your first job.
Yes, it may mean paying interest on purchases (don’t forget interest-free deals you can take advantage of), but would you say to a new homeowner that buying a washer and dryer on credit is a bad purchase if it allows them to wash items at home rather that the time and expense of using laundromats? (Don’t forget gas and mileage costs.)
I happen to use a credit card for all purchases and pay off the balance each month. I have been getting 2% back into my children’s college fund and it resulted in over $10,000 in money the card company gave me for using their service.
Credit, if used wisely, is an incredibly powerful tool.
It is sad
Thanks for the info, very interesting.
One thing I do is read the federal flow of funds account report every quarter. It shows the raw numbers of where the money is in this country. Before Obama it showed people saving again; they had $7,000 or so in savings and $2,500 in checking (bill money). Now, people have no savings and fewer checking accounts. I guess ya gotta have a job to need a checking account.
buying a washer and dryer on credit is a bad purchase
YES I Would, Buying ANYTHING on credit with the exception of your home is always a Bad Idea. Home Mortgage is the Only Debt I have ever had. And even then you should do everything possible to pay off that house as fast as possible. I payed off 1 in 8 years and the other in 1 year, paid cash for the other one. I was only able to do this by NOT GOING INTO DEBT and SAVING MY MONEY. But what the hell do I know, I have 3 paid for houses, 2 boats, 2 airplanes, 12 cars and trucks, 9 motorcycles and NO DEBT with a $150k Income. The world could collapse tomorrow and I DON’T CARE because I owe Nobody Anything.
This is why the debt ratio has remained constant since the 1980s, he said
Why don’t they show the Debt Ratio up until 1971 before Credit Cards were Invented after Nixon Filed Bankruptcy on behalf of the US.??? Because we DIDN’T LIVE ON CREDIT THEN.
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