Pennies To Heaven
So the other month Congress passed the bankruptcy "reform" act, which among other things protected credit-card debt from being wiped away. The banks argued that people have a personal responsibility to make the beds in which they lie.
Now, it seems, they are using the act as an opportunity to cash in.
The banks argue that, as people become bad credit risks, the rate has to go higher. But if credit-card debt won't be wiped away by bankruptcy, what exactly is the risk to the bank?
The banks are now guaranteed to get their money back. They're covered. They're safe. Now they can wring us for whatever they want, and they can't lose. They might break even, but they won't lose.
So they jack up the interest rate. At worst, the person will declare bankruptcy. But who wants to declare bankruptcy? It affects your whole life for years. So most people will do whatever they can to avoid bankruptcy, and the bank rakes in big piles of interest over a longer period (because more money to interest means less to principal).
Meanwhile, this must reflect on the person's credit rating somehow, which means borrowing less, at higher rates. Plus, higher payments mean less disposable income. Either way, less money goes into the purchase of goods and services — you know, the things that make the economy go.
In the long term, this can't be good. Bankruptcy sits on you for seven years; the pool of the bankrupt is not revolving like the lines of credit the banks extend. The banks ruin someone, they can't indenture him again for seven more years, unless they loosen their rules (which I wouldn't put it past them to do), thus further increasing their "risk" (which, of course, is nonexistent), &c., &c.
So, as the banks clear out (through bankruptcy) and indenture (by soaking up a bigger piece of disposable income) the higher-"risk", lower-influence people, they'll come after the rest of us. So less and less money will be available for discretionary spending, so demand will increase at lower rates, so non-financial businesses won't do as well as they might, so payrolls will grow more slowly, &c., &c.
It used to be that the only way to make money was to spend it. Now it seems like the only way to make money is to lend it.
Now, it seems, they are using the act as an opportunity to cash in.
The banks argue that, as people become bad credit risks, the rate has to go higher. But if credit-card debt won't be wiped away by bankruptcy, what exactly is the risk to the bank?
The banks are now guaranteed to get their money back. They're covered. They're safe. Now they can wring us for whatever they want, and they can't lose. They might break even, but they won't lose.
So they jack up the interest rate. At worst, the person will declare bankruptcy. But who wants to declare bankruptcy? It affects your whole life for years. So most people will do whatever they can to avoid bankruptcy, and the bank rakes in big piles of interest over a longer period (because more money to interest means less to principal).
Meanwhile, this must reflect on the person's credit rating somehow, which means borrowing less, at higher rates. Plus, higher payments mean less disposable income. Either way, less money goes into the purchase of goods and services — you know, the things that make the economy go.
In the long term, this can't be good. Bankruptcy sits on you for seven years; the pool of the bankrupt is not revolving like the lines of credit the banks extend. The banks ruin someone, they can't indenture him again for seven more years, unless they loosen their rules (which I wouldn't put it past them to do), thus further increasing their "risk" (which, of course, is nonexistent), &c., &c.
So, as the banks clear out (through bankruptcy) and indenture (by soaking up a bigger piece of disposable income) the higher-"risk", lower-influence people, they'll come after the rest of us. So less and less money will be available for discretionary spending, so demand will increase at lower rates, so non-financial businesses won't do as well as they might, so payrolls will grow more slowly, &c., &c.
It used to be that the only way to make money was to spend it. Now it seems like the only way to make money is to lend it.
posted by Dr. Bubbles at 20:14
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