from the hip

Every week I receive several offers for American credit cards. And the offers are basically so wild they are completely silly. Mostly I am pre-approved, whatever that means. Now, I am lucky – since I am not an American I don’t have to use any of them. And I don’t.

All of them, of course, have zero interest on something or other and/or have no annual fee. So far all is well. But then the craziness starts.

Wild terms

Stuff like cash-APR 20.9%-26.9%. What? And 3% of the US dollar amount on transactions that are made abroad. Why? Are they nuts? I buy for 2000, they want 60 bucks for doing exactly what?

And then, of course, a so called “finance charge”, up and above the interest rate charged, of 3-5% – depending on the offer – for cash advances. WHAT? So, I take out 1000 dollars in cash, and the buggers want 50 for doing exactly what? Having a machine count bills? Come on!

What to do?

So, on one level my conclusion is: American credit cards are all scams – don’t use them! On another level – for Christ’s sake don’t use them abroad – use cash or travelers cheques!

Efficiency in the credit industry

But then – and this is far more serious: How can the US and Americans tolerate this? An efficient banking and credit industry reduces transaction costs across the board – improves the efficiency for every sector in the economy!

My thinking is that electronic payments are much more efficient than other types. So America must want 99.99% of payments to be electronic. But how can you persuade people to go electronic when the banks and the credit card industry make a scam out it? Well, I don’t think you can.

But other countries have achieved that. And those countries are competitors of the US in the world market. So as long as the US doesn’t sharpen it’s act and get efficient, the competitors have a competitive edge.

Regulation needed

And as far as making consumers and businesses go electronic is concerned: It’s easy to achieve! Just takes some federal regulation. Since the costs of electronic payments, ATM cash advances, and so on, are very close to 0, all the regulators need to do it to impose some low maximum rates.

Say 1 US $ max for cash advances, 2 max if abroad, max interest rate 10% above the Fed’s rate, no charges for over-limit (they can be almost eliminated with modern online technology), but instead allow credit providers to terminate the contract in cases of over the limit. All transfers to the credit card account to be debited within 12 hours.

Does this sound outlandish? Well, it is. I have terms like this on my cards. I can’t thank my bank for it – it’s not because they have chosen to give me terms like this. I have these terms because they have been forced to. But they have no problem complying to them. And they still make excellent money.

See also: Plastic Card Tricks (NYT)
               The World’s Worst Credit Card (it is American, of course!)
               FTC Crack down

Another popular, somewhat more refined way of explaining away the current crisis in the American economy is to refer to the crash of the sub-prime marked, and its leveraging by means of C.D.O’s (collateralized debt obligations), and perhaps throwing in some blame for Moody’s as well. That’s really blaming the instruments, not finding the cause.

Still, that’s the version presented to the American public today by New York Times. It has all the marks of a great story, and I’m willing to bet it’s going to sell well. While appealing, it doesn’t hold up as more than a partial explanation.

Because the huge mountain built by these three factors – sub-prime loans, CDO’s and high rankings by Moody’s – didn’t stumble upon itself. It wasn’t iself the reason it fell, that is to say.

It fell because the housing marked finally burnt itself out. As it has to. Because for a long time capital (in terms of the real interest rate) has been far too cheap in the US. The US used cheap capital to buy its way out of the last crisis (as indeed it has several times in the past), and it resulted in a far too high rate of construction in the housing sector. As it had to. When capital is cheap, it’s put to use for lots on non-productive purposes.

At the same time, of course, cheap capital means it’s also cheap to borrow for people wanting new homes or wanting to speculate in real estate. So there was supply, and there was demand. And for a long time, – and I am sure history will confirm this – too long a time actually, demand kept up with supply due to speculation using cheap capital.

But even under these circumstances, when the discrepancy between supply and need for capital goods such as housing grow too big, the fun is over, as the demand for these goods are more limited (bounded) than for some other types of goods.

This is one part of the real explanation for the current recession, I think. Not the instruments (C.D.O.’s, subprime loans, or Moody), but the structure on which they rested.

More to come!