All children of history are familiar with the Smoot Hawley Tariff Bill, which raised tariffs while we were going into a Depression, and is widely agreed to have made the Depression worse. Smoot Hawley was popular at the time, Hoover was seen as a brilliant engineer who could turn the economy around, just as many see Obama today.
The so called "Credit Card Holders' Bill of Rights" championed by Chris Dodd, who is self interestedly desperate to save his own skin, is today's version of Smoot Hawley Tariff Bill. Mark my words. It will be remembered as the bill which was popular at the time but that destroyed the economy in the end.
How? Well you see, our economic problem is not that a housing bubble has burst but that a debt bubble (specifically, consumer/household debt bubble) has burst. We are in a generalized debt deflation led by the household sector.
Study this chart very carefully. What is it telling you? First of all, a high debt to GDP ratio was not the cause of the Great Depression. That spike you see peaks in 1933, the bottom of the Depression, and was solely a function of the fact that GDP had declined by 50% from 1929 to 1933. In other words we did not have a high debt to GDP in 1929.
Second of all, our debt problem is in the Household sector and the Financial and GSE sectors which are extensions of the Household sector, not the Corporate or Government sectors.
The problem of liquidity is a problem with the household sector and not the banks. It's households that weren't able to pay their mortgages, causing the housing collapse. And it's households who won't be able to pay their credit cards.
70% of the American economy is now based on consumer spending. In order for the economy to recover, credit must be restored to the household sector, and household's creditworthiness must be restored as well. The so called "Credit Card Holder's Bill of Rights" will do the opposite. It will withdraw money from the household sector and kill consumer spending, which means 70% of our economy.
"Credit card issuers like to say that they are engaged in a risky business, lending unsecured debt to millions of consumers, but it is clear that they have learned to price credit card products in ways that produce enormous profit," Levin said.
Well Senator Levin, that is the point of running a private, for-profit company. To make a profit. Unless the government wants to go into the credit card business itself and start making loans or subsidizing consumer's payments it has no right to tell lenders that they can't make a profit.
This bill is being sold as something that would prevent "predatory lending". That is an all well and noble purpose. No doubt there has been a lot of predatory lending going on. But credit card expert Meredith Whitney, who correctly called Citigroup's demise, and back in May 2008 predicted $2 trillion in credit card money being withdrawn, says that is not all it will do:
And fourth, along with many important and necessary mandates regarding fairness to consumers, impending changes to Unfair and Deceptive Acts or Practices (UDAP) regulations risk the very real unintended consequence of cutting off vast amounts of credit to consumers. Specifically, the new UDAP provisions would restrict repricing of risk, which could in turn restrict the availability of credit. If a lender cannot reprice for changing risk on an unsecured loan, the lender simply will not make the loan. This proposal is set to be effective by mid-2010, but talk now is of accelerating its adoption date. Politicians and regulators need to seriously consider what unintended consequences could occur from the implementation of this proposal in current form. Short of the U.S. government becoming a direct credit-card lender, invariably credit will come out of the system.
(Link)
and this:
regulators who have so clearly gaffed on the housing bubble are now going to make up for lost time, and are going to make it so prohibitive for credit card lenders to make profits, and maybe that's a good thing long term, but what's it's going to do I think is going to extract over $2 trillion of liquidity from the consumer balance sheet.
(Link) About 1 and a half minutes in.
In other words, this bill is not going to help Main Street. It is not going to help the consumer. Amidst a massive withdrawal of consumer credit that is already occurring, due to the collapse of the securitization market which funded many consumer loans, and a massive withdrawal of consumer credit due to rising unemployment rates and default rates (which is why your interest rates are getting jacked up-- NO ONE is safe anymore, regardless of your credit history), this well-intentioned "Credit Card Holders' Bill of Rights" will only further make credit inaccessible to the consumer.
Which will in turn gut consumer spending. Which is in turn the foundation of 70% of our economy and virtually all of the demand which is our only hope of getting out of the recession.
Don't listen to people in Congress who are only passing this bill because it's an easy way for them to win re-election. It's a well intentioned bill that might have been a good idea 10 years ago, 15 years ago. Right now, it's not in the interests of consumers, and it's not in the interests of the country.