Will New Credit Card Legislation Become the Smoot-Hawley Tariff of 2009?
Dec 22nd, 2008 | By Rob | Category: Congress
One of the commonly accepted contributing factors of the Great Depression in the 1930s was the Smoot-Hawley tariff bill, which increased taxes on goods imported into the United States. After retaliation by foreign governments, trade between countries shrunk dramatically. After a few days to think about what the Federal Reserve has done, I’m wondering if there won’t be a comparison made in the future between efforts to deal with the credit card debt problem such as the Federal Reserve regulations and the Smoot-Hawley Tariff Act.
It seems clear that part of the incentive for delaying the start of the new credit card rules until July 2010 was that, with any luck, the banking industry will be on the road to recovery at that time and better able to withstand the loss of the $10-12 billion in revenue that the regulations are expected to cost credit card providers. While the Federal Reserve credit card regulations won’t be in place in time to help consumers through the recession, government is more than capable of coming up with alternative plans and measures to aid the American public in the meantime without endangering the financial system, which has already proven that it’s basically on life support.
The media coverage of the credit news has focused on the 2010 start date. There’s been speculation that some government agencies will push credit card companies to make changes faster, with other people hoping that credit card issuers will voluntarily implement the regulations ahead of July 2010. There’s even talk about Congress passing legislation which would require faster changes to credit card rules.
I’ve talked frequently about the need for the U.S. government to even the power imbalance between credit card holders and their credit providers. I’m still of the mindset that changes need to be made to prevent unreasonable fees and interest rates. I’m just wondering this morning if efforts to push immediate credit card reform need to be balanced by efforts to protect our financial institutions as well.
There was more coverage on Friday of analyst Meredith Whitney’s call that banks will slash credit lines in 2009, provided in the context of the new credit card regulations. She argued in a note to clients that efforts to protect consumers through the rules could be counterproductive - as banks decrease credit availability in response and consumer spending subsequently declines.
If new rules for the credit card industry contribute to declining credit lines, and consumers are forced to dramatically cutback on spending as a result, then the comparision between the new policies and the Smoot-Hawley Tariff Act might be apt. While I’m eager to see new rules surrounding the handling of credit and debt, I’m also interested in seeing the stability of the financial system maintained. I’d much rather have new Congressional legislation close additional loopholes that credit providers could use to assess unfair fees than have Congress speed up the rules and credit lines be slashed in response.
It’s interesting that in your last post, you refer to the legislation as an effort to ban unfair and deceptive practices, then talk in the next about the ability of these companies to weather the loss of revenue. While we’ve certainly seen that the sudden collapse of these institutions can negatively impact all of us, the very fact that simply removing the fees gained by deception and unethical practices would have such a catastrophic impact says a lot about the industry itself.
I acknowledge the tension, but it’s a complex relationship between consumers and the companies backing the credit cards in their wallets. If you want to make the relationship simple, there’s an easy way to make sure that credit card companies never engage in another unfair or deceptive practice - ban the use of credit cards. Yet, somehow I think that would be an unacceptable solution to most Americans.
To me, the need for credit card reform is about maintaining an adequate balance of power between credit card companies and the consumers. If lending money to consumers isn’t profitable, then businesses won’t do it. And they certainly won’t lend to risky consumers who might not pay the loan back. The Federal Reserve wants to take it slow and steady when implementing these regulations, and I think that there is a certain wisdom in that approach. For Congress to jump on the bandwagon and implement them now rather than later only because it’s politically popular is troubling. If Congress wanted to actually help you with your credit card debt, it could do so in other ways.
In recent years, credit card companies who have competed with each other primarily based on interest rates took to using their fees to increase profitability. Whether they earn their profit through the interest rate or through fees, they will do so to stay in business. You can see this in the airline industry, which has taken to charging for extra bags when they found that they could not compete with some of their competitors on the base price.
I don’t think that the industry will collapse because of their inability to charge certain fees and penalties, they will find other ways to make money or reduce risk, but I am concerned about the secondary effects of these changes on consumers and investor psychology. How will companies react to these new regulations? What will be the consequences of those reactions? These are things that need to be considered given the precarious state of our economy and financial system.
With the government spending billions to ensure the stability of the financial system, there’s no doubt it is a good time to take a look at credit card practices and set the standards for their next 20 years of operations. But to think what we can pile regulations on the banks without acknowledging the unique historical times and potential consequences of doing so is one of the reason that I think it’s important to examine potential parallels between the current situation and credit card regulations and the Smoot Hawley Tariffs and the Great Depression of the 1930s.