Save the Lemmings

Would somebody explain to me the logic of raising credit card default rates to 30%? How exactly is this supposed to encourage economic activity or even protect lenders?

Consider the scenarios. Take employed borrowers interested in making credit purchases. Except in desperation, are they going to look at using or applying for credit cards with 30% default rates and variable rates up to prime plus 22%, or even more? Oh yes, they’re going to say “I can’t get enough of that. Give me more.”

Likewise, for someone laid off or on reduced income with dwindling assets, how exactly do astronomical default rates encourage continued payments? Even psychologists grasp the simple concept that organisms faced with insurmountable obstacles either give up completely or turn their attention elsewhere. How does compounding loss encourage recovery?

With billions in bailout money propping up credit providers, at the very least, a moral obligation has been imposed to moderate obligations, not to mention the simple business wisdom that raising prices, in this case the price of credit, does not increase sales. Increasing the price of consumer credit is a Reagan era bait-and-switch strategy that has been sustained by economic trends of increasing income and asset values, but in a depressed economy you might as well go out and beat yourself in the head with a brick.

Forcing consumers into bankruptcy with astronomical default rates will not increase recovery for lenders, only for lawyers. What it really does for lenders is to temporarily inflate balance sheets by adding theoretical debt to assets, an effect that got us into this mess in the first place, and a practice that is only just this side of outright criminal, and only theoretically this side.

In a free market economy, price increases are an argument of supply and demand, but it is abundantly apparent that neither the economy nor the free market are what they were cracked up to be. You must have either a genuine contempt for humanity or complete disconnection from reality to believe otherwise. Raising prices in a context of dwindling resources is either the depredation of a predatory monopoly (think oil), or the last resort of the truly desperate.

Price increase is the historic mentality behind failing businesses, and you would think after the lessons of the last presidential administration, that lenders would be smart enough to figure out business as usual won’t cut it. Evidently, hope isn’t the only thing that springs eternal. Bankers, like the lemmings of legend, want to lead us on over the cliff, but the truth is, even lemmings are smarter than that.

Here's thinking for you.

Iffy