Tag: credit cards

Obama Small Business Lending Fund Likely A Bust

President Obama has announced his intention to use $30 billion in TARP funds to create a new small business lending fund.  In all likelihood, this is $30 billion the taxpayers will never see returned.

First of all, the problem facing small business, outside of the massive uncertainty being created by Washington, is one of credit availability, not cost.  For those who can get credit, its quite cheap, arguably too cheap.  So if the president doesn’t intend to lower the cost of credit, the plan must be to lower the quality; using the $30 billion to cover expected credit losses.  Of course, we tried throwing lots of taxpayer money at unsustainable homeownership, is there any reason to believe throwing taxpayer money at unsustainable businesses is going to work any better?

Using TARP funds for this program is also somewhat disingenuous.  This program adds $30 billion to the deficit regardless of whether it’s funded by TARP or by Congressional appropriations.  Taking from the TARP only allows the President to keep treating the TARP as his personal slush fund.  Nowhere in the TARP legislation can you find language authorizing the use of funds to cover credit losses on new loans.  Being a constitutional scholar, the President should know very well that the spending power rests with Congress, not the President.  If we are to have a new small business lending program, it should be designed and funded by Congress, not bureaucrats at the Treasury Department.

Historically the two main sources of small business start-up funding have been home equity and credit cards.  Clearly the availability of home equity has declined.  Sadly as well, with the passing of credit card “reform” the availability of credit card lending has also declined.  If the President truly wants to help small business, then the first thing to do is ask Congress to repeal the credit card bill and then just get out of the way.

What Is Seen and What Is Not Seen

Two items in Tuesday’s newspapers remind us of the often unseen costs of regulation and also of the often unseen benefits of market processes. In the Wall Street Journal, Prof. Todd Zywicki examines the likely consequences of a law to limit credit card interest rates and the fees they charge to merchants:

Card issuers might also reduce the quantity and quality of credit cards by restricting credit availability and cutting back on product innovation or ancillary card benefits. This is exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%. Innovation, especially in terms of improved security and identity-theft protection, was stalled. Card issuers also increased their efforts to attract higher-risk customers who generate interest and penalty fees to offset lower interchange revenues from lower-risk transactional users.

Those are the kinds of unseen costs that most of us wouldn’t anticipate (that’s why economists talk about “unanticipated [or unintended] consequences” of action). Only after the fact were economists able to identify the specific costs of the regulation. It seemed like a good idea – limit the cost of something that consumers (voters) want. Did anyone predict the consequences? People probably predicted that annual fees would rise to compensate for the lost revenue from interchange fees. But did they anticipate a slowdown in innovation in security and identity-theft protection? Did they anticipate that card issuers would work harder to get higher-risk customers? Such regulation always impedes the optimal working of market processes, and thus inevitably delivers sub-optimal results. 

Meanwhile, we often observe conditions in the marketplace that don’t seem to make sense to us. So we assume something is wrong, maybe even corrupt. An article in the Washington Post written in a sober yet hysterical style raised the problem of “medical salesmen in the operating room.” Then, in a letter to the Post, Dr. Mark Domanski explains why it makes sense to have medical salesmen in the operating room. A Post article on the topic had been full of anecdotes about a salesman who “began his career selling hot dogs” hanging out in operating rooms and doctors who expressed outrage. If only they had thought to ask a surgeon in distant Arlington, Virginia:

I found David S. Hilzenrath’s Dec. 27 Business article, “The salesman in the operating room,” to be one-sided.

Of course, medical sales representatives work along doctors in operating rooms. As a surgeon, I always want a company rep in the operating room.

So, if you were having surgery that involved a complicated piece of equipment, wouldn’t you like somebody from the manufacturer to be there? I know I would.

Here’s why:

Remember when you tried to assemble that desk you bought from a furniture store? We all know how to use a screwdriver, but when something is off, it’s nice to know there is a number to call. What if you needed to put that desk together quickly because you needed it for something important? It would be nice if the company sent someone to make sure all the parts were there and in good order. That’s what a good rep does.

As the surgeon, I make the diagnosis and decide the treatment. No company representative tells me how to use a knife. But many products in the operating room are complex and change almost every year; they are getting better that fast.

When I am using a complex product, such as a plating system for fixing a jaw fracture, having the rep in the room ensures that the system is functional. I know all the parts will be there. I know that the right screw and plate will be handed to me at the right time.

Sometimes we call in the rep for an operation, and it turns out that the fracture does not need to be plated. No rep has ever suggested that I plate a fracture that didn’t need to be plated.

Members of Congress and activists are constantly reading articles about apparent problems and rushing off to propose legislation. These examples and countless more should remind us to think carefully before we coercively interfere in the decisions that millions, billions, of people make every day.

Credit Card Dementia and Boundary Cases

credit cardsThe most interesting libertarian-related conversation I’ve read today comes from Rortybomb, by way of Andrew Sullivan, with commentary by Megan McArdle. Here’s a challenge to libertarians from Rortybomb, aka Mike Konczal:

I want to pitch to the credit card and financial industry a new innovative online survey. It is targeted for older, more mature long-time users of our services. We’ll give a $10 credit for anyone who completes it. Here is a sense of what the questions will look like:

- 1) What is your age?
- 2) What day of the week are you taking this survey?
- 3) Many rewards offered are for people with more active lifestyles: vacations, flights, hotels, rental cars. Do you find that your rewards programs aren’t well suited for your lifestyle?
- 4) What is the current season where you live? Are any seasons harder for you in getting to a branch or ATM machine?
- 5) Would rewards that could be given as gifts to others, especially younger people, be helpful for what you’d like to do with your benefits?
- 6) Would replacing your rewards program with a savings account redeemable for education for your grandchildren be something you’d be interested in?
- 7) Write a sentence you’d like us to hear about anything, good or bad!
- 8 ) How worried are you you’ll leave legal and financial problems for your next-of-kin after your passing?

Did you catch it? Questions 1,2,4,7 are taken from the ‘Mini-mental State Examination’ which is a quick test given by medical professionals to see if a patient is suffering from dementia. (It’s a little blunt, but we can always hire some psychologist and marketers for the final version. They’re cheap to hire.) We can use this test to subtly increase limits, and break out the best automated tricks and traps mechanisms, on those whose dementia lights up in our surveys. Anyone who flags all four can get a giant increase in balance and get their due dates moved to holidays where the Post Office is slowest! We’d have to be very subtle about it, because there are many nanny-staters out there who’d want to coddle citizens here…

I smell money – it’s like walking down a sidewalk and turning a corner and then there is suddenly money all over the sidewalk. One problem with hitting up sick people, single mothers, college kids who didn’t plan well and the cash-constrained poor with fees and traps is that they’re poor. Hitting up people with a lifetime of savings suffering from dementia is some real, serious money we can tap as a revenue source.

Clearly, only an evil person (or a libertarian!) would allow a scam like this one. Megan responds, I think rightly:

I’m not sure why this is supposed to be a hard question for libertarians. I mean, I might argue that preventing people from ripping off the marginally mentally impaired would, in practice, be too difficult. Crafting a rule that prevented companies from identifying people who are marginally impaired might well be impossible – I’m pretty sure that if I wanted to, I could devise subtler tests than “What day of the week is it?” And while the seniors lobby is probably in favor of not ripping off seniors, they’re resolutely against making it harder for seniors to do things like drive or get credit, which is the result that any sufficiently strong rule would probably have.

But it’s pretty much standard libertarian theory that you shouldn’t take advantage of people who do not have the cognitive ability to make contracts. Marginal cases are hard not because we think it’s okay, but because there is disagreement over what constitutes impairment, and the more forcefully you act to protect marginal cases, the more you start treating perfectly able-minded adults like children.

The elderly are a challenge precisely because there’s no obvious point at which you can say: now this previously able adult should be treated like a child. Either you let some people get ripped off, or you infringe the liberty, and the dignity, of people who are still capable of making their own decisions.

I’d add two responses of my own.

First, I can’t believe there’s all that much money to be had here. Anyone who wanders into Tiffany’s and back out again without remembering what they bought is, generally speaking, a bad credit risk. Mildly irresponsible people – those who slightly overspend, then have to make it up later – those are probably great for creditors. Lesson learned: If you’re not demented, don’t be irresponsible. (If you are demented, you’re not going to follow my advice anyway.)

Second, I am always amazed at how border cases are dragged out, again and again, as if they proved something against libertarianism. Border cases – How old before you can vote? How demented before a contract doesn’t bind? – are a problem in all political systems, because all systems start with a presumed community of citizens and/or subjects. We always have to draw boundaries between the in-group and the outliers before we have a polity in the first place.

What makes the classical liberal/libertarian approach so valuable is in fact that it draws so few boundaries. Where other systems depend on class boundaries, race boundaries, religious boundaries, and so forth – with annoying boundary issues at every stop along the way – libertarians make it as simple as I think it can be. We presume that all mentally competent adults are worthy of liberty until they prove themselves otherwise.

The boundary cases are still there, but they are fewer and more tractable. Konczal just wandered into one of them. It proves much less than he thinks.

Credit Card Act Is Affecting the Job Market

Despite the economic stimulus and various financial bailouts, our economy continues to shed jobs.  One of the reasons for continued job losses is the decline in new hires, especially the lack of new hiring by small business.

As bank analyst Meredith Whitney discusses in the Wall Street Journal [$], all the major credit programs created by Congress and the Federal Reserve have been targeted at big corporations and Wall Street firms.  However, small companies, especially start-ups and partnerships, do not issue bonds in the debt markets, nor do they borrow from Goldman Sachs.  So these firms have been left out in the cold, as federal credit inventions have favored corporate America.

Adding insult to injury is that not only has Washington subsidized credit to large firms, it has taken actions that restrict the credit available to small firms and start-ups.  The prime example of this is the Credit Card Reform Act signed by President Obama in May.

As Whitney reports, “Credit cards are the most common source of liquidity to small businesses, used by 82 percent as a vital portion of their overall funding.”  In restricting the usage of credit cards and reducing the ability to risk-base price, Washington has eliminated the most important source of credit to small business.

Of course, being unable to project their future health care costs, or tax burdens (yes, they are going up, but by how much), many small businesses have either been forced to or chosen to sit on the sidelines of our economy.  Washington needs to recognize that Wall Street and corporate American are not the sum of our economy, if we hope to turn the employment situation around.

Don’t Bail Out Bernanke

Here is the message members of Congress should send to Ben Bernanke during the Fed chief’s annual Capitol Hill testimony this week: He is fighting for his job. With his term up in January of next year, Bernanke needs to be called to account for the Fed’s many questionable actions during the financial turmoil of the past year.

Even while correctly identifying the “global savings glut,” Bernanke sat by and did nothing about the unsustainable build-up of leverage in the housing market—the “bubble” which famously burst in late 2008. Bernanke also used Fed financing to bail out Bear Stearns and AIG—hotly political moves which should rightfully have been left to Congress—and oversaw the massive expansion of the Fed’s balance sheet from about $900 billion to over $2 trillion. Under Bernanke, the Fed has transcended monetary policy and bank supervision into the world of fiscal policy.

While thus politicizing the Fed on one hand, Bernanke has sought to insulate the bank from congressional pressures by appeasing majority Democrats with various new credit regulations. Both the recently proposed credit card and mortgage rules unnecessarily restrict credit and increase the litigation risk facing banks, while doing nothing to roll back some of the irresponsible lending policies that exacerbated the housing bubble.

Bernanke’s pandering to the Left on misguided “consumer protections,” and the absence of any debate over the Fed’s role in the housing bubble, raise serious questions as to whether Bernanke understands the causes of the current financial crisis. We cannot hope to avoid the next financial crisis without a Fed chairman who understands the current one.

Does the PASS ID Act Protect Privacy?

I’ve written about PASS ID here a couple of times before - first on whether or not it’s a national ID and, second, on the politics of this REAL ID revival bill. Now I’ll take a look at whether it fixes the privacy issues with REAL ID. Privacy is complicated. Buckle up.

The day the bill was introduced, the Center for Democracy and Technology issued a press release giving it a privacy stamp of approval.

“The PASS ID Act addresses most of the major privacy and security concerns with REAL ID,” said Ari Schwartz, Vice-President of CDT. The release cited four ways that PASS ID was an improvement over the bill it’s modeled on, REAL ID.

Interstate Data Sharing?

First, CDT said, PASS ID “[r]emoves the requirement that states ‘provide electronic access’ allowing every other state to search their motor vehicles records.” It’s technically true: The language from REAL ID directly requiring states to share information among themselves came out of PASS ID. But the requirements of the law will cause that information sharing to happen all the same.

Like REAL ID did, PASS ID would require states to confirm that “a person submitting an application for a driver’s license or identification card is terminating or has terminated any driver’s license or identification card” issued by another state.

How do you do that? You check the driver license databases of every other state. Maybe you do this by directly accessing other states’ databases; maybe you do this indirectly, through a “pointer system” or “hub.” But to confirm that you’re talking about the right person, you don’t just compare names. You compare names, addresses, pictures, and other biometrics.

Just like REAL ID, PASS ID would require states to share driver data on a very large scale. It just doesn’t say so. As with REAL ID, the security weaknesses of any one state’s operations would accrue to the harm of all others.

Mission Creep?

Second, CDT says that PASS ID “[l]imits the ‘official purposes’ for which federal agencies can demand a PASS ID driver’s license, thereby helping prevent ‘mission creep.’” Again, it’s technically true, but materially false.

REAL ID had an open-ended list of “official purposes” - things that the homeland security secretary could require a REAL ID for. PASS ID is not so open-ended, but that is a small impediment to only one form of mission creep.

PASS ID places no limits on how the DHS, other agencies, and states could use the national ID to regulate the population. It simply requires the DHS to use PASS ID for certain purposes. A simple law change or amendment to existing regulation would expand those uses to give the federal government control over access to employment, access to credit cards, voting - CDT’s own PolicyBeta blog called a plan to use REAL ID to control cold medicine a “terrifying” example of mission creep. And these are just the ideas that have already been floated.

When I testified before the Senate Judiciary Committee on REAL ID in May 2007, I spoke about what we had recently heard in a meeting of the DHS Privacy Committee:

Ann Collins, the Registrar of Motor Vehicles from the State of Massachusetts, … said, “If you build it, they will come.” What she meant by that is that if you compile deep data bases of information about every driver, uses for it will be found. The Department of Homeland Security will find uses for it. Every agency that wants to control, manipulate, and affect people’s lives will say, “There is our easiest place to go. That is our path of least resistance.”

PASS ID is the same medium for mission creep that REAL ID is. The problem is with having a national ID at all - not with what its enabling legislation says.

Privacy Protections?

Next, CDT says that PASS ID requires “privacy and security protections for PII stored in back-end motor vehicle databases.” (“PII” means “personally identifiable information.”)

A glaring oversight of REAL ID - and the competition for glaring oversights was fierce - was to omit any requirement for privacy and security of the databases states would maintain and share on behalf of the federal government. The DHS took pains in the REAL ID rulemaking to drain this swamp. It tried to require minimal information collection for identity verification and minimal information display on the card and in the machine readable zone. (It failed in important ways, as I will discuss below.) The REAL ID regulation required states to file security plans that would explain how the state would protect personally identifiable information. And it said it would produce a set of “Privacy and Security Best Practices.” None of this mollified REAL ID opponents, and the privacy bromides in the PASS ID Act won’t either.

One of the more interesting privacy “protections” in the PASS ID Act is a requirement that individuals may access, amend, and correct their own personally identifiable information. This is a new and different security/identity fraud challenge not found in REAL ID, and the states have no idea what they’re getting themselves into if they try to implement such a thing. A May 2000 report from a panel of experts convened by the Federal Trade Commission was bowled over by the complexity of trying to secure information while giving people access to it. Nowhere is that tension more acute than in giving the public access to basic identity information.

The privacy language in the PASS ID Act is a welcome change to REAL ID’s gross error on that score. At least there’s privacy language! But creating a national identity system that is privacy protective is like trying to make water that isn’t wet.

Limits on Use of Card Data?

CDT’s final defense of PASS ID is the presence of meager limits on how data collected from national ID cards will be used. Much like with mission creep, the statutory language is beside the point, but CDT points out that PASS ID “prohibits states from including the cardholder’s social security number in the MRZ and places limits on the storage, use, and re-disclosure of that information.”

“MRZ” stands for “machine-readable zone.” In the PASS Act and REAL ID Act, this is referred to as “machine-readable technology,” and in the REAL ID rulemaking, the DHS selected a 2D barcode standard for the back of REAL ID licenses and IDs. Think of government officials scanning your license the way grocery clerks scan your toilet paper and canned peaches.

It’s true that the PASS ID Act bars states from including the Social Security number in that easily scanable data, but it doesn’t prohibit anything else from being scanned - including race, which was included in DHS’ standard for REAL ID.

And don’t think that limits on the storage, use, and re-disclosure of card information would have any teeth. It would create a new crime: scanning licenses, reselling or trading information from them, or tracking holders of them “without lawful authority,” but it’s not clear what “without lawful authority” means. It would probably allow people to give implied permission for all this data-collection and -sharing by handing their cards to someone else. It would certainly allow governments to authorize themselves to collect and trade data from cards en masse.

Not that we should want this “protection.” The last thing we need is another obtusely defined federal crime. Nearly as bad as being required to carry a national ID is making it illegal for people to collect information from it when you want them to!

And in Some Ways PASS ID is Worse

But let’s talk some more about that machine-readable zone. When Congress passed REAL ID, suspicion was strong that the “MRZ” would be an RFID chip - a tiny computer chip that can be read remotely by radio.

Recognizing the insecurity of such devices - and the strong public opposition to it - DHS declined to adopt RFID for the REAL ID Act. It did, however, work with a few states and the U.S. State Department to develop an RFID-chipped license that it calls the “enhanced driver’s license.” This has a long read-range chip that will signal its presence to readers as much as fifteen or twenty feet away. The convenience gain DHS and State sought for themselves at the border would be a privacy loss, as scanning cards could become commonplace in doorways and other bottlenecks throughout the country - your whereabouts recorded regularly, as a matter of course, by public and private entities.

Why do we care about “enhanced drivers licenses”? Because the PASS ID Act would ratify them for use as national IDs. States could push their residents into using these chipped cards if they didn’t want to implement every last detail of PASS ID.

Needless to say, ID cards with long-distance (including surreptitious) tracking are a step backward for privacy. This is one sense in which PASS ID is worse than REAL ID.

Consider more carefully also what PASS ID and REAL ID are about in terms of biometrics. Both require states to “[s]ubject each person applying for a driver’s license or identification card to mandatory facial image capture.”

States across the country are using driver license photos to implement facial-recognition software that will ultimately be able to track people directly - nevermind whether you have an RFID-chipped license or show your card to a government official. They are aiming at preventing identity fraud, of course, but with advancing technology, before too long you will be subject to biometric tracking simply because you posed for an unsmiling digital photo at the DMV. REAL ID and PASS ID are part and parcel of promoting that.

Does PASS ID address “most of the major privacy and security concerns with REAL ID”? Not even close. PASS ID is a national ID, with all the privacy consequences that go with that.

Changing the name of REAL ID to something else is not an alternative to scrapping it. Scrapping REAL ID is something Senator Akaka (D-HI) proposed in the last Congress. Fixing REAL ID is an impossibility, and PASS ID does not do that.

Congress Just Raised Our Credit Card Fees

Technically, it was the companies which raised their fees.  But they did so to anticipate new legislative restrictions on fees taking effect.  Congress wanted to cut costs for consumers, but ended up costing them instead.

Reports the Washington Post:

Credit card companies are raising interest rates and fees seven months before new rules go into effect that will limit their ability to do so, much to the irritation of Congress and consumer advocates.

Chase, for instance, will raise the minimum payment required of some of its customers from 2 percent to 5 percent of the statement balance starting in August. Chase and Discover have increased the maximum fee charged for transferring a balance to the card to 5 percent of the amount, up from 3 and 4 percent, respectively. Bank of America last month raised the transaction fee for balance transfers and cash advances from 3 to 4 percent. Card issuers including Bank of America and Citi also continue to cut limits and hike up rates, which they have been doing with more frequency since January.

“This is a common practice and will continue to be common, because issuers can do these things for really no reason until February,” said John Ulzheimer, president of consumer education for Credit.com, which tracks the industry. “It’s what I call the Credit Card Trifecta – lower limits, higher rates, higher minimum payments.”

It’s not just the top card issuers making changes. Atlanta-based InfiBank, for example, will raise the minimum annual percentage rate it charges nearly all of its customers in September “in order to more effectively manage the profitability of our credit card account portfolio in a very challenging economic environment,” said spokesman Kevin C. Langin.

The flurry of activity, which the banks say is necessary to shore up their revenue losses, has irked members of Congress, who passed a new credit card law, which was signed by President Obama in May. The law, among other things, would prevent card companies from raising rates on existing balances unless the borrower was at least 60 days late and would require the original rate to be restored if payments are received on time for six months. The law would also require banks to get customers’ permission before allowing them to go over their limits, for which they would have to pay a fee.

One hates to think of what additional “help” Congress plans on providing for us in the future.