Tag: crisis

Now Is Not the Time to Reduce Credit Card Availability

With the House having passed credit card legislation and the Senate scheduled to take up its own bill this week, one questions keeps coming back to me: What’s the hurry?

We are in the midst of a recession, which will not turn around until consumer spending turns around—so why reduce the availability of consumer credit now? And the Federal Reserve has already proposed a rule that would address many of Congress’ supposed concerns. The Fed rule will be implemented July 2010. Were Congress to get a bill to the president by Memorial Day, as he has asked, the Federal Reserve and the industry still couldn’t implement it before maybe January, if they were lucky.

Congress should keep in mind that credit cards have been a significant source of consumer liquidity during this downturn. While few of us want to have to cover our basic living expenses on our credit card, that option is certainly better than going without those basic needs. The wide availability of credit cards has helped to significantly maintain some level of consumer purchasing, even while confidence and other indicators have nosedived.

It was the massive under-pricing of risk, often at the urging of Washington, that brought on our current financial market crisis. To now pressure credit card companies not to raise their fees or more accurately price credit risk, will only reduce the availability of credit while undermining the financial viability of the companies, ultimately prolonging the recession and potentially increasing the cost of bank bailouts to the taxpayer.

As Treasury Secretary Timothy Geithner has repeatedly said, some of the biggest credit card issuers will not be allowed to fail (think Citibank, American Express, Capital One, KepCorp) should they suffer significant losses to their credit card portfolios. Will taxpayers ultimately be the ones covering those losses?

Congress should also further examine the wisdom of restricting credit to college students under the age of 21. Outside of the obvious age discrimination, why treat adults between the ages of 18 and 21 any differently from those above 21? The basic premise of college is making sacrifices today in order to have a wealthier tomorrow—accordingly being able to borrow against that better tomorrow should be an option for any college student. Just as some small number of college students don’t benefit from college, some don’t benefit from credit cards, but throwing the “baby out with the bathwater” hardly seems the idea solution.

The Cost of Flu Fears - and Our Ongoing Vulnerability

The ever-sensible Shaun Waterman has begun to tally the cost of overreaction to the fear outbreak inspired by the H1N1 flu strain. He reports in ISN Security Watch:

Even the precautions that you take against this kind of global flu pandemic could knock about 1.9 [or] 2 percent off global [economic production]. That’s about a trillion dollars,” according to journalist Martin Walker, who cited World Bank figures from a study last year.

The Economist reported last week that the crisis in Mexico was costing Mexico City’s service and retail industries $55m a day - not because of the handful of deaths but because of people’s reactions. And that was even before the national suspension of non-essential public activities called for this week by the authorities there, which was expected to double that cost.

Waterman also cites my joke about moving Vice President Biden to an undisclosed location in future crises - not for his protection or government continuity, but to keep him away from the media.

It’s comedic wrapping on a substantive point: As long as people look to government leaders in times of crises, leaders have a responsibility to communicate carefully, according to a plan, and with message discipline. If they don’t, the damage can be very high.

Even if all Americans knew to dismiss the words of the Vice President as if he’s a “Crazy Uncle Joe” - and they don’t - foreign tourists certainly don’t know that. Biden harmed the country simply by speaking off the cuff.

Here, an outbreak of flu appears to have caused billions of dollars in damage to the world economy. One billion lost to the U.S. economy is about 145 deaths (using the current $6.9 million valuation for a human life). When overreactions restrict economic activity, that reduces wealth and thus health and longevity.

Now, imagine what might happen if the United States encountered a novel, directed threat - some kind of attack that inspires widespread concern. Will Vice President Biden and officials from a half-dozen agencies rush forth with personal observations and speculation? The results could be devastating, especially to a country that is already suffering economically.

People die from poor situation management, and it makes Americans worse off. Political leaders should not get a free pass for failing to communicate well just because it’s hard to do.

The Obama Administration should learn from its many errors in handling the rather benign H1N1 flu situation. It should train up for communicating in the event of a real emergency. If the Obama Administration fails to soothe nerves in the event of some future terrorist attack, that will be a clear failure of leadership.

Like FDR — In a Really Bad Way

President Barack Obama based his candidacy in part on the promise to set a new tone in Washington.  But we saw a much older tone emerge with his demonization of hedge funds over the Chrysler bankruptcy.  Reports the Washington Post:

President Obama’s harsh attack on hedge funds he blamed for forcing Chrysler into bankruptcy yesterday sparked cries of protest from the secretive financial firms that hold about $1 billion of the automaker’s debt.

Hedge funds and investment managers were irate at Obama’s description of them as “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”

“Some of the characterizations that were used today to refer to us as speculators or to say we’re looking for a bailout is really unfair,” said one executive who spoke on condition of anonymity because of the sensitivity of the matter. “What we’re looking for is a reasonable payout on the value of the debt … more in line with what unions and Fiat were getting.”

George Schultze, the managing member of the hedge fund Schultze Asset Management, a Chrysler bondholder, said, “We are simply seeking to enforce our bargained-for rights under well-settled law.”

“Hopefully, the bankruptcy process will help refocus on this issue rather than on pointing fingers at lenders,” he said.

I won’t claim any special expertise to parse who is responsible for what in the crash of the U.S.  (meaning Big Three) auto industry.  However, attacking people for exercising their legal rights and trashing those who make their business investing in companies hardly seems like the right way to get the U.S. economy moving again.

During the Depression, FDR’s relentless attacks on business and the rich almost certainly added to a climate of uncertainty that discouraged investment during tough times.  Why put your money at real risk when the president and his cohorts seem determined to treat you like the enemy?  While President Obama need not treat gently those who contributed to the current crisis by acting illegally or unscrupulously, he should not act as if those who simply aren’t willing to turn their economic futures over to the tender mercies of the White House are criminals.

We’ve just lived through eight years of bitter partisan warfare.  The president shouldn’t replace that with a jihad against businesses that resist increased government direction of the economy.