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Thursday, April 23, 2009

Credit Card Companies Need Checked

Today Obama meets with execs of many major credit card companies to discuss his administration's ideas for new regulations to control some of the anti-consumer behavior of the companies (some of which I have personally experienced and I have written about in the past).

Here is just some back and forth I saw while browsing the web today:

XXXX wrote:
So I guess it's OK for credit card companies to raise your interest rate on purchases already made? How would you like it if you had a contract with someone to do some work on your house and they decided to charge you more simply because they wanted more money out of you? How is that fair play?

YYYY replied:
Yes. If it wasn't in the contract that they could raise the rate, then they can't legally do that, if it was, I must have agreed to it. So yeah, that's fair.

XXXX makes one of many valid points against predatory lending practices conducted by credit card companies. YYYY uses a typical (private party economics) argument as a response. IE., as long as presumably rational parties agree to a contract (in this case the company and the credit user), then there's nothing to see here... move on. Well folks, I hear that argument a lot (esp. from people with econ backgrounds), and I'm here to say it is shit. It's the typical "I don't really feel like thinking more than at a cursory level" response. Contracts are fine tools - and, in fact, contracts (that work in all senses of the word) underly almost all of economics as one of the largest assumptions the field makes. The problem is, like many assumptions in economics, it's not the complete reality. Contracts (implicit or explicit) are not made in a vacuum where all parties equally know what they are agreeing to, where no one has more power over the other, etc....

The truth is credit card companies have huge advantages over the consumer because they have 100% control over the language of the contract. Try it out - next time you sign up for a credit card, call them up and ask if you can have any of the myriad terms they wrote in their favor changed or removed - they will likely reply "no, that is industry standard." "Industry standard" is another way of saying the industry controls all terms and you get no say. Credit cards are necessity goods in our society - having little or no credit will come back to bite you. Credit card companies know this so they use that to extract power from consumers.

And that is even assuming you know what the terms are to begin with. Have you read the terms of your credit card? I have - I work with lawyers and legal statutes all day so I have a pretty decent grasp of these things - but I doubt the typical consumer is even halfway fluent in legalese.

Oh, and as I type this, hundreds of credit users are receiving small but pivotal changes in their terms (perhaps their interest rate is being quadrupled), but they probably won't ever see it, because it was thrown in the trash just like the other 8 mailings from the same credit card company they received during the week promising 'incredibly' low rates (restrictions apply, see fine print for details after eye surgery).

Having said what I've had to say, I don't ever want to hear that tired, ridiculous, idiotic argument in favor or "free" market (ie. continually abusing) credit card companies.

Wednesday, April 15, 2009

Posner Misses the Point

From his blog:

"Bubble behavior is exhibit number 1 to the claim by some behavioral economists that stock market investors often act irrationally. For example, buying in a rising market or selling in a falling one (both illustrating what is called "serial momentum" or "momentum trading") is said to illustrate "herding" behavior."

I disagree with his premise. Behavioral economists do point to herding behavior and momentum to explain bubble formation and collapse, but I don't think many would necessarily deem the behavior at the individual level as "irrational." Many try to avoid such useless terms - behavior is not necessarily rational or irrational, it just is. Nevertheless, the behavior can be deemed to be quite "rational" for precisely the reason Posner cites: uncertainty. In an uncertain environment, people see trends and observe the behavior of the herd and calculate subjectively that they can potentially beat the market provided they can 'exit' in time. I don't think many behavioral economists would say there is anything irrational about that - it's just a gamble. It is long-run inefficient (and 'irrational' if you want to use that word) at the aggregate market level - but since people don't act like the Borg, the term itself is rather useless in this case.

Volatile Prices - Blame the Auto Industry and the Government

I posted this on my intro macro class website:

Consumer prices have been, at least according to the CPI data which we discussed in class has numerous biases and flaws, volatile to say the least these last few months. BLS has released March data on prices. Prices (seasonally adjusted) fell in March.

You will notice that prices however have been CONSISTENTLY rising (or remaining stagnant) over the last few months once you exclude energy prices. Energy prices are likely fluctuating wildly due to the increased uncertainty regarding the automotive industry. Price stability is one of the goals of the Fed, as we learned since price changes influence expectations. Unfortunately, the Fed has limited control over prices in the energy sectors of the economy. This also suggests, though, that an 'orderly' bankruptcy of GM and Chrysler COULD help stabilize energy prices. Right now we are in limbo since one minute we are bailing out the autos and the next we are giving them ultimatums (of course that is just my opinion - I'd love to hear yours!)

"The index has decreased 0.4 percent over the last year, the first 12 month decline since August 1955.

On a seasonally adjusted basis, the CPI-U decreased 0.1 percent in March after rising 0.4 percent in February. The decrease was due to a downturn in the energy index, which declined 3.0 percent in March after rising 3.3 percent the previous month. All the energy indexes decreased, particularly the indexes for fuel oil, natural gas, and motor fuel. The food index declined 0.1 percent for the second straight month to virtually the same level as October 2008. The food at home index declined 0.4 percent, the second straight such decrease, as the index for dairy and related products continued to decline."

Monday, April 6, 2009

Talkin' Bout a Revolution

There needs to be a revolt in economics. I'm not talking about a movement from within - the heterodox fields regarding post-Keynesian and institutionalist thinking etc are covering that at an increasing pace. No, I'm talking about the everyday Joe who is going to, or already has, lost his job because of the misleading "facts" purported by, and the downright intellectual ineptitude coming from, mainstream economic thought over the last few decades.

Joe should be angry, and he should be angry at the economists.

The more I think about it, the more mad I get at my profession (or at least the field in which I was schooled).

This crisis can be summed up easily:
Bubbles are naturally occuring. Most economists dismissed the housing bubble as just "what you get when your economy is doing really well and people have more income to live out their American dream in owning a home." In other words, economists took the classical economics line of laissez-faire it's-just-the-glorious-market approach, and they ignored any talk of something going askew.

But these same economists (including Greenspan, and even Ben Bernanke said it back in 2005,....)are NOW saying, oh, well, sorry, there really was - guess we should have listened to the realists in the world.

I challenge you to google "is no housing bubble" in 'google.' It will come up with scores of economists and people with real authority that said as much. Why should we look to these same people now? Why does the profession continue to rely on the unrealistic physics-wannabe modeling of mainstream economics?

Why do we continue to kid ourselves? Yes, the tide is turning (finally) but when I say "we" I mean everyone - why isn't the entire populace outraged? Why aren't they banging at the gates of the Ivory Tower - nay, why aren't they burning it down?