Why Credit Card Companies are so Mean

[alfred russel]

The problem with these sorts of proposals, as sensible as they sound, is that marketing people would find some way of twisting the statements and sales people would be trained on how to talk past them.

Absolutely. And insurance industry lobbyists would want additional qualifiers around all sorts of statements and terms more specifically defined, other groups would want the statement to also appear in Spanish, and before it was said and done the disclosure would probably fill up at least a page in small print and be just another form to sign without reading.

I'm under no illusion that there is a magic cure all that is going to solve all the problems in the credit card industry (or life insurance, as we are now discussing). That doesn't mean some reform won't help at the margins.

[Berkut]

I'm under no illusion that there is a magic cure all that is going to solve all the problems in the credit card industry (or life insurance, as we are now discussing). That doesn't mean some reform won't help at the margins.

Isn't that a truism though?

Couldn't you *always* say about anything that "some reform would help at the margins"?

I think the bar for enacting legislation that will reduce choice and increase costs for every single person involved should be higher than a theoretical "it will help at the margins".

I think whatever help this legislation creates, it will create many more problems than it solves. So far we have seen zero data that shows that it will solve anything at all.

This vague and subjective justification is WHY we have a legal code that requires us to spend billions upon billions on lawyers to figure it all out. A series of seemingly "well, it can't hurt to enact just a little more 'at the margins' legislation..." well meaning acts that just end up doing precisely the opposite of what they intend - creating more complication, more confusion, more pages of dense print to justify why this deal doesn't violate that law, etc., etc., etc.

[The Minsky Moment]

One can oppose regulation either because one believes that economic freedom is a good in and of itself (libertarianism), or because one believes that free markets tend to give much more efficient outcomes than regulation.  I am not a libertarian but I am firmly in the second camp.  However well-intentioned a regulation, there is always a real danger of unintended consequences, and thus absent a very strong justification for the regulation, the default position should be not to regulate.

That said, there are differences between different kind of markets.  Many markets when left to operate relatively freely are competitive, open, and transparent, and offer useful goods or services to the general public.  But some are opaque, confusing, prone to monopoly or collusion, and/or offer goods or services of questionable merit.  The mere fact that a market can be characterized in the latter sense doesn't mean that it ought to be heavily regulated.  But it may push the justification bar a little lower.

Which brings us to the subject at hand.  I tend to agree with AR that financial services markets (and the market for credit cards in particular) often tend to the second group than the first.  The credit card market, for example, is a bit of a mess -- i consider myself a pretty sophisticated consumer and knowledgable in legal matters as compared with the average person, but comparing the relative mertis of credit card offers and their obtusely written agreements is a giant headache.  I suppose if I dedicated serious time and effort to the question I could come to a reasonable conclusion but I don't have the time or energy to do so.  Nor should I have to do so.

I also think we have to keep in mind that although it may be tempting to say cavaet emptor and take the position that if people abuse their credit it is their problem, the plain fact is that position is not really tenable.  If the experience of the last two years has taught us anything, it has taught us that the bad credit decision of individuals can have very serious negative economic and social impacts on the national (and even the world) economy.  It would be foolish not to take that reality in account in thinking about policy.

That said, I haven't seriously reviewed or thought about this particular law, nor am I taking any position on it. 

[Admiral Yi]

Yes, because over here at least many people have their "life insurance" paid out when they retire (many insurances offer a combined life insurance/pension fund).

We have both kinds as well.

[crazy canuck]

I would be in favor of a piece of paper that must be signed with every life insurance sale stating something along the lines of: "The primary purpose of life insurance is to replace income that was lost due to death. Life insurance can protect dependents and others relying your income in the event that you die.

However, life insurance policies should rarely be taken out on children, or adults without dependents. In these cases, life insurance can drain your financial resources without providing significant financial protection against loss for your family."

Would it really be so hard to do this? It isn't as though we would need a new regulatory agency--not only do we have many insurance agencies as it stands, this would just be a few sentences that need to be signed before a policy can become active.

And btw, the investment components of life insurance policies are notoriously awful. I see no reason a young person without financial obligations should ever purchase life insurance (at least in excess of funeral costs).

But that only assumes one kind of life insurance product. The wording you propose is actually quite misleading. There are other ways that life insurance products can benefit people.  I know you say that they don't but do you really want regulators to make those kinds of judgments?  As an anecdote, one of my partners bought life insurance investments vehicles for his children years ago when interest rates were high.  The product turned out to be a wonderful investment - certainy much better then his stock portfolio atm. It matures when his kids hit 65 and when they do mature his children will be wealthy enough that they will have no financial concerns.

The point is that regulating what people should buy is a very tricky game for the State to play.  No one knows enough to predict all the unintended consequences.  Your proposed wording is a great example.   Your wording assumes that all life insurance investments are crap and so you would want the regulator to take that kind of choice away when in fact it can be a good investment in particular circumstances.

[crazy canuck]

Which brings us to the subject at hand.  I tend to agree with AR that financial services markets (and the market for credit cards in particular) often tend to the second group than the first.  The credit card market, for example, is a bit of a mess -- i consider myself a pretty sophisticated consumer and knowledgable in legal matters as compared with the average person, but comparing the relative mertis of credit card offers and their obtusely written agreements is a giant headache.  I suppose if I dedicated serious time and effort to the question I could come to a reasonable conclusion but I don't have the time or energy to do so.  Nor should I have to do so.

Actually it sounds like you are more in Berk's camp.  No one is arguing against the requirement that there be clear disclosure of the terms.  What I think the push back is about is dictating what those terms ought to be.

[Malthus]

Which brings us to the subject at hand.  I tend to agree with AR that financial services markets (and the market for credit cards in particular) often tend to the second group than the first.  The credit card market, for example, is a bit of a mess -- i consider myself a pretty sophisticated consumer and knowledgable in legal matters as compared with the average person, but comparing the relative mertis of credit card offers and their obtusely written agreements is a giant headache.  I suppose if I dedicated serious time and effort to the question I could come to a reasonable conclusion but I don't have the time or energy to do so.  Nor should I have to do so.

Actually it sounds like you are more in Berk's camp.  No one is arguing against the requirement that there be clear disclosure of the terms.  What I think the push back is about is dictating what those terms ought to be.

The problem arises when the terms are complex. It may well be the case that the terms are not difficult to understand due to a deliberate attempt to confuse and deceive, but simply because the subject matter is one which is reasonably complex. In that case, cavaet emptor may not be sufficient - again, more disclosure obligations may make the situation worse and not better when the disclosure adds details that the average person does not understand, or is more material than they can be expected to absorb.

That is a consideration that competes with the other general consideration, that state-nannyism is basically a bad idea, and outcomes are more efficient if only people are allowed to do what they want, freeing human ingenuity - that didn't work so well in other lending situations such as mortgages.

[Berkut]

That is a consideration that competes with the other general consideration, that state-nannyism is basically a bad idea, and outcomes are more efficient if only people are allowed to do what they want, freeing human ingenuity - that didn't work so well in other lending situations such as mortgages.

Actually, I would conclude the opposite - banks have been loaning people money for houses for a long time before we had this housing crisis, so I think the conclusion that there is some fundamental problem that must be addressed via more legislation is not really supported. It's not like there was a dearth of rules about loaning money for houses. They just weren't the right rules, and had the wrong motivation behind them.

Rather, I think the lesson should be that the government should stay out of the money lending business, and decisions about who to loan money to should not be based on political considerations, and government directed lending institutions directed or allowed to  respond accordingly - even if that means that poor people who vote Democrat may not be able to buy a McMansion.

[Admiral Yi]

That is a consideration that competes with the other general consideration, that state-nannyism is basically a bad idea, and outcomes are more efficient if only people are allowed to do what they want, freeing human ingenuity - that didn't work so well in other lending situations such as mortgages.

Leaving aside the other government regulations and policies which contributed to the subprime bubble, one of the culprits in both that and the credit card market is soft monetary policy.  Presumably after the economy is back on track the Fed will take a look and try to target money supply better.  New restrictions on credit cards which looked sound and sensible in a time of easy money might not look so good when the taps are tightened.

[viper37]

You could say that life insurance is mainly for protecting the family against the sudden death of the breadwinner, AND IS NOT MEANT TO BE AN INVESTMENT VEHICLE.  It might be a bit too editorial, though.

some insurance policies are investment vehicles.

[viper37]

I would be in favor of a piece of paper that must be signed with every life insurance sale stating something along the lines of: "The primary purpose of life insurance is to replace income that was lost due to death. Life insurance can protect dependents and others relying your income in the event that you die.

However, life insurance policies should rarely be taken out on children, or adults without dependents. In these cases, life insurance can drain your financial resources without providing significant financial protection against loss for your family."

Would it really be so hard to do this? It isn't as though we would need a new regulatory agency--not only do we have many insurance agencies as it stands, this would just be a few sentences that need to be signed before a policy can become active.

And btw, the investment components of life insurance policies are notoriously awful. I see no reason a young person without financial obligations should ever purchase life insurance (at least in excess of funeral costs).

that's stupid.  Parents could be in serious financial trouble if they don't have a small insurance to pay for the costs of the funerals.  Funerals don't come cheap.  They don't drain resources, they offer you a choice: pay now by small increments, or pay later in one big sum.  Most people can't put their money aside for such important things.

[Admiral Yi]

that's stupid.  Parents could be in serious financial trouble if they don't have a small insurance to pay for the costs of the funerals.  Funerals don't come cheap.  They don't drain resources, they offer you a choice: pay now by small increments, or pay later in one big sum.  Most people can't put their money aside for such important things.

Do people still do that?  I thought taking out a life insurance policy to pay for a funeral went out with the Great Depression.

[alfred russel]

I would be in favor of a piece of paper that must be signed with every life insurance sale stating something along the lines of: "The primary purpose of life insurance is to replace income that was lost due to death. Life insurance can protect dependents and others relying your income in the event that you die.

However, life insurance policies should rarely be taken out on children, or adults without dependents. In these cases, life insurance can drain your financial resources without providing significant financial protection against loss for your family."

Would it really be so hard to do this? It isn't as though we would need a new regulatory agency--not only do we have many insurance agencies as it stands, this would just be a few sentences that need to be signed before a policy can become active.

And btw, the investment components of life insurance policies are notoriously awful. I see no reason a young person without financial obligations should ever purchase life insurance (at least in excess of funeral costs).

But that only assumes one kind of life insurance product. The wording you propose is actually quite misleading. There are other ways that life insurance products can benefit people.  I know you say that they don't but do you really want regulators to make those kinds of judgments?  As an anecdote, one of my partners bought life insurance investments vehicles for his children years ago when interest rates were high.  The product turned out to be a wonderful investment - certainy much better then his stock portfolio atm. It matures when his kids hit 65 and when they do mature his children will be wealthy enough that they will have no financial concerns.

The point is that regulating what people should buy is a very tricky game for the State to play.  No one knows enough to predict all the unintended consequences.  Your proposed wording is a great example.   Your wording assumes that all life insurance investments are crap and so you would want the regulator to take that kind of choice away when in fact it can be a good investment in particular circumstances.

Not a fair characterization: a disclosure takes away choice from no one.

The issue is not that in certain circumstances life insurance can't produce financial windfalls: as you said, the returns were linked to interest rates, which turned out to fall. If you bet on red in roulette and it comes up red for you, that is a great incident, but roulette is still a terrible investment. A better point of comparison would be whether you can earn better returns on similar investments outside of a life insurance policy, and in most cases you can. My guess is that when your partner entered the policy, he did not necessarily want an investment product speculating on interest rate declines.

There are certain tax and compensation circumstances that can make life insurance attractive: but those are complex enough that anyone knowledgeable of them will not be deterred by a few sentences from a regulator.

[crazy canuck]

that's stupid.  Parents could be in serious financial trouble if they don't have a small insurance to pay for the costs of the funerals.  Funerals don't come cheap.  They don't drain resources, they offer you a choice: pay now by small increments, or pay later in one big sum.  Most people can't put their money aside for such important things.

While I dont agree with the fininacial wisdom of this statement it is a good indication of why we should not be regulating what people should buy.  Judgments about what is good and bad differ. 

[viper37]

The problem arises when the terms are complex. It may well be the case that the terms are not difficult to understand due to a deliberate attempt to confuse and deceive, but simply because the subject matter is one which is reasonably complex.

that argument could be madfor just about anything, you know, including lawyers...  It seems many people don't clearly understand what their lawyer is gonna charge them and end up with huge bills.  Got caught once like that; 20 000$ for the lawyer and still had to pay 40 000$ for a problem that was clearly the fault of the client (analogy: a restaurant telling a client that his coffee his hot, then proceeds to voluntarily spill the coffee on him and sues the restaurant for serving coffee too hot and the restaurant has to pay through a settlement).

I could make the same arguments about computers where many people feel the salesman is delibaretely trying to confuse them with ambiguous terms such as "megahertz", "megabits", "megabytes", "modem", "refreshment rate", "OEM OS", etc, etc,.

I understand all about that, some people may not.  I understand everything about finance, some may not. 
I have no idea where my liver is.  Before having problems with one of them, I never knew how to exactly place my kidneys. 

I'm supposed to buy some kind of strap for my car and it's supposedly easy to change.  Truth is, I'm gonna have it done by a mechanic 'cause I don't know shit about cars.  He's gonna charge me maybe 50$ for something that takes 15 min.
Some people would say it's fraud.  The mean garage guy did not explain me in details how to do the job myself and did not give me the exact part# I need.  Should we require by law that all doctors teach their patient about biology?  That all mechanics teach you how to repair your car?  Are they dishonest because they do stuff you could maybe do yourself but are scared too?  I never had a computer tech come into my house, I always repair my stuff.  Some people have paid me 40-60$ to repair simple problems.  Computer stores charge 80$ to wipe your hard drive and reinstall Windows.  Are they evil like the insurance companies, the lawyers, the credit card companies, etc?  Should lawyer have to write in advance how much they will charge their client for each case they take and put that in writing on a contract that takes less than a 8.5x11 page?


How far do we need to go to regulate industry practice because not everyone knows everything?