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Yet Another Dumb Idea From Chris Dodd
His supply seems endless. The latest, a call for an immediate rate freeze by card lenders, could screw up the economy.

Thomas Brown ( about me )
Posted 10/27/2009
bankstocks.com
tbrown@bankstocks.com

I assume Sen. Chris Dodd knows how the free enterprise system works and that, with his new bill that would require credit card lenders to immediately freeze rates on existing balances, he’s simply playing to the pitchforks in my home State of Connecticut, where he’s having to scramble from behind in his 2010 reelection bid.

What other explanation can there be? Back in May, recall, Congress passed a law that will restrict the ability of card lenders to raise rates and impose fees on their customers. The card industry opposed the bill, but made no secret of the fact it can adapt to the bill’s new rules. Since then, understandably, lenders have selectively increased rates and imposed fees, in anticipation of their soon-to-be-restricted ability to dynamically price when the new law goes into effect in February. The people who voted for the law should have expected this to happen. The card lenders’ lobbyists must have promised them it would. This isn’t an instance of card companies putting an extra squeeze on their customers. They’re simply reacting to a changed regulatory environment.

And now Chris Dodd wants to force card lenders to freeze rates immediately? If Dodd were to get his wish, the first result would be to severely restrict the flow of consumer credit, which is precisely what the economy does not need at this point in the cycle.

Here’s a basic truth in banking: The more restrictions government places on lenders’ ability to extend credit, the more expensive credit will become. We’ve already seen how lenders have responded to the bill Congress passed in May: rates have risen and fees have proliferated. Now Dodd wants to impose even further restrictions. Guess what figures to happen next? Follow this process to its logical conclusion, and credit won’t simply become even more expensive, it will dry up altogether. As I say, this is just what the economy does not need.

If government changes the rules under which banks can extend credit, lawmakers shouldn’t be surprised that banks will in turn change the rules under which they extend credit. Any bank that’s interested in staying in business has no choice but to do that.

Chris Dodd’s bill is idiotic and dangerous. If Congress is even capable of acting even remotely rationally, it will never see the light of day.

What do you think? Let me know!

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Comment:

HanoverH Posted On 10/27/2009 2:12:09 PM

Maybe so. But whatever happened to the need to reduce consumer credit in the first place ? Also, whether it starts now or in February does not change much in the pro or con arguments.

fsda Posted On 10/27/2009 2:27:19 PM

Democratic Senator Christopher Dodd, former candidate for President, revealed his grasp of the situation on July 11, 2008, when he strongly defended the financial condition of Fannie & Freddie: "This is not a time to be panicking about this. These are viable, strong institutions. To suggest somehow they are in major trouble is not accurate. These institutions are in sound shape. The economics are fine in these institutions and people need to know that. [There’s no reason] "to talk about failure. These two institutions are fundamentally, fundamentally strong. There's no reason for the kind of reaction we're getting. They have adequate capital. They have access to that capital. This is the reason for people to have confidence in Fannie and Freddie.” http://www.energypublisher.com/article.asp?id=16140 Unfortunately, about an average Senator.

Texascommunitybanker Posted On 10/27/2009 3:01:55 PM

Yes and his grasp and understanding of "how banks work" was on display again in his proposed legislation on Overdraft Fees... only allowing one a month and six a year. That's a surefire formula for banking the unbanked! Can you imagine the state of the economy when banks can't charge for returns or overdrafts, not to mention collect interchange fees. The retailers will really howl about the lack of consumer spending when cash is the only medium to buy goods and services! Bring back the gold standard while you are at it! This political posturing is really over the top. What some people will do to make people forget they received favors from those they pillory now...

Former Banker Posted On 10/27/2009 3:43:42 PM

Chris Dodd is a pandering idiot. Unfortunately, he is only one of the more egregious examples of this species currently serving in Congress.

ALW Posted On 10/27/2009 3:48:12 PM

"I assume Sen. Chris Dodd knows how the free enterprise system works..." A large assumption Tom.

Hobnob Posted On 10/27/2009 4:07:04 PM

Sing your song to the poor devils who just got notice that their credit card rates will shift up toward 30% ( and that the Mafia might well be employed to handle collections) . Usury is usury, isn't it? Sooner or later the sound of tumbrils will be heard in the land.

gborodude22 Posted On 10/27/2009 4:31:04 PM

Texascommunitybanker, the age of the overdraft is over. OD/NSF fees have peaked and you only have your greedy banking brethren to blame for spoiling a valuable service to consumers who need this. Pigs get fed and hogs get slaughtered. And politicians can make good hay on effective interest rates exceeding 1000% and being a worse deal than getting funds from a payday lender. Better find a new source of noninterest income.

gborodude22 Posted On 10/27/2009 4:36:59 PM

Texascommunitybanker, the age of the overdraft is over. OD/NSF fees have peaked and you only have your greedy banking brethren to blame for spoiling a valuable service to consumers who need this. Pigs get fed and hogs get slaughtered. And politicians can make good hay on effective interest rates exceeding 1000% and being a worse deal than getting funds from a payday lender. Better find a new source of noninterest income.

gborodude22 Posted On 10/27/2009 4:49:58 PM

Texascommunitybanker, the age of the overdraft is over. OD/NSF fees have peaked and you only have your greedy banking brethren to blame for spoiling a valuable service to consumers who need this. Pigs get fed and hogs get slaughtered. And politicians can make good hay on effective interest rates exceeding 1000% and being a worse deal than getting funds from a payday lender. Better find a new source of noninterest income.

chris Posted On 10/27/2009 4:57:29 PM

Here’s a basic truth in banking: The more restrictions government places on lenders’ ability to extend credit, the more expensive credit will become .Really...this is ideology...truth needs numbers to back it up

Ken Greenberg Posted On 10/27/2009 5:28:15 PM

Tom is right - sad in a way. OD - you can't simply take $38 billion (or almost all of that) out of a weak banking system and think the banks won't find a way to replace it. Likewise the credit cards. Yes, 36% is too high. But it's one thing to cap at, say, 27% (high enough) and another to freeze rates. Would the freeze apply to low intro rates? Probably not. Then again, this is the Congress that just increased discretionary spending by 12.1% for next year despite a fall in revenues. The same ones that almost bought more jets for themselves before the screaming curbed that. There's only one hope here: DON'T VOTE FOR THEM AGAIN. If we ran our companies like this would WE still have jobs? Just about the only more embarrassing thing is the NY Legislature.

Bernard Posted On 10/27/2009 6:24:01 PM

I do believe the purpose of the law is to make banks more critical of to whom they extend loans. By increasing rates the effect is to lessen the amount of debt that credit card holders will run up. There is nothing wrong with debtors behaving more responsibly and avoiding credit card debt. No matter how high the rate banks will be unable to collect from poor risks and that will make them more level headed when extending credit limits to people who shouldn't have credit cards.

william band Posted On 10/27/2009 7:41:00 PM

Again you are an idiot….banks have made money by devouring the customers they should be protecting…banks borrow at 0 to .25 %...if they can’t make money at existing rates they should not be in business..When will you admit they have been screwing the public for 16 years…may be credit should not be available for everyone not responsible enough to manage their finances. Hopefully going forward we will not spend money unless we have the money in hand. Nothing wrong with the economy contracting..a lower standard of living is better than abusing credit and remaining in debt

Lori Posted On 10/27/2009 7:48:58 PM

I think he IS too close to the banking industry and I think you are correct. Got hope?

geckler Posted On 10/27/2009 10:47:52 PM

You miss the point in your analysis. Clearly the Banking Committee, Fed and the Obama administration have a policy goal to centralize and do away with inefficiencies in capital allocation. You already see the student lending market federalized and Sallie Mae lucky to remain a servicer. The SBA lending program clearly will expand and offer entrepreneurs lower cost of capital. The lemonade stand that exits today (upward sloping yield curve) for banks is gift enough to the industry, if anything these rules will eliminate the highest yielding credit tranches in the securitization markets making underwriting even more profitable and more therefore more credit will be extended. Albeit at higher rates than otherwise without legislation, but the government will always choose more access over marginal price increases.

Litch Posted On 10/28/2009 3:12:12 AM

While assinine, let us only hope that Dodd is successful, as a reduction in consumer credit will only further illuminate the bafoonery of pols like him who need a permanent vacation from Washington. Broadly, and including this instance, the more eggegeous the moves of the far left the better, as it will help ensure they get tossed in November.

John Tschohl Posted On 10/28/2009 10:24:57 AM

Chris Dodd is an idiot and belongs in jail. He has the brains of a dead turtle.

Bob Tancredi Posted On 10/28/2009 10:30:42 AM

Absolutely idiotic. But in the words of idiotic Barney Frank, Congress is doing everything in its power to expand the power of government, which would ipso facto include shackling money lenders, who to all decent power elites wherever they may dictate represent the bane of good hearted spending.

Kyle Posted On 10/28/2009 10:52:14 AM

Although I'm for restrictions on the ability of consumers to discharge debt in bankruptcy (that is a major source of high credit card rates), I do think that credit card companies have a lot of power to charge the terms on *existing* debt, which is an unusual circumstance. Increasing a rate from 10% to 30% because of one late payment probably causes more default than it solves. Increasing a rate from 20% to 30% in the absense of a late payment is a bit dishonest, although consumers can usually opt out of any increases in rates that are not associated with delinquency (at the cost of the line of credit no longer being available). My general feeling is that credit card companies are scrambling now that they have offered out so much credit that default rates have risen above 10%, now that there is a downturn. It's in no small part their own fault.

constant50 Posted On 10/28/2009 12:25:07 PM

How about another dumb idea from Thomas Brown regarding Synovus Financial Corp. Give me a break! Shouldn't you stay as far away from recommendations as possible.

jack macdonald Posted On 10/28/2009 2:47:36 PM

Great story.

Texascommunitybanker Posted On 10/28/2009 10:49:04 PM

qborodude 22... looks like your grasp of OD/NSF is right up there with Mr. Dodds! Before there were OD Programs there were still OD/NSFs'. In the good old days before ODP when you wrote checks for more money than you had in your checking account you still had the same issue. Not enough cash to cover what you purchased. The difference then was it was a manual review and decision by the account officer to pay or return the item(s). You still paid fees for the handling of the item. (OD fee). You also suffered the embarassment if your check was returned of having to be called by the merchant who accepted your check to make it good and then having your name or worse, the check, posted so employees who worked for the merchant wouldn't accept any more checks from you. Ahhhh the good old days! Today technology reigns supreme for effiency's sake. You are granted a "OD limit" attached to your account and a computer makes the decision to pay or return based on said limit. You may have other savings or money market accounts attached to your checking account in case you are forgetful or unobservant. Our ATMs will not let you make a withdrawal if you don't have enough to cover it without your authorization at the point of withdrawal. But still the masses complain about the "evil" banks and their wicked ways. I have one word for you... responsibility. There are so many ways to keep up with your account balances... by phone, computer and PDA. No excuse for people not to stay plugged in and aware of their fiscal status at anytime. So tomorrow when you get up read the NYTimes and drink the koolaid and dream of the perfect nanny state where no one has to take responsibility for any of their actions. Big brother is looking out for you!

newfie1 Posted On 10/29/2009 10:30:19 AM

"Better find a new source of noninterest income." Be careful what you wish for...

GwynethShugart Posted On 11/26/2009 12:27:26 PM

I find it so moronically stupid that people need OD/ NSF fees to be able to be called responsible and smart in balancing their checkbooks. That is so idiotic! Life is simple and banks would not be able to milk their customers if we just stopped trying to live on credit. Spend what you have in your account. If you try to spend one cent over program the system to deny that without all the BS that it needs an NSF fee. Shame? Give me a break and get over yourself. You tried to spend money you did not have! America is the only country in the world where the stupid banks milk their customers for OD/ NSF fees yet ironically American banks are the only banks in the world that needed and got a 7 billion USD bailout! That to me clearly says ignorant management and a screwed up banking system. The other thing also... Trying to put the blame on the customers that are starting to realize that they are being duped is incrediously retarted. Example: you have 50USD in the bank on Saturday. On Sunday you spend 5 times 5USD totalling in 25USD. Since you started with 50USD on Saturday you should have 25USD left on Monday. On Monday a bill for 50US tries to go through. What should happen is that that bill should simply be denied without NSF OR... Bill could be paid and your account should only be minus (25USD + 1OD fee). That should be it, simple and honest. But no, let's feed on this customer. Let the Bill on Monday go totally through leaving you with zero balance then be so kind to pay the 5 times 5USD from Sunday after that so we can charge you 5 OD FEES instead of one!!! Now people are supposed to accept and trust this as a sane banking system while it stinks of scam? Sad sad sad and stupid! I will not and do not accept, tolerate or comply with a system like that. Then it comes... If you do not pay our cooked up fees your credit score will go bad threat. Gosh like controlling and manipulating bullies. So what? Credit Score systems only work in societies that are at least 50% sta

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