Monday, February 22, 2010


Two Cheers for Credit Cards

(Not three cheers, mind you.) The intro:
Ever since someone in grad school deviously introduced me to the concept of "irrational" debt aversion, I have been carrying credit-card balances that are far too high. Believe me, I understand the tricks these companies pull, like the clause in fine print where you unwittingly pledged away your firstborn.

I have had credit-card employees explain matter-of-factly to me that it was in my interest that they apply payments to the balances with the lowest interest rates first, and I was once driven to vulgarity on the phone by a representative who got philosophical with me when I was trying to close an account with a zero balance.[1] So believe me when I say that I get it when people complain about credit-card companies.

Yet in the present article I want to describe some of the benefits of these seductive tools of a modern financial economy. Although many critics would argue that credit cards show the flaws of capitalism, they also showcase its strengths.
And if you want to see what's good about credit cards, you'll have to read the article.

If it wasn't for credit cards, Yiff Night Fridays with Tom Woods would be but a fantasy.
I disagree that credit cards are a seductive tool of a modern financial economy; They are a seductive tool of a fascist financial economy.

The only reason credit cards for consumers exist is because of a guarantee of a bailout. They take scarce credit away from businesses and drive up prices.

We are all poorer because of credit cards.

There could have been credit cards during the industrial revolution if consumer credit was a good thing. Before credit cards we had personal paper checks (yesterday's version of debit cards). People paid for consumer goods if they had the money. This keeps prices down, and encourages savings, which is where capital comes from, which is where production comes from, which is how the value of our money increases.

Only businesses should have credit cards.
There could have been credit cards during the industrial revolution if consumer credit was a good thing.

Maybe, but would you say the same thing about iPods and laptops?
Would I say that there could have been iPods and laptops during the industrial revolution or would I say that iPods and laptops couldn't exist without consumer credit?

No and No.

All the existence of credit cards means is that they can charge more for iPods and laptops, and there is less capital available to produce iPods and laptops, because people aren't saving for emergencies they're using credit cards. Could you imagine how little production there would be if the whole world depended on credit cards? Where would the capital come from?

In a free market, consumer credit would almost disappear. The interest rates would be too high on credit cards for consumers.
Is it wrong for me to think there is a huge inflationary aspect with credit cards? I hear people calling into Dave Ramsey on a daily basis with tens of thousands of dollars worth of credit card debt and then him saying, "well, you should be able to settle with the company for about half of that amount" And I'm thinking, in regards to the debt-induced caller, you just accumulated fifty grand worth of liabilities and were able to settle that amount with half the quantity. This has to be rediculously inflationary, right?

I wonder how much of the "tricks" credit card companies pull is the result of credit card regulation, which requires them to find away around onerous regs.
Last Anonmy

@Bob: Thanks for the pointer about AmEx. I didn't realize cardholders got treated better, and for that reason. I'll have to apply for one. (Let's hope they don't reject me like Arnold Kling says can't happen.)
Oops, forgot to finish my comment to Anonymous.

Last Anonymous: I don't think those cases are inflationary because most of that debt is probably due to the interest compounding, and even at a loss, the card issuer suffers a corresponding loss of purchasing power. It could have a bubble creating effect.

And as I keep emphasizing, the real problem isn't inflation per se, but rather, the refusal of the risk free interest rate to keep up with it. (And given the short term thinking that predominates corporate culture today, I'm guessing the social discount rate is MUCH higher than that reflected by interest rates.)
Butt-plug say what?
Post a Comment

Subscribe to Post Comments [Atom]

<< Home

This page is powered by Blogger. Isn't yours?

Subscribe to Posts [Atom]