10 July 2009
I am very disappointed with the shortcomings of the legislation just enacted on credit cards.
Economics can be summed up as the study of the commerce of rents. When I use one of my credit cards, I rent cash from the card's issuer on previously established T&C. For this, the issuer bills me monthly for rent in the amount I paid to the merchant. Using VISA as an example, the merchant will receive about 97% of the amount (including sales tax) shown as the transaction amount charged to my card. The card issuer has an agreement with VISA for VISA to function as the clearing house between me and issuer. For acting as the intermediary or clearing house, the issuer pays VISA to accurately record the transaction total for which I rented cash using the issuer's card and pays VISA the cash transaction total amount. The next paragraph explains two different corporate policies for accounting for revenues.
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Not only was the issue of a federal usury limit not open to public discussion, the new law does not restrain the retail credit issuers' ability to make unilateral decisions for changing the terms and conditions for using their cards. Not only have issuers pushed up daily interest rates and shortened the payment due date interval, almost all issuers associated with VISA and MasterCard have reduced the amount of available credit for their customers.
Economics can be summed up as the study of the commerce of rents. When I use one of my credit cards, I rent cash from the card's issuer on previously established T&C. For this, the issuer bills me monthly for rent in the amount I paid to the merchant. Using VISA as an example, the merchant will receive about 97% of the amount (including sales tax) shown as the transaction amount charged to my card. The card issuer has an agreement with VISA for VISA to function as the clearing house between me and issuer. For acting as the intermediary or clearing house, the issuer pays VISA to accurately record the transaction total for which I rented cash using the issuer's card and pays VISA the cash transaction total amount. The next paragraph explains two different corporate policies for accounting for revenues.
It's to the merchant's advantage to have robust sales paid in cash or by credit card. The merchant wants to maximize cash revenues to pay the costs of doing business. The merchant may also purchase inventory using rented cash, viz. credit, to ensure a predictable cash inflow is vital for remaining in business.
What we need for our economy now is Rent Control, plain and simple. Instead of apartment rents, this rent control is about cash.
Banks saw an opportunity to expand their retail banking products to include credit cards for individuals and businesses. Prior to expanding into retail and wholesale credit business, the banking industry's markets were underwriting and mortgages, also known as funding loans and structured repayment loans for real estate and personal, unsecure loans. Bank revenues came from interest charged on mortgages and other loans.
Banks saw an opportunity to expand their retail banking products to include credit cards for individuals and businesses. Prior to expanding into retail and wholesale credit business, the banking industry's markets were underwriting and mortgages, also known as funding loans and structured repayment loans for real estate and personal, unsecure loans. Bank revenues came from interest charged on mortgages and other loans.
Long-term reform of the US banking system will involve parsing out the different kinds of credit instruments in different markets to establish requirements of a new system. Currently, the banks seem focused on cash inflows and minimal cash payments. It seems to me that raising interest rates for savings accounts and CDs would increase the volume of deposits and purchases of CDs even at rates up to half of that charged to its business and individual debtors. The banks, however, seem unwilling to pay out interest on savings and CDs at rates more than 2% of the banks' cost of money or to lower lending rates even when their cost of cash could produce 400-500% profit margins. Instead, absent government regulation, the banks are realizing profit margins for retail credit over 3,000%. When banks can buy money at 0.0-1.23% for their reserve requirements, investments and loans, they charge fees and interest for credit card receivables at unregulated rates of up to 35-40% per dollar owed, the card users provide not only cash related to principal, but also the free cash received from payments for interest and fees.
The Obama Administration did not succeed in reforming a banking system developed in 1934 because the U.S. credit-based economy remains insufficiently regulated to encourage savings, to stabilize the manner in which the banks make their profits from retail credit and mortgage loans. The federal infusion of cash prior to January 20, 2009, gave carte blanche without mandating terms and conditions for using those $ billions offered for the taking. After the Obama Administration set rules on the use of stimulus cash, banks could not pay back those funds quickly enough. Had Congress created a strong, national bank for regulating debt, cash reserves and currency value, then true reform could have been possible.
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