President Obama has lately been pushing a credit-card reform bill in the Senate, which he says is designed to curb abuses by the card issuers. Among these ‘abuses’ are interest-rate hikes imposed on delinquent card holders, and applying payments first to lower-interest balances rolled over from other credit cards at discounted introductory rates. “Americans know that they have a responsibility to live within their means and pay what they owe. But they also have a right to not get ripped off,” the President argued in his weekly radio address. “Abuses in our credit card industry have only multiplied in the midst of this recession, when Americans can least afford to bear an extra burden.”
Of course, nobody who has ever been on the receiving end of a credit card rate hike likes them very much, and such increased costs are indeed tougher for consumers to bear in a recession. We might, however, ask how a company exercising its lawful right to adjust its fees – in accordance with terms clearly spelled out on the agreements signed by its customers – is ripping Americans off. It might not be nice for credit-card companies to raise their rates on struggling clients, and it might not be a sound business practice in a down economy, but it’s not fraud. Maybe someone with access to unlimited media exposure, such as the President, could use his bully pulpit to call upon these companies to exercise more compassionate policies toward their customers, and suggest the competitive advantage in being able to advertise their “kinder and gentler” credit products, instead of treating them like perps in a police lineup.
These casual accusations of criminality and deceit come easily to Obama, who has been a real bull in the china shop of the credit industry. He’s threatened Chrysler’s bond holders with personal destruction, and used raw government power to adjust the balances on home mortgages. Nervous banks have taken TARP funds designed to stimulate new lending, and sat on those funds instead, because they’re afraid to make loans in the increasingly Venezuelan business environment the Administration has created. U.S. Treasury bonds are losing frightening amounts of value in the face of reckless deficit spending. This Administration probably wouldn’t exist if a group of fabulously corrupt senators – including Barack Hussein Obama – hadn’t gotten rich by forcing the mortgage industry to make unrealistic loans to politically favored constituent groups, and fending off every attempt to correct the system before it crashed.
This is all very bad news for our future, because credit – in all its forms – is one of the most advanced instruments for the creation of wealth ever devised. A market filled with timid lenders and frightened borrowers is a market where wealth shrivels away.
In the most primitive type of economy, people barter goods and services directly. If you want some of the meat I brought back from my hunt, you have to give me some eggs. Besides being terribly inconvenient, the barter system makes complex financial transactions impossible, because value is so difficult to determine precisely. My hunk of venison is worth as many eggs as you’re willing to give me, and the next person I trade with might be prepared to give me more, or less. It’s hard to make trades with high values, or perform complex transactions, or carry goods over long distances to trade with distant folks. Consumers are reluctant to trade for anything they can’t assess personally. How can I tell if I’m trading for good meat, or well-made shoes, or a decent clay pot, if I don’t know anything about hunting, leather-working, or pottery?
The first contribution government makes to an economy is security. The government makes it safe to hunt, farm, or travel, by keeping away bandits and predators. The second contribution is a stable currency. Money gives consumers and producers a way to transport their wealth easily, and have confidence in the value of a transaction. It also makes much more complex financial arrangements possible, as people can pool their efforts in exchange for shares of value. A group of people can work together to do something, earn money, and then divide the money between themselves, much more easily than they could in a barter system. The exchange of money creates wealth. You give the shoemaker some money for a fine pair of shoes, and you are both wealthier after the exchange – you got a pair of shoes you needed more than a handful of money, and he got the money he wants, which he can spend on things he doesn’t know how to make for himself.
Everyone knows the old saying that “time is money,” but think about this: money lets you use your time more efficiently. You don’t have to fool around with shoemaking tools for hours, producing a barely adequate set of footwear. You can buy those shoes from someone who knows what they’re doing, and use the time you would have wasted at the workbench doing things you’re better at. This creates greater overall wealth in the economy. It also creates more leisure time, which leads to even more ways for people to make money, as they use their skills to fulfill each others’ desires, as well as meeting their basic needs. Moving from barter to money opens countless possibilities for people, and drives the development of technology. Nobody can organize the resources to create things like steam engines, industrial plants, or high-energy physics laboratories, if they have to trade goats and chickens to get what they need.
At the highest level of economic development is credit – the willingness of people with large amounts of money to loan it, for repayment plus interest. This is hugely important to the creation of an advanced society. Credit, in its many forms, allows enormously complex transactions, and encourages the kind of financial speculation needed for a roaring economy. It lets businessmen quickly assemble the resources to take advantage of opportunities. It encourages technology, by funding research and development – it’s hard for people to make speedy technological breakthroughs if they have to save up the money before they can buy equipment and hire assistants. Credit allows young people with minimal earning power to afford higher education, repaying their loans after they acquire the skills to increase their income. Consumer loans improve the standard of living, by allowing people to buy major items like cars and houses, when it would take them years to save up the money needed. These credit purchases supercharge the economy, by making people willing to buy things they might not have the resolve to carefully save up for. Would the market for iPhones, plasma TVs, and home computers have exploded if every potential buyer had to save up the money for months and years, then bust open his piggy bank to make a purchase? Credit makes money virtual, instead of physical – you can spend tomorrow’s money today.
Of course, credit can be abused. People run up loans they have difficulty repaying. Financial institutions hungry to earn interest made it easy for consumers to get in over their heads. People born in the Seventies, or earlier, can remember when credit cards were much more difficult to obtain than they are today. Consumers became addicted to buying luxuries on credit, and so has the government, which has been on a deficit spending binge. The problem with going after business and personal lending institutions and demonizing them, as Obama has been doing, is that it will reduce the supply of credit, without changing the demand. People still expect to be able to flash their charge cards and get everything they want immediately, business startups still need loans, major goods like cars and houses must still be purchased with loans, and the government shows absolutely no sign of cutting back on that massive deficit spending. However, the institutions which loan money are being frightened out of lending it, because they can no longer rely upon the value of binding contracts – the government has demonstrated a willingness to rewrite the terms by decree. Investors are wary of loaning capital to businesses that might be nationalized. Banks are a little nervous about loaning money for real estate with wildly fluctuating values. Worst of all, insane deficit spending is threatening the value of money. Lenders may wonder if risking a large sum of money to earn 6% interest is worthwhile, when the dollars repaying that loan might be worth 10% less. The effects of this uncertainty are making themselves felt slowly now, but they will become more obvious with increasing speed, if steps are not taken to restore confidence in the financial system.
Obamanomics is destroying the instruments of wealth in reverse order. Credit was devastated first, and money is starting to look a bit shaky. The increasing sense that politics will allocate resources, rather than financial necessity, makes money seem less important, and money pouts when it’s ignored. The core of the economy is security, and ridiculous spectacles like the Pelosi waterboarding tango, the weak response to high-seas piracy, or the sad performance of Obama and Hillary Clinton during recent trips abroad, can only damage it. An actual terrorist attack or Middle East war would be catastrophic, far beyond any immediate damage inflicted (as if that wasn’t bad enough.) It has become fashionable to forget the miraculous recovery of the Bush economy after 9/11. The Obama economy could never survive such a blow – it’s mortgaged to the hilt, with all its credit cards maxed out, and businessmen have been learning Obama views them more as adversaries than constituents. A life-and-death crisis would irrevocably shatter what confidence they have left.
In order for the economy to recover, we need a political class that restrains itself from bullying and menacing the credit industry. We have created too much wealth in America, over the last few decades, to effectively manage and nurture it, without the vigorous use of the most sophisticated instruments of wealth.
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