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Credit Cards and the Collapsing Country

October 27, 2009 Leave a comment

The policy of credit card companies charging an annual fee for those cardholders with solid credit is a good proxy for the state of the nation, and also a microcosm of both the progressive (read socialist) movement in this country and the unintended consequences of an economic policy destined to fail — or succeed if you measure success by increased impoverishment.

Those two solvent, reputable, dare I say creditworthy institutions Bank of America and Citi are reportedly

starting to charge fees to reliable customers in response to a slew of new credit card industry regulations that will limit when banks can hike interest rates. Cardholders who get a new annual fee notice in the mail will be in a no-win situation.

“They can either pay that fee or they can close the account, and if they have had the account for a while and they close it, they are potentially going to hurt their credit card score,” said Woolsey (Director of Consumer Research at CreditCards.com).

This response to government intervention provides great insight into the problems with regulations the government claims will help the consumer. By preventing banks from increasing their rates in response to a lack of creditworthy borrowers in the markets, those who have proved creditworthy customers over time will be forced to subsidize those less reliable to make up the difference, proving yet again that there is no such thing as a free lunch. We could examine the further consequences for the macroeconomy of these creditworthy people being incentivized to become less creditworthy or if nothing else losing purchasing power as a result of this policy, but the above synopsis should do.

This policy reflects what happens every time the government tries to set prices – in this case the price of credit. Some people are aided, while others lose as a consequence. Further, as with the way in which government seems to favor the debtor over the creditor today, here the less responsible is favored over the more responsible. Adding insult to injury, the more responsible cardholder must subsidize the less responsible one. In essence, this is the basis of the welfare state. Those who generate more wealth must have a significant percentage of it expropriated to help out those who do not create as much wealth. We can argue over whether wealth generators are more responsible than the indigent, but I think you understand my point.

As I have mentioned before though, this liberal system in the end devours itself. First, it is economically unsustainable. At some point, those continually forced to subsidize the reckless and feckless will either go broke or go Galt. As a consequence, so too will the whole system (go broke that is). Second, from a moral perspective, the values engendered in rewarding people for being unproductive and penalizing those who create will pervert society, leading to its malaise.

As I have harped on continually here, the problem with the development of a capitalist system is that if not constantly fought for on both economic and perhaps more importantly moral grounds, it ends up sowing the seeds of its own destruction. Wealth begets wealth until it begets redistribution of wealth. Redistribution of wealth destroys the mechanisms that create it in the first place and weakens the moral fiber of a society. Much like organisms in nature that grow beautiful and strong only to decay in old age, capitalism seems to grow great only to end in grief.


Tax the rich
Feed the poor
Til’ there are no, rich no more

Moral Hazard at Qdoba

February 15, 2009 2 comments

Americans Could Learn a Lot from Dwight Schrute

Drudge always happens to find a way to capture outrageous stories that reflect the times we’re living in. To this end, I could not believe this nugget regarding a worker at Qdoba. Apparently, in order for one to receive unemployment insurance, one needs to be officially fired. So the brilliant fellow in this story decided that the best way to do this was to wreak havoc on the restaurant, throwing pots and pans along with food all over the place. This is reminiscent of the type of scene one would find in my fraternity house common room on a weekend morning.

What this reflects however is moral hazard at its lowest common denominator. A man is so desperate to receive compensation for being laid off that he tries to intentionally get himself fired. Honestly, what is the world coming to? And I would bet that this is not an isolated incident. Because we have built in a social safety net to our society, we have created the conditions for people to become lazier, less hard working and more profligate. We feel that because the government has X, Y and Z programs that we will have nothing to fear come retirement; or even be rewarded if we rowdy a Qdoba restaurant (why would you ever denigrate an institution that makes such a delectable burrito!?). It is akin to the way a high school student drives a car bequeathed to him, versus a car that he purchases with his own money. Trust me, I speak from experience here.

The fact of the matter is that in the case of the nation, the social safety net devours the very system that was able to support it, until it kills the system from within. The social safety net would have never been considered had we not been able to develop an economy wealthy enough to sustain it. Yet it is this socialist system that has grown so big that it may cause our government to default someday — either that or print up enough money to devalue the massive unfunded liabilities lurking over the next twenty years. Moral hazard has placed a debt burden on future generations. The Ponzi scheme of everyone paying into a system to distribute advantages to certain people will collapse because it will be unsustainable.

Thankfully, the laws of economics are color-blind and class-blind. They are just in that they weed out failed operations, fraudulent schemes and profligate people. They provide pain when a government immorally tries to stop the markets from functioning as they should. In the long run, they reward the savers, the prudent businessmen and the innovators. But you can be sure that until such time as things collapse to the point where we abandon a mixed economy and the welfare state, there will be far more people like the man above who seek to con the system for personal gain. Only after the fall will the deserving people prosper.