Obamanomics

Credit Cards and Automobiles

            Two revealing circumstances occurred this week before Memorial Day, which is celebrated early this year. One was the credit card legislation that the President wanted on his desk before the holiday. Amazingly, although some adjustments between the Senate and House bills is required, the deadline of Obama looks doable. This legislation is hailed as relief for the debtor who has had high balances and has had his rate or payment requirements changed in mid-stream. You know, the kind of folks who should not have credit in the first place. The government has now fixed that problem. Right?

            Sure. But, what of the unintended consequences? Credit card companies have made big money from those who could not pay balances when due. The interest rates have always been high and a great profit source for the companies. That has made them greedy for more card holders. So, college kids out of college yet without work received credit card offers. Maybe their limits were only $500 but they charged to the limit and could not pay balances. Millions of interest payments on $500 balances equals real money. First unintended consequence: Those offers will now be non-existent, which is a good thing but there will also be many lower income folks, who could pay modest balances, who will also not be able to have cards. When their time is up…no new card.

Some credit card companies seeing this coming are already offering to buy back credit cards from customers!

            Second unintended consequence: Those who paid balances will become the new source of income for credit card companies. They are, after all, in business to make money. Someone has to pay. It had been a great ride for payers. They change a purchase with interest free money and if they pay their balance in dull when due they have used the bank’s money without an interest payment of any kind. When credit is restricted and high interest is not recovered from non-balance payer, how will money be made? Two ways seem to be the only option. One, charge interest from the date of purchase so that no one uses bank money for free. Two, charge fees again for all cards. Anyone over the age of 40 can remember the days of two.

            Now this seems eminently reasonable. Credit card companies need to make money. But, what will card holder who have the wherewithal to pay balances do? Do you think they want to pay interest on purchases? I think not. There will be a flight to cash and those that have will spend and those on the margins will not. Unintended consequence three: Making the consumer economy weaker, which we are told is 2/3rds of our overall economy. Charging a fee for maintaining a card may not have the same disincentive, but we have an entire generation who never paid to have a card. So…who knows how the new way will be received.

            Unintended consequence four: Many of the big banks make big money from credit card operations. At a time when we are worried about future “stress” on them we make “stress” for them by impacting a stream of revenue. So, Congress and the Administration have saved the “deadbeats” from the greedy credit card folks. There is blame to pass around on the credit card mess. But, the remedy may in fact be deleterious to those who used their cards correctly and the entire economy. But, that is not all….

            The second big item of the week was the Obama Administration’s announcement of 39 mile per gallon fleet standards by the year 2016! This was done with apparent agreement by the Big 3 [or is it Little 3], major foreign makers, UAW and environmentalists. It was a Kodak moment with all the players smiling behind the President. The WSJ had an editorial with the sub-title “Are we nuts?” Automakers in this country have lost money to date trying to meet 20 something standards. Why? Because consumers want bigger cars that do not meet the standards but they have to build unwanted, what we used to call, “compact cars” folks do not want.

            Living where I do where winters are tough and much travel is on I-80 with 60% of the traffic is 18 wheelers, I for one do not want a “compact car”. But, this is an example of why elections have consequences. BO has the banks in tow, is about to own Chrysler and GM with the UAW, and wants to forward his “green” agenda by building hybred “compact cars”. Notice how this lines up: Two of Bo’s constituent supporter groups are happy [unions and environmentalists]; he will have ownership of two of the three US auto makers; and Ford and the foreign makers have to play ball since they are still private enterprise [for now!] and will have to deal with credit markets and banks now controlled by the Treasury. It’s a perfect Strorm!

            The feds justify this by saying this eliminates individual state CAFE standards the create inconsistency for the auto makers. But, the target is more ambitious than the 32 per gallon by 2015 standard heretofore established by those trying to balance mileage against profitability. The latter is obviously not a concern of the Obama Administration. These “green compacts” will be build, and we will all go along. So, how does this happen if the consumer doesn’t want the cars? Grab you wallet! Subsidized loans or tax credits for buyers will be the only way. Again, we all are in this together and short of outlawing any car over 4 cylinders or without a battery, subsidies from the government [the taxpayer] seems to be the only way.

            We cannot stand many more weeks like this one. The Obamanomics policies are coming fast and furious. We have yet to get into cap & trade tax or health care reform. I guess I should look on the bright side. With the new “green compacts” I will travel less, walk more, create less green house gases and be healthier and we won’t need a carbon tax and government health care. Some how, I don’t think it will work out that way. The worse it yet to come from Obamanomics.