Semantic games should be illegal

Post #35,245 by drewk 4/12/02 9:57:32 AM Reply	Semantic games should be illegal If the end result of the shenanigans is that they are passing out money they don't have, which is what the law is intended to prohibit, then it should also be prohibited. Calling it a "sale of bonds" instead of a "loan" is just semantics. Another (smaller) example. Most (all?) states have laws capping the amount a bank can charge for an overdraft. But, if the bank the check is drawn on pays it instead of bouncing it, they can charge the account owner a "convenience fee" for covering the overdraft. This is the same dodge they use with credit cards. Charges are, for the most part, never refused regardless of whether there is any credit left. They will just authorize the transaction and tack on some extra fees. See [link\|http://www.consumer-action.org/Library/CA_News/CA_News_Winter-1998-99_EN.html\|here]: To show how damaging it can be for someone trapped in a cycle of late fees and penalty rates, CA calculated approximately how much it would cost a hypothetical cardholder who carried a $2,000 balance, paid only the 2% minimum payment and did not meet the due date three times in six months. The cardholder's payments were not on time in the second and third billing cycles, which led to two late fees ($25 each) and an increase in the cardholder's interest rate from 13% to 24%. In the sixth billing cycle, the cardholder paid late again, incurring another $25 late fee. By the end of six months, the cardholder's $2,000 balance had increased by $76 and he had paid $277 in interest and late fees. or [link\|http://www.reporternews.com/biz/cards1107.html\|here]: "This study is the first to reveal that in the last two years banks have imposed penalty rates and significantly increased fees," said Stephen Brobeck, executive director of the Consumer Federation of America, a Washington-based association of more than 260 pro-consumer groups. "Essentially what's happening is the issuers are shifting costs onto the most troubled debtors: those who have trouble making payments on time or may exceed the credit limit." === I can't be a Democrat because I like to spend the money I make. I can't be a Republican because I like to spend the money I make on drugs and whores.
Post #35,372 by ben_tilly 4/14/02 1:54:03 PM Reply	But they aren't being dishonest The people buying the bonds know exactly what is backing them. There are fairly extensive reporting requirements, and every bond holder knows both how much is required in defaults before they are hit, and has estimates from the rating agencies of the odds of that. (For investment grade bonds the odds are supposed to be 99.9% of paying off, for B-grade bonds they expect a 30-40% failure rate.) Everyone involved in the process is keenly aware that risk has not been reduced in any way, it has merely been reallocated from one bond to another. The purchaser gets to pick the risks - and returns - they feel comfortable with. ([link\|http://www.criimimaeinc.com/corporate.asp\|Sometimes] they feel comfortable with too much risk...) When loans are made, the banks have cash on hand to make the loans. Again no dishonesty here. And when the banks have deposits, those are backed by cash on hand, exactly as regulations require. Where financial institutions are supposed to also back up debts owed by cash, they generally do as well. (If they don't, that is a regulatory issue.) No individual player is stepping outside of regulations or behaving unrealistically. The problem I see is an overall systemic one. Banking rules are designed to limit the amount of credit that can wind up extended total in the system. They no longer are performing that function as effectively as they used to. The result is an increase in leverage to levels that historically were regarded as unwise and unhealthy. Let me give a specific example. Life insurance companies make loans on commercial real estate. If they hold those loans, they are legally obligated to hold at least 3% of the value of those loans in cash on hand. If they convert those loans into bonds, sell some, and keep others, regulations say that they have to back those bonds with 0.3% cash on hand. In other words when a life company like John Hancock goes from holding loans on its books, to passing loans into bonds, 2 things happen. The first is that with a given amount of cash on hand, they can hold 10 times as much debt. The second thing is that the cycle from making a loan to getting their money back shortens from 10 years to a few months. So, subject to the availability of people willing to buy the bonds, they can issue loans over 20x as fast with the same cash on hand, hold 10x the debt long term, and they lose all limits on how many loans they can make in the long term. The result? A staid financial institution turns into a mean, lean lending machine, a small minority of the market gets the vast majority of the risk (and return), while the total amount of money available to lend goes up. This is a process that has happened for a lot of kinds of loans. It has happened to a different extent for different kinds of loans, but the result is an ongoing fundamental restructuring in our economy of who ultimately issues credit and how much credit they can issue. Cheers, Ben "... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything." --Richard Feynman
Post #35,394 by static 4/14/02 7:48:29 PM Reply	Summary of the summary of the summary. "Credit is ba-a-ad, mm'kay?" :-) Wade. "All around me are nothing but fakes Come with me on the biggest fake of all!"
Post #35,422 by ben_tilly 4/15/02 7:09:20 AM Reply	But that isn't true Credit is a necessary part of capitalism. It is how we pay for things now that we know will make money in the future. (Eg Getting an education, moving from renting to owning a home, getting a car when that transportation is needed to hold down a job.) The ability to translate into the present that which you have good reason to believe that you can earn allows people to take advantage of opportunities that result in us all being better off. The problem is that excessive credit is a Bad Thing. A loan at the right time is a great enabler. When it enables economically productive activity, this is Good. It is also good when it allows us to weather minor crises that we didn't have resources set aside for. But when we have a lifestyle based on credit, there is an enormous hidden cost. When we have an economic system where credit is overextended, there is risk to our monetary system. Cheers, Ben "... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything." --Richard Feynman
Post #35,443 by boxley 4/15/02 11:44:59 AM Reply	Something else that effects the economy is cash there is a huge amount of goods trading in cash and convertables. I think this portion of the unmeasured economy has been propping up the measured one. Look at the downtown sky in Miami, no industry to speak of, a shipping and transport hub to the south and tourists, yet the building boom hasnt stopped yet. Loans made by offshore banks that are washing money and shell games to cover losses. thanx, bill TAM ARIS QUAM ARMIPOTENS
Post #35,567 by static 4/16/02 7:16:16 AM Reply	Okay, yes, you're right. It is dangerous to simplify too far, which is what I obviously did. I'm sorry. The discussion is indeed about excessive credit and unfettered credit and misuse of credit, all of which can and do cause problems in an economy. You'll have to forgive me for overreacting somewhat; although I have a credit card, I have never found it difficult to spend less than I earn. Wade. "All around me are nothing but fakes Come with me on the biggest fake of all!"

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