Banks to Hike Card Rates Ahead of New Regulations

Related subjects: Economic Recovery, Ethics, J.E. Robertson, Mortgage & Credit Crisis, Opinion, U.S. Economy Comments (0)

12 November 2009 :: J.E. Robertson

With new regulatory restrictions on predatory lending practices, including constraints on the freedom of banks to raise interest rates to unsustainable levels, major banks have told federal regulators that they will be hiking interest rates and slashing credit limits for millions of customers, even where payments have not been missed. According to CNN, “a minority of banks” have said they will reduce penalties for good customers; economists worry the credit-card cost hikes will impede economic recovery.

The question many are asking is: what ethical or economic justification can there be for the same banks whose bad-faith practices have led to millions of consumer bankruptcies and home foreclosures, as well as the consumer-protection regulations to take effect next year, using the crisis they created to punish those who can least afford it? Is this not just a return to the same unethical, predatory business practices that led to near total economic collapse?

The fact is, analysts have become much more comfortable over the last year exploring the possibility that the banks were actually the worst deadbeats in a failed credit system, “borrowing” against fictional future wealth claims based on flagrantly unsustainable business practices not founded in any sensible mathematical analysis of real value (of outstanding debt liabilities).

This is the problem the banks are trying to fix: they need to cover the cost of massive projected “losses” that are really just a byproduct of the natural and inevitable correction of their flawed profit projections. They are, quite simply, persisting in the pervasive fiction that pins all responsibility for failed credit relationships on the borrower. The banks seek to sustain the myth that they are only lenders, never borrowers.

Regulators, however, not to mention market analysts, need to look harder at the banks’ relentless push to deflect attention away from their policy of counting future interest-based profits as actual wealth against which they borrow to fund their unsustainable business practices. The manner in which banks have been accounting for current and future assets flies in the face of basic arithmetical reasoning, and has been rooted in fundamental distortions of the reality of both the real extant wealth available to them and their future potential earnings.

The banks have behaved just like irresponsible consumer borrowers who know they cannot pay for the credit they are taking out, but continue to take out more to pay off what they can’t pay. They have done this for at least a decade, by inflating the value of their investment holdings, counting unrecoverable loan valuations as actual wealth, and borrowing against business they knew they could not sustain.

This made them far more vulnerable to the housing bubble, and in fact meant that their actions were not just intimately intertwined with the inner workings of the housing bubble, but were a big part of what created the bubble in the first place. Banks’ need for more consumer revenue drove them to lend in sometimes reckless, sometimes predatory fashion, to borrowers who would not, ultimately, be able to use the loans as they believed they would, and the banks knew they were doing this.

They covered the extreme risk inherent in such deals, or sought to cover it, by “bundling” high-risk loans into derivative packages they then sold off to third parties, or used the questionable practice of credit-default swaps to insure against disaster. The practice was questionable, because the bad loans were so widespread, so fundamental, that the swap system was clearly over-extended and could not reasonably have been expected to work in a crisis.

In 2008, that crisis hit, when one after another major financial institution was suddenly “discovered” to have been too heavily invested in this complex of ill-wrought financial dealings. Some would say it was pervasive systemic fraud, others that it was just a misunderstanding on the part of executives who became overly enthusiastic about the potential ROI of what used to be considered risky business. But when the crisis hit, the wealth was not there to insure against disaster, and the house of cards began to come down.

Now, after tens of billions of dollars in taxpayer-funded bailouts, the banks want to milk those same taxpayers, their customers, for still more money, on top of the already extortionate compounded interest rates, in the midst of the worst foreclosure crisis in American history, with household bankruptcies at record highs, to sustain the same unsustainable business practices that generated the crisis.

The banks’ declaration that their rates will be going up not only represents a draconian disregard for the well-being of their own customers; it clearly illustrates how pervasive is the unwillingness to grow, heal and change with the times and the market environment. The banks argue they are now trying to be “more responsible”, but in effect, they are using the same strategy that pits their bottom line against their customers’ freedom to cover the costs of life as they know it.

In short, to avoid going bankrupt themselves, they plan to bankrupt their customers, without a second thought as to whether such a strategy might make their long-term business plan untenable. If there is no money to pay for their exorbitant profit projections, there is no money. Putting severely increased pressure on consumers in an already severely pressurized economic environment will only exacerbate the underlying consumer-economy crisis: more families closer to bankruptcy, more homes in foreclosure.

The banks have to learn to innovate, and that means they have to learn to do more with less, like everybody else. They have to learn to treat their customers like human beings who cannot magically make money appear out of nowhere and who have priorities like keeping a roof over their heads, food on the table and paying for their children’s healthcare and education. A continued refusal to do this amounts to an assault on the American family and a pathologically determined attempt to prolong this economic crisis.