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Credit-Card Rules, Unintended Consequences


New regulations could worsen economic inequality.

It's only 35 days now until one of the biggest parties in the history of America - the day that Obama assumes the presidency. The challenges faced by this president are even greater now than they were on November 4th, impossible as that is to imagine.

As for the solutions: Yes, we're going to print money to jumpstart the economy - but how do we keep it going once it's started? Consider the plight of US automakers. I can't fathom how they'll stay in business without government loans, or tax incentives for would-be buyers to pick them over their rivals. And those rivals employ 425,000 Americans - which makes it a lot harder to discriminate against them. You've embraced the urgency of going green, so it's unlikely there will be an end to the onerous CAFÉ standards - and that will make Detroit's recovery impossible, in my estimation.

Unless, of course, the government never closes the spigot. Maybe taxpayers could prop them up forever - but that would be unfair. On the topic of unfairness; Given tougher regulations and limited credit, how will people even get money to buy new cars or homes?

I've always worried that the knee-jerk reaction to the housing correction would mean prohibitively tougher standards and substantially fewer options for people on the margins. Millions of Americans will be shut out of homeownership. Decades of progress for African-Americans and Hispanics will be reversed, since banks won't risk lending to folks with lower FICO scores. It may require delicate legislation - but then again, the Community Reinvestment Act was supposed to be the law that leveled the playing field.

It's a serious conundrum, to be sure. This week we'll actually see a change in the rules governing credit-card companies - the kind of change that makes you recognize the truth in the old saying, "Be careful what you wish for."

Admittedly, many subprime credit-card issuers have run roughshod over the public. These cards begin with an APR of 9.9% or so, but could skyrocket to 25% or more, sometimes overnight. Obviously, that simply isn't fair. So the Fed plans to enact at least 5 new rules this week, one of which prohibits issuers to change rates on existing account balances. On the surface, these rules make sense.

However, there could be serious unintended consequences. These same lenders have to assess risk: And if they aren't able to adjust their rates to meet the economic reality of the broader economy, they will simply cut back on the number of cards they issue. This could be horrible news for the general public, but especially for minorities, who now face a world in which they are unable to secure any form of personal credit.

I'm not sure how our new president is going to address this situation. It's Main Street stuff, and it's real. Right now, it's a given that even well-run businesses and individuals with exemplary credit ratings are having difficulty borrowing - imagine what poorer folks will be facing.

Once the dust settles, we will see credit return to the haves - but the American Dream will actually be further out of reach for the have-nots. It's going to take some serious magic to figure out how to stop abuses, but still make certain that high-risk people are able to access that Dream.
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