The Credit Economy

McCardle is clearly ignorant about credit. Credit has almost *always* been important to the individual American. Does she think farmers have always paid cash, for heaven's sake? That small merchants in the early 19th century-- when we really developed as a domestic commercial economy-- paid cash, or that they received cash for what they sold?

At least since the 18th century people have always done business by running tabs and paying when the money came in-- either a harvest, or a pay envelope, or a paycheck, or payment for goods they made and sold. That's why Dow Jones got started as a credit-rating agency-- we got more mobile after independence and laws that used to allow collection from family members changed, so it became critically important to know who you were giving credit to.

The big difference between now and then is that credit has become much more like almost everything else over the same period of time, namely much more centralized. That makes life tougher on people with thin credit compared to 150 years ago and puts much, much more responsibility on credit rating agencies to put out the right information. To the point, really, where they need to be held liable for errors.

Dave,

I know this is off topic, but I thought I'd respond to your point about guns in national parks. I really feel this is mostly a symbolic issue. There's really nothing preventing people from taking guns into national parks as is--there are no metal detectors at the entrances, and in my experience most parks are "policed" by friendly green-shirted parks services types who mostly give hand out permits and directions (when they are even there at all, instead of an "iron ranger" that simply accepts an envelope with some money and your license plate number).

Which is not to say that I think that guns in national parks is a great idea--far from it. I'm certainly very uncomfortable about the idea of hikers, backpackers, or random fools accidentally or intentionally shooting each other (or wildlife) in parks, which are generally very far from emergency services. I'd rather nobody brought weapons into parks more deadly than bear spray or a folding knife. I'm just not sure that the law being one way or the other on the subject is going to impact the situation on the ground very much, unless we decided to spend a lot of resources on enforcing that law.

I'd certainly like the credit card bill better if it didn't have this stupid national parks gun thing in it, but to be honest, my reaction to this was that if this is all it took to win over a bunch of conservative votes, then those conservatives in congress are a bunch of chumps. They pretty much had this anyway.

Widespread use of credit really does make life more convenient, really does make banking more efficient, really does enable useful advances like online shopping, and really does allow easier access to goods and services that would otherwise be difficult to get hold of.

Well then, if it makes things more convenient and efficient, and makes getting "stuff" easier, then I guess we'd be stupid not to let these folks have this kind of power over us. Good call.

Shopping! Woo!

A few simple reforms would go a long way.

For instance, any company reporting on YOU should reveal that report to you, without charge. In other words, you should receive your own credit report regularly, and without having to pay fees. After all, they are profiting off of your information -- either you get a cut, or at least access to the same information they are selling.

The big difference between now and then is that credit has become much more like almost everything else over the same period of time, namely much more centralized. That makes life tougher on people with thin credit compared to 150 years ago and puts much, much more responsibility on credit rating agencies to put out the right information.

This statement by the way is utter tripe.

In fact, credit reporting such as via credit bureaux vastly improves the situation of poorer people seeking credit and even for those with weak credit history by providing a clear basis for extending credit. I work in emerging markets and have observed the transition from situations entirely like the developed economies 150 yrs ago, to credit transparency.

Credit cost goes down, and there is a clear basis for building credit histories - that is demonstrating improved behaviour (or maintenance of good behaviour). Prior to Credit Bureaux development, credit extension was almost purely subjective, highly discriminatory and very expensive.

The idea that the centralised bureaux somehow make access to credit harder for persons with thin credit is absolute bollocks and typical Left whanking on about some romantic non corporate idle.

@Trippp, yes, the 18th century Atlantic economy ran on credit systems that were based on 17th-century models. But I didn't want to confuse The Lounsbury's 19th century mind.

Here's a basic point. Credit cards, which used to be hard to get, have gotten very easy to get since US usury limits were repealed in the 70s and since the lending institutions decided it wasn't worth ensuring that everybody holding a card would be responsible with credit, but rather that it made more sense and money to pay attention to the aggregate payment profile of their cardholders and also to see payment trouble as a money-making opportunity. They, like firms trading in corporate and mortgage debts, have come to rely on information from only a few agencies to assess the value of their financial assets. So both lending and financial information in this sphere have become much more concentrated.

Efficiency can be one effect of such consolidation. But so can bilking behavior-- cf Theodore Roosevelt. There's no guarantee that efficiencies in a consolidated business area will be passed on to the buyer. Instead they can be capitalized on by the seller.

What did people who needed credit do before credit cards, thinking only of the 20th century? They relied on credit from individual shopkeepers and merchandisers, largely. Some borrowed from family and friends. Some borrowed from loan sharks. Little of that credit was cheap, and I didn't say or imply it was. It was very risky to the lenders, and the smaller they were, the greater the risk to themselves. And it was expensive for every little merchandiser to maintain a full credit department.

That, plus a prevailing mode of thinking, strongly encouraged lenders to limit credit to the extent they could-- expense and exposure made credit harder to get before mass-issued credit cards appeared. People had less access to it than they've had in probably the past 20 years or so and their standard of living probably was lower before this period than that experienced more recently by people with comparable incomes, at least in the US.

But how's that working out for us? So well that the credit issuers just recently got a draconian bankruptcy law passed to protect them from themselves, and so well that non-payment has been rising. Too-easy credit encourages overuse of credit. But the issuers have been fine with that because they can make money on non-payment too-- in most cases more than they make from people who pay in full and don't carry a balance, who they call "deadbeats."

And that's fine until the moment when too many cardholders just can't pay enough. It's structurally identical to the recent mortgage market. The prevailing model doesn't look much at underlying aggregate ability to maintain payments, or at the likelihood of conditions that would affect that ability. When that moment does come, panic ensues-- among the issuers. That bankruptcy law was a sign of panic to come.

When New Dealers said business is too important to be left to business people, they meant precisely that business people behave just like other people-- they know there can be too much of a good thing, but when the good thing is there they want at least as much of it as they can gobble up and then some. They do need someone outside the circle to step in and set limits. Otherwise we get cycles of booms and crashes.

How many Equifax reports are jammed up The Lounsbury's ass?

Widespread use of credit really does make life more convenient, really does make banking more efficient, really does enable useful advances like online shopping, and really does allow easier access to goods and services that would otherwise be difficult to get hold of. Used in moderation, it's good stuff. I sure don't want to return to the days of hauling around travelers checks whenever I fly off to Europe.

I am with Jorgen on this one. Here is how I shop online in Europe:

Step one: choose a product and click “order”
Step two: choose a bank from a pull down menu, enter my online banking username and password, and enter a transaction authorization code from a text message, pocket calculator like challenge response token or sheet of paper. Click “confirm transaction”
Step three: wait for the package to arrive pretty soon since the payment gets deducted from my bank balance instantaneously.

I suspect this system has by now all but replaced credit card payments for online transactions.

Of course I am a poor student who has paid a couple hundred Euros for my completely subsidized education. So I only have a couple of thousand Euros in my account. Its so little I dont care I only get between zero and one percent interest over it. Why, how much interest do Americans pay once these same banks lend this same money? Is it true American kids are thousands of dollars in debt by the time the get our of college?

The only time I used a credit card was when traveling through the US. And even then my debit card worked at 100% of the ATMs and 66% of the cash registers. Though what is this $3 ATM fee of which you speak? I just ended up getting cash back at supermarkets. I suspect Americans traveling in Europe would be better of with a meastro pin debit card than a credit card, but who knows. All google could find me was the processing fees US merchants would pay would be lower.

I didn`t pay a cent for my debit card, or the recent replacement I got as part of a bank takeover. (Is it me or were there a lot of those just before the credit markets froze up?) I used to have a bank account for free as well, but now its three Euros a year. Maybe I can digg up the recent EU investigation into the true costs per electronic transaction across Europe.

There has also been this national network for small payments based on pre-payed chip cards for more than a decade now. The thing is that these chipcards are way, way more secure than mag-stripe based or credit card number based transactions. Meanwhile most of the banking world has postponed the move to chipcards for years because its just so much cheaper to refund people who had their identity stolen than it is to replace lots of payment infrastructure.

Saying there are good reasons for credit cards is one thing, arguing things would be impossible without them just ignores a lot of the rest of the world.

I dont trust equitransunion to hold peoples private details either. I am pretty sure I once read the story of how identity thiefs, out to plunder someones credit rating, bought their information from one of these very outfits.