Them Pore Ol’ Banks Need All the Help They Can Get

At Reason (“The Government Wants To Cap Credit Card Late Fees. It Will Hurt the Poor“), Veronique de Rugy shows levels of compassion for the poor suffering banks that hasn’t been seen since John Stossel condemned the immorality of walking away from underwater mortgages.

De Rugy starts off on a note seemingly calculated to alienate all but the most egregious bootlickers of the libertarian right: she compares banks to long-suffering parents intent only on the well-being of their children, and borrowers to children who don’t understand that eating spinach is for their own good.

Any parent will tell you that forcing children to eat their spinach is no way to win a household popularity contest. Children don’t care about the long-term benefits of eating healthy food when the alternative is the short-term thrill of sugary treats. Much to their children’s chagrin, parents impose rules, like limiting the quantity of treats and making their receipt contingent upon finishing a healthy meal. Good behavior must be encouraged with appropriate incentives.

Consumers, like ungrateful children who refuse to eat their spinach, just don’t understand that “misleadingly labeled ‘junk fees’” are really good for them. O, how sharper than a serpent’s tooth is a thankless borrower:

The ability to levy appropriately stiff late fees is an important part of the overall consumer credit system. Placing arbitrary limits on such fees might prove popular with consumers today but will also leave these same consumers worse off tomorrow. Companies use heavy fees to discourage late payments. While the actual fee provides some amount of income, its chief function is to lower and offset the risks of lending. Companies would prefer that payments arrive on time rather than having to collect late fees.

Um, this is a big “no” all around. First of all, “the ability to levy appropriately stiff late fees” is doing a whole lot of work here. In the real world, late fees just keep getting bigger and bigger. “Appropriately stiff” is defined — much in the same way that landlords set rent — by whatever the banks can get away with.  

Second, the claim that credit card companies would prefer timely payments to “having to collect late fees” is so far from the truth that all existing terms for “incorrect” seem inadequate. Again, in the real world, statements keep getting closer to the due date because banks want people to make as many late payments as possible. Late fees — and the higher interest rates imposed as punishment for late payments — are a major component of their profit model. Banks even deliberately sit on payments that arrived on time, in order to make them late. Barclays was notorious for this. When I had a Barclays credit card I repeatedly received late payment fees, for months in a row, despite having mailed my payment over a week ahead. A Google search of consumer websites quickly turned up a long list of similar complaints. I caught them in the act by sending in my payment extra early, via registered mail, to confirm that they received my “late payment” days ahead of time. Confronted with the evidence, they refunded all my previous late fees. Once again, banks do this because they can get away with it.

De Rugy goes on to explain how, contrary to the perception of those short-sighted consumers, late fees are really good for them:

Proper risk management doesn’t just benefit financial institutions. Individuals considered risky are still able to access credit because of contractual terms like late fees. Lighten the fees and delayed payments will increase, making lending money riskier for institutions. When that happens, the only tools left to manage risk will be higher interest rates — which means higher costs even for responsible borrowers — or outright denials of low-income credit card applicants.

On the off chance some doubting Thomas might hesitate to accept this argument based on her own imaginary scenario, de Rugy cites the impeachable authority of… a bank lobbyist:

Rob Nichols, president of the American Bankers Association, similarly predicts that “credit card issuers will be forced to adjust to the new risks by reducing credit lines, tightening standards for new accounts and raising APRs for all consumers, including the millions who pay on time.”

Any time a right-libertarian presents themselves as trying to help the poor, I think of a line from Cool Hand Luke: “Wish you wouldn’t be so good to me, cap’n.” 

“Capping fees will hurt the poor” — much like “minimum wages will cause unemployment” — indicates we’re dealing with a typical right-libertarian who apparently never heard of ceteris paribus. The question of whether, and how much, minimum wages will affect employment levels depends on how much of employers’ existing profit consists of economic rent resulting from unequal bargaining power in the labor market, and how much of the wage increase will come out of the company’s excess profit. The same is true of banks: to the extent that the amount they currently extract in late fees and interest are economic rents enabled by their monopoly power — which we can safely assume is a very great extent indeed — the banks will have to eat the loss in late fees, simply because they’re already charging all the interest they can get away with. 

We should really bookmark de Rugy’s article for use as a rejoinder to the next right-libertarian who says “You just don’t understand economics.” Her imaginary picture of how the banking industry works is so far removed from the real world of economics, dominated by revenue-maximizing and rent-extracting monopolists, as day from night.

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