The Obama administration is pushing Americans away from credit cards and regular lines of credit in the financial market and pushing them toward loan sharks and other lines of credit, a panel of professors noted at the libertarian think tank Cato Institute.
Todd Zywicki, law professor at George Mason University and the author of a new book entitled, Consumer Credit and the American Economy, and Anthony Yezer, an economics professor at George Washington University, were on the panel.
Zywicki said, “We’ve had…the most unbelievable assault of economic regulation in my life” under the current administration. Rules put into place by the Durbin Amendment, post-2008 financial crisis, have “driven people out of the mainstream financial system” and said the administration’s next target is payday loans. Without the normal lines of getting credit, Americans are going to learn, “painfully, the lessons of history,” Zywicki said.
The Durbin Amendment, as Zywicki referred to it, was part of the Dodd-Frank 2008 law where it limited the amount of “swipe fees” that debit card companies could charge consumers and affected banks.
Consumer credit and lines of credit are not new issues, Zywicki said, and gave several examples of newspaper headlines from the 1800s from the likes of The New York Times. pointed out how credit is used for necessities such as washing machines, stoves, televisions, and the like. Americans use credit on investments like these, and America has seen its “credit card ownership has risen dramatically… [and its] credit card debt has risen dramatically.” But, Zywicki said that is not the complete story, because credit cards have replaced opening lines of credits at appliance stores and the like. Instead, “the debt service ratio remains constant over time” and “overall debt service ratio today is the same as it was in 1982,” Zywicki said. “A rise in credit card debt is a perfect substitute for installment debt,” or in other words, you put debt on your credit card rather than putting an IOU on a paper with a store clerk or owner. “It replaced the various forms” of credit from the past, he said.
Zywicki argued, “Credit cards are better, a more efficient and less expensive way to borrowing than a finance company, or a bank loan.” This is why the debt ratio has remained constant since the 1980s, he said.
“The way people use credit is rational,” Zywicki added, and credit cards have “unleashed competition in the retail sector.” Where else can consumers be in a situation where “four people [or companies] want my business so bad they’ll give me a subsidy” like rewards on credit cards. When credit cards are not allowed or used, we have to go back to other inefficient lines of credit like in the past. An example is the state of Arkansas, the “pawn shop capital” of America, where there are strict laws against credit cards and this ends up driving Arkansans to other states to purchase goods on credit cards.
Yezer added, “Poor people used to shop in different types of stores” because America used to be “a peddler economy.” With credit cards, people of all socioeconomic classes can shop at a variety of stores. But, he said, “that [peddler] economy is coming back, maybe, we have resurrected it [because] there’s no credit, there’s no interest rate.” He criticized opponents of credit cards, who contend those who do not qualify for credit cards will save their money instead. Yezer said, “Do you really think passing a law stops it?” Instead, consumers will not have lines of credit for purchases and they will most likely not save their money if they don’t have access to credit cards.
He pointed out, as a professor at George Washington, “We are teaching remedial algebra at GW, we’ve had to throw out kids, and we’re not the only ones.” He continued, “A lot of the most selective institutions now have tests to go into the math field because they can’t do the basics.” Yezer lamented, “This is a major problem…especially with consumer credit.”