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Lions, Zebras, and Credit Cards

April 22, 2009

President Obama has summoned leading credit card executives to a meeting at the White House tomorrow. According to the Washington Post, Presidential Press Secretary Robert Gibbs said that “Obama would like them to take action voluntarily, but that he supports legislation to force restrictions on their lending practices if they refuse.” Let’s hope that the Press Secretary is mischaracterizing the President’s position — because no amount of voluntary reform can be a substitute for strong legislation.

Even the prolific federal judge that the Huffington Post correctly identifies as “one of the most prominent proponents of free-market capitalism” now understands this.  In Judge Richard A. Posner’s own colorful words:

“If you’re worried that lions are eating too many zebras, you don’t say to the lions, ‘You’re eating too many zebras.’ You have to build a fence around the lions. They’re not going to build it.”

Dramatic evidence of the need for laws and regulations rather than voluntary commitments by the credit card companies is provided in a recent report by the Pew Charitable Trust’s Safe Credit Cards Project.  A group of researchers, consumer advocates, and industry representatives undertook an extensive survey of existing credit card terms and practices, and then identified a set of “Safe Credit Card Standards.”  These eight standards are relatively modest, and a foreigner visiting our shores could be excused for thinking that no one could get away with issuing cards that weren’t in compliance with all of them.  In fact, however, the Project was unable to identify any existing credit card that was in compliance with their standards.  Not only that, it was unable to persuade any of the credit card companies to agree to issue a new card that met the standards!  As the report explains:

…revenue expectations and competitive pressures make it difficult for individual companies to discontinue profitable practices, even if those practices can confuse or harm their customers.  As long as some companies can use these practices to attract customers with the perception of lower costs, few companies will be motivated to adopt more transparent practices.”

In other words, not a single credit card company was willing to abandon the “tricks and traps” business model that is based on extracting high interest rates and fees from vulnerable consumers who they can lure into more taking on more debt than they can afford to repay.

Among the report’s conclusions:

Strong, universally applicable laws provide the surest means of protecting cardholders and eliminating pressures for issuers to compete through unfair and deceptive practices.

AFFIL and Judge Posner strongly agree. The President should too.

(Photo:  wwarby)

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