Our Perverse Government’s Perverse Actions Lead To Perverse Incentives
How exactly did we get to the point where government owned banks started charging credit card holders fees for paying off their balances every month?
The government passed laws like the Community Reinvestment Act which essentially mandated banks to loan to people who would not have been able to obtain loans otherwise. Then, the government and the Federal Reserve created money out of thin air and lent it to banks at absurdly low rates. Flush with new and cheap money, these banks massively increased their lending to “sub-prime” borrowers (begin bubble). With the money supply growing at unprecedented rates in the 1990’s and this decade, there was always enough money for banks to make loans. Borrowers were able to take out second mortgages at very low rates. Home builders rapidly built houses to meet soaring (bubble-induced) demand.
As with all bubbles, this one burst, leaving home builders unable to sell newly built houses and borrowers unable to meet their obligations. Banks had sold off the rights to their lender’s payments so they would have more money to make new loans. This left the banks in the same boat as homeowners who could not make their payments. But, while homeowners and home builders had to file for bankruptcy and sell off their assets to pay their debts, the banks used their lobbyists, fear, and their ownership of the Federal Reserve to convince our government to bal them out.
The government and the Federal Reserve then printed up a bunch of money–they simply created it out of thin air–and gave it to the banks in exchange for ownership.
This happened on October 3rd, 2008. I can understand the government’s perverse rationale that led it to bail out these banks. What I can not understand is why, over a year later, the government continues to own large stakes in these banks.
The government has now taken to regulating the salaries of banking officials, as well as the actions and practices of these banks.
So, it comes as no surprise to the observant that the government would use its power and control to create perverse incentives.
Bank of America and Citigroup–two firms now under the ownership of the federal government have begun implementing new fees. These fees are not on late payments, gong over one’s credit limit, or cash advances. Instead, these government owned banks have announced fees for customers who regularly pay off their balances. Customers who leave monthly balances on their cards will not be charged the fees.
A fee is similar to a tax (especially if t is levied by a government owned entity). Both taxes and fees use pricing to create incentives to change behavior.
Because Bank of America and Citigroup are owned by the government, a fee on those who pay off their balances regularly can be viewed as a tax on them. Because those who leave monthly balances on their cards are exempt from these fees, this can be viewed as a subsidy for those who leave balances.
Our government is creating perverse and dangerous incentives: they are incentivizing debt and discouraging good and proper financial habits.
But, you cant hardly be surprised by this. After all: our perverse government’s perverse actions do tend to lead to perverse incentives.
Americanly Yours,
Phred Barnet
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