IQ Arbitrage
November 25, 2009, 04:33 AM
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Buffalo News reports:

With the holidays nearly upon us, no documentary is more timely than tonight’s ”Frontline” presentation, ”The Card Game.”

Better yet, it should have run on Halloween week because it exposes many of the ”tricks and traps” disguised as treats to credit card holders. ... The show airs at 9 tonight on WNED-TV. ...

But the interview subject who contributes the best perspective is a former banking executive, Shailesh Mehta, who made millions when he ran Providian Bank by using deceptive credit card practices that targeted financially stressed customers. Mehta tells how the game is played to entice lower-and middle-income people with low rates that can quickly rise to loan-shark levels if a payment is missed or if a bank just decides it wants to raise rates.

He made a fortune on the practices. Bergman explains that Mehta resigned from Providian after the company had to pay $300 million following an investigation by federal regulators.

Mehta tosses around terms like ”stealth pricing” and ”the unbanked” to illustrate how easy it is to destroy vulnerable Americans who are a job loss or a medical issue away from financial ruin. The stories of several credit card victims are told, serving as cautionary tales for viewers. ...

With Mehta’s help, Bergman’s report illustrates that practically every positive move to protect the vulnerable can be overcome by banks looking for easy marks.

”Because none of you are smart enough,” concludes Mehta. ”You make the stupid laws and I’ll comply and I’ll make money. . . . There are always some desperate people who will take the product. Lending money to people is never a difficult exercise. OK? People will take money if you’re willing to give it to them.”

We used to have a variety of usury laws setting maximum interest rates, which meant that some people couldn't get credit , but when inflation came along, driving interest rates through the roof, the old limits became temporarily untenable. Usury laws were widely junked, although my impression, as an Economics major from 1976-80 and as a Finance major from 1980-82 was that the economics profession thought getting rid of anti-usury limits on interest rates was a feature, not a bug of high inflation. Why shouldn't everybody be able to borrow at whatever interest they freely agreed to?

Moreover, I have a general sense that anti-usury laws during these years were seen by reformers as relics of an anti-Semitic past. Once freed from benighted prejudice, how could anybody logically argue against unlimited interested rates? Legal limits on interest rates artificially restricted the number and diversity of people who could get loans. How could anybody be in favor of that? Liberty, diversity, profit ... how could anybody complain?