Subsidizing irresponsibility

Government rhetoric:

We’ve become accustomed to our economic dominance in the world, forgetting that it wasn’t reckless deals and get-rich-quick schemes that got us there; but hard work and smart ideas -quality products and wise investments. So we started taking shortcuts. We started living on credit, instead of building up savings.

President Obama, ASU commencement address

Government policy:

Credit cards have long been a very good deal for people who pay their bills on time and in full. Even as card companies imposed punitive fees and penalties on those late with their payments, the best customers racked up cash-back rewards, frequent-flier miles and other perks in recent years.

Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.

“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”

(Via Hot Air.)

It’s a basic principle that anyone (even a politician) should be able to understand that you get more of whatever you subsidize.

UPDATE: The bill passed the House 361-64, so I suppose this has to be considered bipartisan foolishness.

UPDATE: Yingling also made this key point, quoted by the Washington Post but not the NYT:

“This bill fundamentally changes the entire business model of credit cards by restricting the ability to price credit for risk,” said Edward L. Yingling, the chief executive of the American Bankers Association. He said that lending would become more risky and that, “It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate.”

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