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Should the federal government encourage more credit card borrowing?
No, and especially not with federal dollars. Give them back to the people who earned them! Many people use credit cards as charge cards and of course that is both a) efficient, and b) not where the problem is. We're talking about credit card debt as a means of financing consumption expenditures. I am not sure what is the going credit card interest rate for the marginal borrowers who will be aided by this new change in the Paulson plan, but I believe it is over fifteen percent.
More spending today, in return for less spending in the future. At a rate of, say, fifteen percent. Or higher. Think of our government as "borrowing" aggregate demand at a rate of fifteen percent or higher. Of course our government can, on its own, borrow at a much lower rate of interest than that and then stimulate aggregate demand on its own, through state and local governments, or with a tax cut. Maybe our government is afraid of damaging its credit rating but is it really a good solution to have its poorer citizens do the borrowing on their credit cards instead?
This is not the time to be subsidizing credit card expenditures. And if our political discount rate is this high, I fear to think what other mistakes we will soon make.
Posted by Tyler Cowen on November 12, 2008 at 01:15 PM in Economics | Permalink
Comments
It’s a natural response for banks to be more risk-averse during times like these. I don’t know if lending more capital, and by extension, getting into more debt, is the answer to our economic problems. Risk aversion and savings are huge positives in the structure of an economy, as the former will deter this from happening again and the latter will propel us to new economic heights. So why is the Treasury still striving for an artificially grown economy, supported by a debt-laden society?
Posted by: Marcelo at Nov 12, 2008 2:12:09 PM
Wouldn't a preferred way of spending more today in exchange for less spending in the future be by lowering the payroll tax for a period of time? It has the benefit of being progressive (the payroll tax is capped at incomes over $10x,000), it increases incentives for businesses to hire and retain workers, and it is very low cost to administer. I have not heard any echoes of anything resembling this kind of fiscal stimulus.
Posted by: wintercow20 at Nov 12, 2008 2:38:45 PM
Good post Tyler! These fiscal conservatives are spending as much as possible before the ride ends.
On a somewhat related note, back when Tyler and Alex were arguing about the credit crunch's existence, I mentioned here that I had applied for a business credit card, and that I had no history of revenues to show the bank. Well I have been traveling and last night checked my pile of mail, only to find that I was indeed approved for a $7500 line (with purchase APR right now of 12.99%).
More to the point, when I was applying I asked the lady at the bank if she expected any hiccups, what with the "credit crunch." And she explained that they were a community bank, didn't get into all the exotic stuff that the "bigger, greedier" banks had, and though they were being more careful in their standards, she didn't expect any trouble. And she literally said (without prodding from me) something like, "If there's a credit crunch, we certainly haven't seen it."
Posted by: Bob Murphy at Nov 12, 2008 2:44:24 PM
Man, that Paulson idea almost had me weeping it sounds so bad.
Posted by: Nick at Nov 12, 2008 2:50:57 PM
Just to put things in perspective: that 15% that the marginal borrower pays is significantly less than the ~35% that GM bonds are trading with yields of.
GM, of course, is much more likely to get federal help...
(I'd provide a link but I don't know a free corporate bond price site.)
Posted by: Silas_Barta_(formerly_Person) at Nov 12, 2008 2:59:33 PM
finra.org is free and close to realtime
Posted by: rluser at Nov 12, 2008 4:06:40 PM
At this moment in time, we're dealing with fairly unique circumstances. And, with all due respect to Treas. Sec'y Paulsen, it's not rocket science: at the end of the day the piper must paid and I personally rather not pay him with my children. Its a nightmare, sure, and we shouldn't of permitted crazy 24/7 lending to all the rats in town, but its absolutely time to pay the piper his price and send him on his merry way.
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