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Friday, May 16, 2008

Fed Challenging Creditors

The subprime mortgage mess, no doubt, has wounded our economy. Many people claim they foresaw (hindsight bias, anyone?) the problem coming, and say the Fed should have to. The government has taken much heat for not quickly reacting to the problem.

In addition to the mortgage problems, we also have a serious credit crisis on our hands. Many people took on much more debt than they could handle, and it shows in the marketplace. However, it does not seem as if the credit card providers are doing much to help solve the problem. Recently, an interest rate on a credit card of mine increased, even though I have not used the card in months. In fact, many credit card companies have been arbitrarily increasing rates on outstanding balances, and only applying payments to the balances with lower interest rates. In a sense they are charging interest on repaid debt.

According to the Washington Post, “The proposed regulations, which could be finalized by year's end, would label as "unfair or deceptive" practices that consumers have long complained about. That includes charging interest on debt that has been repaid and assessing late fees when consumers are not given a reasonable amount of time to make a payment. When different interest rates apply to different balances on one card, companies would be prohibited from applying a payment first to the balance with the lowest rate.”

It’s good to hear that the credit problems are seen for what they are. However, one thing that concerns me is the government’s current involvement in the markets, for example, the unprecedented rate cuts and government backed bailout of Bear Stearns. It seems as though the government just can’t keep its hands off the markets. As student of economics, we all know that markets tend to adjust themselves in the long run. By creating more rules and regulations, seemingly every month, the government is reducing risk and incentives that characterize a free market economy.

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