Credit-card sharks vs. regulation

A PBS Frontline program last night documented the thinking and the policies of credit-card companies as they seek maximum income. An interview with the man who, in a sense, started the whole process when he was CEO of Providian was refreshingly (and frighteningly) candid. He acknowledged that Providian had led the way (with many followers) in offering free credit cards (when most competitors were still charging annual fees) but making up the lost income by charging high interest rates combined with huge overdraft and late-payment fees. And of course other credit-card companies and banks saw the possibilities and quickly followed suit.

But this former CEO said something that I think gives a clue to the whole issue of government regulation of business. He acknowledged that his company – like almost every other – will be looking for loopholes in the newly passed credit card law. He said (paraphrased), “You [the government] can make any stupid laws you want, and we will play by those rules. But since our job is to make money, we will be looking for angles, loopholes, that will leave us a way to make a profit.”

I think this is a reasonable attitude, much though we would like every business to be charitable and altruistic – and much though it appears that Congress believes that to be the case when it passes laws that let business monitor itself and make its own rules.

No, let’s have a realistic separation of functions: let us recognize that the function of business is to make money, and one necessary function of government is to set up reasonable but realistic limits on how business can make money.

It appeared from the PBS program that the new law already has numerous loopholes, and credit-card companies will be able to exploit them to make even more money. Since it takes Congress an extremely long time to respond to abuses (and then the influence of lobbyists prevents Congress from really solving the problem), there seems to be an excellent case for a new regulatory agency that can create rules for credit-card companies (and other lending institutions) and modify them in a timely manner if they do not work as intended.