I love that – I will start using that one.

BTW, think about how much wealth flowed from that imbalance, and where did it flow to?

And the renewed regulatory oversight is even more likely to fail under current configuration. Overseen by Barney Frank.

Did I mention that Barney Frank is, was, and has been running Fannie & Freddie?

Awesome. Once again, those of us who are responsible get screwed so that those who are irresponsible can get off the hook. It’s the MO of liberals and Democrats. I buy almost everything (including groceries) on 1 card and pay it off in full every month. But if I have to worry about my credit limit getting cut in response, and having to pay overlimit fees, and all that junk, I guess I’ll have to go back to cash (I despise checks).

Thanks, Democrats.

OK? Suppose you gave a card to an A-1 applicant. Good income, good assets, debt well within control, plenty of excess credit available. Two years later Mr. A-1 loses his job and then gets a divorce 8 months later as a result of the stress.

Abruptly he’s lost half his assets and more than 1/2 his income. His utilization rates are going through the roof. You can’t raise his rate to compensate for the risk any more under the new law. You can cut his credit limit or take away the card, but believe me, taking away the card is often unproductive if the borrower is really strapped. You can cut his credit limit to encourage him to pay it off. That’s all. But suppose he’s now got 5K on the card – your odds of losing most of that 5K are pretty high. But you can’t raise his rates to compensate for that risk or to get out early, which increases the chance that he will ratchet up the balance on that card ASAP – it is probably his cheapest way to get money. What’s he gonna do, walk into a bank and ask for a loan when he doesn’t have a job?

So to handle such risks (which are uncontrollable at time of origination), you institute other fees and so forth to help you offset those risks, and you institute them on the entire pool.

One of the features of CC debt is that chargeoffs are way higher than default percentages. When they default, they default and you lose everything, and because it is credit of accommodation, naturally your borrowers getting into trouble will tend to run up their balances before defaulting. So even if 5% of your good pool over a few years transitions into high-risk (an excellent performance), you are going to lose more than 5% of the pool principal. You can’t market cards at high rates to good borrowers. You have to cover your losses from interest and fees, and if you can’t raise the rates to individuals as borrowers transition to higher risk categories (which encourages them to raise cash elsewhere) then your only recourse is to raise prices to all the borrowers in the pool.

I can also promise you that banks will be cutting credit limits like lightening the moment they detect a move to higher risk, including charging groceries, or clothing at cheap stores, etc, or a sudden change in payment habits (abruptly converting to running a balance when borrower usually pays all or most charges within a few months). Credit cards are going to become a really bad option for emergency cash, because the banks will spend a jackload of money for data to tell them when to cut credit limits, so when you need that card, the odds that you won’t be able to use it will be very high.

The one thing that they used to do was offer the low rates and no-fee cards; but those terms would change if risk went up. Oops…. can’t do that now.

The only tool they have left to manage risk is to lower available credit. This has the nasty side effect of lowering credit scores by changing the ammount of available credit in use; which makes other unsecured lenders lower their limits, and so on.

And Jess is right. There is already agitating about the limited access to financial insturments as a “Social Justice” issue. That’s what kicked off the Fannie Mae and Freddy Mac festival of stupidity — “It’s not fair that poor people can’t get $180k mortgages!”

You pool all these accounts, and since you aren’t charging people in the pool for increased risk (until default, when, hahahaha, charging for increased risk doesn’t get you anywhere), you add fees to other parts of the pool to compensate. The Coyote is entirely correct.