Archive for May, 2009

When President Obama talks, everyone listens — especially when the topic is about the economy. Of course, we all know what is going on right now. Everyone can attest how bad our economy is. But how much do we really know? And how will this affect the credit card industry? The truth is, we really don’t know enough, and at this time of age where information is becoming more of a necessity than a commodity, then knowing more about what is going on in the economic world is vital to making informed decisions later on.
So, going back to the proverbial question: Just how bad is the economy right now? Everyone knows that it’s in a staggering near-life-and-death situation. Although we are not saying that it is impossible to solve, we should be aware of them nonetheless. And the first thing to do is to focus on the two most pressing problems that need immediate attention. These are:
The problem with wages. Wages become stagnant while prices continuously increase. According to an article at Obama’s website, “the cost of in-state college tuition has grown 35 percent over the past five years. Health care costs have risen four times faster than wages over the past six years. And the personal savings rate is now the lowest it’s been since the Great Depression.”

The problem with tax cuts. The truth is, tax cuts favor the rich instead of the middle class. The Bush administration went all out in giving tax cuts to those who earn over a million dollars. In fact, it went all out that the cut was 160 times greater than the middle-class earners. In addition to this, Bush has neglected health care, education and housing benefits for the middle class.
With all these problems happening in the current scene, how does it affect the credit card industry? To start with, economic downturns cause fluctuating interest rates to happen. In addition, President Obama acknowledges the main problem of most consumers when it comes to credit cards — exploitation from consumers.
These situations have led him to recognize the “predatory credit card practices,” and here are some of the solutions he will implement in his administration.
First, Obama and Biden will create a five-star rating system so every consumer will be abreast with the risks of using credit cards.
Second, a Credit Card Bill of Rights will be established. This will help stop credit card companies from taking advantage of consumers.
Third, a credit card rating system will be created. It will be modeled on five-star systems used in other products. This will help consumers identify a credit card’s ranking system, based on the card’s features. In addition, the credit card companies are mandated to display this rating on all application and contract materials, making the consumers well-informed of the major provisions of credit cards without going through pages and pages of lengthy documents that discourage people from completely reading it.
Fourth, a Credit Card Bill of Rights to protect consumers will be implemented. This plan will ban unilateral changes, apply interest rate increases only to future debt, prohibit interests of fees, prohibit “universal defaults,” and require prompt and fair crediting of cardholder payments.

It was heralded to be the absolute solution to the financial woes of the US, and probably the boldest move the US government has ever made in terms of financial matters, but has the Obama Bailout really delivered so far on what it was supposedly touted to do? Has it even begun rolling and building steam? Are there positive markers somewhere out there to suggest that it is, indeed, what the US economy is waiting for?

Some may answer all these questions with a resounding NO.

The new administration has made it quite clear that it intends to push spending back up to levels before the financial crash and to fill the entire credit void that has disappeared into the black hole of the U.S. financial system. Economists, however, contend that credit, rather than savings, is the central figure in the economic equation. Therefore, US Treasury Secretary Timothy Geithner sees anything that tends to ease the process of lending to be an effective economic policy. With this in mind, the main crux of Geithner’s plan is the commitment of at least $1 trillion to revive the collapsed market for securitized debt. It is worth remembering, however, that just before the recent economic crash, it was securitization that permitted Americans to borrow more than they had ever borrowed before.

Securitization permitted loans of all types to be packaged into investment-ready securities, and this worked quite well, fueling unprecedented levels of lending in various sectors, such as home, auto, student, and credit-card. In the lest few years, however, as the collateral supporting these securities collapsed in value, the trillions of dollars of securitized debt now in circulation has become the death spikes lining the bottom of the US financial pit. It appears that Secretary Geithner is making the false assumption that cleaning up and rebuilding the securitization market is the much-needed prerequisite for a strong economy.

The United States’ experience with wide securitization has proven that the process can lead to massive mispricing of assets and risks. Should the securitization market be artificially rebuilt, and then propped up by the commitment of taxpayer funds as collateral, the U.S. economy is expected to be pushed even farther out onto a limb, until such time as no amount of damage control can prevent a total economic collapse.

So, is this the underlining idea behind the great Obama bailout plan? Is it really this cut out and dried for the movers and planners controlling the financial strings of the country? How long will it be before an actual resolution, which will be irrefutably seen by the public be arrived at? It seems, only time will tell.