U.S. Credit Downgrade - Who is to blame?

Remove all ads!

No, but not being able to scarcely afford the basic necessities without the use of credit creates a lot of pressure. Outright physical coercion is a lot easier to see than the pressure of circumstances. And the very same people who would need to use credit as a means of survival (the poor) are also the ones with whom contracts and reading the fine print is a lot harder to be able to understand, and who also usually lack the free time to always search around for the best deal possible anyways. I try to avoid anecdotal evidence, but this is one that my family and friends of mine have lived through and experienced.

I just don't understand your rationale here. It's like there's a bridge with a majority of it being unsafe, and instead of fixing the bridge to make it safer for everybody you just insist that people get better at balancing.

This idea also becomes more undefenseable when you consider that there is a risk of this behavior by companies in any market where only a few firms dominate a good majority of it. So we wouldn't have to just get better at balancing in one area, we would have to do research and make highly informed choices in many areas for many products and services to avoid being ripped off.

One more thing, companies in oligopolies also understand that choice and do things to fight against it.

http://www.justice.gov/atr/public/guidelines/211578.htm

It explains various ways they do that under the market division section. So yes, you do have a choice, but without the antitrust laws you would have a second job of being a consumer scientist constantly on the watch because of the freedom companies have to overcharge simply because of their bigness and power.


I also have to ask, if you think unions are outdated, does that mean that the capitalists should be the ones who have all the decision making power on economic issues of fundamental importance to the well-being of society? Because without the power of the people to control the market, they also lack the ability to affect in any significant way the ability to create a decent life for themselves. Sure you can be an entrepreneur, but 95% of new businesses fail in 5 years, 50% in the first, and there always needs to be more employees than employers. Being against the only two tools that have actually made life better for the majority of Americans (anti-trust laws and similar legislation and organized labor) is baffling to me. Is a dignified life a privilege and not a right in America?

Yeah, the idea of a whip makes me shudder. It just shows how party power beats sense in the political climate.

 

The problem with your bridge analogy is you are comparing "public safety" to "personal responsibility". Even conservatives (gasp) believe the government is responsible for making sure the roads, ports, and airports are functioning. We can even tolerate the government keeping the food and water supply safe. However, when it comes to issues of liberty we take exception. It is not the governments job to make sure we don't make a bad decision. If I want to invest poorly or get heavily in to debt that should be my problem and the government should not prevent me from doing so nor should it bail me out when I realize what a putz I've been.

Should the oligarchy make all of the rules? Tough question and I'm not sure I like either answer. The thing that the unions and their supporters forget is that we are now in a global economy. Two hundred years ago the location of things mattered, now it doesn't. When you have people in poor countries that will work for pennies a day it make it harder to justify how the companies can pay high wages because the unions want them to. Does it suck, yes it does, but it is reality not fantasyland.

I am the equipment manager for our town's soccer club. I am inundated with emails from Pakistani companies that want to sell the club soccer balls/uniforms/pinnies/etc. at a third of the price I pay the local sporting goods store. Since I'm a big fan of supporting the local economy and our club is very profitable as of now we continue to purchase locally. Can I say that will continue forever, no I can't? The last thing the local sporting goods store needs is a union telling him how much he has to pay people, how many hours they can work, and how hard they have to work, when he potentially is facing losing the "club" portion of his entire business.

This is where all the arguments for "living wages" etc. fail horribly. As long as international trade is free and open and the "union way" isn't being applied everywhere there is no way that it can work. Good luck getting union wages in China, India, Pakistan, and Russia.

 

Would it contravene the Constitution if laws were to be passed that said something like this:

Law #1: You rich folks want a tax loophole -- here it is. Demonstrate that you are putting a certain amount of your wealth toward creating legal jobs here in the US, and we won't tax you on that money.

Law#2: Any profits that you make from US citizens must be kept here -- no taking our wealth overseas.

Law #3: If we catch you cooking your books, we the people (ie the govt) will seize all of your assets and give them to a company in your field that is law abiding.

Sounds like a good start to mee, but there's likely problems with it . . .

 

Snook has addressed damedod's points quite well, so I'll just add a couple more:

Making the transaction tax 5% rather than something more nominal (<1%) would basically kill the financial markets. Anyone looking for a reasonable return on their money (such as myself) would turn to fixed income securities, because I wouldn't be willing to gamble that I would make more than the 5% price of admission. (And where I would put my money would still not be in what you call the "productive economy" - I'm not about to start my own business, employ workers, etc. with a few thousand dollars, particularly since I already have a full-time job which provides a stable income.) This would likely put tens, if not hundreds, of thousands of people out of work as demand for financial services evaporated. And I'm not talking just stock brokers here (who arguably reap what they sow) - it includes all the support staff who just need to earn a living; in fact, the only traders likely to be left would be those with insider information who would make the markets even more volatile, thus having the opposite effect of what you're trying to accomplish.

Why is it the reponsibility of credit card companies to make sure that people can afford basic necessities? If people need to turn to credit to live, why not apply for a much cheaper line of credit? And if they don't qualify for that, how on earth do they expect to repay credit card debt? (Ironocally, this is exactly the mantra of conservatives when it comes to the public debt.) I agree, credit card companies make it easy for people to get credit cards, but that is why rates are high - so are the risks.

 

It seems like that is the governments job, considering they do just that. I'm seeing a lack of consistency in your reasoning, or in what you consider to be issues of public safety and personal responsibility. Like I said before, companies are fully aware of your choice to go somewhere else and they do things like divide the market into certain areas (or income groups, whatever they can) making it harder for people in those divided groups to go elsewhere by putting up artificial price barriers. Markets with monopolistic or oligarchic tendencies raise prices, prey on consumers, and limit the choice that they have. And when you lack choice, how is it a matter of responsibility?

You're right about that part about unions, it doesn't work in an international perspective...unless those third world workers aren't going to accept that lifestyle forever. You think there isn't eventually going to be a massive demand for workers rights in those areas? Especially when you consider how most of the companies that are doing that are american, if the economic slaves in those areas protested their conditions you can bet you would see a movement hear to pressure those companies into a deal. And reality not being fantasyland doesn't make it unchangeable either. What, are we supposed to just accept neo-slavery as the right of the wealthy to have? For all the talk of personal responsibility you sure tolerate a lot of irresponsibility from the people who's decisions affect everyone.

Splunge, I don't actually support a 5% tax, that was a number I used to show the massive amount of money even a small tax could bring in. I support somewhere around 2 or 3% for short term and 1% for long. Tens of thousands of jobs being lost? You're gonna have to prove that one to me. The big players here are the heads of major companies and various banks, I don't see the investment team getting kicked out just because one market has a tax on it now. I know you're not going to invest in that, but you also wouldn't be affected by the tax I advocate anyway (i would but the tax starting at a million but only tax the profits). I never said it was there responsibility, I was making a point about the actual lack of objective choice as seen by the poorer classes who actually have to make said choice. I think the mantra of "personal responsibility" sounds good on paper but is elitist in practice, as conservatives want to continually cut the school budget making the idea that people should take on more dangerous choices while losing education kind of nonsensical.

LKD- i'm in agreement with those ideas, and I don't think there's anything in the constitution that would not allow that. Capitalism isn't a constitutional right, despite what the politicians in power (and in service to the wealthy) might have to say about it.

 

This topic has splintered and broken to several different subjects it seems but that's ok. It's interesting discussion all the same.

Regarding the Tobin tax there's an abundance of research done on it and the most common consensus among supporters is a top percentage of 1% for short term investments such as swaps, options, warrants, futures and other derivatives and a much lower (0,1-0,5) for stocks and bonds. There's also various variants of the Tobin tax. Tobin himself advocated a financial transaction tax which only affects transactions that include changes to foreign currency while some advocate tax on all financial transactions domestic or foreign. Interestingly enough Sweden experimented with the full financial transaction tax during the 80'ies. It turned out to be largely unsuccessful with disappointing revenues and it managed to kill the trade in derivatives almost entirely. Eventually it was abolished in the 90'ies during the financial reforms after the recession. It's worth noting that this was a unilateral tax which probably is not a very good idea and it would possibly require some sort of international agreement. In the EU a internal financial transaction tax has been discussed a few times but Britain is objecting quite heavily. I doubt we'll get one anytime soon.

The main problem in the tax is of course that it will automatically affect employment. The financial sector will no doubt lose jobs when market trades slow down, making the choice of implementing a transaction tax a difficult one politically.

Regarding the credit card discussion. Collaborating on prices in oligopolies is illegal since most countries have anti-trust laws. In some branches oligopolies form automatically and the risk of trusts always exist. That's why there are very heavy penalties for companies abusing such situations. The governments splitting companies for that is not unheard of either.

Lastly a comment regarding unions. Considering how much I've seen, heard, read and experienced regarding employers abusing their employees and basically cheating them out of their legal rights I'm quite convinced that unions are still needed to give the employees the legal support they need which they otherwise might not have. Unfortunately most of the abuses happen in jobs where the employer is doing their very best to prevent the organisation of labor, typically on sectors that require little in the form of skilled labor. Skilled labor is usually more appreciated because of higher demand on the labor market and therefore have less need of collective support.

 

That's very different than what you said previously. If you're only going to tax profits made of stock investments, they already do that. They're called capital gains, and are taxed at 15% of whatever profit you made. It doesn't matter whether it was short term or long term, it's 15% of whatever you made.

 

But they do have a choice. They can choose to find cheaper forms of credit (such as a line of cdredit from their bank) or, if that's not available, they can choose to live within their means.

Well, that would be tough to prove, since there is no historical data. But as Morgoroth points out as well (and I think he has done a lot more research on this than I have), employoment definitely would be affected even at less than a 1% fee. If fewer people are investing, that reduces demand for investment services, and that means layoffs. Of course, I was using your 5% figure; now that you've lowered that, the effect on jobs would be reduced, but I think it would still be significant.

Edit: and Aldeth addreesed the other point I was going to make. I really don't see where you're going with this.

 

As Morgoroth said, this discussion has branched off a thousand different ways, so allow me to try to clarify what I was stating. Morgoroth, I know all about anti trust law and why it's there, and I also know that price fixing is illegal. It was stated on here that it shouldn't be that way and so I was defending said law.

Aldeth- I was talking about the profits from speculation, not stock investments. I know what capital gains are, and above a certain income bracket I do believe they should be raised, but that's not what I was saying there. I didn't clarify before because my original point when I mentioned the tax was not to give a specific way of doing it but to show that the possibility is there for revenue increases in the money markets, and to show the negative effects of short-term speculation. The prices raises it causes are mostly worldwide (according to my understanding), so it's one thing for a person here to pay an extra dollar or two on food and it's a whole other thing for a family in another country to not get fed because some rich guy wanted to make an extra buck.

Splunge- But again, that's expecting too much from the poor and uneducated. If you underfund school systems by millions of dollars you can't piously claim that they were being irresponsible- they were never taught and never had the means to learn, especially with the insanely long contracts and legal jargon. Being able to shop for different contracts that are purposefully hard to read requires a literary and economic skill that is too much to expect from people who haven't been prepped to deal with this stuff. Granted, credit is a unique market in that it's not a tangible thing so there is a possibility of changing providers, but without anti trust laws they would be able to put up tons of artificial barriers to you being able to make your choice (a fact i've stated over and over again but seems to be ignored). And try telling someone who needs credit to feed their family the last week before their paycheck to "live within their means". Is it their fault they would rather not have their kids living in a more dangerous area than they are forced to already? If so, factor in the cost of armed robbery. Oh, and if you don't know where i'm going with it, it's because I don't think the problems caused by capitalism can be completely solved inside of it. I advocate a new system.

I would also have to call into question the idea of job losses due to a speculation tax (not a financial transactions one), simply because a good majority of this type of deal is above average risk for short term above average gain. They could just as easily lose their job if they lost a single deal of this type than if a tax was imposed, considering the amount of money loss both represent. George Soros made a 30% return on a single currency speculation, so that should tell you what a 2 or 3% tax would really do to employment.

 

But aren't speculative buys necessarily financial transactions? There is currency speculation, stock speculation, and even oil and natural gas speculation. Pretty much every financial transaction you can think of is going to have some amount of speculation in it (OK, maybe not T-Bills). A specualtive tax cannot be completely divorced from a financial transaction tax.

 

But you did give a specific way of doing it. In #54, you said:

And in #62, you proposed taxing that capital (not the profits, but the capital):

That sounds pretty specific to me, and that is the point the rest of us have been arguing against. Now you are proposing something entirely different, except that your "new" tax already exists in the form of the capital gains tax, which is levied after the fact and only on profits. Increasing that tax slightly (which it looks like what you are suggesting) won't do anything to solve the problems you think exist.

As to your comments regarding credit and the poor or uneducated, again, why is their welfare the responsibility of credit card companies? In fact, I would argue that high interest rates charged to the poor are entirely justified since they run the greatest risk of default - the greater the risk, the greater the return should be. And again, if all they need is "credit to feed their family the last week before their paycheck", then they should be able to pay off the entire balance of the credit card when due and avoid interest charges entirely; if they can't do that, then they shouldn't be borrowing in the first place - otherwise, how will they ever be in a position to repay the debt?

 

But speculation alone doesn't qualify as a financial transactions tax as it's only one specific area, though it is a financial transaction. Other areas may affect employment more than speculation with an added tax.

I think you're reading too much into it. You can't just say "there's an estimated 600 trillion dollars floating around the market, give us 5% of it". It would have to be levied on the individual deals being made, I was just giving an estimate of the amount of money that would be made with such a tax, it wasn't meant to be implemented according to the specific wording of my post.

You're right, it's not their job to look out for the welfare of consumers, but it is the governments. I'm not advocating credit cards making their own laws to help citizens, i'm advocating the government doing it. And the example I gave is one that actually happened, where my father had to do that but couldn't afford to pay it all off on his next paycheck, so the interest increased which took a larger part of his next paycheck, forcing him to be on a treadmill of constant credit buying which he couldn't afford without it (starving kids) and couldn't afford with it.

Then he missed a rent payment which increased the interest even more on his credit card (that's illegal now, I know) forcing him to have to move from his already dangerous area to an even more dangerous simply because the jobs aren't around anymore that you can live off of decently without college, and there isn't enough jobs with college to support everybody anyways. Higher interest is one thing, but with the way things used to be if credit was a necessity you would have to have perfect payments on all debts if you didn't want to see your interest spike a ton, things that are much harder for the poor than they are for anyone else. It was preying on consumers, period. And how can they ever repay it? Good question, it was next to impossible before the laws were implemented from stopping the credit cards from preying on people in desperate situations, making it that much harder. But living within means can mean the deprivation of basic necessities for people who are dependent upon those who have to make that choice.

And that's my basic point on this I guess- "choice" doesn't happen in a vacuum, it's dependent on an ecomomic and social context. If our government makes tons of free trade agreements, outsourcing jobs once used to give the lower class citizens a decent life, forcing them to work for lower wages with less jobs around, the concept of choice holds little meaning. Life is based on survival at that point, and the constant stress of that makes informed choices in dangerous markets even harder to do. So we have a choice here- allow oligopolies to do their natural inclination of artificially raising prices and making life that much harder for the lower classes, or use existing antitrust laws to ensure that consumers are protected from these practices. If we really think it's the choice of a few private hands looking out for themselves to freely influence economic life for the masses, than how is it any different than economic dictators?

The problems I "think" exist? Do a little research and you'll see that speculative trading provably creates the problems I speak of. Don't mix fact with opinion. The tax is my opinion, the problems are not. And it's not a new tax or new idea, it's something being debated and talked about:

http://money.cnn.com/2011/01/24/markets/financial_speculation_tax/index.htm

http://thehill.com/opinion/op-ed/71319-a-speculation-tax-would-make-wall-street-pay-for-damages

http://www.thenation.com/article/161257/cut-wall-street-down-size-financial-speculation-tax

http://wealthforcommongood.org/campaign/financial-transaction-tax/

 

Wrong, it isn't the government's job either. As has been mentioned. Your dad got stuck with high interest rates because he is at a very high risk of defaulting. He had the choice of what to spend his limited funds on and he also had the choice to use a credit card or not.

 

You say it's not the governments job, and yet a) they do it. b) "promote the general welfare" is in the constitution and there's no doubt that making predatory prices illegal does so. You say i'm wrong on the job of government, and yet you're the one arguing against what the government is actually doing. Care to give us your vision of what government is or should be?

And yet he didn't default on his credit payment, ever. He defaulted on something else that isn't even a default as it was a missed day. Risk means nothing if it never happens, and again there was no choice as it was either that or let his family go without food. You're concept of choice is pretty distorted if one way means he should suffer and the other means his family.

 

First off, I didn’t say that; you did. And to raise "the amount of money that would be made with such a tax" (i.e. $30 trillion) would require the implementation of the tax precisiely as you descibed in #54/62. Anyway, I really don’t know what you are now proposing. In #54/62 you were proposing a transaction tax, in #85 it became a profit tax, and now it looks like you’re back to a transaction tax (although that’s not particularly clear). If on transactions, I’ve already said how I feel about it (1% max); if on profits, that tax already exists in the form of a capital gains tax.

As far as credit card interest goes, I guess we’ll just have to agree to disagree.

 

Whoa, whoa, whoa ... holster that weapon there....

Typically it's not just one choices that sets people down an unfortunate path. It is many. For very few, they made all the "right" choices and still got punished. For most, it's a combination of good and bad decisions. We have no idea what happened with your father or how different choices he made may have impacted that final choice -- which, in my opinion, was the right one (feeding the kids is a priority).

Many of us on the boards do not believe that the government should get involved in the personal decisions we make. We do not believe the government should be looking over every person's shoulder to stop them from investing in a Ponzi scheme or prevent them from sacrificing their retirement so their kids will have a college fund (or vice versa).

The government should be there to help when people are down but it cannot always be there to prevent the fall.

 

Now, after 5 pages on this topic, there is the most sensible comment made so far. Everything else written to date has just been about shifting the problem around. The only solution is for USA as a nation (not just the government, but everybody) to spend less than they earn. It's the only way to reduce debt. The only way.

 

Actually, you're right, I did shift my meaning from profit to transaction and back. That doesn't make the idea false though, and I never meant taxing the total capital base since that's an impossible thing to do. I advocate a tax on speculation, but the specific details I never had a position on so you'll have to excuse me if I had different scenarios of how that would play out. Either way, I apologize for the inconsistency.

 

No, it doesn’t make your idea false. The idea of a speculation tax has merit, and is essentially what Morgoroth proposed (and I tried to claim as my own )

Anyway, no problem on the inconsistency. I applaud your willingness to acknowledge it (and apologise for it in the process).

 

Of course, Splunge. I'm willing to admit when i'm wrong or mistaken (and even willing to be proved so), and anyone who isn't shouldn't be debating in the first place.

I'd like to add one more thought to this subject before it's over. The idea of personal choice in the credit card industry has validity, and my position to take the anti trust argument actually doesn't work here as well as it does in other places, as there actually is the objective choice that can't be completely taken away, unlike other markets and industries where trusts can be much more damaging and hard to escape. Don't get me wrong, I still don't think the idea of adding more objective harms to society is a good one, but the case for interference isn't as iron-clad as it can be in other areas. I think a decent comprimise should be a law where, if a customer asks, the salesmen must give a comprehensive summary of the contract being signed, with all neccesary and important points mentioned. It would be very easy for a company to add a readable summary to their contracts anyways.

So, good debate everyone. I've seen better arguments here than in most politcally based boards