-- Posted Thursday, 26 August 2010 | Digg This Article
| | Source: GoldSeek.com
Rick’s Picks
Thursday, August 26, 2010
“Phenomenally accurate forecasts”
You’ve got to wonder what the banks have in mind now that they’ve raised credit card rates to an average 14.7 percent, up 160 basis points from a year ago. Are lenders perhaps trying to tell us that they are no longer interested in advancing cash to users of plastic? After all, what shopper or diner would borrow a dime with a credit card if it carried such an exorbitant interest charge? And even if there were borrowers at such usurious rates, how many of them could be counted on to service their loans indefinitely (which is how long it would take to pay off such loans)? It’s not as though the banks can go after delinquent borrowers with such time-honored tools of the loan shark as baseball bats, brass-buckled belts and straight razors.
Still, we have to assume the banks know their business and that they think they can make a profit by charging economically lethal rates on unsecured balances. But if you or I were making such loans, we’d probably be asking ourselves up-front, How desperate does someone have to be to run up credit-card debt at 14.7%? The answer, obviously, is: the kind of person we would not want to lend money to. So why are the banks doing it anyway? It’s possible that although they don’t actually know how things will play out, they believe they’ve pegged rates high enough to compensate for new regulations that will make it more difficult for them to lend as they traditionally have – i.e., with the same loving kindness and respect for their customers as Frankie the Camel and rent-to-own furniture stores. And who cares about high delinquency rates when there will always be a few customers willing and able to pay $6 for $5 (and presumably much more if there are penalties and fees involved. Although the regulators may have made it harder for banks to assess such charges, they have not been eliminated.
Joe Sixpack’s Fate
However this disaster-in-the-making plays out, it’s obvious that 14.7 percent interest rates are not going to stimulate retail purchases, even though that has always been the ostensible point of credit cards. The inflationists will probably say that loan-shark rates on plastic represent just one more cost that is going up. But because no one – even Las Vegas casinos -- can actually afford to borrow at such rates for more than short stretches of time, we would argue the opposite – that credit cards designed to stimulate spending are fast becoming a deflationary pressure point, burdening shoppers with real rates of interest that are more than triple what the average hedge fund is returning these days. Under the circumstances, Joe Sixpack will be biting off more than he can chew if he opts to make only minimum payments for perhaps three or four months.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. There is a substantial risk of loss in futures and option trading, and even experts can, and sometimes do, lose their proverbial shirts. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2010, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Thursday, 26 August 2010 | Digg This Article | Source: GoldSeek.com
