...for credit cards, that is. Well, sort of. As of today, the Credit Card Accountability Responsibility and Disclosure Act comes into force. Among other things, banks will now have to offer 45 days' notice before changing terms(!), payments have to be applied to the highest-interest balance first(!!), and banks can no longer retroactively raise interest rates on credit card balances(!!!). Shocking, I know, that this bill got passed in the first place. For someone who doesn't carry a balance, though, this doesn't really affect me, other than the threat from banks that they'll start paring back rewards programs -- which they were already doing anyway -- and start charging annual fees to make up for lost revenue -- but won't, because they would then lose all their customers.
Now if only we could get some sort of financial reform passed....
Showing posts with label banks. Show all posts
Showing posts with label banks. Show all posts
Monday, February 22, 2010
Saturday, November 14, 2009
The Lloyd's Prayer
Our Chairman,
Who Art At Goldman,
Blankfein Be Thy Name.
The Rally's Come. God's Work Be Done
On Earth, As There's No Fear Of Correction.
Give Us This Day Our Daily Gains,
And Bankrupt Our Competitors
As You Taught Lehman And Bear Their Lessons.
And Bring Us Not Under Indictment.
For Thine Is The Treasury,
The House And The Senate,
Forever And Ever.
Goldman
Who Art At Goldman,
Blankfein Be Thy Name.
The Rally's Come. God's Work Be Done
On Earth, As There's No Fear Of Correction.
Give Us This Day Our Daily Gains,
And Bankrupt Our Competitors
As You Taught Lehman And Bear Their Lessons.
And Bring Us Not Under Indictment.
For Thine Is The Treasury,
The House And The Senate,
Forever And Ever.
Goldman
Thursday, October 15, 2009
Such a Great Deal!
I got an email from Chase today telling me to enroll in their "FREE debit rewards program ... And if you enroll by November 30, 2009, you'll get a $10 gift card!" After reading the fine print, it turns out that $10 gift card actually is a free $10 gift card. Awesome. But the free debit rewards program is completely useless.
In the email they tell you that you'll earn 1 point for every $1 you spend. Then in the fine print, they tell you that the $10 gift card will come in the form of 5,500 points, which is equivalent to a $10 gift card... meaning that you're earning 0.18% on your purchases. In other words, in order to earn a $10 gift card, you need to spend $5,500! If you want to get that $50 Macy's gift card they have on their site's main redemption page, you'll need to spend $20,000! I think I'll stick with my credit card rewards program, which earns more than five times the amount this debit card rewards program is paying. But I'll gladly take them up on their free gift card offer.
In the email they tell you that you'll earn 1 point for every $1 you spend. Then in the fine print, they tell you that the $10 gift card will come in the form of 5,500 points, which is equivalent to a $10 gift card... meaning that you're earning 0.18% on your purchases. In other words, in order to earn a $10 gift card, you need to spend $5,500! If you want to get that $50 Macy's gift card they have on their site's main redemption page, you'll need to spend $20,000! I think I'll stick with my credit card rewards program, which earns more than five times the amount this debit card rewards program is paying. But I'll gladly take them up on their free gift card offer.
Wednesday, September 9, 2009
Debit Cards Again
There's an article today from the New York Times about debit cards, which is fitting since I wrote about credit cards versus debit cards a few weeks ago. The basic idea: Debit cards used to be a good way for people to manage their money, since you couldn't spend more than what you had in your account... or so you thought. This forced budgeting is a big reason why debit cards became so popular, but banks have come to realize what a huge amount of profit they can make on debit card overdraft fees. Instead of declining a purchase for insufficient funds, banks will let the transaction through, in exchange for a fee of up to $35. Sure, it's more convenient for customers, but that convenience sure comes with a hefty price. Imagine using your debit card to buy a $3 cup of coffee, only to find out your bank charged you $35 (the equivalent of nearly 12 cups of coffee) to buy that coffee because you were overdrawn.
It's not merely the huge fees that banks charge that is so riling. Consumers need to keep track of how much money is in their account, and if they spend more than they have, then they should be prepared to face the consequences. And frankly, if you don't have enough money in your account, you probably shouldn't be spending $3 on coffee anyway. Charging $35 is excessive, though, and if you were to treat it as interest and express it in percentage terms, the fee would be equivalent to an interest rate of thousands of percent! This would put even the most zealous loan shark to shame. (And guess what? The banks lobbied to make sure that these fees could not be treated as interest, saving them from revealing how usurious this practice really is.)
Here's the worst part, though: Not only will banks charge onerous overdraft charges on your debit card purchases, but they will purposefully reorder your transactions in order to maximize those fees. Say you have $50 in your account, and you buy a $5 sandwich, then buy a $2 coffee, then pay a $60 utility bill, in that order. Most people would think you would get hit with an overdraft fee only once, when you paid your bill, but that is wrong. Even though you paid the bill last, the bank will reorder the transactions so that the bill is paid first. This puts you at -$10. The bank charges you a $35 overdraft fee. Then it runs the $5 sandwich purchase through, putting your account at -$15. The bank charges you another $35 overdraft fee. Finally, it runs your $2 coffee purchase, putting your account at -$17. The bank charges you yet another $35 overdraft fee, for a total of $105 in fees. That's an easy extra $70 in profit.
I've always preferred credit cards over debit cards, and this plainly shows why. Furthermore, when you use a credit card, you also have more legal protection should your card ever get stolen. With a credit card, you are liable for no more than $50. With a debit card, you are liable for the entire balance. If a thief completely empties your bank account, you're out of luck.
The moral of the story? If you don't want to be at the mercy of the banks, don't give them power over your life. Use a credit card instead of a debit card and pay off the balance every month. Or better yet, use cash and cut out the banks entirely.
It's not merely the huge fees that banks charge that is so riling. Consumers need to keep track of how much money is in their account, and if they spend more than they have, then they should be prepared to face the consequences. And frankly, if you don't have enough money in your account, you probably shouldn't be spending $3 on coffee anyway. Charging $35 is excessive, though, and if you were to treat it as interest and express it in percentage terms, the fee would be equivalent to an interest rate of thousands of percent! This would put even the most zealous loan shark to shame. (And guess what? The banks lobbied to make sure that these fees could not be treated as interest, saving them from revealing how usurious this practice really is.)
Here's the worst part, though: Not only will banks charge onerous overdraft charges on your debit card purchases, but they will purposefully reorder your transactions in order to maximize those fees. Say you have $50 in your account, and you buy a $5 sandwich, then buy a $2 coffee, then pay a $60 utility bill, in that order. Most people would think you would get hit with an overdraft fee only once, when you paid your bill, but that is wrong. Even though you paid the bill last, the bank will reorder the transactions so that the bill is paid first. This puts you at -$10. The bank charges you a $35 overdraft fee. Then it runs the $5 sandwich purchase through, putting your account at -$15. The bank charges you another $35 overdraft fee. Finally, it runs your $2 coffee purchase, putting your account at -$17. The bank charges you yet another $35 overdraft fee, for a total of $105 in fees. That's an easy extra $70 in profit.
I've always preferred credit cards over debit cards, and this plainly shows why. Furthermore, when you use a credit card, you also have more legal protection should your card ever get stolen. With a credit card, you are liable for no more than $50. With a debit card, you are liable for the entire balance. If a thief completely empties your bank account, you're out of luck.
The moral of the story? If you don't want to be at the mercy of the banks, don't give them power over your life. Use a credit card instead of a debit card and pay off the balance every month. Or better yet, use cash and cut out the banks entirely.
Wednesday, August 19, 2009
Credit or Debit?
I have never used an ATM, ever. I'm old-fashioned like that. When I need cash, I go to the bank and fill out a slip and give it to the teller. It's not as inconvenient as it sounds because I usually have checks to deposit anyway. I've never used a debit card either... until today.
My formerly free checking account at Chase recently switched over to their regular Chase Checking account. In order to avoid a monthly service fee, I need to either have direct deposit or make five debit card purchases a month. Since I probably won't be having direct deposit anytime soon, I had to go find my debit card and start using it.
I was a little angry about this at first. I use my credit card for nearly everything, and having to use my debit card five times a month was going to be a hassle. Not only would I miss out on any cash back reward that I would get if I used my credit card, but I would also have to make sure that my checking account has enough money in order to prevent overdraft charges.
But then I realized I'm not the only one who's losing out because of this rule. JP Morgan Chase, N.A., in its infinite wisdom, is actually losing out on this too. You see, when I use my Chase credit card, Chase typically charges the merchant (e.g., Wal-Mart) around $0.25 + 2% of the purchase price. (The actual fee schedule is extremely complex and opaque, with different fees depending on which card is used, where it is used, how it is used, and so on.) This is known as the interchange fee, and is how, besides charging those foolish enough to carry a monthly balance on their card usurious interest rates, credit card companies make money. Most debit cards, however, charge a fixed fee per transaction. The details are a little hazy (as always), but if you use your PIN with your debit card, the charge will be around $0.25 to $0.50 per transaction. If it's $0.25, then Chase loses money on every transaction I make with my debit card that I would have made with my credit card. If it's $0.50, they lose money whenever I spend more than $12.50 on a purchase. At best, Chase gets a few extra cents a month in additional revenue, at the expense of an unhappy customer ready to jump ship. Not a very smart move on their part. Then again, this is the same bank that's sitting on tens of billions of dollars of option ARMs that's going to make subprime look tame....
Just remember: Banks are evil. They're even worse than cable companies.
My formerly free checking account at Chase recently switched over to their regular Chase Checking account. In order to avoid a monthly service fee, I need to either have direct deposit or make five debit card purchases a month. Since I probably won't be having direct deposit anytime soon, I had to go find my debit card and start using it.
I was a little angry about this at first. I use my credit card for nearly everything, and having to use my debit card five times a month was going to be a hassle. Not only would I miss out on any cash back reward that I would get if I used my credit card, but I would also have to make sure that my checking account has enough money in order to prevent overdraft charges.
But then I realized I'm not the only one who's losing out because of this rule. JP Morgan Chase, N.A., in its infinite wisdom, is actually losing out on this too. You see, when I use my Chase credit card, Chase typically charges the merchant (e.g., Wal-Mart) around $0.25 + 2% of the purchase price. (The actual fee schedule is extremely complex and opaque, with different fees depending on which card is used, where it is used, how it is used, and so on.) This is known as the interchange fee, and is how, besides charging those foolish enough to carry a monthly balance on their card usurious interest rates, credit card companies make money. Most debit cards, however, charge a fixed fee per transaction. The details are a little hazy (as always), but if you use your PIN with your debit card, the charge will be around $0.25 to $0.50 per transaction. If it's $0.25, then Chase loses money on every transaction I make with my debit card that I would have made with my credit card. If it's $0.50, they lose money whenever I spend more than $12.50 on a purchase. At best, Chase gets a few extra cents a month in additional revenue, at the expense of an unhappy customer ready to jump ship. Not a very smart move on their part. Then again, this is the same bank that's sitting on tens of billions of dollars of option ARMs that's going to make subprime look tame....
Just remember: Banks are evil. They're even worse than cable companies.
Wednesday, April 15, 2009
The Future of the Economy: Three Scenarios
From the look of things, it seems like we're nowhere near the end of the recession. The consensus economists have become more optimistic in the past few weeks, however. They point to the recent signs in consumer spending and home sales that might be pointing to a turnaround for the economy, or at the very least, a decrease in the rate of decline. The stock market likes the optimism and has been (irrationally) rising very strongly in the past few weeks. I don't see anything to change my mind, though. Things still look bad, and I think things have a good chance of becoming even worse. Looking at the Great Depression, people are thinking we are in 1933 after Roosevelt's bank holiday. I, on the other hand, worry we're in 1930. Things were becoming bad after the stock market crash in 1929, but what started the Great Depression was not the crash; it was the bank panics that started in 1931 and lasted until 1933. That was what made the Great Depression so Great. With that in mind, here are three ways the economy could play out in the next year or two.
1. Consensus: The bottom is a few months away
Frankly, this is the most unrealistic scenario, but it is something we should consider, however unlikely it is. Suppose that Geithner and Bernanke can pull off their trick and actually instill some sort of confidence in the banking sector. A stabilization of the banks might cause housing prices to at least slow their rate of decline. With banks able to lend again, companies can get the credit they need to expand their business. Consumers slowly begin spending again, and the economy gradually recovers. We might have many quarters of anemic growth, but at least we'll be out of the woods.
This seems to be the consensus picture. Most economists have been moving the time they predict the bottom will occur forward to somewhere around the fourth quarter of 2009 or so. If this actually is the case, then it makes sense for the stock market to be rallying right now, since the stock market is a leading indicator of the economy.
What's wrong with this picture? Well, everything. Obviously, Geithner and Bernanke truly, truly hope that things will play out this way, but let's be realistic. The biggest linchpin is the stabilization of the banking sector. But the banks are suffering not from a liquidity problem, as the Treasury and Fed would have us believe, but from a solvency problem. Given that the banks are technically bankrupt (haha, sorry), making it easier to trade won't actually do anything. The government's new PPIP plan implicitly assumes that the market for toxic assets is frozen (hence, a liquidity problem), and that because the market is frozen, the bid-ask spread between the banks and investors is too large, and that is what is keeping the banks from recovering. This is also the reasoning behind the suspension of mark-to-market accounting. By adding money to the market, the government hopes that the price for toxic assets will reach its so-called "true" value.
But investors are asking for 30 cents on the dollar for these toxic assets because these assets are actually only worth 30 cents. The PPIP might actually succeed, though, in inflating the value of these toxic assets... at least until housing prices fall enough that banks have to take yet more writedowns. The PPIP is simply a way to obscure the fact that the government will be bailing out the banks... again.
If banks truly were facing a liquidity crisis, then loaning money would work because banks could rely on their future profits to pay back the loans. But if the banks are insolvent -- which they clearly are -- then loaning money simply delays the inevitable. More money does not make a company turn a profit. The issue is profitability, and the banks are not profitable.
2. The bottom will be in the second half of 2010 or the beginning of 2011
This is the most likely scenario in my mind. The economy cannot recover until the banks get through their solvency crisis. I think several months from now, the government will finally realize that the only realistic scenario is for some sort of "reorganization" (i.e., structured bankruptcy through a nationalization) of the banks, which will involve the culling of the weakest ones. Citigroup will certainly not survive. Neither will AIG, or Bank of America, at least as a public company. Wells Fargo has been substantially weakened by its acquisition of WaMu. JP Morgan will be facing a lot of pain, but it will probably survive. Goldman Sachs will likely survive as well, though it has yet to face any significant test.
Housing prices will continue to fall. But the bigger thing will be mortgage resets. What caused all of this was the default on subprime mortgages. The next wave of resets will be hitting homeowners sometime next year. This time it will be option ARMs. The defaults on option ARMs will make subprime look like prime. When homeowners see their mortgage payments tripling, there's no chance in hell they're going to continue paying it -- even assuming they had the ability in the first place to make those payments. This will cause massive losses for the banks, and could in fact be the 1931 event that we're looking for. Allow me to be optimistic(!) , but there is a silver lining here. The banking panic redux will quite possibly provide the impetus necessary to finally deal with the banking problem properly. The government will realize that it simply cannot continue pouring money down a bottomless pit. The losses will continue, but at last we'll be able to start anew. As I have said, once we solve the banking problem, we can finally start getting through this recession.
Meanwhile, unemployment will continue rising and could possibly reach a peak of around 15%. We'll continue having a massive asset deflation. The stock market will certainly fall from its current price. If the recession ends in the beginning of 2011, it will have lasted for three years. To put this in perspective, that is about as long as the 1980-82 double recession (though technically there was a year of growth in between) and a bit shorter than the 1929-33 recession. So things will be bad, but probably not worse than the Great Depression.
3. The Greater Depression
I have to admit that the second scenario might actually be a bit optimistic. I assume that the government will finally get its act together and do what's necessary for the banks, but as we all know too well, government has a pretty poor track record of doing things right. That was part of the problem of the Great Depression. The government, through its action and inaction, turned what was a bad recession into an entire decade of misery. For all the talk about how we have learned the lessons of Japan and the Lost Decade of the 1990s, what amazes me is how much we're copying Japan. Though we may know what to avoid, will we actually do things differently? That remains to be seen.
In considering the Greater Depression, there are actually two ways this could pan out. The first is a Great Depression but on a greater scale. We end up with massive unemployment (well over 15%, maybe even over 20%), and the stock market completely crashes. The stock market in the 1929-33 recession lost 90% of its value. If the same thing happens to the market today, then we'll be looking at a Dow of around 1400 and S&P of 150! The recession will last for years, until early 2012 at the earliest, possibly until 2014. The government will be powerless like Japan was to stop it. It will be a slow and painful bleeding of wealth and energy, but eventually all the bad blood is removed from the body, and the economy can start to rebuild itself.
Alternatively, the government could go with the nuclear option. That is, the problem we have right now is deflation. What the government might end up doing is pulling a Zimbabwe and going for hyperinflation. Through the printing of huge amounts of money (or rather, adding more zeros to an account in a database), the Fed can get the housing market, the credit market, and the banking sector all moving again. Of course, the only problem is that they'll be moving at incredible speeds as everyone tries to dump their dollars before they become worthless. The currency collapses, but we destroy all debt in the process, and we finally have the chance to start all over.
In both scenarios people lose. The difference is who loses the most. In the Greater Depression, those who don't have a job will be having a miserable and painful experience. Those who do have a job, on the other hand, might actually finds things to be not so bad. As they say, the Great Depression was great if you had a job. Prices were constantly falling, meaning that you could buy more and more for less and less. By forcing everyone, including the government, to pay down their debts, the foreigners get to keep their money at the expense of the Americans. In the Weimar Republic/Zimbabwe scenario, the middle class will be totally wiped out, though they will get to start with a clean slate, as all their debts will be cancelled in the process. The foreigners, too, will be wiped out when we repudiate our debt. The poor actually might not do so badly because they have no assets to lose, while those who own tangible assets like gold, commodities, and real estate will be able to preserve their purchasing power. They will probably even end up ahead after the hyperinflation ends, as they will be the ones with all the remaining wealth.
No matter how it plays out, somebody has to lose. The Devil demands his due.
---------
I talked about monetary policy a little bit in this last scenario, but I haven't talked too much about it when I should be, because how the Fed acts will have a big effect on what will happen in the coming years. I'll talk about inflation and deflation in more detail in the next post or two. I'll also talk about some investment ideas for the future.
1. Consensus: The bottom is a few months away
Frankly, this is the most unrealistic scenario, but it is something we should consider, however unlikely it is. Suppose that Geithner and Bernanke can pull off their trick and actually instill some sort of confidence in the banking sector. A stabilization of the banks might cause housing prices to at least slow their rate of decline. With banks able to lend again, companies can get the credit they need to expand their business. Consumers slowly begin spending again, and the economy gradually recovers. We might have many quarters of anemic growth, but at least we'll be out of the woods.
This seems to be the consensus picture. Most economists have been moving the time they predict the bottom will occur forward to somewhere around the fourth quarter of 2009 or so. If this actually is the case, then it makes sense for the stock market to be rallying right now, since the stock market is a leading indicator of the economy.
What's wrong with this picture? Well, everything. Obviously, Geithner and Bernanke truly, truly hope that things will play out this way, but let's be realistic. The biggest linchpin is the stabilization of the banking sector. But the banks are suffering not from a liquidity problem, as the Treasury and Fed would have us believe, but from a solvency problem. Given that the banks are technically bankrupt (haha, sorry), making it easier to trade won't actually do anything. The government's new PPIP plan implicitly assumes that the market for toxic assets is frozen (hence, a liquidity problem), and that because the market is frozen, the bid-ask spread between the banks and investors is too large, and that is what is keeping the banks from recovering. This is also the reasoning behind the suspension of mark-to-market accounting. By adding money to the market, the government hopes that the price for toxic assets will reach its so-called "true" value.
But investors are asking for 30 cents on the dollar for these toxic assets because these assets are actually only worth 30 cents. The PPIP might actually succeed, though, in inflating the value of these toxic assets... at least until housing prices fall enough that banks have to take yet more writedowns. The PPIP is simply a way to obscure the fact that the government will be bailing out the banks... again.
If banks truly were facing a liquidity crisis, then loaning money would work because banks could rely on their future profits to pay back the loans. But if the banks are insolvent -- which they clearly are -- then loaning money simply delays the inevitable. More money does not make a company turn a profit. The issue is profitability, and the banks are not profitable.
2. The bottom will be in the second half of 2010 or the beginning of 2011
This is the most likely scenario in my mind. The economy cannot recover until the banks get through their solvency crisis. I think several months from now, the government will finally realize that the only realistic scenario is for some sort of "reorganization" (i.e., structured bankruptcy through a nationalization) of the banks, which will involve the culling of the weakest ones. Citigroup will certainly not survive. Neither will AIG, or Bank of America, at least as a public company. Wells Fargo has been substantially weakened by its acquisition of WaMu. JP Morgan will be facing a lot of pain, but it will probably survive. Goldman Sachs will likely survive as well, though it has yet to face any significant test.
Housing prices will continue to fall. But the bigger thing will be mortgage resets. What caused all of this was the default on subprime mortgages. The next wave of resets will be hitting homeowners sometime next year. This time it will be option ARMs. The defaults on option ARMs will make subprime look like prime. When homeowners see their mortgage payments tripling, there's no chance in hell they're going to continue paying it -- even assuming they had the ability in the first place to make those payments. This will cause massive losses for the banks, and could in fact be the 1931 event that we're looking for. Allow me to be optimistic(!) , but there is a silver lining here. The banking panic redux will quite possibly provide the impetus necessary to finally deal with the banking problem properly. The government will realize that it simply cannot continue pouring money down a bottomless pit. The losses will continue, but at last we'll be able to start anew. As I have said, once we solve the banking problem, we can finally start getting through this recession.
Meanwhile, unemployment will continue rising and could possibly reach a peak of around 15%. We'll continue having a massive asset deflation. The stock market will certainly fall from its current price. If the recession ends in the beginning of 2011, it will have lasted for three years. To put this in perspective, that is about as long as the 1980-82 double recession (though technically there was a year of growth in between) and a bit shorter than the 1929-33 recession. So things will be bad, but probably not worse than the Great Depression.
3. The Greater Depression
I have to admit that the second scenario might actually be a bit optimistic. I assume that the government will finally get its act together and do what's necessary for the banks, but as we all know too well, government has a pretty poor track record of doing things right. That was part of the problem of the Great Depression. The government, through its action and inaction, turned what was a bad recession into an entire decade of misery. For all the talk about how we have learned the lessons of Japan and the Lost Decade of the 1990s, what amazes me is how much we're copying Japan. Though we may know what to avoid, will we actually do things differently? That remains to be seen.
In considering the Greater Depression, there are actually two ways this could pan out. The first is a Great Depression but on a greater scale. We end up with massive unemployment (well over 15%, maybe even over 20%), and the stock market completely crashes. The stock market in the 1929-33 recession lost 90% of its value. If the same thing happens to the market today, then we'll be looking at a Dow of around 1400 and S&P of 150! The recession will last for years, until early 2012 at the earliest, possibly until 2014. The government will be powerless like Japan was to stop it. It will be a slow and painful bleeding of wealth and energy, but eventually all the bad blood is removed from the body, and the economy can start to rebuild itself.
Alternatively, the government could go with the nuclear option. That is, the problem we have right now is deflation. What the government might end up doing is pulling a Zimbabwe and going for hyperinflation. Through the printing of huge amounts of money (or rather, adding more zeros to an account in a database), the Fed can get the housing market, the credit market, and the banking sector all moving again. Of course, the only problem is that they'll be moving at incredible speeds as everyone tries to dump their dollars before they become worthless. The currency collapses, but we destroy all debt in the process, and we finally have the chance to start all over.
In both scenarios people lose. The difference is who loses the most. In the Greater Depression, those who don't have a job will be having a miserable and painful experience. Those who do have a job, on the other hand, might actually finds things to be not so bad. As they say, the Great Depression was great if you had a job. Prices were constantly falling, meaning that you could buy more and more for less and less. By forcing everyone, including the government, to pay down their debts, the foreigners get to keep their money at the expense of the Americans. In the Weimar Republic/Zimbabwe scenario, the middle class will be totally wiped out, though they will get to start with a clean slate, as all their debts will be cancelled in the process. The foreigners, too, will be wiped out when we repudiate our debt. The poor actually might not do so badly because they have no assets to lose, while those who own tangible assets like gold, commodities, and real estate will be able to preserve their purchasing power. They will probably even end up ahead after the hyperinflation ends, as they will be the ones with all the remaining wealth.
No matter how it plays out, somebody has to lose. The Devil demands his due.
---------
I talked about monetary policy a little bit in this last scenario, but I haven't talked too much about it when I should be, because how the Fed acts will have a big effect on what will happen in the coming years. I'll talk about inflation and deflation in more detail in the next post or two. I'll also talk about some investment ideas for the future.
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