Paintball Guns and Bank Bailouts

I just finished watching Maxed Out, an interesting documentary on the influence of banks on American’s use of credit. The general theme was that banks use an array of coercive tactics to sign people up for high interest, high fee credit cards and then find ways to inhibit people’s ability to pay off the balance.

I received my first credit card the month of my eighteenth birthday. I promptly bought a paintball gun and never paid the bill. My second card was an American Express charge card, with which I went to Las Vegas, promptly purchased a hotel room and again, never paid the bill. Probably because of this, the interest on my first car loan was 13.5%. And my next credit card was a Providian Mastercard with a $200 limit and a $75 annual fee charged to the card before I even activated it. The interest rate was 26.99%+prime and they also charged me an $18 fee for making payments online. There were more credit issues, but the point is that it took me four years to rebuild my credit.

Now, I don’t think I was tricked into any of this. It took little more than telling me that I could buy something even though I did not have money to convince me to sign up. But the banks were certainly not upfront with the fee structure. Generally in mutually beneficial transactions, there is no need to hide the fees on page 29 of a booklet written in tiny convoluted language.

Imperfect information distorts markets because people without information to perform cost-benefit analysis act irrationally. In the case of credit, it causes people to act irrationally exuberant. What’s worse is that people tend to buy depreciating assets(like paintball guns) with credit so that the only capital people have to back their purchases are their houses or potential income. For some people, this ends in a debilitating spiral of debt.

In a crude way, this is what happened in the financial crisis, debilitating spiral and all. Except it was the banks themselves who bought depreciating assets leveraged up 10-20 times (meaning they bought million dollar paintball guns with fifty thousand dollars in their pocket). They assumed that housing prices would never go down. Except when I went into debt, the government did not buy my paintball gun at its retail value, as it did the financial derivatives full of sub-prime mortgages of the banks. That would have given me the incentive to just buy another paintball gun and never pay it off. Yet after all was said and done, that’s exactly what the government said to the banks, “Here’s your bailout. Please be more careful next time, but if you’re not, it’s ok because there is this giant tax-payer financed insurance policy here to help.”

For me, this exposes the dual-morality of the banking system. Banks punish consumers for bankruptcy in this country. Yet, when banks are the consumers, they expect to and did in fact walk away free of consequence. But at least the banks changed their tune since the bailout and gave the same treatment to under water home owners… or not. Bailing out banks was necessary to save the financial system, bailing out homeowners is wasting money on deadbeats. Banks still make more money on defaulting homeowners and bankruptcy than they do readjusting loans. Even though it was the same underwater homeowners who paid for the bank bailout, banks continue to extend consumers the generosity of high rates on over-priced assets. In essence, the bailout was just one extremely large fee that was printed on page 167 of our account terms agreements, under the heading, “Banks Get out of Jail Free.” 

In my opinion, the only solution is a good public caning. With that in mind, I would like to use this opportunity to extend my middle finger to HSBC, Providian, the former Washington Mutual, Bank of Stockton, Kowloon auto sales, JP Morgan Chase, and Wells Fargo.