The New Credit Rules

Here is the summary of the new credit regulations from the Fed.

The main changes include: interest rates cannot be changed within the first year (with a couple of exceptions), new rates can only apply to future purchases, an end to two-cycle billing, and the annual fee is capped at 25% of the initial limit. Consumers must also have the option of over limit "protection." Another change coming in August is that consumers will have to opt-in to overdraft "protection" on their bank accounts.

One of the more blatant policies banks have been using was to enforce new interest rates to past purchases. This would be a blatant breach in any other contract. I don't expect the lender of my car loan change my interest rate in the middle of my four year repayment schedule. Banks cannot alter a fixed mortgage interest rate in the middle of the term either. Yet, credit cards were subject to this insane practice.

Most of the other regulations seem like common sense and are aimed at making sure consumers have the necessary information. In reality, I don't think this is going to be as big of a hit to banks as many are predicting. American's have gotten used to the idea of spending more money than have, regardless of the interest rate or other fees attached. Most people are going to continue to not read their credit card policies anyway.

One of the consequences of this is that banks are going to have to resort to a more standard business model: price discrimination, meaning that they are going to charge high fess to people who they believe can afford to pay more. This is standard practice in many industries. The interesting part is that before these new regulations,  banks had found a way to reverse-discriminate. By not providing or hiding information, and making retro-active rate changes, banks found a way to charge the highest price to those who could least afford to pay it.

I pay all my bills online. I review my interest charges and make sure there have been no unauthorized purchases, but I rarely review my paper bill unless there is a discrepancy. Banks push online banking and email statements almost as hard as they push overdraft protection. I wonder if banks will decide not to make the new information available in an easy to find manner on their websites. That could be a big loop hole.

A Day of Healthcare Reading

1. Why Americans have no idea about what healthcare legislation actually says:
                Obama Details Plan to Expand Health Care to Uninsured

                From: NY Times

                Obama Health Plan Costs $950 Billion Over 10 Years

                From: WSJ

                Finally, ObamaCare Arrives

               From: The Atlantic

               The President’s Proposal puts American families and small business owners in control of their own  

               health care.

               From: Whitehouse.gov

Now, if you put it all together, Obamacare is going to spend $950 billion to extend care to the uninsured, but in a way that helps people take control of their own healthcare. Still, after reading the three articles I have no clue how this proposal is going to affect me, or how it will provide healthcare to the uninsured--the only two aspects I care about. So I started a search. 

I found how it is going to affect me pretty easily:

Currently, UCB mandates that I have health insurance. They sold it to me for $1500 (and then paid for it in a back-handed way; but for the sake of argument, let's say I paid for it). That would put the cost around the $40,000 income range, which is above what most students earn. So I would get a tax credit. 

The chart makes it pretty easy to predict changes for most people who already have insurance, at least in the short term. Many of the long-term cost saving measures like the health insurance exchange and technology developments are going to be negotiated and implemented by corporations and labor unions. Oddly though, the chart stops at $88,000. And since the actual bill is not posted (that I could find anyway), I don't know what happens to people with incomes above that amount. 

The solution to my other concern, how to provide healthcare to the thirty millionish uninsured people, is a bit more convoluted and was harder to find. This is from the Whitehouse.gov:

Beginning in April of this year, States will be allowed to expand Medicaid eligibility to more individuals. Starting on January 1, 2014, all low-income, non-elderly and non-disabled individuals will be eligible for Medicaid. This includes unemployed adults and working famlies – all people with income below $29,000 for a family of four (133% of poverty). 

The Federal Government will support States by providing 100% of the cost of newly eligible people between 2014 and 2017, 95% of the costs between 2018 and 2019, and 90 percent matching for subsequent years.

So... he is going to give them Medicaid. Again, I am a bit upset that the actual bill does not seem to be posted anywhere. It seems that the President is counting on his other cost saving measures and some tax hikes to pay for this. I am also not sure what the term "cost" means in this context. Is it premium costs, out of pocket costs, or is up to the state?

How is he going to pay for this? He is going to tax insurance companies at a higher rate because their profits are going to soar as more Americans are forced to sign up for some form of insurance. He is going tax pharmaceutical companies. He is going to raise taxes by .9% on high income individuals; and he is going to tax health insurance plans that cost over $27,000.

There are definitely some elements lacking in the proposal, none of which are cleared up by reading the newspaper. I would like to think that these missing elements would be hashed out in the Summit, but I have no reason to believe that either the Summit itself or the coverage of it will focus on explaining to Americans how this bill is going to affect them or help the uninsured. If anyone has answers to these questions or has found the actual legislation, please share. 

Good Reads: 2/19/2010

1. A Sight All Too Familiar in Poor Neighborhoods

From: NY Times

All too often, efforts to speed up a jobs bill or stimulus package are labelled as "rushing frantically," but the truth is that stimulus programs would help real people who are struggling. They needed help last month, not six months from now. 

2. The Case for a Consumer Financial Protection Agency

From:  Time

"When you buy a dishwasher, you know it probably won't explode. When you buy aspirin, you can figure out the side effects without an advanced degree. When you buy zucchini, you can feel confident it won't be toxic. And when you buy movie tickets, you can presume the terms of your purchase won't change after you leave the window."

Yet, the banking industry has found a way to avoid presenting such clearly labelled products. More than that, financial instruments have become more complex and the explanations more convoluted. Sure, banks will suffer a bit as consumers begin to make more educated decisions about their money based on clear options; but how this is bad for the economy escapes me. 


3. Tax Rates for Top 400 Earners Fall as Income Soars, IRS Data

From: Tax.com

The  most idiotic aspect of this is that the effective tax rate for someone making $60,000 is only 1%-2% less than someone making $400 million. And only 8% of the top 400 earners payed the top tax bracket. Some even managed not to pay taxes at all.

4. Stupidest Thing: Obama’s Faith-Based Economics

From: The National Review

I don't wan't to get into a debate about how the exact number of jobs the stimulus bill created, but certain parts of this author's logic are flawed. Mainly: 

"The idea that government spending creates jobs makes sense only if you never ask where the government got the money. It didn’t fall from the sky. The only way Congress can inject spending into the economy is by first taxing or borrowing it out of the economy. No new demand is created; it’s a zero-sum transfer of existing demand."

I'm out of time, though. A smarter person that me would probably explain it better anyway...

4. Interesting Graph: