All faith, no credit

Much has been made about how the U.S.' current consumer spending is driven almost entirely by debt rather than by rising wages. But Kos diarist cskendrick points out that the new U.S. bankruptcy bill will severely curb the debt spending - and will also heavily punish Americans for the spending they've already done on credit cards. The end result should be nothing but disastrous for the American economy, and the consequences don't end there.

($20-80 billion in credit card defaults) would be covered by credit card companies significantly increasing the spread to prime that they charge the surviving debtors, which would both increase the vulnerability of same to falling under the default cloud, and decrease remaining cardholders' willingness to incur additional consumer debt.

Just in time for Christmas 2005, a large fraction of American credit card users are going to be given a very bad case of sticker shock. A small portion of these will be financially ruined, another small portion soon threatened as card rates are jacked to cover losses due to default, or their own rates transcend 30% due to late or insufficient payment on their balances.

I've mentioned before that I'm not a fan of consumer overspending, but also that solutions can easily go too far in trying to prevent spending; as a disease, overspending is far less harmful than the cures I've seen so far. And the the bankruptcy bill is a particularly egregious example. Rather than better informing consumers in a context of attempting to reduce reliance on debt by pointing out alternatives, the bill imposes unforeseen consequences to past spending and helps to prevent responsible use of credit in the future.

What's unclear to me is who's supposed to benefit from this part of the bill. The rationale is supposed to be to discipline debtors, but surely the U.S. wouldn't be that eager to shoot itself in the foot just for the sake of perceived morality - or at least not without some Republican contributors making a buck off it.

It's apparently not the credit card companies who will benefit, as they have to provide for greater credit losses. Consumers will obviously be hurt, and most retailers (and in turn manufacturers) will likely see lower sales as a result.

One industry likely to benefit is the payday loan industry, who will presumably see some added business from people trying to meet the higher payment requirements. But that alone can't justify an otherwise disastrous policy. Right?

The other likely beneficiaries are those concerned about the U.S.' current foreign debt: it does follow that if Americans refuse to spend money, then imports should diminish and exports increase proportionally. (Assuming, of course, that the move won't cause even more people to buy the cheapest foreign-made goods available at the Wal-Marts of the world instead of more expensive domestic alternatives. But let's not assume that the Republicans have thought this through that deeply.)

With this gain, of course, comes a loss for the U.S.' trading partners - and here's where Canada is of course hit worse than anybody. We're making progress in diversifying the destinations for Canadian goods, but we're nonetheless more dependent on the U.S. than almost any other state - so when the U.S. shoots itself in the foot, we end up limping as well.

Unfortunately, there isn't much we can do about the bill for now, other than learn from its mistakes. The consequences are coming, and we can only hope that Canada won't be hit too hard.