Caveat Emptor

“Caveat emptor” is a Latin phrase meaning “Buyer beware.” It is a principle that every consumer should adhere to for their own benefit and protection. It is a concept at the core of how micro-economics quantifies consumption decisions made by people.

The need for buyers to beware is as old as the Devil’s temptation of Eve and then Adam and it has been a sad part of human nature ever since.. There have always been snake-oil salesmen and conmen who would sell you the cure for whatever ails you, the Brooklyn Bridge, or some land in Florida that turns out to be a swamp. Nowadays, it is the email you get from a Secretary of the Treasury of some banana republic who just happens to have $12 million dollars he would like to share with you if only you would provide your bank account numbers and other personal information.

We are all taught to be skeptical consumers. Phrases like “Too good to be true,” or “There is no such thing as a free lunch” are burned into our psyches. We all have a deep seated mistrust of salesmen, and as wary consumers, we do our research on products before we buy them. Well, at least, I thought this was all true.

It turns out we are not very smart consumers, so we need the government to step in and protect us poor unwitting souls. Enter the Food and Drug Administration, the Consumer Products Safety Commission, and the Federal Deposit Insurance Corporation to protect us from ourselves. Not that these agencies don’t serve a valuable role, but when does government protection slip over the line into the realm of a nanny state that treats us all like babies and severely limits our consumer choices.

Recently, our Congressman, Tom Perriello, touted the final implementation of the Credit Card Accountability, Responsibility, and Disclosure Act (Credit CARD) and his roll in drafting the legislation. First of all, you have to love the acronym—Credit CARD. Unfortunately, that is often the most thought that goes into legislation written these days.

While the nation is still reeling from the effects of the Great Recession, much of the blame for our economic woes are now being laid at the feet of the banking industry. “We bailed out the fat-cat banks and now they are not loaning money, thus the economy is not growing,” we hear some say. Never mind the fact that it was federal government mortgage policies that required banks to loosen the credit requirements for home loans and that is what led to the sub-prime mortgage defaults that started the Great Recession. There can be no doubt that bankers share the responsibility for coming up with products like “liar loans” and Wall Street packaged up these bad loans and sold security interest in them to consumers thirsting for a higher rate of return. Everyone can share a little blame for the collapse, but the federal policy was the root of the problem.

But, how do we reconcile the desire to have banks loan more money on the one hand with more restrictive regulation of the banking industry on the other hand. And is more readily available credit really good for the economy? Should the American consumers borrow our way out of the recession like the federal government tried and failed to do with the stimulus bill? Was it all the fault of credit card companies that consumer credit card debt in America went from $69 billion in 1986 to $1.8 trillion in 2006?

It is irrefutable that some credit card companies charged interest rates that were too high and they lived off consumers who spent money liberally, but paid it back with the Minimum Payment. Some of those credit card companies created their own delinquency problems by adding excessive late charges and penalties on to balances that caused the borrower to spiral into default. But, it is not as though somebody held a gun to the consumer’s head and made them buy that flat-screen television and all the other luxury items that put them in debt up to their eyeballs.

I worked at a bank back in the 1980’s when credit companies had liberal credit policies and were mailing pre-approved credit cards to college students. But, it did not take a new law to correct the problem. It was the market system that led to a correction. Credit card losses and bankruptcies are bad for business and the appropriate response of credit card companies was to tighten credit requirements and not be so liberal in their issuance of credit cards. Obviously, memories are short term and the credit card companies thought the economy would just continue to grow us out of our excess spending habits and now the chicken has come home to roost once again. But, instead of allowing a market correction to take place, Washington has come to the rescue with a new set of onerous regulations that will increase the cost of credit cards.

But since credit card standards are tightening up again, guess who will be paying for the new credit card regulatory compliance? That’s right, those of us who did not rack up tens of thousands of dollars in debt, those of us who pay our bills on time, those of us who exercised fiscal responsibility in our personal finances, we will be the ones paying for this new regulation. Many of you diligently guard your credit rating. You take responsibility and pay back what you borrow from others, including the banks. And because of your responsible actions and because you practice the principle of buyer beware, you most likely had a credit card with a low interest rate and no annual fee. You most likely use your credit out of convenience only and pay the balance in full each month. Good for you if you do.

But, now, we are inundated with television and radio ads that advise us all that we have a right to make the credit card companies charge off up to one half of our credit card debt. However, that “right” only applies to those who owe more than $10,000 and to those who are delinquent on their payments. It is an upside down and crazy world that rewards bad behavior by punishing those who acted responsibly. “Buyer beware” has become “What me worry?” And “There is no such thing as a free lunch” has been embellished with “unless you eat at fine restaurants and stiff the credit company when they send you the bill.” Perhaps we should move from “Caveat emptor” to “Electoris emptor.” November is coming.