NYT: Steven Pinker reviews What the Dog Saw

I always felt the New York Times was kind of the jack-of-all-trades paper more than the paper of record: somewhere approaching fair in its coverage of every subject, but not a standout in any subject.  Their book reviews would be the exception: They are far and away the best articles in the paper.

Harvard psychology professor Steven Pinker provides an excellent and fair review of Malcolm Gladwell’s newest book, What the Dog Saw: And Other Adventures, and in effect provides a review on the author himself.

I very strongly agree with Prof. Pinker in his praise of Gladwell as an essayist in prose, style, and his ability to provoke thought.  I am equally concerned with Gladwell’s somewhat lackadaisical approach to science (his writings tend to be in the realm of pop psychology, and the scientific rigour of his assertions seem to match that field).

The boldness — and counter-intuitive — nature of Gladwell’s assertions make the claims interesting and provoke further thought, perhaps the primary objectives of a writer or essayist, but tend to fall apart within the theses of his collected works (such as Blink, The Tipping Point, and Outliers).  As a result, I have always preferred Gladwell in the smaller units apportioned by The New Yorker over the lengthier helpings of his books.

Steven Pinker’s reasoned criticism is much needed considering the scope of Gladwell’s influence (I can hardly enter a bus or train without seeing one rider reading one of his books.  Which isn’t a bad thing considering the alternative would be Dan Brown or Harry Potter) and, as should be clear from my comments above, I agree strongly with Pinker’s review.

Simply put, enjoy Prof. Pinker’s review and keep it in mind the next time you read Gladwell’s excellent articles or somewhat unconvincing books.  Gladwell is a fantastic essayist, an extremely interesting and inquisitive author, but his writings are perhaps more properly viewed as very constructive than well-constructed.

[Nonetheless, I am always happy to see a new article of his appear at The New Yorker]

… and the cow goes moo

NYT: Credit Card Lending Tightens Ahead of New Rules

I work in Canadian retail banking, so I feel fairly well-qualified (or appropriately biased) to comment on this topic (to an extent, as substantial differences exist between Canadian and US markets).

I’ve been monitoring the debate and commentary as the subject has gained some prominence in the past year or so on such sites as Mish’s Global Economic Trend Analysis, Calculated Risk, and Naked Capitalism and feel that each has been providing important input, but have opted to under-represent certain viewpoints (though collectively, I think they have everything covered).

The New York Times (and the usually excellent PBS Frontline in an upcoming episode airing Nov 24, 2009, @ 9:00pm) are currently working on a major series called The Card Game to put all the trends in recent changes ahead of impending legislation into a collection of anecdotes and statistics.  And sadly, the series — so far anyways — are failing to provide the level of intelligent commentary that those above-mentioned blogs provide.

From the NYT article, “A Squeeze on Customers Ahead of New Rules”.  Please be advised the following large snips are mostly, but not entirely in order.  Really, the article isn’t long and manages to encapsulate a large number of telling statistics, so just read the damn thing.  Now here’s the parts that I felt begged for comment:

[Rates are up, lines are being reduced, applications are more heavily scrutinized, fees are changing, blah blah blah...]

“One recipient of new credit card terms is Anita Holaday, a 91-year-old in Florida, who received a letter last month from Citibank announcing that her new interest rate was 29.99 percent, an increase of 10 percentage points.

“I think it’s outrageous they pursue such a policy,” said Susan Holaday Schumacher, Ms. Holaday’s daughter, who pays her mother’s bills. “That rate is shocking under any circumstances.”

While the average interest rates charged by banks are lower than Ms. Holaday’s, her situation is not all that unusual. The higher rates and fees reflect the grim new realities of the credit card industry — the percentage of uncollectible balances has hit a record even as a new law may further limit the cards’ profitability.

…

She said she haggled with Citibank to try to get her mother’s bills forwarded to her house in Washington and, during the process, two bills were inadvertently paid late, resulting in the rate increase.“How unbelievably unfair for an older person who might not understand what this is all about,” she said. Citibank declined to comment on the account.”

Okeedoke.  Now this seems like a typical attempt at an unequivocally sympathetic case, and is standard fare in a general-population paper like the NYT, but what the hell do we learn out of this?  That Citi DOESN’T have an age-specific manner of adjudicating accounts?  I don’t want 91-year-old women paying high interest, but I don’t want credit card companies having separate risk and fee structures for every different age.  Seniors often enjoy special banking benefits as-is, and credit cards just seem to be one of the few areas where these perquisites seem to be lacking.

Ms. Schumacher expresses her outrage at the hike in interest rates, unacceptable to her “under any circumstances”, which the authors opt to omit from the article.  We are given no indication that the rate change was outrageous at all.  If Ms. Holaday has been late on payments recently, would that be acceptable or at least understandable reason to raise interest rates?

And of course, that final paragraph quoted (taken from the tail end of the article, where the rest was from the article’s start) reveals that Ms. Holaday has been late in her payments for at least the past two months and her interest rate hike notification came a month ago.  So what’s the fucking problem?

Oh right.  The problem is Ms. Holaday is 91-years-old, making her exempt from what is a very typical outcome of a series of late payments: A higher interest rate.  And that, by the way, is not a new response to late payments initiated due to mounting credit card losses or impending legislative changes.  It’s just another facet of the credit card business model of making customers with poor payment histories pay a premium over the most responsible borrowers.

Really, it’s not Citi’s responsibility to make sure a clients bills are forwarded to the client’s daughters house.  Or to assume a lesser degree of personal responsibility or ability to manage her personal finances of 91-year-old lady.  My grandmother isn’t 91, but doesn’t even read or speak English and her finances are fine because our family understands that it’s not the banks responsibility to make sure she pays on time.  The fact is, my grandmother should never be able to apply for a credit card as she would never understand the documentation, and my family skirts the rules by helping her with it, must like many families certainly do.  As far as her banks know, my grandmother can read a 12 page credit card application in dense legalese and agree to the terms and conditions.  And since I know better, if I hadn’t received my grandmother’s bill this month, I wouldn’t leave it up to her or her bank to make sure it all worked out:  I’d just pay her bill with a safe amount well beyond what she could possibly owe to protect her credit score and I wouldn’t wait for her mailed bills (that I’m not legally entitled to open) to make it to my door.  I know bills are due every month and I know my grandmother uses her credit card.  Because I don’t receive a letter isn’t enough for me to forget that fact.  If it was, maybe I’m not properly equipped to be handling other people’s finances for them.

Now that I’m done blaming poor Ms. Schumacher (I am actually sympathetic to her to a degree, as caring for elderly relatives in a climate where so few people are even able to take care of themselves is a massive responsibility), let’s rejoin the article as they continue blaming the credit card companies:

“As banks have become more aggressive in making changes, lawmakers have accused them of trying to impose rate increases before many of the new rules take effect in February. On Monday, the Federal Reserve provided new evidence of the banks’ actions. About 50 percent of the banks responding to the Fed’s survey said they were increasing interest rates and reducing credit lines on borrowers with good credit scores. About 40 percent said they were imposing higher fees. The banks also said they were demanding higher minimum credit scores and tightening other requirements.”

Now this is a pertinent bit of news and I don’t doubt it’s accuracy, but the article suggests the changes are all due to impending legislation.  It seems to me that it could be largely due to changing economics (there’s a crisis going on, and all), and loss mitigation.

Just because a credit card company is raising rates or raising fees, it doesn’t mean they’re ONLY trying to collect more interest or fees (believe it or not).  It is only logical to me that when customers are defaulting on credit card debt at a high pace (10% charge-off rate, so says the article), and the average interest rate is now 13.71% (so says the article), reflecting what appears to be a very low margin for profitability (expected losses over $2 billion in credit cards for JP Morgan over the first half of 2010, says the article), that you do your best to reduce your exposure within that line of business.

Most customers have multiple credit cards and logically (I know, consumers seldom operate all that logically…) should the interest rate or fee structure become less favorable on one card, it would make sense to move your business (and balances) over to another card.  Suddenly the 10% charge-off chance is now some other sucker bank’s problem.  It may be a bit of a circuitous route to the same result of just canceling someone’s credit card account, but it does provide them with an opportunity to earn a bit more or accelerate the inevitable default should the client not have the option or will to leave.

Let’s not forget that the credit card companies are rightfully seeking a profit, and profits for credit card companies have to come at the expense of the merchants (remember all those poor small businesses closing up shop?) and the cardholders.

“The nation’s largest banks are scrambling to figure out a new business model that fits within the new rules and current economic conditions. Those banks made handsome profits over the last decade by charging high interest rates and penalty fees to a small group of customers who routinely paid late or exceeded their balances.

Already, banks are shifting to a model in which a smaller pool of Americans will be eligible for credit cards, and customers with cards will probably pay more for the privilege through annual fees and higher interest.

Meanwhile, the banks are in the process of shedding customers considered too risky. That means tens of thousands of Americans will no longer be able to splurge on Nike gym shoes or flat-screen televisions unless, of course, they have enough cash to pay for them.”

Now here’s the most important facet of these changes (or perceived changes):  These changes may reflect the credit card companies adapting to a new economic outlook, a new and sustained level of heightened loss rates and risk, and the fact that the current model of making all their profits on the least responsible credit card users may not fit the changed economics.

Only one source I have read aside from this article has broached this very important topic, and that’s the always-thorough Naked Capitalism (I’m sure she had earlier comments about this subject as well but they were embedded in related posts that I wasn’t able to find right away).  The current business model relies almost entirely on the irresponsible users of credit (and probably usually least able to afford high rates) to pay the kind of premiums necessary to subsidize all the freeloaders like myself who use no or low-fee credit cards, pay zero interest, and receive rewards/points/cash back with every purchase on top of the grace period.

Sadly, as is true in all areas of business, those with the lowest product knowledge and fewest alternatives are in a poor bargaining position and tend to get it in the ass for credit card terms, and are like-wise first to suffer when the lenders feel a pinch.  (Not to say I haven’t suffered.  My favorite no-fee credit card is introducing an annual fee!  Sure, I get several times the amount of the fee back in cash for using the card every year, but I still don’t like paying the $XX.XX.  Though perhaps this isn’t the best post to bitch about that…)

The alternative business model is roughly what Yves Smith describes in the Naked Capitalism post I linked to earlier:  Annual fees for most cards, lower interest rates, and probably more strict approval standards.  Which is probably going to make the same number of people unhappy (though will at least spread the suffering somewhat).  Of course, there’s a reason why we arrived at the business model that we have currently:  Credit-worthy borrowers can take their business wherever they want, and they’ll want to keep as much of their current freeloading setup as possible.

Now for the happy ending:

“… JPMorgan has started a program that can help consumers categorize their spending and pay down their balances more quickly.

And Bank of America is promoting a line of consumer products so simple that the terms and conditions fit on one page. The BankAmericard Basic Visa, for instance, has no rewards and a single interest rate.”

Now this is fantastic news to me, and probably something that makes notorious credit-card-contract-hater Elizabeth Warren (her wiki here) very happy.

The problem as I see it in my biased eyes is that credit cards are seen as vital to modern life and so common place that card users do not bother to read their agreements.  After all, how bad could they be if everyone’s got one (or six)?  And the credit card companies do not help at all, with dense contracts written in tiny fonts with broad ‘outs’ written in that allow terms to change with little to no explanation.

I love my credit cards.  I love the features they offer.  I spend days or even weeks researching the cards that worked best for the way I intended to use them before applying for them.  And I am fine with my more feature-heavy cards coming with small books to explain the various insurances and warranty perquisites that come with them.  But I’m someone who stays up until 2am writing a 2,400-word commentary on an article about credit cards.  I may not represent the vast majority of credit card users.

Most people just have them because they think they have to, and enjoy the ease of making purchases even if they are paying a lot of interest for the right not to plan ahead and have cash available for every purchase they make.

JPM’s bit of innovation (actually present at some Canadian banks I know of already, but I am unsure if JPM’s offering is an innovation for the US market) helps remedy the budgeting issues associated with profligate credit card use (I’m sure to their advantage:  After all, it’s very likely that a service that would help pay down debts faster would focus on high interest credit card debt first, thereby reducing JPM’s exposure).

And the return of the simple no-frills card through Bank of America is exactly what we need now that a few centuries worth of history have made it clear that people are notoriously poor financial consumers and that is unlikely to ever change.  Too bad without the esteem of being platinum or gold or similarly garish, the card will likely appeal little to those irresponsible consumers who might benefit from it, but have other options.  But I suppose those with the credit scores and incomes to be able to pick and choose their cards are probably the ones BAC wants using their more complicated cards.

… and the cow goes moo