Gimme Credit

What ever happened to the concept of personal responsibility? I seem to remember a time when people actually blamed themselves for their own bad decisions. If they got caught speeding or even if they lost some money in the market, they simply said, "It's my own damn fault!" Today, however, that's the last thing on their mind. If things don't go the way they hoped, they immediately try to find someone else to blame. Sometimes, of course, they are right to do so. Yet all too often, their loss really is their own damn fault.

The problem is that even irresponsible people get to vote. Which explains why politicians are so eager to listen to them. For example, politicians are now falling all over themselves to blame the banks for charging too much interest on credit card purchases. The consensus opinion--at least among some in the political class--seems to be that consumers were somehow duped by the banks. That it wasn't made clear to these innocent consumers that someday they would have to pay back the money they borrowed--with interest no less!

I simply can't buy this argument. I have been using credit cards for at least a few decades. I have been receiving solicitations for even more credit cards for almost as long. I cannot remember one instance when an offer for a card did not clearly state the interest rate I would be charged. I cannot remember one time that I was not notified by the issuer of a card I already owned that it was planning to raise the interest rate. I cannot remember one credit card bill I ever received that did not clearly state the finance charge.

So just exactly how have the banks deceived us? It doesn't take a rocket scientist to avoid paying interest on a credit card. There are at least three ways that come to mind: 1) Don't use the credit card. 2) Use the credit card, but don't buy more than you can afford; and make sure you pay off the balance within the grace period. 3) Buy more than you can afford at this very moment, but only if you are certain that you have enough cash flow coming in before the grace period ends.

There is a very simple rule of thumb in the credit markets. The higher the risk of the borrower, the higher the interest rate charged. This is exactly why BB rated companies pay higher interest rates to borrow money than do AAA rated companies. And this is why banks will issue credit cards to high risk borrowers, but only at higher rates than they charge borrowers with good credit scores.

It seems what the politicians really want is for the banks to lend money for free. Even if this is good public policy, it makes no sense to a business trying to earn a profit. Let's not forget, however, that the government is now running many of our financial institutions. Profits have taken a back seat to public policy. This is the inevitable result of nationalization. Yet if the government forces the credit card companies to reduce the interest rates they charge, there will be less credit available to the very borrowers the government is trying to protect. On second thought, maybe that's not such a bad thing after all.

Protecting Taxpayers' Money

I want to call your attention to an op-ed written in yesterday's Wall Street Journal by Ari Fleischer, former press secretary for President George W. Bush. Fleischer makes a point I've made on this blog, in my book, and in my newsletter. Only he articulates it much better than I do. He says everyone should pay their fair share in taxes. There are simply too many Americans who pay absolutely no income tax at all, yet they have a sense of entitlement.

The government is trying to get more money out of the so-called rich. But the rich are already overtaxed. The top 1% pay about 40% of the income taxes. Keep that in mind the next time you hear someone like Barney Frank claim he is trying to protect taxpayers' money.

April Issue of FGI

The following commentary is from the April issue of the Forbes Growth Investor.

The United States was once a bastion of capitalism, but a comment I sometimes hear from recent immigrants is very telling. They ask,“Why are some Americans trying to turn this country toward socialism?”

The government now owns large stakes in major U.S. corporations. It created a task force to make strategic decisions for the automobile industry. It fired the CEO of General Motors. After pouring billions of dollars into that company, it finally admits that bankruptcy might be an option. A capitalistic economy would have recognized this long ago. With Americans buying only nine million cars per year, the industry has too much capacity. The least efficient companies and plants must be shut down. While I hate to see anyone lose their job, I have to wonder if it wouldn’t have been cheaper to pay laid off GM autoworkers to retool their skills for a new job than to keep pouring money into a failing business.

Then there is the uproar over the AIG bonuses. Excessive executive compensation has been a point of contention for years—and rightly so. As I mention in my book, Even Buffett Isn't Perfect, in the 1970s the typical CEO made about 25 times what the average worker at his company made. By 2000 this multiple reached almost 400. My long held personal opinion is that anyone who makes more money than I do is grossly overpaid. Yet, if you have noticed, I haven’t quit my job. That should tell you that I must be at least somewhat satisfied with what I’m making.

It is not surprising that the average Joe gets all worked up when he hears about multimillion dollar bonuses in the executive suite. No doubt he works hard too, but no one has ever offered to pay him anything close to that kind of money. So the outrage over the AIG bonuses is perfectly understandable. The real shame, however, is the behavior exhibited by some of our politicians. After forcing out the former CEO, the government asked Ed Liddy to come out of retirement to save the company. He did not seek the job. The government even passed legislation authorizing the payment of those controversial bonuses. Then when elected officials realized their constituents were upset, they gave Liddy a public tongue lashing. The man who is getting paid just $1 per year to do the government’s bidding sat there and looked contrite with hardly a word of objection. He should have pulled a Johnny Paycheck. He should have stood up and said, "Take this job and shove it! I ain’t workin’ here no more."

Of course, if taxpayers had not bailed out AIG, the company would no longer exist and bonuses would not have been paid. However, the government chose to bail it out, and as one AIG employee who recently published his letter of resignation in the New York Times pointed out, employees were promised on several occasions that they would receive the bonuses if they stayed. Some gave up opportunities elsewhere because of those promises. Now with a gun pointed at their head, they are "voluntarily" returning the bonuses. With a multitrillion dollar budget deficit and trillions more in debt, taxpayers can at least take solace in the fact that politicians did everything possible to get back those bonuses.