Friday, November 20, 2009

Getting out of the Hole, or Digging it Deeper?

Yesterday I focused on the proposition that "irrationality knows no bounds." Today's news brings evidence that the same can be said about greed. (Resolving the question of whether or not greed is irrational is left as an exercise for the reader.) The evidence comes from Candice Choi, Personal Finance Writer for Associated Press. It takes the form of an anecdote of one of the major victims of the current economic crisis, an ordinary citizen faced with the problem of credit card debt. Her name is Lindsey Pappas, she is 25 years old, and she is fortunate enough to have a job here in San Francisco in public relations. Here is Choi's account of her story:

She received a letter from Citi Wednesday that her interest rate was being hiked to 19.99 percent, up from 14.99 percent.

If she spends $750 a month, however, she can get a refund for part of the higher interest rate charges.

The problem is that Pappas is trying to pay off a $5,000 balance on the card, so she tries not to charge any money on it.

"I'm just going to have to deal with the higher interest rate. Spending that much would be irresponsible," she said.

Choi does not provide the details for how Pappas got into her $5000 hole, but that last sentence seems to indicate that she has learned the consequences of unmanageable debt. At the very least she has learned that you do not get out of a hole by digging it deeper.

Choi also explains the context behind Citi making this offer (which, depending on your point of view, is either predatory or preposterous) in the first place:

The change by Citi comes as the industry rushes to adjust to sweeping reforms to start in February that will limit when and how much card issuers can hike interest rates. In a statement, Citi said the actions were necessary given elevated losses from souring loans and "regulatory changes that eliminate repricing for that risk."

The bank also noted that "customers who do more business with us will have the most opportunity to reduce their rates."

Citi's reasoning (deliberately?) overlooks the obvious corollary that, in their semantic model of the world, "doing more business" actually means "building up more customer debt." Ultimately, this is a last-ditch effort to promote one more Ponzi scheme before new regulations take effect. The only way in which Citi distinguishes itself from Bernard Madoff is that, while Madoff preyed on the substantial retirement assets of a relatively select few, Citi can go after the sizable percentage of all of its 92 million credit card customers who do not pay off their balance in full every month, making up for the relatively small profit from each account by the high volume of the number of accounts.

So, someone remind me, was Citi one of those businesses declared by our government as "too big to fail?" If so, is it about time to promote the new motto of "too devious to succeed?" Sadly, that will never be more than wishful thinking. If greed does, indeed, know no bounds, then there will never be any such thing as "too devious!"

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