31 May 2011

Fact Check on Credit CARD Act

All Posts 29 Comments

Believe it or not, there is some quality control on my op eds. I am working on something concerning Elizabeth Warren, and I want to know exactly what it means when the Credit CARD Act “bans arbitrary increases in credit card interest rates for consumers who haven’t missed payments.” (E.g. look here.)

What I want to know is, can credit card companies still raise interest rates in a non-arbitrary way, specifically, if LIBOR or some other benchmark rate goes up? E.g. let’s say I’m carrying a $5,000 balance, and I faithfully make my monthly payments. But then LIBOR and the prime rate go up 20 points because the dollar crashes. Can credit card companies jack up my APR on the next statement, if I’m not able to pay off the whole balance?

29 Responses to “Fact Check on Credit CARD Act”

  1. Joseph Fetz says:

    Usury laws are SO 17th century….

    • RJackie Browne says:

      Usury is whatever I say is uncomfortable!

      • RJackie Browne says:

        Oh jeebus please fix me or delete this whole thing

        • bobmurphy says:


          • Jackie Browne says:

            Sorry, I was trying to say, “I wish there was an Edit or Delete button”.

  2. Ashley Johnston says:

    Unrelated, but does Bob have any insight into Bitcoin?

  3. Major_Freedom says:

    By “arbitrary” she means “without my expressed approval.”

  4. Silas Barta says:

    Whoa whoa whoa, timeout, are you saying there’s an insidious practice that CC companies *can’t* currently get away with?

  5. AP Lerner says:

    Off topic. But.

    Mr. Murphy – 10 treasury closed at 2.95% today. Clearly, the market is worried about a US default and/or inflation. 🙂

    Also, wanted to pass along this paper by the NYFED. It clears up some of the misunderstanding you have towards the banking and monetary system. It’s a good, short read.


    • MamMoTh says:

      In this note, we present a basic model of the current U.S. banking system, in which interest is paid on bank reserves and there are no binding reserve requirements. We find that, absent any frictions, lending is unaffected by the amount of reserves in the banking system.
      The key determinant of bank lending is the di§erence between the return on loans and the opportunity cost of making a loan. We show that this difference does not depend on the quantity of reserves.

      It is about price not quantity, like Mosler always said.

    • Bob Roddis says:

      Wow. If the central bank conjures up reserves out of thin air and hands them to the banks and then pays the banks interest created out of thin air on the reserves so that the banks can make more money that way instead of lending, banks won’t lend! Low rates and regime uncertainty impair investment opportunities so the average rate of profit stays low or non-existent and the fascist state can fund its hellacious debt at low rates.

      The Austrian axioms have been refuted!

    • Zack A says:


      Yields are probably so low right now because the Fed is buying at unprecedented levels. The low yield does not reflect a high demand for U.S debt; it shows that the Fed is buying bonds in the secondary market thus artificially increasing the demand, hence the low yield. If you took the Fed out of the bond market, which may happen in late June when QE2 is scheduled to be over (although I’m not convinced Big Ben will pull the plug) yields may rise.

      To your credit AP I do hear rumblings about “the bond market has already priced in the end of QE2.” Although I’m not sure how the bond market could do this. Regardless though, when our own central bank is the biggest buyer of our bonds it is hard to determine what the real yield on the 10 year would look like if the fed stopped buying. Imagine if the Fed started selling bonds? Yields would certainly rise in that case. Which I don’t think the Fed do really, because it would more than likely cause a very severe recession.

      • Joseph Fetz says:

        I have been giving warning to my investment banking friends about this very dynamic. They keep telling me that they are expecting a rising dollar after QE2 (and falling equities and commodities), which will tend to lower yields. I agree with this during most market moves, but I simply cannot get it out of my mind that if the Fed stops its purchases that not only will foreign buyers not be able to take up the slack (many nations haven’t been increasing debt purchases), but that institutions won’t be able to jump in either. The prime driver behind current institutional purchases has been the guaranteed buyer at the other end (the Fed). Call this a wild prediction, but I think there will be a dislocation between the dollar and yields, and that they will both rise.

        • Zack A says:

          I agree. China has slowly been scaling its purchases back, and Japan certainley can’t afford to step in and buy more bonds after their disastor. If anything, Japan should sell its bonds and repatriate the funds back into their own country to rebuild parts of their country that got destroyed.

          Japan and China are the next too largest buyers behind the Fed, if they can’t step in and fill the gap who will?

          This is why some people are calling for QE3 or QE indefinitley, which could really spark off inflation and sink the dollar

          • Joseph Fetz says:

            To be honest, I don’t think that the Fed will end QE2. As it is, we are starting to slip back into recession (technical), interest rates are zero, and the Fed is monetizing. I have a feeling that QE3 will be a much larger monetization than anything we have ever seen, because they have no other options to prop up this economy.

            If they do end QE, rest assured that I will be buying the dips.

          • MamMoTh says:

            I doubt Japan will do that. They don’t need to “repatriate” US$, that will only make the Yen more expensive which is exactly what they don’t want, especially after the disaster, when they could spend all the Yen they want.

            • Zack A says:

              @MamMo Th

              I would argue that Japan should liquidate its U.S treasury holdings and repatriate the funds back into their home country to rebuild their infrastructure instead of just print more yen out of thin air.

              Would the yen rise? Of course, however, that would actually be good for their citizens because their currency would have more purchasing power. Japanese citizens could purchase more goods and services with a stronger yen, and their cost of living would likely fall, which is exactly what they need during times like these.

              Also with a stronger yen, imports would be relatively cheaper as well, making it easier to import more raw materials and goods that they desperately need to help rebuild the damage that the tsunami inflicted upon their country.

              At the end of the day, Japan needs real funding to finance their rebuilding process. Instead of print yen by pressing buttons on a computer screen at the BOJ, Japan should repatriate funds already invested in US treasuries back into yen to put to use.

              Holding US treasuries is foolish for them really, as their assets are denominated in a falling currency. They will likely be paid back in debased dollars, better liquidate their bonds now before it’s too late.

              • MamMoTh says:

                Japan has always been prone to preventing the Yen to rise against the US$ to support their exports.

                I really don’t think they will do the opposite when their export sector needs to be supported the most, since some of their capacity has been destroyed or severely disrupted.

                Being long the dollar is always a bet for a foreign country.

                Moreover, why would the US$ get debased against the Yen? Didn’t Japan already proved that high levels of debt/GDP are irrelevant in terms of inflation, interest and exchange rates?

        • AP Lerner says:

          “if the Fed stops its purchases that not only will foreign buyers not be able to take up the slack (many nations haven’t been increasing debt purchases)”

          Foreign purchases are a function of the trade balance. Lower foreign purchases is a function of lower domestic imports.

          “The prime driver behind current institutional purchases has been the guaranteed buyer at the other end (the Fed). ”

          False. See recent bid to covers at recent auctions.

      • AP Lerner says:

        “The low yield does not reflect a high demand for U.S debt; it shows that the Fed is buying bonds in the secondary market thus ”

        Look up the bid to cover ratios of the last few auctions (sorry, don’t have a link right now). You’ll see bid to covers have been moving higher. Lower rates has zero to do with Fed buying. Lower rates are due to falling growth/inflation expectations. The market is finally realizing QE is a deflationary transaction

        • Joseph Fetz says:

          Yes, indirects are buying-in the dips at this point and spiked the BTC, but I still don’t see the BTC staying this high come July if current Fed plans stay in force. Where this indirect demand is coming from, I do not know, but I doubt that it is our primary foreign holders, maybe the Saudis and the UK, but not China. I have no idea what Japan is up to, but BoJ has already done some wild things since the disaster (esp. with regard to trying to keep the carry trade going), so I guess they could also be buying.

          While now would normally be the time to purchase treasuries if one wants to ride the yield curve down, I just do not think that the dollar rally will be significant enough to cover the drop in Treasury demand come July, especially if other currencies see a similar rise is strength (they probably will). We will have to see what actually transpires come July, if the Fed does indeed end its purchases or not.

    • Dan says:

      “Mr. Murphy – 10 treasury closed at 2.95% today. Clearly, the market is worried about a US default and/or inflation. ”

      This should be a good quote to come back to wiith QE2 about to end.

      • bobmurphy says:

        Yeah but if Europe collapses then people will rush to Treasuries. So he might look good for a while until everyone realizes Bernanke’s got nothing but paper and ink up his sleeve.

        • AP Lerner says:

          “Bernanke’s got nothing but paper and ink up his sleeve”

          Paper and ink that will remain in high demand, and will be in even higher demand if policy makers do something foolish like trying to the balance budget.

          • Zack A says:

            AP, Demand for U.S bonds is in fact being manipulated by the Fed. The Fed is buying over 85% of the new bonds being issues right now.

            I don’t have the link, but you can look that up. Whoever is bidding on these bonds in auctions turns around and sells them right to the Fed in the secondary market. I don’t see how the low yield reflects a true high demand for U.S bonds.

            Also, wouldn’t inflation expectations send yields higher? Why would buyers buy bonds denominated in a currency that they feel is being debased?

            I agree Bob. If the Euro zone really goes downhill before the U.S encounters its fiscal problems that could be bullish for the dollar and treasuries.

            I could see a knee jerk reaction and a flight to safety into the dollar. However, I’m not sure if people are going to make the same mistake they made in 2008.

            That paper and ink is only remaining in high demand primarily because of the Fed. Legitimate buyers won’t want that paper and ink if it has no purchasing power.

        • MamMoTh says:

          He’s got computer keystrokes too.

          • Zack A says:

            @ MamMo Th (your japan comment)

            Japan chooses to export what they produce. They don’t have to. Their citizens can enjoy the fruits of the own labor, and with a strong currency, they could buy the products that they produce and raise their standard of living. Suppressing your currency to “support” your exports comes at the expense of your own citizens.

            No such thing as an export driven economy in my opinion, there are only wealth producing economies, what you choose to do with your goods and services, whether to consume them domestically or export them is up the country.

            Japan does not need to export more. They need more imports, more raw materials and resources. Debasing their currency further hurts their ability to import raw materials and other goods they need. A stronger yen would help the ability to rebuild.

            The U.S dollar would get debased if the Fed continues its QE campaign.

      • AP Lerner says:

        ‘This should be a good quote to come back to wiith QE2 about to end.’

        End of QE2 will push rates lower. Already happening.