Remember when people on reddit had a clue? | Hacker News Reader

Remember when people on reddit had a clue?

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14 pointsrun4yourlives22 comments

A shockingly large number of Americans don't understand how debt works. I suppose this must apply to people in other countries as well, but I haven't noticed as much fiscal ignorance coming from non-Americans. Among the crazy comments I've heard recently from outraged Americans:

"You can't take away my house just because I stopped making mortgage payments! I live here!"

"I missed three credit card payments, and now the credit card company has raised the interest rate from 16% up to 28%! That should be illegal!"

Maybe people are just taking cues from the US government -- after all, if the government is going into debt by over a thousand dollars per year per person, why shouldn't individual Americans?

Rather sad actually. The more I read, the more I think economics should be mandatory in high-school.

It was in my (wealthy, suburban, white, public) high school. At the non AP level, it was dumbed down beyond recognition.

Because mandatory history, English, Math, etc classes helped anything?

Well, they're reading each other's comments and writing responses aren't they? I think there were a few demonstrations of arithmetic and algebra as well.

People were thinking, just misinformed. It's a tough spot to be in, not knowing you don't know something.

"I missed three credit card payments, and now the credit card company has raised the interest rate from 16% up to 28%! That should be illegal!"

Where I live the national limit on interest for Credit Cards is 16%, no ifs, no buts. If credit card companies benefit when people miss their payments they have an incentive to give credit cards to people who can't afford them. This, in turn, reduces the general level of prosperity in the country.

So, why do you think it -should- be legal for CC companies to raise the interest rates to absurd levels?

why do you think it -should- be legal for CC companies to raise the interest rates to absurd levels?

Because someone who misses three credit card payments -- I'm not talking about someone who doesn't pay off the credit card completely, I'm talking about someone who doesn't even make the minimum payment -- has a significant likelyhood of going bankrupt and never paying off the debt.

Not making credit card payments on time exposes you as a poor credit risk; why should those of us who are good credit risks pay higher rates to subsize you?

The credit card companies will eventually get their money - it will just be painful for them. They have to send a bunch of warnings, get a collection agency involved, and so on. If somebody goes bankrupt the CC company won't get its money back, so the rates then become irrelevant.

You argue that the pain to the credit card companies will ultimately end up at the doorstep of those who do pay off their debt. And to some extend, that's true. But I don't think it's as bad as you make it sound.

Let's take an analogy. When amazon offers free shipping, are you upset when you live close to their distribution center so that you (effectively) pay a higher price for the product? After all, the money for the shipping has to come from some place, and if shipping to your house is relatively inexpensive, then you're subsidizing the shipping costs of others. It's not really something anybody would worry about. Implicitly subsidizing others happens all the time, and I think that it averages out pretty well.

Besides, when people go bankrupt because they borrow money irresponsibly, the society as a whole also suffers. So preventing unnecessary bankruptcy is a good thing. And CC companies make it hard for people to get higher caps on their CC to minimize their own risk. And everybody benefits from that.

A. Higher interests rates for people who can't pay to begin with isn't going to get them more money.

B. Don't give credit cards to people who historically pay badly.

In my opinion, greed on the part of the CC companies is also to blame, besides financially stupid creditees.

A. Higher interests rates for people who can't pay to begin with isn't going to get them more money.

As a matter of fact, it does. In bankruptcy, assets are divided between creditors of the same class (in this case, the class of unsecured creditors) in proportion to the size of debts they hold; a credit card company which records a higher rate of interest ends up getting a bigger slice of the pie.

B. Don't give credit cards to people who historically pay badly.

Credit card companies do this too -- if you have a poor credit rating to start with, you'll find it hard to get a credit card; and if you start with a good credit rating but start not paying your bills, there's a good chance that the credit card company will lower your credit limit.

"a credit card company which records a higher rate of interest ends up getting a bigger slice of the pie"

That's fascinating. So there's a clear financial incentive to drive the rates up quickly as soon as there's a sign of trouble

Would it make sense to remove that incentive? For example, slice the pie based on principal rather than principal+interest? Or to add in some consistent rate of interest across all creditors?

Yeah, that's what I was thinking. Absurdly high interest rates clearly seem a form of theft on the part of the CC company.

Who decides what levels are absurd? What is magical about 16%?

I think this attitude is largely to blame for the current financial crisis in the US. People have come to see it as their inalienable right to have access to large amounts of debt, without much thought as to when and how it should be paid back.

This is a dangerous situation, as we are beginning to see now.

No kidding, it's dangerous. It has gotten so far out of control that even the decision-makers at banks are afflicted by this problem -- else the sub-prime mortgage crisis would never have happened. Without middlemen (banks) fundamentally failing to understand basic economics, we wouldn't have a crash.

> Without middlemen (banks) fundamentally failing to understand basic economics, we wouldn't have a crash.

That isn't necessarily the case. There could be situations in which everyone does the rational thing for themselves, and we get a worse result for everyone anyway. Whether or not a given market (with regulations applied, etc) is such a situation is left as an exercise for the reader... :)

The core of the problem is that economic theory, and hence decision makers, stipulate that markets are rational.

This, however, is clearly not the case if you look at the data.

Last tuesday the NASDAQ fell by (if i remember correctly) 3%. Since stock price is a direct product of valuation a lot of companies were supposedly worth 3% less than they had been the day before. And none of them came out with any devastating news, fired employees, or had any other problems: they were the exact same companies as the day before, yet their value had dropped markedly.

This clearly shows that markets are not rational...

Markets are like any other endeavors involving humans: driven by fear, greed, stampeding and other human emotions.

Wait a second. Just because most of these companies did not produce news and changed value does not show the market is irrational.

The price of stock can be affected by a lot of things, like the Fed interest rates, otehr stock prices, housing, etc.

If stockholders suddenly think they can get a better ROI on housing than in NASDAQ (not the case anymore, but bear with me) they'll take their money out of NASDAQ and put it in housing. Even if the NASDAQ companies did not change over the course of these events, their prices still dropped for a rational reason: investors could get a better deal elsewhere.

The NASDAQ might have dropped because the general economy looked bad, so US consumers might buy fewer goods from NASDAQ companies.

Agree, it is not all black and white, and by no means simple. And that is the core of the problem. The markets are so complicated that noone really has any idea what will happen. The reason for this is that there are a large number of players influenced by each other, noone has an overview, and basically noone is at the helm steering the whole thing.

The reason I disagree with classical economics is that it very often gets things wrong, and can only predict major trends after they have happened - which is not much of a prediction.

I think that economists need to break away from the classical models and see the economy for what it is: a chaotic system. Start lookig at emergence, negative and positive feedback loops, etc.

The system is the solution

By Donald J. Boudreaux

http://www.pittsburghlive.com/x/pittsburghtrib/opinion/colum...

That really wasn't that bad as far as reddit goes. In spirit, he's somewhat correct: Mortgages are different in that the house is collateral. The things bought with credit card debt [1] are usually long gone before bankruptcy strikes. In some cases, a forfeited house could actually be a net gain for the bank when a person defaults. The big problem now is that people will be losing 400K houses on 600K loans.

[1] Or government debt.

Previously in News.YC:

This is what happens when you lend money to poor people http://news.ycombinator.com/item?id=50853

"Turns out, if you're poor, you don't need to pay lawyers. You don't like the deal you just wave your hands in the air and moan about how poor you are. Then you default."

Then there's SNL's take:

"That's why I've developed this unique new program for managing your debt. It's called, 'Don't Buy Stuff You Cannot Afford'."

http://consumerist.com/consumer/clips/snl-skit-dont-buy-stuf...

Reply on news.ycombinator.com