Saturday, October 24, 2009

The Economics of Debt

The Secret History of the Credit Card sheds some light on what has persisted as a dark corner of the global economy: the debt-based economy of the credit card.

The film outlines how banks and credit card companies have profited by encouraging customers to accumulate debts that prove to be, in many cases, unmanagable.

The marketing of debt proves exremely profitable in cases where credit card companies can collect returns incrementally greater than the funds loaned.

It's unsurprising that credit card companies would embrace this kind of a business model. What's troubling is that their business model seems to thrive on extending increasing levels of credit to people who cannot afford it.

Certainly, banks and credit card companies can earn tidy profit by abusing credit card fees and hiking rates.

But short-sighted executives seem to have chosen the route of steadily increasing the amount to which individuals are becoming indebted via credit cards as opposed to receiving the most timely returns on that company's investment -- and each card issued, each account opened, and each loan issued very much does represent an investment by the company.

If the recent financial collapse and ensuing recession has shown anything, it's that business designs that rely on the accumulation of unmanagable debt will inevitably face the risk of coming out on the wrong end of a bankruptcy -- or even a few thousand bankruptcies.

The economic peril of allowing financial institutions too free a hand has become tragically apparent over the last year. The time has come to put the regulatory leash back on credit card companies.

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