How Credit Cards Rob the Poor to Spoil the Rich

I recently had the chance to catch a preview of "The Card Game," a Frontline special on credit cards, which airs tonight at 9pm ET (check local listings). Lowell Bergman talks with a wide range of financial insiders and regulators and describes the changing nature of the credit card industry over the past 30 years.

During the hour, Bergman speaks with Tim Geithner, former Providian CEO Shailesh Mehta, Elizabeth Warren, Christopher Dodd, and many others. He traces a narrative of the changing nature of credit and debit cards, where services and goods became free because they explicitly took on hidden fees and charges, hoping to net enough from a large body of consumers to make profits. Mehta is quite explicit about this, as are other insiders.

There's been a lot of fascinating research in behavioral applied microeconomics along these lines recently; it seems that the credit card industry already figured it out a long time ago. Mehta points out that the most affluent consumers pay the least, while the poorest pay the most. Another way to phrase that is struggling working class families pay a little extra so the comfortable can fly for free, or as a risk modeler told Felix Salmon: "The industry is just a giant wealth transfer mechanism from poor people to wealthly people. The profits from below (subprime) serve to subsidize the interest rate and rewards cost of people in the 'super prime' category."

It's one thing to hear it from a commenter on a blog; it's another thing to hear a former major credit card company CEO say it. The show ends with a discussion of creating a Consumer Financial Protection Agency. If you follow financial blogs obsessively you may have heard a lot of these debates already; however it is good to step back from the esoteric world of capital reserving models and over-the-counter derivatives and realize how the financial crisis is playing out for hundreds of millions of everyday Americans, and this special covers the creation, evolution and current precarious state of the credit card industry well.

And it does have a quote that consumer advocates and financial literacy experts will need to hurdle, during the discussion of free checking that isn't necessarily free: "The two best marketing words in the United States are 'free' and 'all you can eat.'"

The Card Game will be available for streaming here after it airs tonight.