Damned if they do, damned if they don't

By Megan McArdle

The left is angry at banks for not managing their credit risks well enough, loaning money to people who couldn't pay it back.  The implication is often that this was all some sort of scheme to get working stiffs into debt slavery. 

Now it looks like American Express may be cracking down on credit risks, and Kevin Drum is mad:

Here's the latest reason to hate credit card companies: Shop at Wal-Mart, obviously a sign of financial distress, and your credit limit gets lowered. Hallelujah!

This is from American Express, which has now decided to hunker down and simply lie about their habit of doing this.  Compare and contrast the following news accounts. When Kevin Johnson returned from his honeymoon last year he got a letter from Amex saying, "Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express." 

This is what credit management looks like:  you try to shut off access to the poor.  Poor people have less financial cushion than wealthier people, and they are therefore much more likely to default on their debt. 

(Yes, I know, there are a lot of affluent people who live up to--and beyond--their means.  But it's easier to pull Emily and Silas out of Sidwell Friends and sell the second car than it is to send little Maria to PS 187 without shoes; 90-95% of people who declare bankruptcy are below the median income for their area.)

You can't have it both ways.  Either you want credit card companies and mortgage originators to do everything they can to keep credit risks out of their system--which means identifying people whose shopping patterns indicate financial trouble--or you want them to extend too much credit.  The sad fact is that becoming a more responsible lender is largely synonymous with discriminating against the poor.

I never bought into the notion that expanding credit was bad for poor people (though I now realize it wasn't good for the economy as a whole).  So the cutbacks make me uncomfortable and sad.  But that's one reason I can't get too mad at banks for extending the loans in the first place.






This article available online at:

http://www.theatlantic.com/business/archive/2009/02/damned-if-they-do-damned-if-they-don-apos-t/4650/