Chuck “I never met a bank I didn’t destroy” Schumer has introduced legislation designed to further restrict and regulate the credit card industry.  The legislation, which is similar to legislation introduced by Representative Carolyn Maloney and another banking super genius, Chris Dodd, would accelerate newly proposed Federal banking regulations and add further restrictions to the credit card industry.

In a nutshell, the legislation and the new regulations would make the following changes to how credit card companies do business:

• Your interest rate cannot be changed by your bank unless you miss a payment with that bank for more than 30 days.
• If your credit rating goes in the toilet, but you still make your payments with this bank, this bank won’t be able to increase your interest rate.
• Similarly, even promotional rates (like 0% rates) cannot be changed unless you’re 30 days or more overdue.
• You will have at least 21 days’ grace before interest starts accruing.
• The mountain of disclosure and fine print you currently don’t read will increase, so you’ll not be reading more information than you didn’t read before.

You may be thinking, well, how can that be bad?  Those mean old credit card companies have been skinning us for years!  Well, here’s the thing: put yourself in their shoes under these new rules.  Imagine you’re in the business of loaning money to people, and there are 1000 people you’re targeting.  You know that about 50 of them will be deadbeats; 50 will fall behind occasionally, but otherwise pay; 100 will pay just the minimum, 600 will pay more than the minimum and the remaining 200 will pay their balance in full each month.  You would like to charge those people and average of, say, 12% interest to make up for the losses on the 5% who won’t pay even the principle of what they owe.  What you don’t know, however, is who falls into what category.

Under the old system, you could start your customers off with a lower interest rate (say 10%), and if someone became more risky, you could raise their rate.  Those who maintain good credit will keep the lower rate, and on average, you would be charging the amount you needed to.  But now, the government is saying you have to lock in the rate, pretty much for the life of the account.  So what do you think will happen?  If you think credit card companies are going to stick with the lower rate to start, you have not been paying attention.  So the net result of this “protection” is that the average credit cardholder will see their interest rate jump at least a few percentage points.

What else will happen?  Daily Danet prophesizes:

• Interest rates will jump 3-5% almost immediately.
• Zero % interest rate offers will disappear.
• Credit card companies will be far less reluctant to extend credit.
• Consumers, paying higher cost of credit, will spend less.
• Banks will make less money (but that’s okay, I’m sure a bailout is in the works already).
• Your points program will not be so generous anymore.
• Your bank will start charging you additional fees to offset their additional costs.
• The U.S. economy, which is driven by consumerism will stagnate far longer than it would otherwise.

If you think I’m making this up, ask an Australian.  In 2003 the Reserve Bank of Australia enacted a similar “do-gooder” policy, and guess what happened?  Consumers bore the brunt of the increased costs and the broader economy suffered.  In fact, it took nearly four years for consumer spending to return to 2003 levels.

Is this really the time to put the brakes on consumer spending?

• Assume that, last year at this time, you had $5000 burning a hole in your pocket.
• Assume that you bought 100 shares of Citibank stock (about $2500).
• And you also bought a year’s supply for four people of Diet Coke (500 12 packs) (also about $2500).
• Further assume that you and your friends drank all that Diet Coke.
• Today, when you went to redeem all those empty cans, you would have more money in empty cans ($300) than you would in Citi stock ($280).

The same would be true for bank of America, but only if you lived in Maine MIchigan ($.10).

Who is this Maddoff guy?
Bernie Maddoff was the former chairman of NASDAQ and the founder and CEO of his own investment company.

How do you pronounce his name?
“Made-off” as in “That guy just made off with my money!”

What did he do?
Maddoff is charged with running the largest ever Ponzi scheme, essentially defrauding his investors for over $50 billion–enough to buy every domestic car manufacturer twice.

What’s a Ponzi scheme?
Named after Arthur Ponzarelli, this is a complicated financial scheme that involves a Jewish man pretending to be Italian.  The scheme reaches its peak when the man uses two slick sticks and a speed boat to jump over a large, omniverous fish.

Really?
No.  A Ponzi Scheme is a type of fraud, made famous by Charles Ponzi.  In this fraud, the conman takes money from investors, promising huge returns.  For a while, the conman pays those returns with new money from new investors.  As the scam grows, the conman needs more and more investors to continue to pay the returns to the old investors (and the new ones as well).  This is also called a “pyramid” scheme.

Kind of like Social Security?
Exactly.

Seriously, how is this different from Social Security?
It’s not different at all.  Social Security takes money from current employees (new “investors”) to pay returns it promised current retirees (initial “investors”).  Just like a Ponzi scheme, it depends on a constant stream of new “investors” or the system collapses.  So it’s no different than what Maddoff did.

Really?
Well, there are a few minor differences.

Phew!  Like what?
Well, Maddoff conned people who voluntarily invested in his fund.  Social Security is mandated by law.  If you don’t contribute to the fraud, they throw you in jail.

What else?
Well, even though the SEC dropped the ball on this, Bernie Maddoff’s Company was still regulated.  Social Security is not.  The people who run Social Security (Congress) are the same people who oversee it.  It’s a lot like Bernie Maddoff being made the head of the SEC.

But Social Security isn’t a criminal fraud, is it?
Of course not.  Congressmen are exempt from prosecution for any laws they enact.  No criminal, no crime.

But there will always be more new “investors” in Social Security, right?
No.  Sadly, the government cannot force us to procreate.  Because of the large number of people born just after World War II, the number of current retirees is just about to sky rocket.  In addition, the low number of births in the 1970′s through today is just showing up in the employment rolls.  Add that all up and then tack on an increasing unemployment rate and you’ll see where we are.  This is the point in the Ponzi scheme where the conman fakes his own death and flees to Buenos Aires.

!@#%^$ing Baby Boomers.  So what happens when Social Security fails?
Sorry, but I’m prohibited by law from telling you that.  But you’ll know in about 12 months.

Seriously, give me a hint.
Okay, but you didn’t get this from me, but don’t eat the soylent green wafers.

So, what happened in the late 1990′s that could have caused such a bubble?  Some Democrats point to Gramm Leach Bliley, this is because these people are either idiots or naked opportunists.  As I pointed out earlier, GLB has cushioned the blow from this crisis as it allows healthy banks to bail out (i.e., buy) struggling investment banks and vice versa.  Some banks (Wells Fargo, Goldman Sachs) were not so incredibly stupid to invest in a bubble twice in one decade.  In addition, GLB was passed in 1999 when the bubble was clearly already underway.

In 1995, however, Democrats decided they wanted to encourage home ownership among people who, frankly, could not afford it.  We heard speaches about “everyone has a right to affordable housing.”  The government authorized and encouraged Fannie Mae and Freddie Mac to issue subprime loans.  Subprime loans are loans to borrowers with “subprime” credit, usually meaning a FICO score of less than 620 or 660, depending on the lender.  In order to have credit score that low, the borrower probably either (i) missed two or more payments in the last year; (ii) declared bankruptcy or been foreclosed on recently, (iii) really pissed of one of the credit rating agencies.  Put simply, a subprime loan is a loan to someone who probably cannot pay it back.  (I know, I’m being mean or racist, but frankly, if you’re going to ask that I pay for your mistakes, you can expect me to point them out.)

As an aside, note that the peak was in 2006, two years before the current crisis.  Why?  You can thank the 2 and 28 ARMs.  These are Adjustable Rate Mortgages where the borrower pays interest only for two years, then the payments jump (sometimes by 200-300%) for the remaining 28 years.  Why would anyone agree to that?  They expected housing prices to keep going up.  “Honey, we’ll pay interest only for two years, then sell the house at a profit!  What could go wrong.”  There’s a reason some people have a 620 credit rating.  The banks, on the other hand, reasoned that, “if they default on the mortgage, we’ll foreclose and sell the house at a profit.”  There’s a reason some banks fail.  The point is, if you bought a house two years ago and took a 2/28 ARM, the reaper came calling this year.  When you couldn’t pay, the bank foreclosed, adding tons of cheap housing to an already overcrowded market.  That, combined with the baby boomers retiring (and looking to sell that four bedroom colonial for a two bedroom bungalo) precipitated the bursting bubble two years ago.  Once the housing bubble burst, banks had two years of interest only payments until their problems started.  Now, not only are banks not receiving all of the mortgage payments, they also cannot offload the houses on which they foreclose.

The irony (and thus the title of the post) is that this behavior, forcing banks to make risky loans, is what made owning a home such an unattainable goal.  Congress decided that we need more home ownership, so what happened?  The price of homes went up.  (This is known to some as the Law of Supply and Demand.  To others it is a fact to be avoided at all costs.  I’m looking at you Barney Frank).  Had Congress left well enough alone, the prices may have peaked, as they did in the late 1980s, but certainly nothing like the spike we saw over the last 10 years.  Put simply (for the benefit of Congress, especially Mr. Frank), had they done nothing, more people would have owned homes at lower prices.

Lesson learned, right?  No.  Saturday Night Live may have gotten the message, but Congress is still struggling with reality.  No harm, though, right?  I mean, it’s not like they can make the same mistake again, right?  No.  Now they’re clammoring about how everyone needs affordable healthcare.

No one wants Americans to be evicted from their homes, but wasting taxpayer dollars to reward bad behavior is not the answer to our current crisis.  My wife and I have not purchased a home over the past four years for the simple reason that we could not afford to.  Prices were too high and the mortgage payments would have been untenable.  Unless, of course, you assumed that housing prices would continue to rise.  We knew better, so we rented.

The fact that many people continued to buy into the escalating housing market (with the help of aggressive lending practices) meant that those inflated prices remained artificially high.  This feedback loop kept many smart people out of the housing market, my wife and I included.  It will not be my burden to rescue someone who made a reckless financial decision.

As for the election, it is over.  Barack Obama will win as McCain’s reckless fiscal policy will demoralize the base.  Even without this issue, Obama’s friends at ACORN are already stealing the election in Ohio and Florida.  My recommendation to conservatives is to sleep in on election day.  You will need your rest for the coming four-year nightmare.

“Just like the economic recovery plan I proposed when running for president,” noted President Obama, “this plan allows for an ex post facto repricing. If a taxpayer is having trouble paying for the enormous bloated bureaucracy they bought when they elected me and my fellow Democrats, they can declare bankruptcy and a federal judge will be empowered to adjust their tax burden.”

Critics of the plan note that it will create what one Senator calls “a reverse ponzi scheme.” At first, the lower middle class will begin to file bankruptcy, “which will increase the burden on those left paying taxes, causing them to file for lower taxes. Eventually, you won’t have anyone left to pay taxes except George Soros, Hillary Clinton and Al Gore.”

President Obama dismissed these claims as unhopeful, saying “I find your lack of hope disturbing.” John Sweeney, the new Secretary of the Treasury, noted that the plan would be “as, if not more, successful as the anti-foreclosure rule.” The Treasury department reported that exactly zero home foreclosures have occurred since last month, down from 25 the previous month.

“We have not seen the ‘dramatic’ increase in interest rates predicted by the so called ‘experts,’” noted Secretary Sweeney. The nationwide average interest rate on a 30 year mortgage remains steady at 24%.