Monday, August 27, 2007

Rewarding Bad Behavior

When our daughter has a tantrum, it is only with great difficulty that we can resist the urge to sweep her up and console her.  We manage to resist this urge because we understand what the long term implications of rewarding bad behavior are.

In the United States, the market economy supposedly balances good and evil, corporate and consumer interests.  The market economy is supposed to prevent companies from behaving badly, because such behavior might well put them out of business.  Unless of course they happen to be Amtrak or an airline.  Or an automotive manufacturer.  You get the picture.  In reality, the government routinely bails out bad actors-especially large ones.

For the past eight years, I have flat out refused to do business with Citi.  A clause in their credit card language indicated that a late payment would earn the borrower the default credit rate of 20 something percent.  That's pretty normal, except in this case that late payment could be to any lender.  Imagine, make a late payment on your Sears card and pay 20% interest to Citi.  No thanks.  That's bad behavior, and a good way to piss off your customers.  Citi should have to pay a penalty for such lousy decisions.

Did anybody ever doubt that the rash of exploding ARMs would end badly?  Really?  I didn't, and I'm not even a banker.  The idea that banks were giving bad loans to people with mediocre credit really irritates me.  What's worse, by bailing these banks out of trouble, the US government encourages more bad behavior.  The market economy might actually work, but at this rate we'll never know.

Don't take my word for it, lots of smarter people agree:

The escape of the enablers

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