The Problems With Outlawing "Universal Default"

The world of Christendom is hushed in anticipation today. But the noise keeps coming from the financial world. Yesterday, the Dow held steady. The dollar too. Gold, though, rose $7.

This morning, the Asian markets are moving up…following an announcement by China that she would continue her free-spending, free-lending ‘recovery’ era policies.

Back in the USA, we could swear that we read a headline yesterday telling us that new home sales were rising. Today comes this Bloomberg headline:

“Sales of New Homes Unexpectedly Fell in November.”

That didn’t seem to stop consumers. They spent more! At least, that is what the noise said. Where did they get the money? Incomes apparently went up a little. Spending went up a little more.

And then there is another item on Bloomberg News this morning. A new law will take effect in February. Like every new law, it disrupts the old laws by which people organized their lives. This one decrees that credit card companies shall henceforth cease the practice known as “universal default.”

If a fellow defaults on one credit card, the other credit card companies rightly figure he’s likely to do the same to them. So they take precautions, cutting him off from future credit.

But the authorities want people to spend – apparently, even people who can’t pay their bills. So, they are outlawing the practice of “universal default.”

The term “unintended consequences” was invented for these occasions. As usual, the law produces the exact opposite results from those the politicians wanted. The credit card companies are tightening up on all their accounts, realizing that after the new law goes into effect in February, they will be less able to identify the bad accounts quickly and less able to control their losses.

According to Bloomberg, this threatens $9 billion in holiday season sales.


It’s best to shut it out…listen for the sound of reindeer bells…and look for a bright star in the East.

The Daily Reckoning