May 2009 Archives

Barry Eichengreen, economist at the University of California, Berkeley, is always worth reading. He has written a number of brilliant articles on the Great Contraction. His latest piece is the called The Last Temptation of Risk.
In his latest one:

We now know that much of what we thought was true was not. The Great Moderation was an illusion. Monetary policies focusing on low inflation to the exclusion of other considerations (not least excesses in financial markets) can allow dangerous vulnerabilities to build up. Relying on institutional investors to self-regulate is the economic equivalent of letting children decide their own diets. As a result we are now in for an economic and financial downturn that will rival the Great Depression before it is over.

The question is how we could have been so misguided. One interpretation, understandably popular given our current plight, is that the basic economic theory informing the actions of central bankers and regulators was fatally flawed. The only course left is to throw it out and start over. But another view, considerably closer to the truth, is that the problem lay not so much with the poverty of the underlying theory as with selective reading of it--a selective reading shaped by the social milieu. That social milieu encouraged financial decision makers to cherry-pick the theories that supported excessive risk taking. It discouraged whistle-blowing, not just by risk-management officers in large financial institutions, but also by the economists whose scholarship provided intellectual justification for the financial institutions' decisions. The consequence was that scholarship that warned of potential disaster was ignored. And the result was global economic calamity on a scale not seen for four generations.

You can read the whole essay here.

I was going to write an article about how ridiculous it was for the hedge funds that played hardball with Chrysler's debt--and lost--to complain about how unfair the government acted toward them. One of the Wall Street financiers that lost out is Joseph Perella. He was once half of the dynamic duo at First Boston that threw hundreds of thousands of workers out of a job during the 1980s mergers and acquisitions mania. They destroyed many a managers career along the way, too. (The other half was Bruce Wasserstein, now head of Lazard.)

But Steven Pearlstein at the Washington Post got there first with this column.

There may be nothing more pathetic than a hedge-fund manager worked up in a moral lather, complaining that he hasn't been treated fairly.

What you need to know about these vultures is that their idea of fairness is throwing 100,000 people out of work and denying retirees their pensions and their health benefits just so they can liquidate the company and maybe squeeze an extra 15 cents on the dollar from their Chrysler debt.

A theme of this blog has been that the Administration's efforts are working to avert a greater economic catastrophe than what we've been though. In essence, the bad news is getting less bad. To be sure, the closer you look at any one initiative the more apparent the flaws. But taking a step back it sure looks like the combination of massive fiscal stimulus, a herculean Fed easing and a number of homeowner restructuring initiatives is working. Certainly, that's the message in the stock market.

We are still a long ways away from the job market improving, and the economy remains extremely fragile. The mantra "the bad news is less bad" is hardly rousing information except compared to what appeared to be forming--another Great Depression, 21st century style.

Paul Krugman has been a fierce critic of the Administration. Krugman has also been essentially right on the economy for the past three years or so. That's why I found this line toward the end of his latest column striking: "Credit where credit is due: President Obama and his economic advisers seem to have steered the economy away from the abyss."

The column focuses on stagnant to falling wages.

Robert Barro, professor of economics at Harvard University and Jose Ursua, a Ph.D. student in economics at Harvard, have written a fascinating article titled Pandemics and Depressions. It's published on the editorial page of the Wall Street Journal (which also has a poorly thought through screed by columnist Bret Stephens making fun of the "Swine Flu Hysteria).

In recent articles, Barro has been delving deep into an international database. And even though he has opposed the Administration's fiscal stimulus package, his work has convinced him the prospect of a depression should be taken seriously. Barro and his student booted up the computer again and looked at the effect of pandemics on economies around the world. They focused in particular on the Great Influenza Epidemic of 1918-1920. Anyone worried about the timing of the swine flu pandemic is right to be concerned that a pandemic could turn a severe recession into a depression.

Our ongoing study of economic disasters for 36 countries since 1870 suggests that this concern is well founded. In this sample, we have isolated 158 depressions -- defined as declines in a country's real per capita gross domestic product (GDP) by at least 10%. The most prominent features of these depressions are wars and financial crises. But the fourth-worst global macroeconomic event since 1870 seems to be the Great Influenza Epidemic of 1918-20. This "health shock" accounts for 13 of the depression events. In contrast, World War II is associated with 25, World War I with 23, and the Great Depression of the early 1930s with 21.

Other, far less severe pandemics in the postwar era had only temporary economic and stock market effects.

For most countries -- with Mexico as a likely exception -- the swine-flu epidemic of 2009 may turn out not to have greater macroeconomic consequences than the other four post-World War II flu crises. However, we already have substantial depression risks, arguably 20%-30% in the U.S., due to the global financial crisis that began in 2008. The potential for a flu pandemic surely adds to the depression odds, particularly since -- like the 1918-20 epidemic -- the current strain disproportionately impacts persons of prime working age.

As Max Weber, a founding father of sociology, wrote in "Science as a Vocation": "Our age is characterized by rationalization and intellectualization, and above all, by the disenchantment of the world." Thus, the modern thinker relies on "technology and calculation" -- even going so far as to use historical data to calculate probabilities of flu pandemics, financial crises and depressions. Weber clearly would have supported this kind of quantitative analysis. Sadly, his own work was cut short at the age of 56 by the Great Influenza Epidemic, of which he died in 1920 in Germany.

A recent investigation by the Center for Public Integrity into the subprime mortgage debacle makes a convincing case that it wasn't perpetrated by fly-by-night outfits working out of boiler rooms. We knew that, of course, but the Washington-based Center does a terrific job to reveal that major financial institutions spent almost $370 million in Washington over the past decade on lobbying and campaign donations to fend off tigher regulation.

These are many of the same institutions the government is now shoring up with taxpayer money.

Here's how the Financial Times put it today:

Chronicling the explosion of subprime mortgages is a bit like reading Murder on the Orient Express. As in the novel, in which everyone is revealed to have had a hand in the murder, America's subprime story implicates almost every power centre - including the Bush administration, the Federal Reserve and the Democratic party.

"The mega-banks that funded the subprime industry were not victims of an unforeseen financial collapse, as they have sometimes portrayed themselves," said Center Executive Director Bill Buzenberg. "These banks were deliberate enablers that bankrolled the type of lending that's now threatening the financial system."

The Center investigative reporters booted up their computers to examine almost 7.2 million "high-interest" or subprime loans made from 2005 through 2007. The analysis allows them to compile the Subprime 25 -- the top 25 originators of the high-interest loans, accounting for nearly $1 trillion in loan.

A couple of highlights:

At least 21 of the top 25 subprime lenders were financed by banks that received bailout money.

Nine of the top 10 lenders were based in California, including all of the top 5 -- Countrywide Financial Corp., Ameriquest Mortgage Co., New Century Financial Corp., First Franklin Corp. and, Long Beach Mortgage Co.

Twenty of the top 25 subprime lenders have closed, stopped lending, or been sold to avoid bankruptcy. Most were non-bank lenders.

Eleven of the lenders on the list, including four recipients of bank bailout funds, have made payments to settle claims of widespread lending abuses.

The Administration says it plans on cracking down on offshore tax shelters and avoidance. The target of the initiative is U.S.-based multinational corporations and wealthy individuals. The money that is earned overseas and then kept in offshore tax havens is some $700 billion. No one really knows, but that the best guesstimate out there.

Multinational corporations and rich folks keeping money offshore to evade taxes won't generate a lot of sympathy except from the all-taxes-are-bad crowd. But many economists legitimately worry that enforcement will put U.S. companies at a competitive disadvantage in the international market.

Mike Mandel at Business Week gets to crux of the problem:

As the old saying goes, the road to hell is paved with good intentions. For decades various Washington politicians have tinkered with corporate income tax rules with the laudable goal of getting U.S.-based multinationals such as General Electric (GM) and IBM (IBM) to pay their "fair" share of taxes on growing overseas operations. The result has been a disaster--a system no one understands that requires vast resources to administer while raising very little revenue. The current corporate tax rules even seem to encourage U.S.-based multinationals to move jobs overseas, although no one really knows for sure.

Unfortunately, President Barack Obama's latest proposals to get U.S.-based multinationals to pay higher taxes on their foreign profits do nothing to fix these problems. The tax system will get another layer of complexity--effectively a "stimulus package" that benefits tax lawyers and accountants who find new loopholes.

Mandel proposes that the Obama strike a blow for simplicity and jobs by reducing the corporate income tax rate from its current 35% to 25%. The quid pro quo is that companies make their income tax returns public, at least in summary form.

Mandel called his idea radical. Simplicity and transparency is good. But here's my thought and I'll label it utopian. Over the years, I've become convinced that we should get rid of the corporate income tax altogether. But you can't just get rid of it. The hole in the federal budget would be too great, and forget about tapping into any supply side vodoo to deal with the problem.

But what about this deal: Eliminate the corporate income tax and substitute an energy tax. I believe there would be gains in jobs and wages from the shift. The would stimulate conservation and sustainability initiatives. It would also create market-based incentive for entrepreneurs to come up with new products that sharply reduce our carbon footprint. Since the Administration is going to need tax revenue to help pay for universal health insurance it can be wrapped up in the big swap.

What do you think?

So, what do you think it will be, inflation or deflation? Will we be Zimbabwe or will we be Japan? (I vote neither.)

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Oil prices are heading back up. From today's Wall Street Journal:

Oil futures throttled to a 2009 high Wednesday despite a U.S. government report that showed crude stockpiles rose a ninth straight week and petroleum demand is still weak.

Light, sweet crude for June delivery was recently up $2.17, or 4%, at $56.01 a barrel on the New York Mercantile Exchange, hitting prices last touched in November. Brent crude on the ICE Futures Europe exchange rose $1.53 to $55.65 a barrel.

It seems to me that alternative energy will get another boost once the global economy turns for the better. I know that isn't going to happen anytime soon. But from an investor point of view its probably a good time to look at the track record of alternative energy companies; from a homeowner point of view I'd take advantage of any tax savings for energy efficiency; and from a car owner point of view owning or buying a gas sipping car is still a smart move.

The job loss number is still a big number. It only looks good compared to the past 6 months. It does seem to confirm other signs that not only has the economic abyss been averted (another depression), but that the economy is bottoming out.

Still, aAnother 539,000 workers lost their job and the unemployment rate rose to a 25-year high. So far this recession 5.7 million jobs have been lost, according to the BLS.

A couple of other highlights. Healthcare and education jobs rose again (by 15,000). Since the recession began in December 2007 this sector has seen an increase of almost 600,000 jobs. In sharp contrast manufacturing and construction continued to shed labor, putting the job loss at almost 2.8 million for the recession.

The total unemployment rate--including marginally attached and workers putting in fewer hours than they'd like--came in at 15.8%. That's up from 15.6% a month ago and 8.9% a year ago. That's a horrible figure.

A sign of the increasing importance of intangible assets in the economy?

Seattle University Increases Your Market "Value"
March 31, 2009

Intangible assets have no physical presence and no real value but can have a huge effect on a company's value and performance. They include patents, trademarks, copyrights, and brand recognition, plus a growing suite of features like intellectual property, business practices, environmental consciousness, and social responsibility.

The earned-income tax credit is the country's most successful and largest anti-poverty program for working families. For instance, the EITC is credited with increasing the labor force participation rate of single mothers with children following welfare reform. (You can learn more about welfare reform listening to this American RadioWorks documentary from 2006 by John Biewen.) And it lifts more children out of poverty than any other government program, according to research by economists Nada Eissa of Georgetown University and Hilary Hoynes of the University of California, Davis.

President Ronald Reagan got it right when he hailed the EITC as the "best anti-poverty, the best pro-family, the best job creation measure to come out of Congress." But the EITC can be streamlined and made better. For instance, it's a complicated credit, with numerous and often confusing eligibility requirements. It also could be made somewhat more generous.

One question dogging the EITC is whether the jobs taken by single mothers are "dead end" jobs or jobs with future earnings potential. That's the question Molly Dahl and Jonathan Schwabish of the Congressional Budget Office and Thomas DeLeire of the Department of Population Health Services at the University of Wisconsin, Madison investigated in their April, 2009 paper, Stepping Stone or Dead End? The Effect of the EITC on Earnings Growth.

Their conclusion: "Our results suggest that once a single mother becomes employed, she will develop the skills needed to increase her earnings. The EITC encourages work among single mothers, and that work continues to pay off through future increases in earnings."

I wonder how the single mothers with children that benefitted from the expansion of the EITC during the '90s are doing now with the downturn?

An important new study looks into homeownership, minorities and immigrants over the past decade and a half. In Through Boom and Bust: Minorities, Immigrants and Homeownership by Pew Hispanic Center researchers Rakesh Kochhar, Ana Gonzalez-Barrera, and Daniel Dockterman found the U.S. housing boom and bust generated greater gains and larger losses for minority groups than it has for whites.

That's not so surprising. But I found these results particularly striking.

1) Overall, the ups and downs in the housing market since 1995 have reduced the homeownership gap between whites and all racial and ethnic minority groups. However, a substantial gap persists. As of 2008, 74.9% of whites owned homes, compared with 59.1% of Asians, 48.9% of Hispanics and 47.5% of blacks.

2) The recent decline in the homeownership rate has hit native-born heads of households harder than immigrant householders. Immigrant householders are less likely than native-born householders to be homeowners (52.9% versus 70.0% in 2008) but their losses in recent years have been smaller than those of the native born.

3) The explanation for the relatively modest impact of the recent housing market turmoil on immigrants appears to lie in the changing characteristics of the foreign born. Among other things, the typical immigrant in 2008 had spent more years in the U.S. and was more likely to be a U.S. citizen than was the typical immigrant in 1995. Those factors, strongly associated with higher rates of homeownership, appear to have mitigated recent troubles in the housing market among immigrants.

Taken altogether, this raises a question: The assumption has been that the rise in homeownership among minorities and immigrants was a mistake. These are people with low, fragile incomes that shouldn't have bought homes. But going through the data I wonder if the far bigger problem was the subprime mortgage itself? In other words, homeownership wasn't a mistake (at least for many) but the mortgage instrument guaranteed failure.

A number of conservative critics believe the subprime mortgage implosion reflects bad public policy pushing homeownership too far. I have a feeling it was simpler than that--it was bad, lax regulation. Homeownership among minorities, immigrants and low income communities could go up with a simpler, low-fee transparent mortgage--everything the subprime mortgage wasn't.

Anyway who is geneuinely worried about inequality, poverty, equality of opportunity and economic growth has to focus on two primary issues: Healthcare and education. For too long we've talked about both and done nothing. Hopefully that will change. Certainly, the Obama Administration is making strides buidling a coalition for unversial health care.

Education is even more important when it comes to inequality and poverty. The nation's primary and secondary school system is desperately in need of an overhaul. It won't be easy. But so what. For too long the status quo has existed, short-changing a generation of young people. Parents need much more choice and power when it comes to their children's education, no matter what their income. Teachers need to be paid more. Classes should go year round. Incompetent teachers should be fired. The teacher's unions should embrace radical reform or disappear.

Clive Crook of the Financial Times has a nice piece laying out the case for reform. He uses a recent study by consultants from McKinsey:

Drawing on work by Stanford's Eric Hanushek, the McKinsey team estimates the economic consequences of this educational deficit. If the US had raised its educational performance between 1983 and 1998 to that of countries such as South Korea and Finland, its output last year would have been $1,300bn- $2,300bn (€970bn-€1,716bn, £862bn-£1,525bn) higher - a gain of about 9 to 16 per cent of gross domestic product. In other words, the education deficit imposes the equivalent of a permanent depression on the US.

We should have had dramatic reform long before this:

At a meeting in Washington to launch the McKinsey report, Al Sharpton, a black community leader and all-round stirrer of controversy, was on the platform alongside more orthodox education reformers and administration officials. He called school reform the civil-rights challenge of our time. The enemy of opportunity for blacks in the US was once Jim Crow, he said; today, in a slap at the educational establishment, it was "Professor James Crow". He is right, and the country must hope the president agrees.

New legislation will limit the ability of credit card companies to impose certain fees, ban some practices and impose greater openness and transparency in dealings with customers. Credit card companies are mad, so they are now saying that they're going to stiff their best customers. That's the message delivered by the industry in today's front-page New York Times story.

Credit cards have long been a very good deal for people who pay their bills on time and in full. Even as card companies imposed punitive fees and penalties on those late with their payments, the best customers racked up cash-back rewards, frequent-flier miles and other perks in recent years.

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.

I don't buy it. First of all, the market remains competitive enough that if credit card companies do go after their safe credits someone else--WalMart?Target?--will offer these customers a better deal. What lender doesn't want a book of business from people who pay off their loans in full and on time?

Second, I don't know of any business that thrives by treating its good customers poorly. Just ask executives in the recording industry.

Third, the credit card companies seem to be saying is that they couldn't make money without practicing unsavory tactics. Maybe that true with their current business model, although I doubt it. The end of the story gets to the heart of the industry's problem:

Austan Goolsbee, an economic adviser to President Obama, said that while the credit card industry had the right to make a reasonable profit as long as its contracts were in plain language and rule-breakers were held accountable, its current practices were akin to "a series of carjackings."

"The card industry is giving the argument that if you didn't want to be carjacked, why weren't you locking your doors or taking a different road?" Mr. Goolsbee said.

My bet: Credit card customers are going to end up with a better deal than before. The main industry players may change. But competition and innovation and well-informed consumers is a recipe for the market to push companies to develop a better business model from the customers point of view--not a worse one.

I got a note the other day from Henry "Bud" Hebeler. He runs the financial website analyzenow.com. Bud's advice is always good. In his note he said that " you know things are tough when even our local Kent, WA, courts are offering to let people pay their fines using a "flexible payment plan." People are searching both for ways to save in this environment as well as to find prudent ways to invest their money."

Here are his ideas. Hopefully, you'll find some savings inspiration.

Save more:

Decide how much you should be saving as the first step. (Web sites can help with this.)

Establish a lower family budget that satisfies your savings goal and stay within it.

Arrange for automatic savings deposits from your paychecks.

Sell things you don't really need on the Net or elsewhere.

Downsize your home or rent. Renting provides mobility to get jobs elsewhere in the country.

Move in with relatives or friends.

Grow your own vegetables.

Buy items with cash, not with loans.

Rule out cars, cell phones or IPods for children--or even for yourselves.

Make do with old computers, and software. Use no downloads requiring payments.

May be able to get lower cost TV, internet and telephone services.

Turn down the thermostat and wear sweaters.

Consider refinancing your mortgage if interest rates now significantly lower.

Older people may not need life insurance or long-term-care insurance.

Increase your income:

Rent out a room in your house.

Get a second career. Perhaps teach, start delivery service, tutor, etc.

See about part or full time employment for an unemployed spouse.

Encourage teenagers to work on weekends and pay for some of their own expenses.
Invest prudently:

Reduce personal debts. When debt interest rates are higher than the return you can get from investments, paying debt off early is usually the best investment you can make.

Consider Savings I bonds for the entire family. They are available from local banks and treasurydirect.gov.

Invest in certificates of deposits (CDs). (Available from many sources. See bankrate.com)

Buy Treasury Inflation Protected Securities (TIPS) in self directed IRAs or from treasurydirect.gov.

Take advantage of tax deductions, Roth IRAs and 401(k)s and tax-exempt bonds if you are in a higher income bracket.

Use FDIC insured accounts for immediate cash needs.

Buy bonds, not bond funds. (Increasing interest rates will destroy bond fund principal.)

Change to mutual funds with low upfront costs, low management fees and no kickbacks to advisors.

Use financial advisors with low fees and no commissions.

Good health is the best medical and long-term-care insurance you can buy.

I recently was operated on by one of the most famous orthopedic surgeons. Not noted for his bedside manners, he gave both my wife and me a lecture on eating lots of dark green vegetables and fish, but no red meat or deserts. Then he gave me a number of pages describing exercises I should do. So--

Eat only healthy foods

Exercise and keep weight under control.

The American economy has long relied on a well-educated workforce to fuel innovation, the lifeblood of any modern economy. Yet America's edge in education is eroding by many measures, including school test scores and high-school dropout rates. Even more worrying is that both the federal government and state legislatures have been reducing their support of colleges and universities, the crown jewels of America's human-capital economy. This is a big mistake in an increasingly competitive global economy.

Indeed, in much of the discussion about globalization an underappreciated force has been universities. A linchpin of the evolving integrated world economy is a common university structure. Certainly, the numbers are striking. About 20% of the world's relevant age group -- well over 100 million young adults -- are participating in higher education. That's up from a fraction of 1% of this age group in 1900, or about 500,000 students, calculate John Meyer and Evan Schofer, sociologists at Stanford University and the University of Minnesota, respectively.

To put that figure in perspective, the scholars note that Algeria, Kazakhstan, and Myanmar each now has as many students enrolled in higher education as the entire world did at the start of the 20th century.

Harvard University economist Richard Freeman looks into the trend with an important new paper, What Does the Global Expansion of Higher Education Mean for the U.S.? (NBER Working paper 14962, May 2009). The questions he pursues include whay have so many countries expanded their higher education systems over the past three decades; what are the implications for the U.S; and how might the U.S. best respond to the rest of the world closing the education gap?

Here are the concluding paragraphs of the paper.

This paper has documented the spread of higher education around the world. It has
shown that the rising proportion of young persons going to college in advanced countries, which have risen above those in the US in some countries, and in the huge populous developing countries has greatly diminished the US's share of the world's university students and graduates. Because international students make up roughly half of university graduate immigrants, the ability of US universities to attract the world's best and brightest international students has important consequences for its success in attracting immigrant talent.

The growing number of foreign-born persons getting PhDs outside the US as well as in US universities will undoubtedly diminish the gap between US universities and those in other countries. The world ranking of top universities in 2020 is likely to include many more from other countries. Increasingly, new knowledge will come from workers outside the country, but there is much the US can gain from this. We do not know whether the US will do better through immigration or through off shoring of some university graduate-level work overseas. My guess is that by educating some of the best students in the world, attracting some to stay in the country and positioning the US as an open hub of ideas and connections for university graduates worldwide, the country will be able to maintain excellence and leadership in the "empire of the mind" and in the economic world more so than if it views the rapid increase in graduates overseas as a competitive threat.

My bottom line is that the U.S. needs to boost its investment in education, research and development, fundamental scientific knowledge, and other building blocks of economic and technological activity. The Obama Administration gets it. But both Congress and state governments must stop denying institutions of higher learning the funds they need to grow. To do otherwise is policy insanity.

When it comes to economic growth and living standards, what matters is knowledge and innovation. Other countries have learned that lesson -- from us. It's time we took a refresher course.

The federal government appears to be everywhere when it comes to the economy. It's actively shoring up the banking system, weighing in on executive pay, negotiating with the medical-industrial complex, offering bailout money to insurance companies, even playing hardball with financiers who balked at the Chrysler bankruptcy.

This historic expansion of Washington's role has upended many traditional relationships. The Federal Reserve Board has greatly expanded its reach into the private sector, too, and it has abandoned its independence to work hand-in-glove with Treasury Secretaries Henry Paulson and Timothy Geithner. "There is no debating that the government is grabbing more power from the private sector," says Edward Yardeni, economist, investment strategist, and head of Yardeni Research.

He's right. But there's little debate left that radical efforts by fiscal and monetary leaders are making it increasingly likely that the economic abyss has been averted. And Fed Chairman Ben Bernanke has argued in recent speeches that he and the rest of the Fed's policy-setting members are well aware of the risks they've taken on with their extraordinary initiatives and that the central bank has an exit strategy designed to reduce its impact on private market decision-making and maintain the central bank's vaunted independence. We'll see if Bernanke can pull it off.

What about the Obama Administration? At the moment it has so many initiatives in the works--and the economy remains fragile enough--that its lack of focus on a clearly articulated exit strategy from its involvement in the operations and finances of a big chunk of American business is understandable. Still, it leaves the Administration vulnerable to charges of creeping socialism, fiscal imperialism, and other equally incendiary terms.

Yet even many people who don't believe the Administration harbors any desire to run large parts of private industry share a nagging worry that the more taxpayer money is on the hook, the greater the pressure on Washington to intervene in the economy. Perhaps most worrisome, the longer Washington closely oversees key segments of the economy, the greater the ability of lobbyists to influence the rules written by legislators to benefit well-heeled clients.

Here's a potential standard for defining an exit strategy. It isn't really a reach, since the idea runs through many talks given by Administration officials:

First, focus on saving capitalism from the capitalists--and then get out of the way.

Second, move away from bailing out capitalists and focus instead on workers. When it comes to saving capitalism from the capitalists, the construction of a better safety net is paramount. And here the operating principle should be to protect the interests of employees, not companies.

You can read more about the Administration's exit strategy here.

Thank you, Washington. That's not exactly a phrase many people are sending toward our elected representatives these days. But it's an appropriate sentiment after the Senate and House overwhelmingly approved new rules on the credit card industry--and the President sined the bill. The legislative changes will offer consumers greater protection from arbitrary and abusive practices that became all too commonplace in recent years. The credit card industry will be better off, too.

Among the most important new rules for consumers are: Credit card companies must give at least 45 days notice before hiking rates or changing terms of the contract; no more over-limit fees; the credit card bill must go out at least 21 days before its due date; any money paid over the minimum goes toward the highest interest rate debt first; and students under the age of 21 can't get a credit card without a parent or legal guardian as the primary cardholder. There is also a 5 year life for gift cards.

Now, in the past week you've probably read or heard stories about how the rule changes will force credit card companies to stiff their best customers, the ones that pay their off their bill in full at the end of the month. Company representatives have said the only way left for the industry to maintain profit margins is to raise rates, boost fees, or combination of the two on these financially responsible customers.

I don't buy it at all. For one thing, the financial market is competitive enough that if existing companies start offering their best customers a worse product other companies will offer these customers a better deal. What lender doesn't want a book of business from people who pay off their loans in full and on time while pocketing the fee merchants pay to the card company's? For another, I don't know of any business that thrives by treating its good customers poorly. Just ask executives in the recording industry.

My bet is that all credit card customers end up with a better deal than before. The main industry players may change, but so what? Competition, innovation and better informed consumers is a recipe for the market to push savvy managements into developing better products, not to embrace inferior ones. And credit card companies that could only make money by taking advantage of consumers through obscure rules and arbitrarily rule changes will fall by the wayside.

That said, old rules or new rules don't matter. Credit card holders should stick to the borrowing basics of plastic. A credit card is a technology that offers convenience. Forget the line of credit: Pay off the bill in full at the end of the month. Indeed, for most people I'd get into the habit of using their debit card--and electronic checkbook--for convenience.

Here is a good detailed examination of the new rules:

This could be a financial boon to a number of retirees. Many older people on Social Security have been forced by the bear market to go back to work. If that's you, you can "claim and suspend" your benefits. You'll get a higher benefit when you resume receiving Social Security. The strategy can also enhance benefits for one-earner couples. The details of "claim and suspend" are spelled out in a brief by the Center for Retirement Research at Boston College. The link to the full paper is here