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There was a twitter debate on Trumps plan to limit credit card interest rates to 10%.
In my view this is an interesting exchange between bad academia (fed paper), expert (Patrick Mckenzie), MBA logic, populists (Trump).
Trump proposed a policy of capping credit card interests rates at 10%. That set up a twitter folly of the high rate people are subsidizing low rate people with rewards backed by a fed paper.
https://www.elibrary.imf.org/view/journals/001/2023/054/article-A001-en.xml
Ackman backing it: https://x.com/billackman/status/2009976076559077844?s=46
Personally being a dumb MBA I feel like I can perfectly segment pnl between subprime borrowers and rich people. If I make money on subprime and lose money on rich people I can just shutdown the rich people business and deploy more money to poor people. So the academia people are most likely wrong based on simple logic?
I can’t find it now but somewhere he did a longer post on how all cc are segmented https://x.com/patio11/status/2010185232159518904?s=46
I think for culture war attributes there are: Academia can do bad research. Ignore basic (or a price) and find a conclusion that seems smart but does not pass a logic text.
Honest experts can give full market breakdown.
MBA and idiots can give a logic that makes sense and is more correct than an academic trying to make a paper.
And then there is the Trump 10% interest rate cap. Maybe most borrowing above 10% interest is bad? I might compare this to online gambling where the people doing it and are profitable it’s bad for them. Or legalized weed.
If I didn’t make it clear above. Most of the rich people rewards are paid for by the high interchange fees of 3%. It’s not credit risks. It’s not subsidized by poor people.
Edit: as a high income high fico. I would prefer we limit credit card fees. And rewards go to zero. Then the store I go to doesn’t pay a processing fee. So they cut prices. And it probably saves me more money than getting 2% cash back.
It should be obvious from basic efficient market processes that every measurable category of people the credit card companies can subdivide people into is internally profitable without needing subsidization, otherwise they wouldn't serve those people at those interest rates. The only subsidization occurring is
People that don't use credit cards subsidize rewards for people with credit cards since stores are charging higher average prices than they would if credit cards weren't so prolific.
People who have different actual repayment within the same legibility category. Ie, someone with a bad score who ends up in debt, paying a lot of interest, and working their way out of bad credit ends up subsidizing the people with bad scores who end up defaulting on their loans. If the credit card company doesn't know ahead of time which is which, they have to offer interest rates that will enable them to recoup their costs on average across the group. The former ends up paying a lot of interest because the credit card company gave them the same risk profile as the latter.
Now, you could make a claim that XYZ piece of information should be priced in but isn't and thus the market isn't truly efficient. But it's not going to be something as obvious as "rich people" vs "poor people".
“It should be obvious from basic efficient market processes that every measurable category of people the credit card companies can subdivide people into is internally profitable”
I agree. Ackman 100% tweeted that it’s not without thinking about it. Even Asnes seemed to agree in a tweet. That’s 100% my opinion that a dumb mba should immediately see the logic behind the fed paper saying the poor subsidize the rich is wrong without reading the paper.
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