Credit Cards, Chrysler And Congress This Week

At the beginning of the economic crisis, all eyes were on Wall Street. But now the focus has largely shifted to Washington D.C. as Congress becomes the amphitheater for that debate. NPR's Scott Simon speaks with Joe Nocera, columnist for The New York Times, about proposals in Washington this week to regulate the derivatives markets and the credit card industry.

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SCOTT SIMON, host:

At the beginning of the economic crisis, all eyes seemed to be on Wall Street. But now the focus has largely shifted to Washington, D.C., as the U.S. Congress becomes the amphitheater for that debate. Our friend from the business world, Joe Nocera, joins us from our New York studios. Joe, thanks very much for being with us.

JOE NOCERA: And thanks for having me, Scott.

SIMON: Let me get these two words, two phrases, out of the way first -derivatives and credit default swaps. A lot of people might, you know, just turn around and put their heads back on the pillow, but explain to us that this is the heart of what Congress is going to be dealing with.

NOCERA: Well, yes, it's the first kind of new proposed regulation by the administration for how to handle events that led to the crisis. We all know that credit default swaps and derivatives played a very large role, in no small part because there was no regulation around them and nobody really knew what was out there. I mean there was a very private market. So part of what the administration wants to do is put them on an exchange so there will be a seen. You'll have some price discovery, as we call it in the trade. They will come under certain regulatory strictures.

It is not a complete solution, for a variety of complicated reasons, not the least of which is some of these things are so complicated. They're not standard enough to trade on an exchange. But it is a start and something really does have to be done with derivatives.

SIMON: What are some of the reservations some people have on Wall Street? I don't mean anybody who robbed the American public blind, but honest traders and brokers.

NOCERA: Well, I mean derivatives do serve a useful purpose. There is nothing particularly wrong theoretically and much right theoretically with the ability to, you know, pass risk around to people who are better able to handle it. You know, Wall Street's always worried about all their competitors seeing what they're doing and so on and so forth. And Wall Street is always worried about regulation. I mean they kept Washington from regulating derivatives for a decade.

And now, you know, it has led us to disaster. You know, Wall Street, whether you're a good guy or bad guy, is scared of regulation and they don't want it. And they're going to have to accept it. And that's just the way it's going to have to be.

SIMON: Let me ask you about credit card bills though. White House and Congress are largely united in this legislative effort to bring down interest rates. Does this have any benefit on the economy?

NOCERA: Well, it's really hard to say. I mean, first of all, everybody knows somebody who has woken up one day, gotten a thing in the mail saying your interest rate has just gone to 33 percent, and by the way, your account is frozen. I mean it is infuriating when it happens. And not to give the banks too much credit, but you know, they are losing billions of dollars and they have to figure out some way to make it up. And they have been making it up on the backs of people who, you know, use their credit cards to borrow. They're still going to have to make up the billions of dollars, whether they are allowed to charge somebody 33 percent or not.

And you know, my fear is, you know, the way this is going to play out is that there will be rules - you know, you can only go to 19 to 20 percent, you can only put so much on for late fees and so on - but that the flipside is, you know, annual fees will go up for everybody, interest rates will go up for everybody, that - in other words, because they passed this bill doesn't necessarily mean that everybody's credit card bill is going to go down. It's almost surely going to have unintended effects that affect all of us.

SIMON: And I wonder: One concern I've heard expressed is that of course the legislation doesn't take effect for, I believe, another year. Will the credit card companies use that year to gouge people?

(Soundbite of laughter)

SIMON: I'm sorry. Right. And does Santa Claus come on Christmas Eve, right?

NOCERA: No, exactly. Is the pope Catholic?

(Soundbite of laughter)

SIMON: I believe, yes. The quick answer is yes. Chrysler is closing hundreds of dealerships. There's certainly a lot of heartbreak over that. But explain to me why Ford could wind up being the loser in the Chrysler bankruptcy?

NOCERA: Well, Chrysler and General Motors are both going to wind up bankrupt. And that means they're going to come out with different cost structures. And these dealerships, by the way, are extremely hard to eliminate outside of bankruptcy, because there are state laws and dealerships that are very powerful politically, and so on and so forth. So you almost need the bankruptcy code to void those contracts.

Ford, which is not going to go into bankruptcy, is still going to have a lot of debt that it'll have to pay back that Chrysler and General Motors will not have to pay back, because that'll get dealt with in the bankruptcy. They will still have a large dealership network that will be more difficult to unwind. And in general there's a likelihood they will have a higher cost structure.

I mean this actually happened in the airline industry, Scott, some years ago when, you know, United went into bankruptcy and then all the other airlines felt that they had to go into bankruptcy too so they could compete. And so, you know, Ford has made a strategic decision that it was good for them to stay out of bankruptcy. But you know, now that push is coming to shove, you just sort of have to wonder whether it will succeed or not.

Although keep in mind, the most important thing about the car companies is, will they make cars that people will want to drive? And you know, that actually matters more than any of these other factors.

SIMON: Joe Nocera writes the Talking Business column for The New York Times. Thanks so much.

Mr. NOCERA: Thank you, Scott.

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