Legislation may not protect from consequences of risky behavior

By DAVID MOON, Moon Capital Management, LLC
January 24, 2010


Andrew McIntosh, a researcher at Australia’s University of South Wales, has determined that NFL football players sustain 25 percent more head injuries than the chaps who play rugby.

At first, this might seem strange, given that an NFL helmet is an eight pound protective enclave constructed of a polycarbonate alloy hard shell and inner protective air pockets. Dr. McIntosh reasons that the headgear creates a false sense of invincibility and actually encourages riskier behavior on the field.

It reminds me a lot of our financial system these days.

In February, certain provisions of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 will go into effect. It is full of supposedly protective measures, many of which you’re likely already aware. The most high-profile portions of this legislation pander to consumers by preventing them from entering into certain types of credit arrangements with lenders. Credit card companies will generally be prohibited from increasing rates during the first year after a card has been issued, rates can’t be increased on existing balances and companies will have to get a customer’s approval before charging fees for transactions that exceed a card’s credit limit.

I understand the rationale for those limits, although I personally find them silly. I always thought that two parties should be able to enter into about any contract they choose, as long as there is full disclosure and reciprocal consideration. These limits will likely result in unintended consequences, including raising rates and restricting credit to lower income borrowers.

Here is the most ridiculous attempt at legislating safety from the Act, however. A new rule will prevent lenders from issuing a credit card to a consumer who is less than 21 years old unless the consumer could make the required payment or obtain the guarantee of a parent or other co-signer.

So it is now going to be illegal to loan money to a minor unless the creditor reasonably believes the borrower will pay it back?

Shouldn’t they have always been doing that? Shouldn’t they do that regardless of the cardholder’s age?

But why should they?

We now have a system in which a number of banks have been declared “too big to fail,” implying that there are no real consequences for failed lending decisions.

We’ve given those bankers a helmet and the permission to plow it into brick walls. And it’s the taxpayers head in that helmet.

Risky behavior has consequences, and no amount of legislation can change that. Just like some plotters can shift the rewards of risk-taking to unworthy participants in the capitalistic system, we can also shift the negative consequences to folks who did nothing to deserve them. But the consequences remain.

If every time a dog approached an electric Invisible Fence the shock was instead received by a group of unknown, unseen dogs spread around the country, it wouldn’t do anything to change his behavior. The problem is our behavior, not our system.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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