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The Bad Debt of Tomorrow

By Matthew Yglesias on October 21, 2008 at 10:42 pm

"The Bad Debt of Tomorrow"

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Next up around the corner, it seems, will be a wave of credit card defaults which, like mortgages, have been packaged and securitized and God only knows if the risk models that the owners of the securities are workign from are actually any good. In light of recent events, one suspects the answer is no. Hilzoy has this interesting chart:

creditcardvwages.png

The basic credit card business model is pretty bizarre. With a mortgage, the bank lends out money. In exchange, they charge interest on the loan. There’s a risk of default, but the basic business model is that you’re hoping most of your customers pay their bills on time. With credit cards, though, you don’t make any money off people who pay their bills on time. You’re hoping your customers won’t pay what they owe you, thus letting you start tagging them with the high interest rates and sundry penalties. But of course you don’t want your customers to default either. It’s a delicate balance. But the risk with a delicate balance is that you fall off.

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