WASHINGTON - Bankers must use caution when expanding their customers' credit card limits, Federal Reserve Board Gov. Lawrence B. Lindsey said Tuesday.
"I'm just urging a little bit of a yellow light," Mr. Lindsey said during the question-and-answer part of a National Economists Club meeting at the Library of Congress.
Lenders must fight the temptation to "push the envelope" by expanding credit now on the expectation that the industry could reduce limits later, he said.
"Even if such a practice is considered acceptable from a business point of view, I can assure you the industry will encounter political problems if it attempts such a practice in any wide-scale way during the next cyclical downturn," he said.
The governor then proceeded to act out an exchange between a lawmaker and a recently unemployed consumer who had his credit reduced right when he needed it to buy medicine. Who would want to be the credit card company officer who had to testify next, he asked?
"We should bear in mind that there is a social cost to inappropriate credit extension as well as the economic cost," Mr. Lindsey said. "While the democratization of credit is on balance a good thing, lenders do have a responsibility to honestly assess the capacity of the borrower to repay the loan, and to take prudent risks."
Mr. Lindsey, during his wide-ranging talk on consumer spending, also suggested that it may be time to ease restrictions on pension and retirement account withdrawals.
"I certainly think that is a policy option policymakers should keep in their hip pocket," he said.
Allowing these withdrawals, especially during economic downturns, would allow the government to boost spending with little cost, he said.
On the credit card limit issue, he said bankers must accept the monetary implications of having "the credit card limit" as the primary constraint on consumer spending.
"To the extent that is the case, the willingness of the industry to extend credit in ever-greater quantities will determine in a major way the duration of the current consumer spending binge, the extent to which consumers become overextended, and therefore the depth of the next macroeconomics downturn," he said.
Mr. Lindsey explicitly rejected having the Fed pressure banks to change their ways.
"I'm a little skeptical about teeth," Mr. Lindsey said. "Teeth all bite at once."