Indebted America keeps packing on the plastic
April 7, 2008
As much as you try to see beyond what is happening in this economy, as tempting as it is to strain and listen for the few remaining voices saying everything will be all right, common sense says it won't be.
Eight thousand American households are sliding into foreclosure every day. An estimated 1.2 million families now face losing their homes.
The national mood is dark and frightened. Ben Bernanke, the Federal Reserve Board chairman whose job it is to maintain a stable economy, actually warned last week that the situation is going to get worse. A new poll suggests America's confidence in public institutions has shriveled. Washington borrows endlessly to finance its needs.
So, evidently, does the American consumer.
With home equity turned to dust and cheap credit drying up, the cost of borrowing here is getting vicious. Increasingly, and once again with the encouragement of Wall Street, Americans are turning to the worst of all legalized options — the ooze of credit card borrowing.
In just the last three months of 2007, the amount Americans owed credit card companies surged by $20 billion, to a total of nearly $1 trillion.
A one-sided deal
For banks, this is an excellent development: Consumers willing to run up credit card debt must look like the last remaining herds of fattened cattle on an otherwise desolate prairie.
"Life takes Visa," customers are told in the sweet-sounding, pre-approved applications that fill American mailboxes every day.
But if anyone here still believes business won't operate in a predatory manner without proper regulation, the behaviour of American credit card companies pretty much ends the debate.
In the U.S., big banks own the credit cards and nearly all of them locate their credit divisions in the compliant states of Delaware and South Dakota. That is because neither state has anti-usury laws, effectively allowing loansharking.
"The credit card contract in the United States is a thing of amazement," says Ira Rheingold, director of the National Association of Consumer Advocates. "It is the only contract that exists where the powerful party can change the terms of that contract at any point and time for any reason."
And once the customer starts carrying a balance, which 58 per cent do, that's exactly what happens.
The banks routinely allow cardholders to exceed their credit "limits," then charge them punitive fees for having done so. When those fees bloat the monthly balance, the banks pile on more fees. There are fees for paying by phone. Fees for paying late. Fees for purchases in another currency.
Tony Soprano would die for this
Any violation of the incomprehensible, multi-page cardholder agreements — or even no violation at all, in some cases — can send the rate charged on the existing debt spiraling to levels that would make Tony Soprano jealous.
As one business writer recently put it, practices that would have been considered criminal a few years ago are now central to the credit card business model.
With the subprime mortgage fiasco unfolding and banks facing the consequences of their own unbridled greed from earlier in the decade, lenders are pouncing on every opportunity to milk a few more dollars from anyone who can still pay.
Take the case of Christy Mylar-Smith of Niagara Falls, N.Y. Over the past eight years, she and her husband ran up a $20,000 balance, which is not an unusual sum.
For most of that period, she was paying 12.99 per cent interest, meaning a nice profit for Citibank, which, after all, gets to borrow money from the U.S. Federal Reserve at 2.5 per cent.
But then last year, says Mylar-Smith, she was a day late paying for the second time. Suddenly Citibank wanted more. Much more.
"It went from 12.99 to 31.40, so my rate pretty much tripled," she says. That pushed her minimum payment from about $400 a month to $905 — $640.81 of which was interest.
Then there is Marvin Weatherspoon of Chicago. He put $12,000 worth of home repairs on his low-interest Bank of America card eight years ago. Since then, he says, the bank has raised his interest rate from 4.25 percent to 25 per cent. He has made $15,360 in payments. And he's only been able to reduce the debt by $800.
"It's madness," says Rheingold, the consumer advocate. "But we've lived with madness in this country for several years now."
In debt for life
Members of Congress, mainly Democrats, are beginning to realize that. They are drafting consumer protection bills and scheduling hearings to underscore the problem. But the credit card issuers still have powerful friends on Capitol Hill.
In 2005, at the behest of the banks, Republicans pushed through measures making it much harder to escape credit card debt by declaring personal bankruptcy. This debt now follows you for life, auctioned off from one collector to another.
Last month, Republicans on the financial services subcommittee effectively prevented a group of cardholders, including Christy Mylar-Smith and Marvin Weatherspoon, from testifying and telling their stories.
The Republican view is that people who contract legal debt must pay it, at the terms in their contracts.
That is a reasonable enough view, at least in theory.
But imagine what homeowners facing foreclosure and cardholders facing financial strangulation must think when they see Washington bailing out the big investment banks and their rich creditors with taxpayer money.
Imagine, also, what most Americans would think if they realized what the banks are doing with all their credit card debt.
It's being "securitized" — meaning that it is being packaged and resold on international financial markets, which is the same practice that led to the subprime disaster and its frightening global fallout.
Rheingold, who correctly predicted the subprime fiasco even before it began, has another prediction today: That Americans will start defaulting on credit card debt, too. And probably auto loans as well, which account for another $1 trillion or so of consumer debt.
(People here routinely finance car purchases with six-year loans and down payments that barely cover the sales tax, meaning they are "under water" on the loans as soon as they drive off the lot. Some dealers suggest you put some of the loan on, wait for it, your credit card.)
"Don't kid yourself," says Rheingold. "The way credit has developed in this country, we're in for a real tough time. We have lived for years on the basis of simply borrowing our way out of trouble. Well, we've seen what borrowing has done to this country right now. It's absurd, it's obscene, and at some point we are going to have to pay the price."
As noted, you try to see beyond what's happening here. But as much as you want it to turn out well, common sense keeps telling you it won't.
Good story and very scary indeed. There is a Frontline program called ďSecret History of the Credit CardĒ at this URL (http://www.pbs.org/wgbh/pages/frontline/shows/credit/) which goes over the credit card industry practices in the United States.
There has to be a balance between free markets and a controlled economy. I think free markets should have regulations and constraints where needed to prevent economic disasters. Hey didnít we have this lesson before? The S&L crisis of the 80ís was sort of similar to the sub prime crisis. Isnít it insane to do things the same way over again and expect a different result?
I think we have lessons in history of where we can place some of these regulations, but perhaps we lack the political will to have these in place. I guess if I could take huge risks to get rich and than get bailed out if things didnít pan out than I would do it too. Itís just simple economics because there is an incentive to do this it will be done.
– Mieszko Krych | Langley, B.C.