The Mess
Nationwide, two million homes sit vacant. Home sales are at a nine-year low.
Former Treasury Secretary Larry Summers says that housing finance has not been
this bad since the Depression. We still don’t know the full extent of the
colossal subprime rip-off, but a recent Bank of America study did some
guesstimating on the scale of the consequences of the “credit crisis.” The
meltdown in the U.S. subprime real estate market, the bank said, had led to a
global loss of $7.7 trillion dollars in stock market value since October.
While many eyes are focusing on the housing meltdown and its hugely negative
effect on an economy clearly moving into recession, few are paying attention to
the next bubble expected to burst: credit cards. Combined with the subprime
losses, such a credit card nightmare has the potential, experts say, of bringing
down the entire financial system and global economy. You and your credit card
have become key players in the highly unstable financial crunch. Mortgage lender
cupidity and bank credit card greed wedded to financial institution deregulation
supported by both political parties, have been made manifestly worse by Bush
administration support-the-rich policies. It has brought us to a brink not seen
since just before the Great Depression.
While campaigning in Edinburg, Texas, in February, Barack Obama met with
students at the University of Texas-Pan American. “Just be careful about those
credit cards, all right? Don’t eat out as much,” he said. After the foreclosure
crisis, he warned, “the credit cards are next in line.”
The coupling of home equity debt and credit card debt has gone hand in glove
for years. The homeowners at risk can no longer use their homes as ATM machines,
thanks to their prior re-financings and equity loans, often used in the past to
pay off their credit cards. Indeed, homeowners cashed out $1.2 trillion from
their home equity from 2002 to 2007 to pay down credit card debts and to cover
other costs of living, according to the public policy research organization
Demos.
To compound the problem, fewer people are paying their credit card bills on
time. And, to flip the old paradigm, more are using high-interest credit card
cash to pay at least part of their mortgages instead of the other way around.
How bad is it?
• Financial analysts say that in the U.S. alone more than $850 billion in
unpaid credit card balances is at stake and fast approaching $1 trillion,
roughly the same amount as in the subprime market.
• CNN reports that worldwide, consumers have racked up more than $2.2
trillion in purchases and cash advances on major credit cards in just the last
year.
• The unpaid debt portion of this is continuing to pile up, with U.S.
consumers last year adding $68 billion against their credit lines, boosting
credit card debt by 7.8 percent, the largest increase in seven years, just when
the last recession was beginning.
• Even as they spent, consumers have been going into default at a stunning
rate. The percentage of people delinquent on their credit cards is soaring, and
credit card companies are now writing off somewhere near 5 percent of payments.
• By last fall, the major banks were setting aside billions for loan-loss
reserves while anticipating an increase of 20 percent in non-payments over the
next two to four quarters.
• Capital One, one of the biggest credit card banks, was forced to write off
$1.9 billion in bad debt just in the last quarter of 2007.
•By October, according to a survey of only the leading credit card banks by
the Associated Press, the value of credit card accounts at least 30 days late
was up 26% from the previous year, to $17.3 billion. Serious delinquencies among
some of the biggest lenders rose by 50 percent or more in the value of accounts
that were at least 90 days delinquent.
• Making matters worse, or more widespread throughout the economy, just as
with mortgage debt, credit card debt is put into pools that are then resold to
investment houses, other banks and institutional investors. About 45 percent of
the nation’s $900-plus billion in credit card debt has been packaged into these
pools, and so many companies, not just a few, are at risk of being forced out of
business by credit card debt write-offs.
What this adds up to, and what Obama didn’t say, is that we are actually face
to face with the results of the most massive failure of our political and
economic system since the Depression. Since Ronald Reagan, we have been living
in an era in which neither the meltdown of the savings and loan banks in the
1980s nor the Enron-like scandals of the Bush years has stopped the relentless
advancement and protection by both parties of the ability of financial
institutions to make a buck at any cost to the social good and economic fabric.
Which is what you get, of course, when both parties are so dependent on massive
financial contributions to get their candidates into office and when the
corporate media, heavy with advertising from the FIRE sector – Finance,
Insurance and Real Estate – doesn’t warn the public or investigate the egregious
fudging, misrepresentation and outright fraud that underpins the subprime and
looming credit card crisis.
Priceless!
The credit card industry (Visa, MasterCard, American Express, etc.) and the
10 banks that dominate the industry as the primary card issuers spend an
estimated $2 billion a year in endless marketing worldwide. We are all bombarded
with their solicitations and sales tie-ins and gimmicks. They know that they
might only have a 2-3 percent return rate, but that more than pays the enormous
costs. They have thus succeeded in supplying 1.5 billion cards to 158 million
U.S. card holders. That averages to 10 cards per person. In the last few years,
retailers, banks, a wide range of companies, sports teams, unions and even
universities have launched specialized card programs. Like the car companies
that discovered that they made more money on car loans than automobiles, the
benefits of what’s been called “financialization” is obvious to more business
sectors.
Credit card advertising for new card holders is especially effective now as
inflation drives costs up and consumers have less to spend. “Charging it” on yet
another new credit card is for many the only option to meet their budgets or
maintain their lifestyles, especially as gas prices rise. It’s become habit for
many to spend more than they have. As a result, overall U.S. credit card debt
grew by 435% from 2002 to year-end 2007, from $211 billion to approximately $915
billion.
The relentless, continuing push by the credit card banks doesn’t target
potential customers alone. Constant focus group studies and other research
techniques are still being used to persuade retailers to encourage more credit
card transactions. Increasingly, businesses simplify their use by “swiping” and
other gimmicks, no signed receipt needed.
“More and more sectors of the American economy recognize that their financial
success is based on the success of the credit card industry,” explains Robert
Manning, the author of the definitive Credit Card Nation and a leading expert
who has been sounding the alarm about the consequences of credit card debt.
“Everything is very clearly thought out and premeditated. Whether it’s having
conferences and think tank sessions about how to encourage people to accept more
debt [or] to work with merchants – for example, to persuade merchants with
empirical information that ... if they use a credit card that they’ll buy 20-25
percent more.”
Manning notes that saving and thrift was historically a positive value in the
U.S. As recently as the l980s, the national savings rate was 10 to 11 percent.
Since 2005, Americans have saved less than 1 percent of their disposable
incomes. In fact, the most recent figures from March show that the savings rate
is negative, below zero. And also in March the government reported that for the
first time since the Depression, Americans owe more on their ≠homes than they
have in equity. Essentially, on average, America is broke and its credit cards
played a dominant role in getting there.
Manning, who teaches at Rochester Institute of Technology, has taken on the
issue with original research and financial literacy courses for students. He
found that many of his students already had credit cards before they arrived on
campus, some for years.
As we all know, the companies don’t tell about the downside when they are
seducing customers. They offer low introductory or teaser rates, in the same way
that mortgage brokers enticed sub-prime customers. They offer rewards, frequent
flyer miles and other prizes. Students are especially targeted because they have
little real-world financial experience. The U.S. Public Interest Research Group,
which is campaigning against student debt, says the average is $4,000 per
student, but it easily climbs after four years to $15,000 to $20,000.
All of this, in our globalized world, is not unique. Clear across the world
and down under, the New Zealand Union of Students’ Associations (NZUSA) and bank
workers’ union Finsec are joining forces to try and keep students out of
high-interest debt. The amount students owe on credit cards has increased by 32
percent since 2004, according to the NZUSA Income and Expenditure Survey. Credit
card debt has increased at a higher rate than low to no interest overdrafts.
Here in the U.S., one mother, Joan E. Lisante, has set up a website targeted
at other parents, www.consumeraffairs.com, so they can tell their stories. She
wrote recently about what she calls the “plastic prison.”
“My 22-year-old son Jon, a college senior, got 52 credit card offers in the
last year. I know this because, like a CIA operative, I intercepted the offers
pouring into our mailbox.
“He got 19 from Capitol One, 13 from Providian, six from Washington Mutual,
four from Chase, four from eBay and one each from an assortment of lenders
ranging from PayPal to First Premier Bank in Sioux Falls, South Dakota
(co-capital with “Small Wonder” Delaware of the credit card kingdom).
“Most begged Jon to rip open the envelope and wallow in instant
gratification. Capital One, the most persistent suitor, shouted, ‘Offer Status:
Confirmed. No Annual Fee!’
“‘16 Card Designs’ (but none that tally the total whenever you use it). You
could get a response in as little as 60 SECONDS when you apply online.
“Now this kid has never held a job (yet) for more than one summer. He spent
one summer working in the FEMA flood insurance call center, which shows how much
expertise you need to work there. Although he is familiar with the inner
workings of Blockbusters and Starbucks, Jon’s not yet a member of any corporate
elite, prestigious profession or skilled craftsman’s guild. Does this matter?
Apparently not.”
“The key for the banks,” Manning says, “is to get them dependent upon
consumer credit, shape their attitudes towards savings, consumption and debt and
to then multiply the number of financial products that they’re buying from that
particular bank so the credit card will lead to the student loan, to the car
loan, eventually to a home mortgage and then maybe some insurance products and
investment opportunity.
The banks, he says, want students in a condition of dependency. “Young people
today that see credit as a social entitlement have no understanding of what it
is going to entail to repay those loans back. Once they’re used to living on
borrowed money, then the banks realize that they’ll be following that pattern
possibly for the rest of their lives. By the time they graduate they’re so
indebted, and they’re so dependent upon the use of credit and debt, that it’s
already presaged their future. They can’t possibly pursue the kinds of careers
that they anticipated.”
Defaults on student loans are climbing. Many students used those loans to pay
off credit cards. Military recruiters are now promising to pay off debts to
entice enlistments. Other government agencies are also offering funds as part of
their head-hunting.
Rise Up
“Many of you have probably forgotten that the American Revolution was largely
driven by the great American planners, that were heavily in debt to European
banks and they had very onerous terms,” Manning said in a lecture I attended
when I was making my film In Debt We Trust. “And they recognized that they could
not financially prosper under such outrageous financial demands.”
On the day I visted Manning’s lecture in an alcove literally right next door
to the lecture room in the student center, local branches of banks like Chase
and HSBC were signing up students for checking accounts and credit cards.
Freshmen lined up at the tables to set up accounts. The banks had permission
from the same school administration that hires Manning to counsel students to
avoid getting into debt.
I listened in at the pitches.
BANK REP: “You don’t need anything for deposit, and we’re giving out free
backpacks.”
BANK REP: “You get zero percent on the purchases for the first six months and
then it goes to the standard intrest rate.”
QUESTION: “What’s the interest rate?”
BANK OF AMERICA REP: “The interest rate is variable ... to be honest with
you, off-hand, I don’t know the interest rate off-hand. Sorry.”
A student is counting out twenties as his first deposit.
BANK REP: “I just need your signature. Right here, please.”
ANOTHER BANK REP: “And it’s free while they’re a student.”
What will happen when they do have to pay it back includes nonstop calls to
them and their parents. Credit card collection agencies know how to harass,
threaten and then sweet-talk cardholders who are late. They even have a term for
people squeezed by debt: “sweatbox.” They also know that the longer the debt
goes unpaid, the larger the potential profit for companies, as interest builds
up at rates of up to 30 percent. Credit card promoters call people who only pay
minimums “revolvers.” Those of us who pay our bills in full? “Deadbeats.”
Recently the companies unilaterally hiked late fees and penalties that
compound the debt. A few missing payments can earn you an interest rate hike to
29 to 30 percent. If you are late with a payment on some other debt not related
to your credit card, you can readily find your interest fee doubled on your
credit card. Some companies make more on fees and penalties than on interest
payments. The companies racked up more than $17 billion in 2006, the last year
for which records are available.
Like many of the homeowners who accepted subprime mortgages, and like you
with your credit cards, youths and adults alike signed dense agreements that are
largely unreadable. The credit card banks constantly update these with those
small print notices with which you get assaulted in the mail, these drafted by
risk-minimizing lawyers. Of course, it’s unlikely you bother to read these. In
part of the unread text, the companies give themselves the right to unilaterally
change the deal even after it is signed. Other small print insures that
consumers cannot sue them over differences. All grievances have to be arbitrated
in a process the companies created and control.
Even the Federal Reserve Bank condemns some of these practices, noting:
“Although profitability for the large credit card banks has risen and fallen
over the years, credit card earnings have been consistently higher than returns
on all commercial bank activities.”
The Failure Trifecta
Track the subprime and credit card mess back, and you will find its origins
in free market policies since Reagan that deregulated banking and much of the
oversight that managed for years to keep the greed-meisters on Wall Street in
check. The failure of media-lionized Alan Greenspan’s Federal Reserve Bank to
pay attention to predatory lenders and sub-prime schemers allowed them to
prosper.
Add to these failures a complicit Congress, with Democrats and Republicans
alike dependent on donations from the three leaders of the FIRE economy. To
assure their freedom to run their businesses their own damn way, the banks in
the 1990s persuaded Congress to deregulate the practices of financial service
companies. Pro-business Court decisions have allowed them to base their
operations in low-tax states like South Dakota and Delaware and to end consumer
protections against usury.
This decade, Bush’s tax cuts and his bankruptcy “reform” bill strengthening
the power of credit card companies were passed with bipartisan support,
including that of Senator Dianne Feinstein. Add major media amnesia to this list
and you get a trifecta of failure. The New York Times admitted that advocates
warned them that a rise in predatory lending was destroying poor communities in
2001, but they sat on the story for nearly six years.
Neither the politicians nor the media told us that every major brand name
banking firm and investment house had its fingers in the juicy pie of pedaling
mortgage-backed securities worldwide without disclosing that many of these
mortgages were deliberately offloaded on people whom they knew could not afford
to pay them. As with the credit card industry, these mortgage borrowers were
cleverly given “teaser rates” that would soon reset upwards. The banks then
resold the mortgages as “asset-backed paper” even though the assets’ value was
so questionable.
Meanwhile, media outlets took in hundreds of millions in ad revenues from
deceptive lenders and credit card banks encouraging Americans to shop and charge
till we drop. The Super Bowl broadcast ran all those cool but misleading ads by
credit card companies and mortgage hustlers. It was, um, “priceless.”
Notes scholar Lionel Tiger: “Those who have been operating the managerial
levers of the financial system have failed embarrassingly and massively to
comprehend the processes for which they are responsible. They have loaned money
avidly and recklessly to people who couldn’t pay it back.
“They fudged data to get loans approved and recalculated. Then they sausaged
fragile figments of money reality into new ‘products’ which could be sold around
the world to investors eager to enjoy the surprising returns which often
accompany theft, managerial incompetence and fraud. When it comes to
responsibility for all this, there appears to be no one here but us spring
chickens.”
Danny Schechter blogs for Mediachannel.org. His film
In Debt We Trust spawned the action website StopTheSqueeze.org. He’s written a
new book on the crisis called PLUNDER: An Investigation Into Our Economic
Calamity. Dissector@mediachannel.org.
