Unsecured

Here's a story from today's paper — "Rising rates, prices squeeze borrowers":

Rising interest rates and higher gasoline prices are putting the squeeze on consumers' budgets, and many are finding it harder to keep up with their bills. …

An important measure of consumer financial distress, late payments on credit cards, ticked up in the first quarter, according to figures from the American Bankers Association. The Washington-based trade group said the percentage of bank cards 30 or more days past due increased to 4.40 percent in the January-March quarter from 4.27 percent in the final quarter of 2005.

The Federal Reserve's decision last week to raise short-term interest rates for the 17th consecutive time will boost yet again borrowing costs for consumers, likely prompting more delinquencies on credit card bills — as well as on auto loans and mortgages.

The slowing economy also is depressing income growth, so a greater percentage of take-home pay is going toward necessities and less is left over for debt payment. …

Catherine Williams, a credit expert with Money Management International, a Houston-based financial counseling and education agency, said rising costs for gasoline and utilities were only part of the explanation for rising credit card delinquencies and increased consumer financial stress.

"People refinanced [their mortgages] six months or a year ago, so the 'house bank' is empty," Williams said. "Most can't go back and tap their home equity again."

Everything in this story is true, except that it's true from only one side.

One-sided coverage is typical of stories in the "business" section of most newspapers. They will report endless stories about the health risks of some prescription drug, considering only how those health risks might harm the value of the pharmaceutical company's stock and whether or not it might be time to sell that stock.

The strange thing about stories involving credit cards and America's enormous, untenable level of credit-card debt, is that the business pages maintain this one-sided approach but, uncharacteristically, approach such stories exclusively from the other side, from the side of the consumer. They get so worked up tut-tutting about household finance that they forget their usual obsession and never consider what all this insurmountable debt means for the producers of it — the over-exposed credit-card banks and their shareholders.

Stories like the one above suggest that the lenders — the credit-card banks that flooded America with all of this unsecured, unresearched, pre-approved credit — are nothing more than forces of nature instead of human actors making choices and business decisions. The writers of such stories are extravagantly aware of the fact that the borrowers have made decisions, and will therefore have to live with the consequences. But it never seems to occur to them that the same is true for the lenders.

Usury is lucrative. It's also very risky. That's why it's so lucrative. The credit-card banks have deluded themselves (and their shareholders, and their puppets in Congress) that it's somehow possible to reap the rewards of usury without accepting any of the inherent risk.

One-sided stories that focus only on the borrowers help to feed this delusion. But it remains a delusion. And that delusion is the foundation of the entire credit-card industry.

It would be interesting to read the story above if it were written from the other side. The credit-card banks, that story would note, have extended billions of dollars of credit gambling that interest rates and energy costs would stay flat, gambling that wages would increase over time, gambling that their debtors would never face $3-a-gallon gas prices, and pretending — it's too fantastic an assumption to even call it a gamble — that those same debtors would have an infinite reservoir of home equity to tap into. They've lost all of those bets.

If this were a typical one-sided business story, it wouldn't be written for consumers, urging them to call their local credit counseling services. It would be written for investors, urging them to call their brokers and to sell, sell, sell! their stock in these credit-card banks.

  • Victor

    I believe that no matter what side of the fence we’re looking from, we’re all going to need to empathize with a little kindness if we don’t want The Lord and or The Aliens to balance this world of ours. I hear ya!
    There he goes again! (lol)

  • Stephen

    I lived in Korea at the end of the 1990′s, right when all those East Asian economies went south. The cause, of course, was poor lending practices.
    Korea was one of the first nations to work its way out of the slump. And that is because Pres. Kim Dae Jung called the CEO’s of the largest conglomerates and banks and told them what they were going to do, how they were going to change their business practices and the way in which they were going to work themselves – and the country – out of the mess they created.
    Kim Dae Jung had no authority to do that, except for the massive moral authority that he had earned as a tireless advocate for democracy. The CEOs listened, they took his advice.
    When the same happens to the USA, will there be anyone who is willing to take a stand? Or will our government do whatever is necessary to protect the interests of the corporations and the few at the top at the expense of everyone else?
    I guess I really didn’t need to ask the question.

  • a scientist

    The problem is we have so few people with such moral authority, and certainly no one in politics has such. All of our pols are so tight with big business that to speak out against excessive consumer lending would be political suicide. Jung has more balls than all three branches of our govt combined.
    Can anyone picture any American politi-scumbag taking such direct action in the face of any given corporation? Don’t make me laugh. That’d be like “Prostitute vs. Rich John”. I’d like to think there’ll be a positive outcome. Too bad the only thing you can count on is a massive tax-sponsored bailout of these banks when the feces hits the fan.

  • L

    Under the current administration’s spend-but-don’t-tax policies, it would unfortunately not be a tax-sponsored bailout. That would be distasteful, but it would at least be a relatively fiscally sound approach. It would be a public debt-sponsored bailout. In other words, in making good the banks’ losses the US government would be essentially transforming the bad consumer debt into T-bills, which will probably end up owned by (ironically, in view of the context provided by Stephen) East Asian creditors.

  • L

    Under the current administration’s spend-but-don’t-tax policies, it would unfortunately not be a tax-sponsored bailout. That would be distasteful, but it would at least be a relatively fiscally sound approach. It would be a public debt-sponsored bailout. In other words, in making good the banks’ losses the US government would be essentially transforming the bad consumer debt into T-bills, which will probably end up owned by (ironically, in view of the context provided by Stephen) East Asian creditors.

  • Eric V

    What we seem to forget here is that in the current regime of legal loan sharking that the US operates under the goal of the credit industry is to get people stuck in a permanent cycle of debt. In other words , they lend at a deceptively low initial rate to someone who can just barely get by with making the minimum payment , so that when the debtor misses or is late for a payment , then boom , the fine print goes into effect , the rate explodes , the fees get piled on and the poor sucker is dragged into the vortex of permanent debt – with the new bankruptcy law blocking the exit. So when you’ve got your debtors stuck in such a bind do you really care whether your loans get paid back ? No – not really because the money you get back in 20-30 % punitive rates plus fees will soon exceed the principal of the loan anyways.
    As Elizabeth and Amelia Warren pointed out in “The Two Income Trap” , the reason why the bankers of yore were much stricter in their lending practices was they were much more limited in the rates they could charge so in order to make a profit they had to make darn sure that the money lent would get paid back on time. As for today , well , the practices described in “The Two Income Trap” make the Mob leg breakers of yesteryear look like a bunch of bleeding heart softies.

  • Eric V

    What we seem to forget here is that in the current regime of legal loan sharking that the US operates under the goal of the credit industry is to get people stuck in a permanent cycle of debt. In other words , they lend at a deceptively low initial rate to someone who can just barely get by with making the minimum payment , so that when the debtor misses or is late for a payment , then boom , the fine print goes into effect , the rate explodes , the fees get piled on and the poor sucker is dragged into the vortex of permanent debt – with the new bankruptcy law blocking the exit. So when you’ve got your debtors stuck in such a bind do you really care whether your loans get paid back ? No – not really because the money you get back in 20-30 % punitive rates plus fees will soon exceed the principal of the loan anyways.
    As Elizabeth and Amelia Warren pointed out in “The Two Income Trap” , the reason why the bankers of yore were much stricter in their lending practices was they were much more limited in the rates they could charge so in order to make a profit they had to make darn sure that the money lent would get paid back on time. As for today , well , the practices described in “The Two Income Trap” make the Mob leg breakers of yesteryear look like a bunch of bleeding heart softies.

  • Zachary Drake

    I’m glad you hear you speaking out on this issue, Mr. Clark. I agree that these stories are often completely one-sided. Credit Cards are the crack cocaine of the masses. But don’t hold your breath for a “just say no to consumer credit” campaign. I agree with Stephen, a scientist, and L that it is unlikely our current crop of politicians will do anything to right this situation. The recent rewrite of the bankrupcy laws in favor of the credit card companies attests to this. It seems like class warfare is happening, and everyday folk are losing badly.
    I don’t know how to launch a massive public interest campaign on this issue when the government won’t help and powerful corporate interests are on the other side. I know there are some non-profit groups involved in this area, but is there a progressive advocacy structure for this issue the way there is for the environment (Sierra Club), civil rights (ACLU, Amnesty), and reproductive issues (Planned Parenthood)? This issue doesn’t get much play in the progressive blogosphere either. All the more reason I’m glad you’re bringing it up.

  • Zachary Drake

    I’m glad you hear you speaking out on this issue, Mr. Clark. I agree that these stories are often completely one-sided. Credit Cards are the crack cocaine of the masses. But don’t hold your breath for a “just say no to consumer credit” campaign. I agree with Stephen, a scientist, and L that it is unlikely our current crop of politicians will do anything to right this situation. The recent rewrite of the bankrupcy laws in favor of the credit card companies attests to this. It seems like class warfare is happening, and everyday folk are losing badly.
    I don’t know how to launch a massive public interest campaign on this issue when the government won’t help and powerful corporate interests are on the other side. I know there are some non-profit groups involved in this area, but is there a progressive advocacy structure for this issue the way there is for the environment (Sierra Club), civil rights (ACLU, Amnesty), and reproductive issues (Planned Parenthood)? This issue doesn’t get much play in the progressive blogosphere either. All the more reason I’m glad you’re bringing it up.

  • http://zdrake.blogspot.com/2006/07/credit-is-new-crack.html Internal Monologue

    Credit is the new crack

    Slacktivist has a post on an issue that ought to get more airing in the progressive blogosphere: the irresponsibility of credit card companies, and the worrying amount of consumer debt to which Americans are chaining themselves. I comment on his post…

  • bellatrys

    Credit Cards are the crack cocaine of the masses.
    Bullshit.
    That’s the conservatarian lie, that if only people were more responsible/less materialistic they’d live within their means. (Yes, Mr. Santorum, why don’t you show us how that’s done?)
    Try living on what *most* Americans make. At the end of each week – and I make 2x minimum wage, work full time – after putting aside what I need to pay my rent and utils – no cable, no A/C, all energy-efficient light bulbs here, dead-average rent for this city – I have about $50-60 per week to live on. Out of that, I try to put a little aside against emergencies. I’m making the same as I was making in 1995, when my rent was half what it is now, and gasoline 1/3.
    So what happens when there’s an emergency? A health one, a car breakdown? Well, I go without, but that only goes so far. I walked to work for a month because I couldn’t afford the repairs to my old car, one year; walked/biked to work for months a previous year when the older car died. (Bike got stolen, can’t afford to replace it.) Finally found a shop that would let me pay on time – the owner did so only *after* asking me “Don’t you have a credit card you can put it on?” Most family bankruptcies and much credit card debt comes about due to medical emergencies. For years, with no insurance, my health plan was “don’t get sick/don’t get hurt.” Fortunately I’m single and have no spouse or kids to worry about, but even cat vet bills add up. New clothes? Patch the old ones. Shoes fall apart? Put ‘em back together with tape, until you can save up the money.
    That’s how I do it, now, after I finally got out of the credit card debt trap where the overdue fees cost more each month than the payments, after I was out of work and looking for several months and used up all my savings to avoid getting evicted. But the only way was by help from wealthier [male] family members, because the bank wouldn’t give me a debt consolidation loan, despite having held a job, paid off my student loans, and lived in the same place then for three years, although they gave my job-bouncing serial-college-dropout brothers car, debt, and home loans no problemo.
    But again, I have no hungry kids to feed or clothe. If I did, I’d *have* to go into debt to take care of them.
    The crushing burden of credit card debt in this country is the result of systematically underpaying people, of refusing to pay living wages, so that the almighty gods CEO paycheck and Wall Street Profits can be subsidized.

  • bellatrys

    Credit Cards are the crack cocaine of the masses.
    Bullshit.
    That’s the conservatarian lie, that if only people were more responsible/less materialistic they’d live within their means. (Yes, Mr. Santorum, why don’t you show us how that’s done?)
    Try living on what *most* Americans make. At the end of each week – and I make 2x minimum wage, work full time – after putting aside what I need to pay my rent and utils – no cable, no A/C, all energy-efficient light bulbs here, dead-average rent for this city – I have about $50-60 per week to live on. Out of that, I try to put a little aside against emergencies. I’m making the same as I was making in 1995, when my rent was half what it is now, and gasoline 1/3.
    So what happens when there’s an emergency? A health one, a car breakdown? Well, I go without, but that only goes so far. I walked to work for a month because I couldn’t afford the repairs to my old car, one year; walked/biked to work for months a previous year when the older car died. (Bike got stolen, can’t afford to replace it.) Finally found a shop that would let me pay on time – the owner did so only *after* asking me “Don’t you have a credit card you can put it on?” Most family bankruptcies and much credit card debt comes about due to medical emergencies. For years, with no insurance, my health plan was “don’t get sick/don’t get hurt.” Fortunately I’m single and have no spouse or kids to worry about, but even cat vet bills add up. New clothes? Patch the old ones. Shoes fall apart? Put ‘em back together with tape, until you can save up the money.
    That’s how I do it, now, after I finally got out of the credit card debt trap where the overdue fees cost more each month than the payments, after I was out of work and looking for several months and used up all my savings to avoid getting evicted. But the only way was by help from wealthier [male] family members, because the bank wouldn’t give me a debt consolidation loan, despite having held a job, paid off my student loans, and lived in the same place then for three years, although they gave my job-bouncing serial-college-dropout brothers car, debt, and home loans no problemo.
    But again, I have no hungry kids to feed or clothe. If I did, I’d *have* to go into debt to take care of them.
    The crushing burden of credit card debt in this country is the result of systematically underpaying people, of refusing to pay living wages, so that the almighty gods CEO paycheck and Wall Street Profits can be subsidized.

  • cjmr

    I fail to see how crashing the stock values of the credit card banks solves the problem, though, Fred. Probably makes it much worse in the long run as many of the mutual funds, IRA’s, 401k’s, and what have you (if you’re lucky enough to have one) are heavily invested in the “Financial Services Industry”.

  • mecki

    I read part of a speech given by a longtime reporter the other day (I forget where I found it, or I’d add a link) The comment that struck me was the fact that, when he started in the newspaper business, the papers aimed for 100% market penetration. They aimed for everyone. Now? They aim for the top 2 quintiles. That means that the interests of the rich and stock-owning will always be more important than the unwashed masses. And that’s exactly why these articles are written with such a viewpoint.
    Dunno how to change it, though. How much news does the average poor person consume? How much time do they have to do so? I don’t know.

  • madjoey

    Usury is lucrative.
    “Usury” is one of the most euphonious words evah. Reminds me of a conversation I had with a Japanese friend:
    “Shin, are you going to travel this Golden Week?”
    “Usury we go to Hokkaido, but this year we’ll stay in Tokyo.”

  • madjoey

    Usury is lucrative.
    “Usury” is one of the most euphonious words evah. Reminds me of a conversation I had with a Japanese friend:
    “Shin, are you going to travel this Golden Week?”
    “Usury we go to Hokkaido, but this year we’ll stay in Tokyo.”

  • Zachary Drake

    Bullshit.
    That’s the conservatarian lie, that if only people were more responsible/less materialistic they’d live within their means.
    OK, bellatrys, perhaps “crack for the masses” was a bad analogy. I totally agree that American society is being pushed in a direction where the earning power of working people is being constantly eroded, and in order to maintain health, safety, and what we consider a minimal standard of living people often have no choice but to resort to the use of consumer credit, whose purveyors are ever ready to exploit your financial distress for their own gain. I agree that this squeeze is delibrately fostered by Republican policies in order to enrich their already wealthy constituents. And I agree that sexist differences in pay and access to good loans and other financial intruments contribute to this crunch for women. Addressing the fundamental issues of economic unfairness in our society is far more important than admomishing people about the dangers of credit.
    However, I don’t think the analogy to addictive drugs is completely off-base. I am aware of people, men and women, who make $60,000-$95,000 a year and STILL have trouble with Credit Card debt and too much consumer spending. These are folks who despite the problems in our society are doing quite well economically, or could be doing quite well if it were not for the debt trap that credit cards laid out for them oh-so-enticingly. So instead of saying “credit cards are the crack cocaine of the masses” I should perhaps say, “credit cards are a dangerous trap for many people.” Or “Credit cards are a way for corporations to profit off your financial distress, whether induced by genuine emergency or wasteful over-spending.”
    Even though I think much of the fault for this crushing debt burden lies with those who made the policies that foster it, I still think we need to warn individual people about the dangers of credit card debt. People need to learn when it is appropriate to use it (e.g. pay for necessary medicine) and when it is not appropriate (e.g. get a larger television than one can afford). In some ways I agree with you that the myth of over-spending is a conservatist lie designed to cover exploitative policies, but for some people I know it is in fact a huge problem. But that should not in anyway let credit card companies or the Republicans who carry their water (and foster the conditions in which credit is so necessary) off the hook for their destructive actions.

  • burritoboy

    “It would be written for investors, urging them to call their brokers and to sell, sell, sell! their stock in these credit-card banks.”
    No, you would sell short the stocks of the credit-card banks, OR buy naked credit default swaps (credit default swaps: the debt goes bad, you get money) on their debt. The reality of the situation though is that a lot of this debt is no longer sitting on the books of the issuing creditor – it was packaged into a collateralized instrument with lots of other credits and sold to various institutions (hedge funds, mutual funds, other banks, pension funds, insurers, etcetcetc). Now, one can argue that these insitutions are making a mistake, but they’re surely the best players in the system to be able to analyze these instruments (if they’re not, it’s not precisely anybody else’s fault they didn’t want to to pay to hire a good credit research department).

  • burritoboy

    “It would be written for investors, urging them to call their brokers and to sell, sell, sell! their stock in these credit-card banks.”
    No, you would sell short the stocks of the credit-card banks, OR buy naked credit default swaps (credit default swaps: the debt goes bad, you get money) on their debt. The reality of the situation though is that a lot of this debt is no longer sitting on the books of the issuing creditor – it was packaged into a collateralized instrument with lots of other credits and sold to various institutions (hedge funds, mutual funds, other banks, pension funds, insurers, etcetcetc). Now, one can argue that these insitutions are making a mistake, but they’re surely the best players in the system to be able to analyze these instruments (if they’re not, it’s not precisely anybody else’s fault they didn’t want to to pay to hire a good credit research department).

  • gordo

    Between the inevitability of Peak Oil and the Social Darwinism of the (then)upcoming Bankruptcy Bill (Thank you, Dem senators who supported it), I chose to get out from under my debt in 2005. I feel no remorse and don’t intend to do so in the near future. I have had no increase in pay in two and a half years while watching the price of oil (and consequently almost everything else) rapidly increase in that same time period and I hold no hope that anything is going to get better. The housing bubble is on the verge of bursting and with it will go the last substancial source of purchasing power many Americans had available.
    If it were prior to the passage of the Bankruptcy Bill, I would urge everyone to get rid of your credit card debt and learn to live on what you make. It was the best decision I have made in many years.

  • Duane

    If it were prior to the passage of the Bankruptcy Bill, I would urge everyone to get rid of your credit card debt and learn to live on what you make. It was the best decision I have made in many years.
    Can I send it to you so you can do that “gordo magic” and make it go away?

  • bulbul

    I would urge everyone to get rid of your credit card debt and learn to live on what you make.
    Hooray for Captain Obvious!

  • bulbul

    I would urge everyone to get rid of your credit card debt and learn to live on what you make.
    Hooray for Captain Obvious!

  • Helen of Troy

    I would urge everyone to get rid of your credit card debt and learn to live on what you make.
    A good friend of mine lost his job when his employer went out of business. He therefore lost his health insurance totally- COBRA doesn’t apply when there is no original employer’s insurance. My friend applied for insurance asap, but the process takes weeks. He also almost immediately got a new job, but the new company insurance didn’t kick in for the first month.
    During the gap, he got hit (not his fault), causing extensive broken bones in his face. $10,000 worth of broken bones. If he had insurance, it would have been less. But, as I’m sure you know, the uninsured pay the highest hospital prices.
    Do you have $10,000 quickly available, without dipping into retirement accounts? Do most people?
    The hospital did negotiate- slightly- saying that if he paid $5,000 right away, then he’d only owe another $3,000 on installment.
    Do you have $5,000 quickly available? Do most people?
    To save $2,000 my friend put the $5,000 on a credit card. He paid it off along with the other $3,000.
    But if the injury had been just a bit worse he’d have owed far more than $10,000, *and* he wouldn’t have been able to work.
    50% of bankrupcies are due to medical payments. Here, asking people to “live on what they make” could easily mean “die on what you make.”

  • Zachary Drake

    I think what we’re finding in this thread is that a lot of huge problems in our society (inequality of wealth, lack of healthcare) end up manifesting themselves as debt problems, because we go into credit card debt as a way of correcting the larger systemic problem when it impacts us. So when we see a rise in credit card debt, it may mean not that people are being irresponsible, but that more people are without insurance. You have to dig into the data a bit more to find out what’s really the root cause of this increased debt load. I would agree that wealth inequality and health care emergencies are probably the largest factors, but I suspect that there are some “cultural” issues lurking in there, too: individual responsibility issues, and more importantly a cavalier attitude towards consumer debt fostered by the companies that profit from it.

  • Holden Lewis

    Here’s the speech that Mecki mentioned, by Tom Stites. I highly recommend it.

  • Holden Lewis

    Here’s the speech that Mecki mentioned, by Tom Stites. I highly recommend it.

  • Duane

    Here, asking people to “live on what they make” could easily mean “die on what you make.”
    If you aren’t willing to sell your daughter into prostitution or your son into indentured servanthood, then you deserve to die! After all, underaged prostitution and indentured servanthood are two of the most traditional forms of debt repayment, right Scott?

  • ajay

    Helen: this is why a sensible “reduce/avoid debt” plan will include “stop living in the US and go somewhere with national health care instead”. Try Canada, if you can.

  • wintermute

    > After all, underaged prostitution and indentured servanthood are two of the most traditional forms of debt repayment, right Scott?
    You know, it’s not nice to put words in other people’s mouths.
    Scott has already made it clear that being expected to repay debts is evil. Probably because it leads to people actually lending money to people without collateral. Which, in turn, gives people without property (and therefore, without rights) the chance to pull themselves up by their bootstraps instead of just dying in the gutter like good little Untemensch.

  • Skyknight

    {sweatdrop} You’re sure THAT’S not putting words in Scott’s mouth? I’ll grant that he’s a bit of a misanthrope, but I think it stems more from sloth than elitism/pride on his part…

  • wintermute

    Scott has said that it’s immoral for creditors to ask for their money back, and that it should be up to the concience of the individual debtor to decide if they want to repay or not, and that people should only loan money to people they’re absolutely sure will voluntarily choose to (and can afford to) repay the loan.
    He has said (repeatedly – it pretty much counts as his core mantra) that the only rights that exist are property rights. I can’t think of a way to interpret that that doesn’t lead inescapably to the conclusion that having no possessions is equivilent to having no rights.
    Other than that, I engaged in a little hyperbole to illustrate what seems to me to be a direct consequence of that position, and of the type of morality needed to believe that’s a desirable outcome.
    Everything following the word “probably”, with the exception of the parenthical, was intened to be satirical commentary rather than reportage.

  • Duane

    I was somply referencing Scott’s recent post on the traditional value of the harem.
    As far as Scott’s actual position on debt repayment, who really cares?

  • Duane

    I was somply referencing Scott’s recent post on the traditional value of the harem.
    As far as Scott’s actual position on debt repayment, who really cares?

  • A Texan in Bavaria

    Credit cards ARE the crack of the masses, even if a lot of the debt is being accumulated to pay for utterly necessarily things. They help the otherwise-responsible masses forget that there’s a gap between what they earn and what healthcare, basic transportation and keeping one’s house warm costs. They help placate the masses, whether it be with spiffy consumer goods or with healthcare that doesn’t involve hunger.
    Without credit that, once initially secured, can be accessed quite anonymously and quickly, a lot more people would stop and say, “hey! what’s going on here?,” rather than slowly slipping into a position they feel there is no recovery from.


CLOSE | X

HIDE | X