Have you been following the “Debt Trap” series in the New York Times? Lordie! A couple of days ago they told the story of one Diane McLeod, who despite a modest lifestyle managed to sink so deep in debt she’s being evicted from her little two-bedroom home. The unholy combination of a divorce, a couple of unexpected medical problems (does one ever expect to get sick?), a job loss, and a habit of shopping to allay depression saddled her with interest payments alone that exceeded 40% of her pre-tax pay
The conversations this harrowing story generated are clustered in the usual two camps: the All-Her-Own-Fault side and the Damn-Greedy-Capitalists side. One letter to the editor in the print edition cattily remarks that if McLeod would quit smoking (she was shown with a cigarette in her hand), she’d save $100 to $300 a month. Hello? You can be a supersophisticated Easterner and never have heard “the quality of mercy is not strained”?
Rapacious Lending Practices
The point is, though, that the lenders who got their claws into this naive and unhappy woman really did not care whether she ever paid her debts. Lenders today make their money by charging usurious interest, at rates that used to be felonious. A loan is not seen as something to be repaid, but as a long-term earning asset. Says the Times:
Though prevailing interest rates have fallen to the low single digits in recent years, for example, the rates that credit card issuers routinely charge even borrowers with good credit records have risen, to 19.1 percent last year from 17.7 percent in 2005 – a difference that adds billions of dollars in interest charges annually to credit card bills.
Average late fees rose to $35 in 2007 from less than $13 in 1994, and fees charged when customers exceed their credit limits more than doubled to $26 a month from $11, according to CardWeb, an online publisher of information on payment and credit cards.
Mortgage lenders similarly added or raised fees associated with borrowing to buy a home – like $75 e-mail charges, $100 document preparation costs and $70 courier fees – bringing the average to $700 a mortgage, according to the Department of Housing and Urban Development. These “junk fees” have risen 50 percent in recent years, said Michael A. Kratzer, president of FeeDisclosure.com, a Web site intended to help consumers reduce fees on mortgages.
A 17% interest rate is nothing other than usury. In my state, usury laws once limited the amount of interest a lender could charge to 11%-until big lenders’ lobbyists persuaded the federal government to override state usury regulations.
The issue is not that Ms. McLeod spent irresponsibly or diddles away money on her nicotine addiction. The point is that abrogation of laws and regulations that formerly protected consumers from unbridled greed is about to drive this country’s economy into the toilet, down the drain, and permanently out to sea.
The Big Picture
Again quoting the Times of July 20, 2008:
Today, Americans carry $2.56 trillion in consumer debt, up 22 percent since 2000 alone, according to the Federal Reserve Board. The average household’s credit card debt is $8,565, up almost 15 percent from 2000.
College debt has more than doubled since 1995. The average student emerges from college carrying $20,000 in educational debt.
Household debt, including mortgages and credit cards, represents 19 percent of household assets, according to the Fed, compared with 13 percent in 1980.
Even as this debt was mounting, incomes stagnated for many Americans. As a result, the percentage of disposable income that consumers must set aside to service their debt – a figure that includes monthly credit card payments, car loans, mortgage interest and principal – has risen to 14.5 percent from 11 percent just 15 years ago.
By contrast, the nation’s savings rate, which exceeded 8 percent of disposable income in 1968, stood at 0.4 percent at the end of the first quarter of this year, according to the Bureau of Economic Analysis.
More ominous, as Americans have dug themselves deeper into debt, the value of their assets has started to fall. Mortgage debt stood at $10.5 trillion at the end of last year, more than double the $4.8 trillion just seven years earlier, but home prices that were rising to support increasing levels of debt, like home equity lines of credit, are now dropping.
The combination of increased debt, falling asset prices and stagnant incomes does not threaten just imprudent borrowers. The entire economy has become vulnerable to the spending slowdown that results when consumers like Ms. McLeod hit the wall.
If you don’t think what happened to Russia can happen here, think again. Right now the world has one superpower with a (fading) supereconomy. It could very well end up with none, at least until China or the EU takes America’s place
And the Small Picture
As individuals in a megasovereignty run by entities with vast quantities of money, there’s little or nothing any of us can do about this, other than get out of debt and stay out of debt. I would suggest that far from being un-American, putting the brakes on your spending impulses and shucking off as much debt as you possibly can is the best thing you can do for your country. It may take us into some hard times, but a change in habits among consumers is about the only message that will get through to elected representatives who are supposed to speak for us, not for those who can purchase their attention.
On the individual level, avoid rapacious mortgages and watch your credit card spending carefully. If you agree with me that a credit card can be a useful tool, remember that every time you use it, you are entering into a deal with the Devil. Proceed accordingly
2 comments left on the iWeb site
!wanda
The graph on the NYT website depicting average savings vs. debts for all Americans really surprised me.Aside from a few years in the 1940’s, there has never been some mythical time when people were all prudent and frugal, making average savings exceed average debts.People are people, apparently; if you give them credit, they’ll use it.What’s changed in the past decade is how much credit people have been offered.
Why would lenders offer more and more credit to more and more people?One reason that lenders, particularly mortgage lenders, are repackaging loans and reselling them, so they don’t suffer the consequences if people default.By the time the loans were repackaged three or four times, no one knew what the real risks were.People were modeling risk based on historical models that weren’t accurate because people had never been offered such large loans before.The incentives for the financial companies were to encourage personal irresponsibility.
For individual people, I want to emphasize personal responsibility.After all, you’re the only one who can dig yourself out of your own debt, and people who take responsibility are generally more proactive about fixing their own problems.But, the financial system should also be changed to encourage more responsible lending.The system will partially fix itself- now we have better data on what people will do if you offer them dangerously large loans, and credit will tighten.We’ve begun to see this already.But there’s also a role here for regulatory changes.
Wednesday, July 23, 2008 – 11:03 A
Absolutely!
About regulation: We all could do without being treated like children by the federal government. However, it’s one thing when your own stupidity harms only you and your family; it’s another when mass stupidity and greed bring down the entire country’s economy. In “killing the beast,” the idealogues who acceded to power over the past two decades may have succeeded in killing America’s well-being. It is, in a word, inexcusable.
As more and more Americans retreat into enforced frugality, our economy will continue to suffer, because its operation has been based on a false perception of affluence. People have confused debt with buying power, with the predictable result.
Thursday, July 24, 2008 – 08:18 A