Financial Life and Death--and Something in Between
The Brits, in their understated way, are on the fast track to revolutionizing the relationship between the debtor and the creditor. Legally speaking, we have had a two-choice world--make payments as they are due or file for the protection of a bankruptcy court. With no public fanfare, the British Ministry of Justice announced a plan for debtors to stop making payments on credit cards for up to a year if they had a change in circumstances, such as a job loss or divorce. In Britain, there may now be a place between financial life and death.
So far, there are no reports of mass heart attacks by lenders, no threats to halt all consumer lending, and no repeal of the law of gravity.
Britain is considering a legally-protected space between regular repayment and bankruptcy--a cessation in payments based on changed circumstances. During the time the debtor has the one-year stay in effect, interest will accrue, but not at penalty rates. The debtor will have to show that he/she will be likely to resume payments at the end of the year. There is some court intervention and some fact finding, but because there is no discharge, the intensity of the inquiry may be considerably less than there might be in a typical bankruptcy.
This is a not-quite-bankrupt state. It's worth noting that even the tests for qualifying for the program match the reasons for filing bankruptcy. (Job loss, medical problems and family break up are involved in 90% of US bankruptcies.)
The British plan raises some interesting empirical questions: If debtors have a not-quite-bankrupt option, will total payments go up? If they can suspend payments, but not get hit with ruinous penalty fees and penalty rates of interest, can they eventually pay off their credit cards? If they can quit paying for a while, will they be able to stay current on home mortgages and car loans?
To ask these questions is a reminder that the world we often describe as debtor versus creditor is, in fact, often creditor versus creditor. Suspension of payment to one group of creditors may help another. In fact, it may mean more payments for everyone.
If the British give consumers this option, the debt paradigm around the world shifts just a little. No longer will Americans be leading the way on how to think about financial death and rebirth. Instead, the new paradigm may be to think about how to help a debtor avoid bankruptcy altogether by finding a that's somewhere between financial life and death.
Actually, the Brit's plan seems to be an attempt to help the City banks who packaged credit card debt and sold it off to investors, our pension funds among others.
Many of those banks are on the hook to the investors if the credit card holders go into default too quickly. Then, the banks may have to buy the bonds back. And too, until the banks who administer these trusts/bonds actually sue and get judgments against defaulting credit card holders, the banks are responsible for paying the interest on those bonds out of their own money.
The government plan will avoid both eventualities since defaulting credit card holders will, technically, no longer be in "default" under the terms of the bond or trust. A win-win for the banks.
January 17, 2008 6:09 PM | Reply | Permalink
You can always tell who the phonies are on TPMC, by their supply-side talking points and propensity to habitually rate each other up.
January 17, 2008 10:35 PM | Reply | Permalink
Huh? What is "supply-side" about this comment? Isn't it possible this idea is something both the City and consumers wanted?
January 18, 2008 1:45 AM | Reply | Permalink
kozmik is back to his original obnoxious persona of about 6 months ago. Which is too bad because his comments for the last 3 months or so, while abrasive, provided a useful alternative viewpoint. Now he has decided that anyone who disagrees with his ex cathedra pronouncements is a Republican troll. And as with his response to Ellen it is a bit bizarre because most of the comments he is so classifying are over to the left of the progressive side of the political-economic spectrum.
sPh
January 18, 2008 4:42 AM | Reply | Permalink
lol. You've been rating stalking me for a long time. So spare me the bad acting.
The notion Ellen is to the left or a progressive, that's really hilarious. And you are too I suppose?
January 18, 2008 11:12 AM | Reply | Permalink
There are always two aspects to supply side:
1) The economic argument of trickle down.
2) The psychological argument that the system is so hopelessly rigged that people shouldn't even bother thinking about politcal and economic change but should keep their head down and hope for a little trickle down.
Ellen and several of the posters at TPMC who rate her up, closet Republicans and DLC types, who she also rates up, promote both of those. Above she's implying #2. I have yet to see Ellen and the people who uprate her make comments for issue advocacy or positive change.
The reality is it's very possible to get national economic relief, protections, and jobs growth, and with political power.
Also, in this particular case, legislated consumer protections are the last thing banks want. If they actually need it, it shows how weakened they are, illustrating how badly we've allowed these chiselers to erode the structure of the global economy risking global collapse.
For example, look at the New Deal and the following decades of Progressive legislature, which contributed to the greatest egalitarianism and prosperity the US has ever seen. It came after another gilded age of institutionalized greed eroding the economy to the point of collapse. There are many parallels now.
***
Regardless, the UK, Europe, Japan and such are fundamentally far better of than Americans right now.
They continually protect their national economies, working class, and industries, becasue they have strong labor unions, high voter participation, and high degree of political awareness and activism. In a global recession they still have factories, more populist monetary policies, and cash under the mattress.
Americans have low voter turnout, gutted labor and working class protections, service jobs, and credit card debt. Thanks to supply side economics and "free trade" moving labor over seas, we're really screwed in a global recession.
Meanwhile it was just in the news that US banks are being bought up by foreign investors mostly coming from places like the M.E. Which is a trifecta for the hyper wealthy, many of whom have wealth and favors stashed away in the M.E. Halliburton just moved to Dubai for example.
***
We're on the tipping point of repudiating the Reagan era and supply side and the whole ugly mess spilling out into daylight. At the very least we're headed towards a mixed economy like Europe. If the crisis gets much worse we're headed for something like the New Deal on steroids.
That's why even Republicans like Huckabee are running on economic populism. And even guys like Buckley are calling for relief as a last ditch to stop the whole rigged game from unraveling.
January 18, 2008 11:43 AM | Reply | Permalink
That may be a consideration, but the article that Professor Warren links to contains another clue as to why this idea is being proposed. The UK government has worries about the market for payment protection insurance; from the pdf available through this UK government website:
It may be the the financial services industry is supportive of this new legislation for its own reasons, but I tend to think the Brown government's agenda would be more consumer orientated.
I definitely agree that this change could benefit the investment bankers who repackage credit card debt, but this could be one of those occasions when consumer driven reforms inadvertently benefit the Big Bad Bankers as well.
January 18, 2008 5:51 AM | Reply | Permalink
good post, El. I followed up below.
January 18, 2008 7:17 AM | Reply | Permalink
That's a ridiculous way to shade it. It's a legislated consumer protection, which as a general principle is the last thing banks want, becasue it empowers people and casts a light on the affairs of bankers and their shortcomings.
That banks may actually need this, becasue their investors are on their backs too, basically institutional lenders eating their own, only goes to show what a train wreck it is.
We're seeing a collapse of the food chain of greed and predatory lenders. The lions have run out of sheep and are eating their own.
btw, they're not half as bad off as our economy is. We have oil money from the M.E. buying up our lending institutions, since they're awash in cash with $100 barrel oil.
We're headed for recession and possibly something more like a depression, thanks to 16 years of economic bubbles looting the middle class economy, and 30 years of supply side, several wars, massive debt, and so on.
January 18, 2008 11:14 AM | Reply | Permalink
You can do this for some student loans here in the US. Its called forbearance. I did it when I was laid off a couple years ago. The bad part is that interest still accrues. So you end up with more debt, but its better than default. I think its a great idea.
January 17, 2008 7:35 PM | Reply | Permalink
As has been suggested above the banks may be in favor of this for their own reasons. It all depends upon how the non-performing loans are shown on the books.
When the real estate crisis hit Japan in the 1990's many banks were technically bankrupt in that the value of their obligations exceeded the value of the assets they had lent money on. The government allowed them to fudge the situation by keeping the loans on the books even though they were not being repaid and thus their negative net worth was not admitted.
It saved the banks, but led to a decade of very slow growth. The bank run on Northern Rock may have scared the government into taking a step like this. It's not clear if this will help the people with the credit card debts. One would have to know how frequently people are able to dig themselves out of trouble within a year. Several life changes like divorce and chronic illness don't really get "fixed". On the other hand one may find a new job when unemployed.
--- Policies not Politics
Daily Landscape
January 18, 2008 6:30 AM | Reply | Permalink
As Ellen pointed out, banks want to avoid a bankrupt cardholder that leaves them holding the bag, so they actually have their own internal programs to help. If you've had a good payment history, most of them will actually cut your interest rate for a period of months, if you've had a life-changing experience. This is actually better in the long run than suspended payments.
I had to use this option once between jobs and got up to 14 months of reduced interest on 2 of my cards.
They all also have their own credit protection plans to make your payments for you for a period of months, but these are usually a bad deal for the consumer, adding as much as $ 30 to the monthly statement. If you've got a $ 3000 limit, you're spending over $ 300 per year to protect $ 3000.
January 18, 2008 7:31 AM | Reply | Permalink
That's ridiculous.
Yes banks do so on occasion, by their own free choice as they decide it profits them.
But no way in hell do banks want legislation of consumer protections which force them to do so. Get real.
January 18, 2008 11:00 AM | Reply | Permalink
Sphealy, Since you seem to enjoy rating stalking, perhaps you could explain your POV.
Are you saying I'm mistaken, and that counter to what I said above, banks do want consumer protections passed into law, as anything but a last resort?
ok, more rating stalking from sphealy. I guess he doesn't have any contribution, just rating abuse.
January 18, 2008 12:04 PM | Reply | Permalink
Are you aware that your "that's ridiculous" response has nothing whatsoever to do with the post you have hooked it under?
YOU GET REAL!
Jan
January 30, 2008 3:00 PM | Reply | Permalink
In Europe the secondary market for consumer debt is smaller, that's the difference. In the US your lender unloads the debt to another investor. That investor is buying for a specific return because they're using the debt as part of a complicated portfolio strategy.
When the lender keeps the obligation on their books, the lender is obliged to support things like "near bankruptcy" because they'd rather get paid more later than nothing now.
BUt most US lenders don't have that kind of motive -- your debt is no longer a liability on their balance sheet. Instead they have to defend themselves against the investor who they sold the debt to, and promised a 13% return per year on. The secondary market makes US lenders more draconian in their reponse to borrower trouble.s
thosethingswesay.blogspot.com
January 18, 2008 7:36 AM | Reply | Permalink
That's not by accident though. It didn't just spring into being as such. The reason is we have in general a much more draconian laissez faire market, which is due to historical reasons going back centuries.
Just recently the Bankruptcy Bill passed which further screws consumers making it harder to get out of debt, further encouraging the feeding frenzy of predatory credit cards at astronomical rates. Bush and the FED inflated the housing bubble, to fluff the consumer economy and get people to transfer equity out of homes, the sole wealth most people have, which has made them debtors.
Predatory economic behavior is institutional in America.
January 18, 2008 11:25 AM | Reply | Permalink
Corvid
Let's look at the entire field of play here. We have a lending and credit system that lets lenders assume that borrowers are infinitely able to provide for themselves under all circumstances and at all times--sort of an agrarian or stone-age assumption--while actual borrowers live in an industrialized world in which such assumptions are completely invalid. But no matter.
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So in the lender's fantasy world (sadly enforced by actual laws), all the risk and penalty can be laid off to the borrower and if the borrower doesn't pay up, why, it's an obvious moral failing and he can be chastised and whipped till he does.
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Of course, in the real world of the borrower, virtually every aspect of his life, including employment and income, are well beyond his control and competence. So the borrower must assume ALL the risk for any loan he takes out, on top of the burden of not knowing from one day to the next whether he will have any income at all.
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Here we (actual human beings) stand, subatomic particles with all the financial might and terror of a mysterious and opaque financial world arrayed against us, naked in the blast of a globalized maelstrom. And we, individually, are supposed to figure it all out.
January 18, 2008 8:18 AM | Reply | Permalink
That, or, remember we live in a democracy, and We the People are not subatomic particles.
We have in the past and we can again move for political change towards economic reform and Progressivism, and put an end to a system of economic looting and exploitation which has been undermining our economy and creating one wealth destroying bubble and crisis after another, while the hyper wealthy get even more so, and while 99% of Americans stagnate economically.
January 18, 2008 11:22 AM | Reply | Permalink
kozmik space -- the undiscovered country
January 18, 2008 3:19 PM | Reply | Permalink
Both Corvid and kozmik are making a lot of sense here, in these most recent comments
I would submit that we ARE most certainly sub-atomic particles in the world of politics in the corporatist/video age, we can have our reactions (and they certainly seem to be bubbling up this winter, maybe we'll actually get major unexpected changes soon), but we also have to learn to interact better with our media and machine-politics "leaders" (controllers & manipulators).
Still emotionally for my own sake I have to have a place of optimism such as kozmik's that we can act revolutionarily at times and make it better, one of these gol-durn days. And his little statement about putting an end to regressive politico-economics as a goal sounds almost like something I could write !
So encouragement to all our better natures, maybe we're finally making progress.
January 18, 2008 10:07 PM | Reply | Permalink
Political change is absolutely coming. The only question is: have we hit bottom yet?
January 19, 2008 1:30 AM | Reply | Permalink
Re: Regardless, the UK, Europe, Japan and such are fundamentally far better of than Americans right now.
I have to disagree. These countries are better in some ways (as in universal health care for example) but worse in others (higher unemployment in some; demographic problems in others, etc.) There is no earthly paradise. I am footstomping in favor of progressive reforms for this country, and I'd like us to be more like (Northern) Europe, though not necessarily more like Japan (where crony capitalism and racism abound). However I am not blind to the fact that there are serious difficulties facing the Europeans too. Neither Europhobia nor Eurolatry is warranted.
Re: Just recently the Bankruptcy Bill passed which further screws consumers making it harder to get out of debt, further encouraging the feeding frenzy of predatory credit cards at astronomical rates
FYI: Even with the (admittedly awful) new bankruptcy law, American bankruptcy is still easier on the debtor than the equivalent process in most European countries.
January 19, 2008 2:11 PM | Reply | Permalink
I love how this looks like something to help debtors in trouble. All it is, is changing the due date on the payment. It is a payment extension. Creditors already do this for borrowers in trouble if they ask. Usually you can get a 60 to 90 day extension on a payment due date, while interest still accrues at the contracted interest rate. I know what we did at GMAC was do an extension where only the interest rate was due, so that we didn't get compounded interest accumulation over the extension period. Sometimes these emergency situations are temporary, but the future is always uncertain. Often times other creditors make the situation even worse by giving no grace at all. The last one to court usually loses more in the short run.
This is a great deal for the creditor, because they still get to make a profit on their loan, even more than they expected. However, it makes the problem worse. The debtor gets deeper in debt. When the extension is up, then the collections start on a larger balance, and the profits are even greater than they would have been before.
Remember how 75% of credit card profits are attributed to high interest, penalties and fees on defaulted accounts? This is a great opportunity for the lender to let that balance get even higher from compounded interest, and more worth the legal fees to sue and attach assets, collecting the accumulated interest, fees, penalties, and legal fees, by garnishing paychecks, seizing assets, and sweeping bank accounts for years to come. The higher the balances, the greater the profits at the end of the year. Even if they settle for 50%, by the time they've gone to court, that 50% is greater than the original principle, and probably the accumulated wholesale interest as well. Getting a 50% settlement is a really great deal. Citibank won't settle for less than 80% of the accumulated balance at the time (including accumulated legal fees).
This isn't something that helps consumers. It is a temporary relief that makes the problem worse. For this type of program to actually help, it needs to either provide a break from accumulating interest as well as payments, or charge only the bank's wholesale interest rate during the period. The creditor must lose something on defaulted accounts in real terms, or the risky lending won't stop. It isn't risky for the lender if they get to make greater profits to cover for accrual accounting losses. Don't forget, the extra interest and fees are accounted as revenue, even though they aren't collected, so the losses look bigger than they are in real terms, as well as the revenue.
Jim Anderson
The Truth About Credit
Facebook Profile
Ministry WebsiteJanuary 20, 2008 4:26 PM | Reply | Permalink
Ultimately, 'the government' of any country has say-so over what kind of lending practices will be taking place in their country, that tends to be one part of the 'job', regulatory oversight.
Sure, there's the back-alley people, but when
back-alley practices become mainstream, that's when it's time to really sit up, take notice, and start writing those letters.
At least GB is going to give its' people a break to have an honest chance to get their act together, but long-term reforms, such as prohibiting the exacting of usury-grade interest rates and fees, well that's the same problem today in the United States, coming up with a good coherent understanding of what really constitutes fair lending, and what kind of practices can end up damaging the economy as a whole. Ultimately, left to their own devices, the banks will put themselves in the money, but out of business. It's all done with computers...
January 21, 2008 11:02 PM | Reply | Permalink