Credit Squeeze
Until recently, if someone entered formal credit counseling, the card companies would often cut interest rates to zero to keep the customer paying. No longer, reports BusinessWeek. Pay it all, and pay it now.
This tough attitude has at least three implications for the short term future of the economy:
First, family debts are tied to each other. If fewer consumers can get any relief, more counseling plans will fail. That means more bankruptcies, and, while they are at it, more consumers discharging other debts such as medical bills. More consumers will also take a second look at whether it makes sense to give back the car for which the loan far exceeds the value. This is also the time to look at the home mortgage and think about whether trying to make the payment after a reset is worthwhile. Don't get me wrong: this won't affect millions, but, at the margins, a credit card squeeze on interest rates will push more people to give up altogether.
Second, the race is on. If Discover won't lower rates, Citi will quickly figure out that a customer's limited funds are going disproportionately to a competitor. Time for Citi to get tough--and so on.
Third, the news is bad on every front. Employment is down and defaults on home mortgages, car loans and credit cards are up. The consumer can't pull the load, and the lenders who made huge profits off those consumers over the past decade or so are facing big losses. The idea that a one-shot stimulus will get us out of this mess seems more fanciful every day.
For years, lenders of all kinds loved every consumer. No income? No problem! No credit history? That's OK. Overloaded with debt? We don't care. Lenders spread around money as if there were no tomorrow.
Tomorrow has come, and the cheery sales staff has been replaced by tough guys who want their money and they want it now--with interest.
Well, they can't get blood from a stone, can they.
Perhaps if they cut out their hired-thugs (collection agencies) the banks could afford to let their golden geese live
March 9, 2008 7:59 PM | Reply | Permalink
If the statistics are accurate, and history is a good guide, the banks are in deep trouble - many fighting for survival.
So you can expect them to try and raise as much cash as they can, using whatever methods they think they can get away with.
What bothers me about this is the lack of relevant international news. In particular, the prices of gold and oil track the fall of the dollar...but are almost stable when denominated in euros. Why?
March 9, 2008 8:42 PM | Reply | Permalink
What's funny is... I suspect they're NOT in deep trouble. A lot of them seem undercapitalized because they wrote down assets in a bear secondary credit market. But... it's not a loss until you sell and if you look at the Commercial Mortgage Backed Market and to a lesser extent the Asset Backed Markets... the banks ain't selling. If they can hold these assets long enough they're going to write up a lot of these write downs. Maybe they're not in as much peril as it seems and they're squeezing the small fries unnecessarily.
March 9, 2008 9:01 PM | Reply | Permalink
Elizabeth Warren is a treasure. Her posts on TPM are nearly always the most enlightening on the site. So thanks for this and all the good work you do.
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One has to wonder, who makes the laws that clear the way for this kind of thuggery? Don't people who work for a living have ANY representation at ANY level of government?
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Finally, so many discussions of our economy and politics occur in a vacuum. So, one wonders as well, do other civilized nations have these problems with their credit industries? Are credit card companies allowed to prey like vampires on, say, helpless
Belgians, Finns and Spaniards?
March 9, 2008 9:24 PM | Reply | Permalink
It is true, she's a gem around here.
As for European countries and lenders... hey, one of the advantages of being in America was that unlike them, we don't have debtor's prison!
I do think there are a lot of lending abuses going on in Europe but... it's not to the extent that it is here.
March 9, 2008 9:47 PM | Reply | Permalink
Ten years ago the banks that issued credit cards owned the accounts. But today, aren't most credit card accounts securitized and owned by investors (I've seen the figure of over 20% of total ABS)?
Thus, aren't "card companies" in a situation similar to that of mortgage servicers? That is, they are acting as agents for the trustees of asset backed securities. Isn't it the investors in card-backed securities, acting by way of instructions to their trustees, who decide what interest rates to offer defaulting card holders?
March 10, 2008 12:39 AM | Reply | Permalink
One thing we desperately need in this country is to make financial education a core part of the high school curriculum. Americans apparently have no idea how to budget, save, manage debt, or read financial contracts. Regulation to prevent abusive practices by the financial services industry and to increase transparency is important, but the complexity of modern financial life requires knowledgeable consumers. The problems we're having today are caused in part by predatory lenders. But they're also caused by ignorance and lack of self-control on the part of consumers. One wonders how an America with such poorly informed and poorly disciplined citizens can preserve a strong domestic economy and compete successfully in an ever more complex and sophisticated global economy.
March 10, 2008 7:36 AM | Reply | Permalink
Good luck getting any such courses in consumer advocacy and financial literacy into the schools' curriculums - at least in the public schools, and probably in most private schools as well. I doubt that the interested sectors of the business community would allow it.
March 10, 2008 12:51 PM | Reply | Permalink
Dave Ramsey's classes are making their way into schools, but we need more. "Financial Peace for the Next Generation Designed by teachers for teachers." I'm not trying to sell his stuff, but his advice is the only advice that truly works for struggling and trapped people. (Dave and Prof. Warren both appeared in MaxedOut together, so he's legit...)
March 12, 2008 10:03 AM | Reply | Permalink
I couldn't agree more. There is a non-profit program called Junior Achievement. To my surprise they are teaching 2nd graders that credit cards are money. The lesson also teaches them to spend money, and ignores giving and saving. After looking more into the program, I found that it is sponsored mainly by banks.
Parents need to get involved and make sure their children aren't fed this credit card propoganda! How can we expect our children to manage their money responsibly if we don't teach them how? Many adults today have bought into the propoganda and wonder why we have so many economic problems now. They were primed for the traps.
March 15, 2008 1:57 AM | Reply | Permalink
Re: Are credit card companies allowed to prey like vampires on, say, helpless
Belgians, Finns and Spaniards?
I don't know about specific practices, but I have read that the US actually has one of the world's most lenient bankruptcy laws, even after 2005's "reform". Some nations even force heirs to assume the debts of the deceased.
March 10, 2008 9:26 AM | Reply | Permalink
Two things:
Many states are interested in having financial literacy education in the high schools. The problem is how to fit it in with all of the other requirements--anent "no child left behind". Kids consistently fail financial literacy tests--and guess what--so do their parents! I would also argue that parents need to start teaching their children at a young age--kids manage money about as well as their parents do. If you don't save or invest--your kid isn't likely to either. Check out the National Jump$tart Coalition to see what is going on in your state.
WAGES! WAGES! WAGES! Real wages are declining. Because we all used credit to maintain our lifestyles--we didn't see the need to keep our unions around--so we let them go and our credit balances went up--proportionally to the decline in WAGES. Yeesh. Don't beat up on the people who are in debt--beat up on the employers that fail to pay family supporting wages while they live on the government trough--tax credits, government grants and low-interest loans. Read the business section of your local newspaper when they announce a government grant that will create jobs--then do the math--one such program was announced a few weeks ago in my area--the business was being paid $30,000 for each job they created--and the jobs only paid $20,400 each per year. At those wages--a family of 3 would be eligible for FOOD STAMPS. Just WHO is getting fat on welfare?
March 10, 2008 4:53 PM | Reply | Permalink
it's not a loss until you sell
Don't they have to book the loan as nonperforming and at some point write off the principal (or at least book the reduction in value)?
I remember when the board that promulgates the "generally accepted accounting principles" decreed that banks with Latin American loans had to "book the loans to market", ie, zero in some cases. There was an overnight hit in the quarter that followed that bookeeping rule change.
March 11, 2008 3:56 PM | Reply | Permalink
No problema. Just mark-to-model and plan on your auditors not being quite up to snuff when it comes to advanced inferential statistics.
March 11, 2008 8:25 PM | Reply | Permalink
There may not be actual debtors prisons in the USA, but when one is held hostage with loan shark interest and outrageous fees, it is like being in a prison, only there are no walls!
March 12, 2008 7:52 AM | Reply | Permalink
Hired thugs is a great name for them.
Buying debt that many times is all interest and fees and then letting these crooks pile on more
interest is disgusting!
And then to make matters worse, they have been known to keep a person in the dark about the interest they are charging!
March 12, 2008 7:56 AM | Reply | Permalink
I agree that financial education in schools should be top priority.
I have had to learn many things the hard way, but am on the right path now.
March 12, 2008 7:59 AM | Reply | Permalink
Hi BabyBelle: Just wanted to point you to Dave Ramsey if you haven't already read his books or taken a class at a local church. My family was literally destroyed by Credit Cards, and Dave's the only voice out there that truly goes all the way in addressing the problem/addiction. No Debt. No Credit.
March 12, 2008 10:07 AM | Reply | Permalink
Wade,
Thanks, but I find other financial help more
helpful than Dave Ramsey.
Example: Elizabeths Warrens book: All Your Worth
Ramsey has some common sense advice, but some of his advice is not for me.
March 12, 2008 5:48 PM | Reply | Permalink