Smoke and Mirrors of the Middle Class: Credit is Slavery
Updated with WSJ Bush-hating goodness!
Schadenfreude is wrong, I guess, because a superior person doesn't take pleasure from mocking other people's pains. I am not a superior person. People looked askance at me when I had a financial blowout, and I felt a lot of shame and guilt for signing my name to credit lines when I suppose I didn't have to. In my defense, it's hard to say "no" to spouses who beat you and then demand another credit line to support their profligate spending habits, and when they abandon you and you're trying to pick up the pieces of your life with only a part time income, things like food seem important. But anyway, I got over it, and no one will ever enslave me with money and credit again. But it seems I'm an outlier:
Unlike a Republican, I'm not going to blame or shame these people. I completely understand what causes people to take on risky loans, in most cases. Bonddad explains:
What this diagram demonstrates is over the last 5 years, the number of higher-risk mortgages has increased each year. For example, in 2001 subprime and Alt-A (which is essentially one step above subprime) comprised roughly 10% of new mortgage loans. By 2006, that total had increased to about 40%. In other words, 40% of new loans in 2006 were made to borrowers who were considered higher risk.
This is a bad thing because it doesn't take much to knock these people into foreclosure. A health care emergency usually does the trick, but job loss or divorce are other common factors which upset the delicate financial balancing job it takes to own a home in the middle class. It's also the case that the housing market is in a downward, self-reinforcing spiral:
U.S. homeowners are falling behind on their payments 33 percent faster than they did last year, according to a report by California-based RealtyTrac, which researches data on Americans entering the foreclosure process.
In February, foreclosure proceedings -- from default notices for late payment to auctions and repossessions -- rose 12 percent from a year earlier, affecting 130,786 properties, or one in every 884 U.S. households, RealtyTrac said.
Falling or little-changed home prices are making it difficult for homeowners to sell or get new mortgages on homes they bought or refinanced with adjustable-rate mortgages.
Most econ people I talk to predict that a slow or medium downward spiral is what we can expect for not just the housing market, but the economy as a whole, and that we'll begin to touch bottom late this year or early next year.
There's a softness to the middle class that is rarely exposed in the SCLM, and that softness is the fact that it exists mostly through credit. People don't just get lousy or risky mortgages because they are stupid or greedy- they get them because the only way to have money when you don't have any is to play roulette with your credit. A house is something you can borrow against, and when you need that money more desperately than you can admit, you don't think about the possibility of risk. I found this interview spot on, and I'll have to check out the movie sometime:
Today's bankruptcy rate is ten times what it was during the Great Depression, foreclosures are at a 37-year high and the United States has a negative savings rate, yet we're told every day that the economy is going gangbusters.
I knew things were bad, but I had no idea that bankruptcy was so widespread. Part of this has to do with changing attitudes towards bankruptcy, but part of it is also that the credit game is much more predatory than it once was, thanks to Republican policies which essentially allow banks and lenders to write their own laws.
You know, everybody in the film and everyone in the book will readily admit that they screwed up. They made a mistake: they bought to many commemorative plates from Franklin Mint or they took out cash advances to pay their mortgage or they bought one of those Ab-tronic belts that are supposed to give you perfect abs in five minutes or they built a 10,000 square-foot McMansion which they knew they wouldn't be able to afford if interest rates were to go up -- which they did -- and on and on.
So that's all there, but what surprised me -- and what got a lot of these people into such deep trouble -- is that lenders weren't asking for their money back along with a reasonable return and maybe a fee or two. They were asking for multiples of what these people had originally borrowed. The line between a loan-shark and a reputable bank has now become so blurred with these banks all writing high-risk, high-interest loans and slapping on all these fees and coming up with all these schemes like double-cycle billing and universal default and on and on.
It's getting to the point now where people actually have a hard time figuring out just exactly what they owe. There was one woman in the film who had a gambling problem -- someone who was very irresponsible, and no one would argue otherwise. But in one year her $12,000 debt went to $50,000 and she didn't make any new charges. There was a guy who testified before Congress recently and he had borrowed $3,200 and had paid Chase back $5,000 or $6,000 and they were still demanding another $5,000 from him.
And if you look at every study done or if you look at what New Year's resolutions people make it becomes clear: people want to pay their debts off. But they're increasingly getting into situations where their $1,000 debts are becoming $4,000, or their mortgage payments are doubling and they don't understand how that happened and in many cases it's just devastating.
Now, there are two parties to these contracts -- that's absolutely true. But the banks have the ability to change the terms and conditions, at will, and these contracts have become so complex that even the Harvard Law professor in the film has a hard time making sense of them. Sometimes bankers can't make sense of the mortgages they're selling. So, caveat emptor, yes, but you should be able to walk into a major banking institution without worrying that you're going to get loan-sharked.
Not when Republicans control all three branches of government! And the Bankruptcy bill essentially makes the situation one where people like this have no protection, and are enslaved to the debt they take on, no matter how unethically or irresponsibly it was given to them.
It's because it's gone from a business based on a conservative business model where you were loaning to people who could safely pay you back and you weren't making a ton of money -- just a bit on the spread -- so you had to look at all your risks very, very carefully in order to make money. That model is now history, and the new one is that you charge a huge amount of fees, and a very high rate of interest. So the trick is actually getting people who will pay the most interest and the highest fees.
Credit card fees went from $1.7 billion dollars per year in 1996 to almost $18 billion last year -- an increase of more than a 1000%, and that's where the money is. Now you take someone who pays their bills on time, who has savings and pays their credit cards down each month, well they're not going to pay those fees. They don't have to. And you want someone who really needs the credit, who will be willing to pay a very high price for it.
One thing you've got to understand is that we have a negative savings rate in this country. Two out of three people can't pay their credit cards off each month. At the same time, last year we cashed $800 billion dollars out of home equity. Trillions of dollars in the last few years have been cashed out of people's homes and much of that went to paying off credit card bills. And the cycle continues. So it's a bit like Enron -- you've got some wishful thinkers, and then there are these bankers making enormous fees and at the end nobody's stepping in to stop the party.
I confess I don't have confidence in the Democrats to change the laws that allow this kind or reckless party to go on. Financial services types are big donors to both parties, and I haven't heard a peep from even progressive Democrats on issues like changing the BK laws or tightening regulation of the loan-shark, I mean, banking industry. Spurlock has the bottom line:
And the truth is, there are a lot of people in this country who look like they're middle class but in fact if you took away their credit cards you'd see that they're actually quite poor.
I have known this for a long time, and the decay I see in our material culture is an indication that the party is coming to an end.
When I say I have schadenfreude, it is for those people in the exurbs who voted for Bush twice and who continue to support this war. I believe that the majority of them are people like this, who will cover their eyes to reality and who don't care about anyone else because they have a middle class lifestyle that they believe they "deserve." The economy of the middle class is a sucker's game, a party in which the booze is about to run out, and a lot of Bush voting middle class types who believe they are in the "top 10%" are about to find out just how little their true Masters care for them. I have pity for people who aren't Bush Republicans who will also suffer, but I will say to them that one can live on greatly reduced incomes and still find life interesting and challenging. Breaking the consumerist habit wasn't that hard, and in many ways it's an important step in the process of political and ideological awakening. Which, given what's probably coming with Peak Oil, is better to have now, rather than later, when things are truly ugly.
Update: Roubini top post has this little gem from those Marxists at the WSJ:
ederal regulators over the past decade issued rules to tighten standards for making loans to borrowers with blemished credit or low incomes. Yet standards still declined and the volume of loans surged in the past two years. One reason: Changes in the lending business and financial markets have moved large swaths of subprime lending from traditional banks to companies outside the jurisdiction of federal banking regulators…Yet even where federal regulators have jurisdiction, they sometimes have been slow to grapple with the explosive growth in especially risky practices and quick to shield federally regulated banks from states and private litigants.
The underlying belief, shared by the Bush Administration, is that too much regulation would stifle credit for low-income families, and that capital markets and well-educated consumers are the best way to curb unscrupulous lending.