many eyes are focusing on the housing meltdown and its hugely
negative effect on an economy clearly moving into recession,
few are paying attention to the next bubble expected to burst:
credit cards. Combined with the subprime losses, such a credit-card
nightmare has the potential, experts say, of bringing down
the entire financial system and global economy. You and your
credit card have become key players in the highly unstable
financial crunch. Mortgage lender cupidity and bank credit-card
greed wedded to financial-institution deregulation supported
by both political parties, have been made manifestly worse
by the Bush administration’s support-the-rich policies. It
has brought us to a brink not seen since just before the Great
campaigning in Edinburg, Texas, in February, Barack Obama
met with students at the University of Texas-Pan American.
“Just be careful about those credit cards, all right? Don’t
eat out as much,” he said. After the foreclosure crisis, he
warned, “the credit cards are next in line.”
of home-equity debt and credit-card debt has gone hand in
glove for years. The homeowners at risk can no longer use
their homes as ATM machines, thanks to their prior refinancings
and equity loans, often used in the past to pay off their
credit cards. Indeed, homeowners cashed out $1.2 trillion
from their home equity from 2002 to 2007 to pay down credit-card
debts and to cover other costs of living, according to the
public policy research organization Demos.
the problem, fewer people are paying their credit-card bills
on time. And, to flip the old paradigm, more are using high-interest
credit card cash to pay at least part of their mortgages instead
of the other way around.
analysts say that in the U.S. alone more than $850 billion
in unpaid credit-card balances is at stake and fast approaching
$1 trillion, roughly the same amount as in the subprime market.
reports that worldwide, consumers have racked up more than
$2.2 trillion in purchases and cash advances on major credit
cards in just the last year.
unpaid debt portion of this is continuing to pile up, with
U.S. consumers last year adding $68 billion against their
credit lines, boosting credit-card debt by 7.8 percent, the
largest increase since seven years ago, just when the last
recession was beginning.
have been going into default at a stunning rate. The percentage
of people delinquent on their credit cards is soaring, and
credit-card companies are now writing off somewhere near 5
percent of payments.
last fall, the major banks were setting aside billions for
loan-loss reserves while anticipating an increase of 20 percent
in nonpayments over the next two to four quarters.
One, one of the biggest credit-card banks, was forced to write
off $1.9 billion in bad debt just in the last quarter of 2007.
October, according to a survey of the leading credit-card
banks by the Associated Press, the value of credit card accounts
at least 30 days late was up 26 percent from the previous
year, to $17.3 billion. Serious delinquencies among some of
the biggest lenders rose by 50 percent or more in the value
of accounts that were at least 90 days delinquent.
matters worse, or more widespread throughout the economy,
just as with mortgage debt, credit-card debt is put into pools
that are then resold to investment houses, other banks and
institutional investors. About 45 percent of the nation’s
$900-plus billion in credit card debt has been packaged into
these pools, and so many companies, not just a few, are at
risk of being forced out of business by credit card debt write-offs.
this adds up to, and what Obama didn’t say, is that we are
actually face-to-face with the results of the most massive
failure of our political and economic system since the Depression.
Since Ronald Reagan, we have been living in an era in which
neither the meltdown of the savings-and-loan banks in the
1980s nor the Enron-like scandals of the Bush years has stopped
the relentless advancement and protection by both parties
of the ability of financial institutions to make a buck at
any cost to the social good and economic fabric. Which is
what you get, of course, when both parties are so dependent
on massive financial contributions to get their candidates
into office and when the corporate media, heavy with advertising
from the FIRE sector—Finance, Insurance and Real Estate—don’t
warn the public or investigate the egregious fudging, misrepresentation
and outright fraud that underpins the subprime and looming
industry (Visa, MasterCard, American Express, etc.) and the
10 banks that dominate the industry as the primary card issuers
spend an estimated $2 billion a year in endless marketing
worldwide. We are all bombarded with their solicitations and
sales tie-ins and gimmicks. They know that they might only
have a 2- to 3-percent return rate, but that more than pays
the enormous costs. They have thus succeeded in supplying
1.5 billion cards to 158 million U.S. card holders. That averages
to 10 cards per person. In the last few years, retailers,
banks, a wide range of companies, sports teams, unions and
even universities have launched specialized card programs.
Like the car companies who discovered that they made more
money on car loans than automobiles, the benefits of what’s
been called “financialization” is obvious to more business
advertising for new cardholders is especially effective now
as inflation drives costs up and consumers have less to spend.
For many, “charging it” on yet another new credit card is
the only option to meet their budgets or maintain their lifestyles,
especially as gas prices rise. It’s become habit for many
to spend more than they have. As a result, overall U.S. credit-card
debt grew by 435 percent from 2002 to year-end 2007, from
$211 billion to approximately $915 billion.
continuing push by the credit-card banks doesn’t target potential
customers alone. Constant focus group studies and other research
techniques are still being used to persuade retailers to encourage
more credit-card transactions. Increasingly, businesses simplify
their use by “swiping” and other gimmicks, no signed receipt
and more sectors of the American economy recognize that their
financial success is based on the success of the credit-card
industry,” explains Robert Manning, the author of the definitive
Credit Card Nation and a leading expert who has been sounding
the alarm about the consequences of credit-card debt.
is very clearly thought out and premeditated. Whether it’s
having conferences and think-tank sessions about how to encourage
people to accept more debt [or] to work with merchants—for
example, to persuade merchants with empirical information
that . . . if they use a credit card that they’ll buy 20-25
notes that saving and thrift was historically a positive value
in the United States. As recently as the 1980s, the national
savings rate was 10 to 11 percent. Since 2005, Americans have
saved less than 1 percent of their disposable incomes. In
fact, the most recent figures from March show that the savings
rate is negative, below zero. Also in March, the government
reported that, for the first time since the Depression, Americans
owe more on their homes than they have in equity. Essentially,
on average, America is broke and its credit cards played a
dominant role in getting there.
who teaches at Rochester Institute of Technology, has taken
on the issue with original research and financial literacy
courses for students. He found that many of his students already
had credit cards before they arrived on campus, some for years.
all know, the companies don’t tell about the downside when
they are seducing customers. They offer low introductory or
teaser rates, in the same way that mortgage brokers enticed
subprime customers. They offer rewards, frequent-flyer miles
and other prizes. Students are especially targeted because
they have little real-world financial experience. The U.S.
Public Interest Research Group, which is campaigning against
student debt, says the average is $4,000 per student, but
it easily climbs after four years to $15,000 to $20,000.
this, in our globalized world, is not unique. Clear across
the world and down under, the New Zealand Union of Students’
Associations (NZUSA) and bank workers’ union Finsec are joining
forces to try and keep students out of high-interest debt.
The amount students owe on credit cards has increased by 32
percent since 2004, according to the NZUSA Income and Expenditure
Survey. Credit-card debt has increased at a higher rate than
low- to no-interest overdrafts.
in the United States, one mother, Joan E. Lisante, has set
up a Web site targeted at other parents, consumeraffairs.com,
so they can tell their stories. She wrote recently about what
she calls the “plastic prison.”
son Jon, a college senior, got 52 credit card offers in the
last year. I know this because, like a CIA operative, I intercepted
the offers pouring into our mailbox.
19 from Capitol One, 13 from Providian, six from Washington
Mutual, four from Chase, four from eBay and one each from
an assortment of lenders ranging from PayPal to First Premier
Bank in Sioux Falls, S.D. (co-capital with “small wonder”
Delaware of the credit-card kingdom).
begged Jon to rip open the envelope and wallow in instant
gratification. Capital One, the most persistent suitor, shouted,
‘Offer Status: Confirmed. No Annual Fee!’
Card Designs’ (but none that tally the total whenever you
use it). You could get a response in as little as 60 SECONDS
when you apply online.
this kid has never held a job (yet) for more than one summer.
He spent one summer working in the FEMA flood-insurance call
center, which shows how much expertise you need to work there.
Although he is familiar with the inner workings of Blockbusters
and Starbucks, Jon’s not yet a member of any corporate elite,
prestigious profession or skilled craftsman’s guild. Does
this matter? Apparently not.”
key for the banks,” Manning says, “is to get them dependent
upon consumer credit, shape their attitudes towards savings,
consumption and debt and to then multiply the number of financial
products that they’re buying from that particular bank so
the credit card will lead to the student loan, to the car
loan, eventually to a home mortgage and then maybe some insurance
products and investment opportunity.
he says, want students in a condition of dependency. “Young
people today that see credit as a social entitlement have
no understanding of what it is going to entail to repay those
loans back. Once they’re used to living on borrowed money,
then the banks realize that they’ll be following that pattern
possibly for the rest of their lives. By the time they graduate
they’re so indebted, and they’re so dependent upon the use
of credit and debt, that it’s already presaged their future.
They can’t possibly pursue the kinds of careers that they
on student loans are climbing. Many students used those loans
to pay off credit cards. Military recruiters are now promising
to pay off debts to entice enlistments. Other government agencies
are also offering funds as part of their head-hunting.
of you have probably forgotten that the American Revolution
was largely driven by the great American planners, that were
heavily in debt to European banks and they had very onerous
terms,” Manning said in a college lecture. “And they recognized
that they could not financially prosper under such outrageous
next door to the lecture room in the student center, local
branches of banks like Chase and HSBC were signing up students
for checking accounts and credit cards. Freshmen lined up
at the tables to set up accounts. The banks had permission
from the same school administration that hires Manning to
counsel students to avoid getting into debt.
rep: “You don’t need anything for deposit, and we’re giving
out free backpacks.”
rep: “You get 0 percent on the purchases for the first six
months and then it goes to the standard interest rate.”
“What’s the interest rate?”
rep: “The interest rate is variable . . . to be honest with
you, off-hand, I don’t know the interest rate off-hand. Sorry.”
is counting out 20s as his first deposit.
rep: “I just need your signature. Right here, please.”
bank rep: “And it’s free while they’re a student.”
will happen when they do have to pay it back includes nonstop
calls to them and to their parents. Credit-card collection
agencies know how to harass, threaten and then sweet-talk
cardholders who are late. They even have a term for people
squeezed by debt: “sweatbox.” They also know that the longer
the debt goes unpaid, the larger the potential profit for
companies, as interest builds up at rates of up to 30 percent.
Credit card promoters call people who only pay minimums “revolvers.”
Those of us who pay our bills in full? “Deadbeats.”
the companies unilaterally hiked late fees and penalties that
compound the debt. A few missing payments can earn you an
interest rate hike to 29 to 30 percent. If you are late with
a payment on some other debt not related to your credit card,
you can readily find your interest fee doubled on your credit
card. Some companies make more on fees and penalties than
on interest payments. The companies racked up more than $17
billion in 2006, the last year for which records are available.
many of the homeowners who accepted subprime mortgages, and
like you with your credit cards, youths and adults alike signed
dense agreements that are largely unreadable. The credit-card
banks constantly update these with those small print notices
with which you get assaulted in the mail, these drafted by
risk- minimizing lawyers. Of course, it’s unlikely you bother
to read these. In part of the unread text, the companies give
themselves the right to unilaterally change the deal even
after it is signed. Other small print insures that consumers
cannot sue them over differences. All grievances have to be
arbitrated in a process the companies created and control.
the Federal Reserve Bank condemns some of these practices,
noting: “Although profitability for the large credit card
banks has risen and fallen over the years, credit card earnings
have been consistently higher than returns on all commercial
the subprime and credit-card mess back, and you will find
its origins in free market policies since Reagan that deregulated
banking and much of the oversight that managed for years to
keep the greedmeisters on Wall Street in check. The failure
of media-lionized Alan Greenspan’s Federal Reserve Bank to
pay attention to predatory lenders and subprime schemers allowed
them to prosper.
these failures a complicit Congress, with Democrats and Republicans
alike dependent on donations from the three leaders of the
FIRE economy. To assure their freedom to run their businesses
their own damn way, the banks in the 1990s persuaded Congress
to deregulate the practices of financial-service companies.
Pro-business court decisions have allowed them to base their
operations in low-tax states like South Dakota and Delaware
and to end consumer protections against usury.
decade, Bush’s tax cuts and his bankruptcy “reform” bill strengthening
the power of credit-card companies were passed with bipartisan
support. Add major media amnesia to this list and you get
a trifecta of failure. The New York Times admitted
that advocates warned them that a rise in predatory lending
was destroying poor communities in 2001, but they sat on the
story for nearly six years.
the politicians nor the media told us that every major brand-name
banking firm and investment house had its fingers in the juicy
pie of pedaling mortgage-backed securities worldwide without
disclosing that many of these mortgages were deliberately
offloaded on people whom they knew could not afford to pay
them. As with the credit-card industry, these mortgage borrowers
were cleverly given “teaser rates” that would soon reset upwards.
The banks then resold the mortgages as “asset-backed paper”
even though the assets’ value was so questionable.
media outlets took in hundreds of millions in ad revenues
from deceptive lenders and credit-card banks encouraging Americans
to shop and charge till we drop. The Super Bowl broadcast
ran all those cool but misleading ads by credit-card companies
and mortgage hustlers. It was, um, “priceless.”
scholar Lionel Tiger: “Those who have been operating the managerial
levers of the financial system have failed embarrassingly
and massively to comprehend the processes for which they are
responsible. They have loaned money avidly and recklessly
to people who couldn’t pay it back.
fudged data to get loans approved and recalculated. Then they
sausaged fragile figments of money reality into new ‘products’
which could be sold around the world to investors eager to
enjoy the surprising returns which often accompany theft,
managerial incompetence and fraud. When it comes to responsibility
for all this, there appears to be no one here but us spring
Schechter is a filmmaker and freelance reporter for Los
Angeles CityBeat, where this article first appeared.