May 14, 2008
Will Credit-Card Debt Be the Next Financial Crisis?
Is the credit-card debt crisis becoming the next housing-debt crisis? That prospect is raised by Robert Reich, a former secretary of labor, now a public-policy professor at Berkeley.
“The Federal Reserve reported recently that consumer credit — basically everything we all owe money on except our houses — rose more than 7 percent last month to $2.5-trillion worth of revolving debt,” Reich writes. “And the price tag is mounting daily as interest charges accumulate.”
Card companies offer what look like great deals, he says, then suddenly crank up interest rates and penalty fees, and shorten billing cycles. “Sound familiar? It’s just like what mortgage lenders were doing before the bust,” he says.
Congress and the Fed are contemplating action, Reich writes, but the bankers’ lobby is powerful, and argues that if card companies can’t come down hard on debtors, other customers will end up being charged the difference. That was housing lenders’ argument too, says Reich, who writes that “the Fed may be the only hope for protecting Americans while avoiding the kind of meltdown that hit the mortgage market.”
“It’s another reminder,” he writes, “of how our democracy has drifted into the hands of nondemocratic agencies like the Fed, because the political branches are answerable to money interests rather than to the public interest.”
Alex Kafka | Posted on Wednesday May 14, 2008 | PermalinkComments
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Good ole’ Robert Reich! Why is he so concerned about “nondemocratic agencies like the Fed” when he has always supported unelected, non-politically reviewable judges who lean and legislate leftward from the bench?
Incidentally, now that he’s moved to Berkeley, Secretary Reich must not be able to keep up with the news on his favorite presidential candidate. No one who saw campaign-plutocrat Barack Obama come crashing down in Pennsylvania and West Virginia after making his infamous “guns and God” statement against small-town working people (in yet-another fundraising speech to big-money interests) could reasonably claim that “the political branches are answerable to money interests rather than to the public interest.”
— S. Britchky May 14, 11:38 AM #
Britchky, the first paragraph of your response was on-topic and appropriate. However, your second paragraph, and your entire response on the Myannmar item, were off-topic, unproductive, and obsessive. Get a blog.
— swishnets May 14, 04:07 PM #
Post #1, you seem to have taken this article as an opportunity to post comments critical of Reich and Obama, without advancing discussion of the topic. Do you have anything meaningful to say about consumer credit in America?
— Pete May 14, 04:10 PM #
Since many people use credit cards and credit accounts as their source(s) of funding their shortfalls — the average creditcard balance alone in the U.S. has recently been reported to be $8,000 per person, it is much higher for many (mine is under $300 on average, so someone is taking up my slack) — it would appear to be inevitable. Personal financial responsibility is sorely lacking.
— bb May 14, 04:23 PM #
So carrying a balance on your credit card (that would be 2 words) is not “personal financial responsibility?” I thought refusing to pay your bills meant you were lacking in personal financial responsibility, not simply the act of creating a bill. Some people have balances due to medical or home repair emergencies, which I would hardly call irresponsible. When they start spending on iPods and iPhones and other things they don’t need, or they stop paying their bills in favor of spending the money on other wants, I’d call that irresponsible.
— Carlo May 14, 05:08 PM #
There are some serious flaws in Mr. Reich’s reasoning, and I would think that he has to know this, learned man that he is.
First of all, mortgage lenders did not and cannot raise your mortgage rates in a manner similar to how credit card companies can raise your card rates. The Adjustable Rate Mortgages (ARMs) that have caused much (but not all) of the recent mortgage problems were upfront in the mortgage contract and every borrower had information readily available in the mortgage contract as to when the rates would re-set and by how much they would re-set. The borrowers “gambled,” in effect, and they lost. The other main problem causing the mortgage “crisis” is that the lenders wanted so badly to lend (and thus make money) and the borrowers wanted so badly to borrow (and get the benefits that come from that), that time-honored prudent practices (such as, “can I afford this loan?”) were dispensed with. The lenders and borrowers need to reap the consequences for their folly — up to the point that their losses begin to imperil society as a whole, which is the only justification for the government to step in and help (which does not include complete bailouts for the lenders or the borrowers).
Credit Card companies, on the other hand, will sometimes raise the interest rate on a person’s card simply because that person was late in making a payment on some OTHER debt instrument. Fees can be similarly changed. Credit card companies also engage in a variety of other practices that most of us would agree are somewhat “shady.” I agree with Mr. Reich that these types of practices should be prohibited. Does this mean that some who now qualify for credit cards will no longer qualify? Undoubtedly, and they probably should not qualify for these cards today, either.I agree with Mr. Reich that credit card debt is a looming problem for many in this country.
— Doug May 14, 05:12 PM #
Credit debt is a great concern to me – and a major reason is that over the past 20 years, the US has steadily de-regulated credit lenders. Payday lenders can charge effective interest rates up to 400% annually, and we are only now starting to notice it. Credit debt may not be a crisis, but credit is too readily available and IMO more restraint and regulation are needed.
— Al May 14, 05:13 PM #
Most credit cards sooner or later end up charging interest rates of more than 20% per year. Those rates used to be defined as usurious, and were illegal. They should be again. The cards are a convenience only if you can afford to pay it off every month without exception. That means that you can afford what you are buying. If not, get off the consumer merry-go-round and stick to what you really need, not what you want. Reduce your consumption to the point that you can save for emergencies.
— Bill S. May 14, 05:39 PM #
Carlo #5 — pardon me for not putting a space between “credit” and “card”. And who is talking about people being reponsible with use of credit? The article — speaking of the next financial crisis — is speaking to the idea of people being irresponsible with use of credit. Responsible use will not lead to a crisis.
How many people do you know that can responsibly carry $20,000 in credit card (note the space!) debt? Or $8,000 (yes, I know that is a fragment)? Putting medical expenses on a credit card, when a payment plan can be worked out with a hospital, does not seem to be responsible use of credit. Home repair emergencies are a different matter. Remodeling isn’t. And creating a balance whose minimum payments are difficult to make is not responsible and can lead to a crisis.
Just as the mortgage crisis was caused by people buying houses too expensive for them by starting out with mortage payments that they could make, but which ballooned to ones they couldn’t. Not all of the onus is upon the lenders (yes, of course, I agree that it was irresponsible lending). Home buyers have to take responsibility for not bothering to understand what they were getting themselves into!
Most huge credit card debt is due to people living beyond their means in ways that are not vital, that is, to support a lifestyle that isn’t warranted by income earned.
(Please forgive me the grammatical license taken.)
— bb May 14, 05:50 PM #
Perhaps another reason we increasingly rely on “nondemocratic agencies” is that elected officials seem more often interested in posturing to constituents rather than accomplishing things. We’ve needed to address energy policy and Social Security for over 30 years, but have done virtually nothing. Things won’t change until voters stop rewarding inaction be reelecting their representatives more interested in painting the opposition as bad guys than reaching meaningful compromise.
— drj50 May 15, 09:48 AM #
The nice thing about Republicans is they talk to each other—the worst possible fate on this earth!
I saw Ross Perot and Robert Reich both together on a stage for the Manhattan Harvard Something Society many years ago. Ross brought in a special elevator stage-let so his short stature would appear tall behind the lecturn. He proceded to be defensive about his stature all night. Robert stood behind the lecturn without a special stage-let, and waved his arms on the sides up and down while starting his remarks thusly “I could do this for the next 20 minutes but my hands are not really my best feature”. Undefensive about his stature, he took a hand mike and proceded to show us himself, short stature and all, for all of his talk.
I felt this comparison of Reich with CEO was emblematic of a profound character difference in our society—what do you rabid drooling rightwingers think?
— Richard Tabor Greene May 15, 10:11 AM #
Agree with Bill (#8).
Would however like to add that the Credit Cards are more than a convenience —- they are an ipso facto requirement in our times —- try travelling without one (make your reservations,—- airline hotel, car, etc. in various cities without one).
Apropos, “Financial Crises Issues” —- in my opine is real, for it is intertwined with greed and personal desiderata. And, the aforementioned clearly thrives given “The Control.”
The issue of “Control” and a de facto Monopoly —- should be a major concern. —- Just five banks own around 85% of the credit cards, and the Credit Card Companies have the right to make any changes in their Agreements that they so desire with or without any justification, reason, or explanation whatsoever (read the inserts/your agreements with the Credit Card Company) —- Does anyone really feel that this one sided agreement is fair? Or, that it is not open to abuse?
“Agreement?” In my opine, any agreement that states that I can change whatever I like, whenever I like without any reason —- defies the word/meaning of “Agreement.”
Arguments that there is a choice is baffling —- since virtually all Credit Cards Agreement have almost the same legal clauses —- And, the choice of choosing not to have a Credit Card in this day and age is highly impractical (try booking your rental car, hotel room, airline tickets, etc. without a Credit Card).
Another, issue —- related to virtual control involves interest rate and credit scores —- The claim is that interest rates charged are partly related to credit score —- but the one “who is charging” the interest can easily change the credit score —- it can happen in many ways, and has happened to many, including me.
Let me elaborate, I never had a late payment, over the limit balance etc. in nearly three decades —- Bank of America one day out of the blue decided to lower my credit line, even though nothing had changed in my credit history or financial circumstances —- given that a part of the credit score computation involves the ratio of the credit used to the total line of credit the credit score is automatically lowered (balance of 1000 on a credit line of 10,000 is a borrowing of 10%; lower the credit line to 2000 and now the borrowing is 50%).A few months later Bank of America raised my interest rates —- they were kind enough to say they had a reason (even though no reason is required per the one-sided Agreement) —- the reason, my credit score was lower than before —- yes it was lower thanks to their actions of lowering my Credit Line by 90% —- By the bye, this Credit Line was issued decades ago, and had never been increased for inflation —- reiterating it had never had a late payment, was never over the limit, even after the 90% reduction in the Credit Line —- and, to amplify the “possible issues,” there has been no late payment on any other bill (mortgage, utilities, all other credit cards, etc.), during at least the last decade.
Additionally, we must bear in mind that the rising costs coupled with stagnant/lower wages, —- clearly lead to borrowings in order to cover deficits —- home equity credit lines sustained many for years —- the loss in home equities, will in many instances lead to borrowings via credit cards —- ergo a financial crises is merely a question of “when”.
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— john smith Jun 3, 01:55 AM #
As academic blogs slow down for the summer, we’ve decided to take a short break at Footnoted. We’ll be using the time to take a step back to see how the blog is going — and how it could be reshaped or improved.
______________
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— David Francis Jun 3, 02:07 AM #