[R-G] Indebted America keeps packing on the plastic

[Anthony Fenton]

http://www.cbc.ca/news/reportsfromabroad/macdonald/20080407.htm

NEIL MACDONALD:
Indebted America keeps packing on the plastic
April 7, 2008

As much as you try to see beyond what is happening in this economy, as  
tempting as it is to strain and listen for the few remaining voices  
saying everything will be all right, common sense says it won't be.

Eight thousand American households are sliding into foreclosure every  
day. An estimated 1.2 million families now face losing their homes.

The national mood is dark and frightened. Ben Bernanke, the Federal  
Reserve Board chairman whose job it is to maintain a stable economy,  
actually warned last week that the situation is going to get worse. A  
new poll suggests America's confidence in public institutions has  
shriveled. Washington borrows endlessly to finance its needs.

So, evidently, does the American consumer.

With home equity turned to dust and cheap credit drying up, the cost  
of borrowing here is getting vicious. Increasingly, and once again  
with the encouragement of Wall Street, Americans are turning to the  
worst of all legalized options — the ooze of credit card borrowing.

In just the last three months of 2007, the amount Americans owed  
credit card companies surged by $20 billion, to a total of nearly $1  
trillion.
A one-sided deal

For banks, this is an excellent development: Consumers willing to run  
up credit card debt must look like the last remaining herds of  
fattened cattle on an otherwise desolate prairie.

"Life takes Visa," customers are told in the sweet-sounding, pre- 
approved applications that fill American mailboxes every day.

But if anyone here still believes business won't operate in a  
predatory manner without proper regulation, the behaviour of American  
credit card companies pretty much ends the debate.

In the U.S., big banks own the credit cards and nearly all of them  
locate their credit divisions in the compliant states of Delaware and  
South Dakota. That is because neither state has anti-usury laws,  
effectively allowing loansharking.

"The credit card contract in the United States is a thing of  
amazement," says Ira Rheingold, director of the National Association  
of Consumer Advocates. "It is the only contract that exists where the  
powerful party can change the terms of that contract at any point and  
time for any reason."

And once the customer starts carrying a balance, which 58 per cent do,  
that's exactly what happens.

The banks routinely allow cardholders to exceed their credit "limits,"  
then charge them punitive fees for having done so. When those fees  
bloat the monthly balance, the banks pile on more fees. There are fees  
for paying by phone. Fees for paying late. Fees for purchases in  
another currency.
Tony Soprano would die for this

Any violation of the incomprehensible, multi-page cardholder  
agreements — or even no violation at all, in some cases — can send the  
rate charged on the existing debt spiraling to levels that would make  
Tony Soprano jealous.

As one business writer recently put it, practices that would have been  
considered criminal a few years ago are now central to the credit card  
business model.

With the subprime mortgage fiasco unfolding and banks facing the  
consequences of their own unbridled greed from earlier in the decade,  
lenders are pouncing on every opportunity to milk a few more dollars  
from anyone who can still pay.

Take the case of Christy Mylar-Smith of Niagara Falls, N.Y. Over the  
past eight years, she and her husband ran up a $20,000 balance, which  
is not an unusual sum.

For most of that period, she was paying 12.99 per cent interest,  
meaning a nice profit for Citibank, which, after all, gets to borrow  
money from the U.S. Federal Reserve at 2.5 per cent.

But then last year, says Mylar-Smith, she was a day late paying for  
the second time. Suddenly Citibank wanted more. Much more.

"It went from 12.99 to 31.40, so my rate pretty much tripled," she  
says. That pushed her minimum payment from about $400 a month to $905  
— $640.81 of which was interest.

Then there is Marvin Weatherspoon of Chicago. He put $12,000 worth of  
home repairs on his low-interest Bank of America card eight years ago.  
Since then, he says, the bank has raised his interest rate from 4.25  
percent to 25 per cent. He has made $15,360 in payments. And he's only  
been able to reduce the debt by $800.

"It's madness," says Rheingold, the consumer advocate. "But we've  
lived with madness in this country for several years now."
In debt for life

Members of Congress, mainly Democrats, are beginning to realize that.  
They are drafting consumer protection bills and scheduling hearings to  
underscore the problem. But the credit card issuers still have  
powerful friends on Capitol Hill.

In 2005, at the behest of the banks, Republicans pushed through  
measures making it much harder to escape credit card debt by declaring  
personal bankruptcy. This debt now follows you for life, auctioned off  
from one collector to another.

Last month, Republicans on the financial services subcommittee  
effectively prevented a group of cardholders, including Christy Mylar- 
Smith and Marvin Weatherspoon, from testifying and telling their  
stories.

The Republican view is that people who contract legal debt must pay  
it, at the terms in their contracts.

That is a reasonable enough view, at least in theory.

But imagine what homeowners facing foreclosure and cardholders facing  
financial strangulation must think when they see Washington bailing  
out the big investment banks and their rich creditors with taxpayer  
money.

Imagine, also, what most Americans would think if they realized what  
the banks are doing with all their credit card debt.

It's being "securitized" — meaning that it is being packaged and  
resold on international financial markets, which is the same practice  
that led to the subprime disaster and its frightening global fallout.

Rheingold, who correctly predicted the subprime fiasco even before it  
began, has another prediction today: That Americans will start  
defaulting on credit card debt, too. And probably auto loans as well,  
which account for another $1 trillion or so of consumer debt.

(People here routinely finance car purchases with six-year loans and  
down payments that barely cover the sales tax, meaning they are "under  
water" on the loans as soon as they drive off the lot. Some dealers  
suggest you put some of the loan on, wait for it, your credit card.)

"Don't kid yourself," says Rheingold. "The way credit has developed in  
this country, we're in for a real tough time. We have lived for years  
on the basis of simply borrowing our way out of trouble. Well, we've  
seen what borrowing has done to this country right now. It's absurd,  
it's obscene, and at some point we are going to have to pay the price."

As noted, you try to see beyond what's happening here. But as much as  
you want it to turn out well, common sense keeps telling you it won't.