by Geoff Olson
In a 2007 Saturday Night Live skit, a book-selling huckster appears before a couple sitting at a kitchen table, picking through their credit card bills. “You’re not the only ones,” he tells them. “Did you know millions of Americans live with debt they cannot control? That’s why I’ve developed this unique program for managing your debt. It’s called “Don’t Buy Stuff You Cannot Afford!”
illustration: James Steidl
The couple struggles with the concept and find it too confusing, even though the book is only a page long. Apparently, this comic confusion is shared by millions in both the US and Canada. In 2007, according to Laurie Campbell, executive director of Credit Canada, the average Canadian over the age of 18 was $80,000 in debt, mortgages included. In 2004, that figure was below $70,000. Since 1990, debt loads have increased sevenfold over income in Canada.
Credit cards are the single biggest factor in all of this increase in debt. While roughly 50 percent of Canadians pay off their credit cards every month, it’s the other 50 percent, the ones who do not pay on time, who are of interest to the pound-of-flesh crowd. You could say the bulk of their profits depend on people behaving like Steve Martin’s dopey, debt-ridden Saturday Night Live character. In both Canada and the US, the avarice of the credit card industry meshes nicely with consumer ignorance. It’s a predator-prey relationship of almost Jurassic perfection.
The ignorance is understandable, given our failure as a culture to instruct our youth in personal finance. Young Canadians, who have the least familiarity with high interest rates, are also the most vulnerable to lifestyle sales pitches. Increasing numbers of them use credit cards for impulse purchases, along with groceries and other essentials. The attitude is with the credit card companies offering points, why not put everything on plastic?
Campbell describes the situation as a “tipping point.” Students are graduating with thousands of dollars of student loan debt. Unable to pay cash for both essentials and impulse buys, they’ve turned to credit cards, following their elders’ lead. In a telephone interview with Common Ground, Campbell noted that, according to figures from 2006, students are coming out of school with an average of $5,000 to $10,000 in credit card debt, on top of $30,000 in student loan debt.
“Our young people are completely uneducated when it comes to financial issues,” Campbell says. “They’re graduating from college and university with the highest debt loads that graduates have had and they’re entering the workforce at incomes they thought would be much higher. Their ability to move forward in life is completely compromised.”
Young people can’t plan their future, Campbell explains. They can’t think about getting married or starting a family or buying a home or even purchasing a car because of debt load. And once young workers start paying with plastic, all it takes is a few missed monthly payments for their credit card interest rate to rise from 18 to 24 percent, in addition to onerously large, added fees. “The ones who can least afford it seem to me to be the ones who are getting hit with these kind of charges,” Campbell says.
It sounds like a perfect storm for young consumers. They’re at risk of becoming a generation of indentured servants, working to service the God of compound interest, a mysterious being that communicates through invoices and threatening reminders.
And how many readers can say they’ve even read the contract that comes with their credit card? How many readers can even understand it, for that matter? In the 2004 PBS Frontline investigative report, The Secret History of the Credit Card, after struggling with the fine print of one such form, Harvard law professor Elizabeth Warren gave up. “I’ve read my credit card agreement and I can’t figure out the terms. I teach contract law and the underlying premise of contract law is that the two parties to the contract understand what the terms are,” Warren stated.
Frontline discovered that the terms for some cards include the right of the credit card agency to reset the interest rate at any time. That includes the late payment on any unrelated loans. Stunned credit card holders in the US have discovered a late payment on a car or other purchase can result in a sudden spike in their interest rate.
A grassroots movement in the US is stumping to reign in the credit card agencies’ rates and predatory billing practices. In contrast, Canadians simply take their lumps and expect Ottawa to look out for them. Until recently, the Canadian criminal code had capped interest rates to 60 percent annually, but that was abolished in 2007 by the Tory government. The federal government had no intention of enforcing it, “so it decided there was no point in having it in the Criminal Code,” Campbell told Common Ground. The responsibility was left with the provinces to determine their own caps to interest rates and to apply their own enforcement. Today in Quebec, there is a 35 percent cap; incredibly, Ontario has no cap.
This doesn’t mean credit card rates will necessarily rise. It’s quite likely the big banks have already used their supercomputers to gauge the sweet spot on the spreadsheet where profit and consumers’ ability to pay are maximized.
Investor and financial commentator Ben Stein, a guy who expresses great fondness for credit cards, told Frontline that credit card companies hate people like him, who pay their bills off every month. “And I know that because I ran into a fellow I went to high school with on the street and he told me he worked for a credit card company. And I told him about how much I use credit cards and how I pay them off every month, and he said, “Oh, we hate you. We hate you guys. We call you deadbeats.”
Frontline examined how this bad craziness began back in the late ‘70s in Sioux Falls, South Dakota, “a modest town of 140,000 known for its cattle auctions and meat-packing industry.” Today, the little town boasts a huge post office, far bigger than its communal needs, but it serves the credit card industry’s interests just fine.
South Dakota once had a historic cap on interest rates, known as usury law. To encourage banks to make loans, the state decided to suspend the law completely. New York-based Citibank took notice. At the time, its credit card division was “haemorrhaging money” and New York’s usury laws prohibited banks from charging more than 12 percent on most consumer loans. Yet interest rates had gone up 20 percent. “And if you are lending money at 12 percent and paying 20 percent, you don’t have to be Einstein to realize you’re out of business,” Walter Wriston, then chairman of Citibank, toldFrontline. The bank saw a big opportunity in South Dakota’s elimination of the usury law, particularly with a surprisingly well-timed Supreme Court decision that said a bank could export its interest rate to other states. Other US states eliminated their usury laws and more big banks joined the gold rush.
This is why the return address on your credit card bill is often some Midwestern US locale. And the rest, as they say, is history. Or rather, the rest is usury.
Merriam Webster defines usury as an “unconscionable or exorbitant rate or amount of interest – specifically: interest in excess of a legal rate charged to a borrower for the use of money.” The key word here is legal. If the banks do it, and regulators are AWOL, then it’s not illegal or immoral by definition. It’s just sound business practice, for the lenders at least.
Yet it’s remarkable how Christians, including those on the boards of major banks, forget that scripture condemns usury in no uncertain terms. There are a half-dozen passages in the Bible damning the practice. For centuries, Christendom got the message. The church outlawed money lending for the flock, leaving it to the Jewish community. This presented a win-win situation for pious Christians, who could condemn the moneylenders even while accepting their loans.
The rise of the mercantile class during the Protestant reformation put a stake into the heart of medieval restrictions on usury, widening the scope for more lenders to join in on the fun. But condemnations of the practice continued. Lexicographer Samuel Johnson noted, “The synonym of usury is ruin.” Joseph Addison echoed his words. “A moneylender. He serves you in the present tense; he lends you in the conditional mood, keeps you in the subjunctive and ruins you in the future.”
Indebtedness, whether it is personal credit or national debt, always involves a reckoning somewhere down the line. And there is an intriguing connection of the credit card agencies’ lending practices to recent events on Wall Street. To explain this, we have to take a trip through the looking glass into the US housing market bubble.
The collapse of the financial houses of Bear Stearns was the first major indication that the US financial/speculative complex is built on sand. The US government recently “bailed out” the bottomless hole that is Freddie Mac and Fannie Mae, to the tune of $250 billion. With the subsequent bankruptcy of the Lehman Brothers investment bank, and Bank of America’s buy-up of brokerage house Merrill Lynch, the free market “shakeout” is turning into a rout. Mainstream economists are now speaking in words more suited to the Book of Revelation than BusinessWeek.
On his blog, Global EconoMonitor, the highly regarded New York University professor of economics Nouriel Roubini insists “this will turn out to be the worst financial crisis since the Great Depression and the worst US recession in decades.”
Unlike Vegas, what goes on in Washington and on Wall Street doesn’t stay there. In a financial version of the “Butterfly Effect,” the stroke of a hedge fund manager’s pen in New York can cause riots in Thailand. So what does this bode for Canada? Although there are still some regulatory differences between Canada and the US, particularly in the housing market, the economies of the two nations are tightly coupled. And the secret is wide open in financial circles that the entire US credit card complex, holding some $12 trillion in debt, is in danger of going down with the ship.
The credit card industry is intertwined with the subprime mortgage market. For more than half a decade, subprime loans were made to US citizens with shaky credit and marginal ability to pay. As long as the real estate market kept rising upwards, everything was fine. But the loans were ticking time bombs if the housing market went south, which it did.
Once again, avarice meshed with ignorance. The subprime vultures coached naive homeowners into believing they could have something for nothing – they could refinance by taking out home loans based on their equity and pay off their credit cards at the lower interest rate. What this did was effectively hide trillions of dollars in US credit card debt in the ruinous subprime mortgages. By refinancing bad debt as “good debt,” it hid how precarious the situation had become for millions of homeowners. From 2000 to 2007, the loans were bundled into securities and sold across the world to unsuspecting buyers, effectively making the subprime problem the world’s problem.
When you combine a $12 trillion credit card debt with the billions in subprime mortgages set to reset at higher rates over the next few years, and the trillions in funny money floating around in derivatives and other cryptic financial instruments, you don’t have a bubble. You have a black hole.
In retrospect, it’s been one hell of a ride around the black holes’ event horizon. On both sides of the border, predatory lenders whipped up the mania for household wealth formation, encouraging homeowners to think of their homes as ATM machines, or better yet, time machines set for an upscale future. Whether it was a sup prime mortgage or a more transparent loan, every other homeowner wanted in, in a bull market that appeared to have the blessing of the Federal Reserve, if not the Almighty Himself.
In an investment stampede that rivalled the Dutch tulip mania, homeowners never twigged to the original meaning of the word “mortgage.” It’s from the French for “death pledge” – a financial arrangement until you die.
But in the speculative Never-Never-Land of the last five years, who had time for scepticism? Pop culture got into the act with a whole new genre of reality television, focused on home renovation. Although these cheery, gyprock-smashing entertainments seemed to be about reaping the rewards of hard work, they always had a whiff of petty bourgeois desperation to them. The home flippers were always working fast, praying they hadn’t mistimed the sacred housing market.
Interestingly enough, not long after the debut of the home reno shows, a new kind of reality television appeared themed around high personal debt. Shows like Till Debt Do Us Part feature financial nannies who counsel couples buried in bills. The ignorance of these folks, many of them weighed under by mortgages and paying for essentials with multiple credit cards, is astonishing, but not untypical. They seem to have virtually no understanding of how compound interest works. They are part of the 50 percent the banks love – the sheep that can be calmly fleeced with usurious rates and exorbitant late payment fees.
Financial advisor Robert Manning, author of Credit Card Nation, put it succinctly in an interview with CBC Radio’s The Current: “The best client used to be someone who could pay off their debts. Today, the best client is someone who can never pay off their debts.”
For the lenders, debt is the gift that keeps on giving. In fact, the same practice that is applied to credit card borrowers has been applied, on a larger scale and with even greater opacity, to loans made by the IMF and World Bank to Third World nations.
Beginning back in the ‘70s, Arab sheiks found themselves flush with credit from OPEC’s oil deals. They had literally more money than they knew what to do with and they invested billions of it in US banks. The bankers now had a problem. To whom could they lend this windfall, and make money themselves? They looked around and saw an opportunity for huge mega projects in the Third World: dams, pipelines and all the big-money infrastructure associated with capitalism’s good life.
The fact that some of the lendees were corrupt dictators, who pocketed significant chunks of money for themselves and their cronies, was outside the banks’ interests. All they wanted was the money back at some point, with interest. So began the great Third World debt crisis, across Latin America, Africa and Asia, with successive governments unable to even service the interest on their interest. This necessitated further rounds of loan arrangements, and often the gutting of social services, along with the privatization of state industries. As Joseph Stiglitz revealed after his tenure as World Bank vice president and chief economist, this miserly misery-creation was simply business as usual for the global loan sharks.
In any case, once you know that the odds are stacked in favour of the house, your attitude to plastic changes. Credit cards aren’t just useful in today’s highly connected world; it’s almost impossible to get by without them. If you make your payments on time, and don’t spend beyond your means, they offer no great risk. But if you fall behind, which is damnably easy to do, you are no longer a “deadbeat” to the credit card industry. You are Argentina, Bolivia or Thailand.
In the end, Henry David Thoreau’s thoughts on debt still apply today: “That man is richest whose pleasures are cheapest.”