Thursday, April 23, 2009

The rest of the iceberg

By Carl

It should come as no surprise to anyone who's read my pieces for even as little as a year that the real economic crisis is still to come --
credit card debt:

The administration — which scheduled the meeting at the request of some issuers — has promised to address credit card practices that Summers recently blamed for coaxing consumers "into paying extraordinarily high rates that they wouldn't have paid if they knew what they were getting themselves into."

The trouble is this: People ran up their credit cards, secure in two pieces of information. First, they could always get a home equity loan to pay off the credit cards, which would also allow them to deduct mortgage interest. Second, the price of houses would always go up, so there would always be more room to refinance the house, and gather in more cash to pay off bigger credit card balances.

Keep in mind that a lot of the problem with the mortgage industry was that people who simply shouldn't have had mortgages got mortgages because banks wanted to throw money at them.

Why? It's not just the interest income, you see, but the fees a bank can charge. Late with a payment? We'll tack on $50. Missed a payment? That's $100.

And then they tightened the rules about when a payment was late and when it was missed. It used to be, if your payment was postmarked before the due date (like when you file your taxes, still) you were presumed to have made a payment to an agent of the company (e.g. the post office).

Now, payments have to physically be received in the office of the lender, and usually by some arbitrary time (say, 2 PM). Doesn't matter if your payment is in the office, so long as they haven't recorded it, they didn't receive it.

You can imagine what that's created.

And that was mortgages. For credit cards, it gets even worse.

A decade or so ago, I held a Fleet Bank Mastercard. I had a really nice rate, 4.9%, and made payments faithfully. One day, I dunno, it was raining or maybe we had a blackout, anyway, my payment was delayed in the mail and was late.

My 4.9% rate climbed up to 26.99%! Now, I was lucky. I had a good record, good credit history, and was able to point out it was a one time occurence, so they dropped my rate. The only reason I noticed it, to be honest, was that on my next statement the late payment fee was charged and as I was disputing that, I looked at the rate information.

Now, banks can do that to me even if my payment record is perfect. Even if ALL my payments to all my cards and on all my loans is perfect.

How? I could be late paying my phone bill. Or electricity. Or cable, even.

Here's a pro economic tip: when a bank starts tacking on fees like there's a sale on them, you can bet your boots that sector of their business is hurting badly. Which means credit card defaults are alarming the hell out of the guys in the pinstriped suits.

There's roughly $1 trillion in credit card debt out there. There's $6.5 trillion or so of mortgage debt.

The rub is, the $6.5 trillion is secured by a house. A piece of property. Something of value. The total losses if every loan collapsed might be something on the order of $500 billion (assuming all the houses eventually get sold).

That $1 trillion in credit card debt is unsecured. If every credit card suddenly became a bad debt, that's a trillion bucks out the door.

You see the problem, I'm sure. In fact, credit cards are even riskier than mortgages because every and any damned fool was offered one, even college kids.

The banks will not give this up easily, and certainly not without a fight.

(Cross-posted to
Simply Left Behind.)

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2 Comments:

  • O.K. You are right. We acted like fools spent like fools....and mostly on debt. YET, believe it or not this morass of our economy IS going to work out.
    Why? Because the rules are changing and have to change, out of neccessity and survival. We will and can change our ridiculous habits of purchasing everything we want (need or not) and delaying the cost. We will become the sane consumer who buys mostly what he needs and puts some away for that rainy day (storms anyone?)
    Another gotcha, the TARP is going to work. Yes, there is much to do and not much room for mistake, but this country has the ability to overcome, learn, and move on.
    Most important? The nightmares of the last 8 years are in the past. If we are able to survive that, we can survive anything.
    Case in point; read yesterdays article in the Wall Street Journal,"Why the Wall Street Bailout is Working".

    Time will tell.....
    MBrillson

    By Blogger Mary Sinead, at 2:28 PM  

  • Mary,

    I agree with you.

    While I do not think the economy is poised to recover quickly, there are some signs it will slowly awaken within the next twelve months.

    People will learn to do with less and that will force the economy into promoting different products and different mindsets.

    But the lessons they have learned about marketing things we do not need are not gone. They cannot be unlearned. We will be here again.

    By Blogger Carl, at 9:36 AM  

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