Economics during the Bush-Cheney administration seems to have revolved around a singular phrase, "Debts don't matter." This seems to be the thinking within the administration, and it certainly helps to explain why markets have experienced a volatile roller coaster of ups and downs in recent weeks. The concept has made it easy to point to certain things and say, "Look how great the economy is doing," while real people are suffering financial hardships. This because the credit/debt industry can easily make it look like money is moving down the trough without actually creating usable wealth.
The most visible lending industry, the credit card industry, is based on two hypocritical ideas: 1. Customers that pay their bills on time are less valuable than customers who cannot pay back their debts, as those who pay on time do not rack up interest; and 2. Never having needed to borrow money puts you in worse standing than having borrowed money and not beeen able to repay the debt in full. In other words, no credit rating is worse than a bad credit rating.
This hypocrisy is what has led to a series of deceptive practices, which are finally coming under scrutiny from the government (of course only as economy seems to be on the brink of a recession). The New York State Consumer Protection Board has asked New York State consumers to submit their stories about credit card deception in an effort to mount a case against the credit card companies (For New York residents visit this site). As part of this effort, New York State Attorney General Andrew Cuomo has forced a $4.5 million settlement with First Premier Bank over deceptive practices. The New York Times covers.
But First Premier customers aren't the only ones. In fact, only six months after receiving a Capital One credit card, I have seen some of these deceptive practices first hand. Two months ago, after the first billing period in which I charged over $300, my bill was ten days late in reaching my house. When I called to find out why it had not arrived on schedule, Capital One told me that they were refiguring the billing cycle, and that many customers were experiencing the same delay. What this reconfiguration entails specifically is that for that month the billing period was extended four extra days (from originally ending on Monday the 15th to instead ending Friday the 19th). In addition to this change, the bills, I was told, were no longer processed and mailed within two days of the end of the billing period, but were instead being mailed ten days after the end of the billing period, all of this without change to the due date on the charges. Thereby, my overall payment period (the time from which I receive the bill to the time which it is due) went, within a matter of two months, from a full four weeks to pay, down to two weeks to pay, an obvious effort to squeeze a late payment out of me.
In the meantime, another deception was occuring. On my first bill for the extended period, I was charged a $30 overlimit fee for having exceeded my $500 spending limit (and I will just forget the fact that it is Capital One's limit, which they allowed me to exceed as a "courtesy" to me they say). I paid the fee and simply cursed them silently in my head. However, on my latest bill, I was charged another overlimit fee despite the fact that I charged nowhere close to $500 during that time. When I called to ask why, I was told that though I had not charged more during that billing period, I had made those charges before paying the previous bill, which exceeded $500. Unfortunetly for Capital One, I am not an idiot. Looking carefully at my bill, the two charges that forced the overlimit fee in the new month were made on the 18th and 19th, two dates which both occurred within the previous billing period, and yet, which suddenly appeared on the next statement side-by-side with a new, and erroneous, overlimit fee. Thanks to my very loud and argumentative voice, the overlimit fee was dropped, as a "one-time courtesy" (read another's concern with Capital One, and the response, in the New York Post's Dear John column from last week).
What is interesting about such deceptive practices is not simply that they are widespread, but that they are actually the foundation of the entire credit industry, mainly because the industry is based on the aforementioned hypocrisies. Let's face it, generally speaking, lending money is not a very good business to be in if your customers are smart and pay in full and on time with little or no interest. Yet the deceptive practices and poor lending standards are what has led us to our current economic volatility, where lending is being extremely tightened as a result of these hypocritical and irresponsible practices. The New York Post covered last week's stock market plummets with this angle.
By now, just about everyone is familiar with subprime mortgages, as this has been widely pointed to as causing the economic downturn, specifically in the housing market. The subprime market is a eupemism for people with poor or risky credit ratings. The philosophy of lending to people with poor credit is fairly simple: Those with poor credit are subject to higher interest rates, so even if they cannot pay you on time, or in full, their debt to you will increase with no extra cost to you; and as long as they cannot pay you, you, for all intents and purposes, own them; their money is automatically your money....until they claim bankruptcy.
Interestingly enough, one of things that has kept the subprime crash at bay, was a recent change in the bankruptcy law, which essentialy favored lenders over the debtors. This help to keep people from claiming bankruptcy. And yet, the foundation of the law exists, essentially, within the frame of mind that corporations are more worth protecting than consumers. The only problem with this is that, at the end of the day, all economies need consumers much much more than they need corporations, or even lenders, so such a policy can only delay an economic downturn.
The idea that loaning money is necessarily advantageous to the economy, regardless of the debtor, is a very antiquated notion. John Perkins, in his book, Confessions of Economic Hit Man, traces state-lending practices and corporate manipulation in third-world investment, and demonstrates fairly well how, ultimately the lowest consumer and laborer is as, if not more, valuable in creating a stable and fruitful economy (though I must note that not everything in the book should be taken at face value despite providing a good picture of how manipulative practices inform the lending industry).
The problem with subprime lending (as with the type demonstrated in Confessions of an Economic Hit Man) is what happens when the debtor cannot pay you back. While it may seem that, if you can cover the debt, it is more valuable to own someone financially than to receive the money they owe you, it is in fact a globally and economically irresponsible policy. Now we are paying the price for such lending. As part of the stock market stumble last week, a major French bank, BNP Paribas, suspended three of its securities fund as a direct result of problems in the U.S. subprime mortgage market (Read AP coverage on AMNewYork's site for more information on how our housing market is effecting global finances). Under a global economy, when lenders continue their fundamentally irresponsible practices, international markets suffer, not simply because lenders themselves ecome delinquent (American Home Mortgage Investment Corp., for example, has just filed for bankruptcy), but also because the lowest level consumers pull their spending from the market too. In other words, the panic and delinquency occurs in corporate banks at the top and poor consumers at the bottom in independent fashions that slowly, but surely, close in on the middle class here, and branch out into markets around the world. What seemed like a two-way street between corporate lenders and subprime borrowers, has actually proved itself to be a rotary encompassing consumers of all levels and markets all over the world.
And such practices also only further damage the United States global standing, particularly as U.S. leaders in the Bush Administration look to our national debt with an apathetic eye toward our lenders (ie China). Daniel Gross makes a good point in Newsweek's Contrary Indicator column from this week, "Chagrined lenders have been gripped by the sudden realization that debt can, and does, go bad...Credit, the fuel that powers the economy, is becoming more scarce and expensive."
What we should see from these developments is that making risky loans as a means of artificially boosting the economy, creates an economy that is only as strong as those taking the loans. Similarly, borrowing, with no concern for our national debt, makes this country as delinquent as the subprime market, and could easily (though probably not quickly) lead to a lending squeeze on our national government.
So why am I still being targted with deceptive practices by Capital One when such practices are not only coming under state and fedral scrutiny, but are also, in part, directly responsible for an upcoming recession? The reason is that such companies only know to cling to past practices (higher interest rates and increased fees) in times of crisis. Instead, we should be demanding a return to responsible credit: credit that can boost entrepreneurship and provide folks at the bottom the means for establishing true wealth, and one of the best ways to send this message is take our national debt very seriously and to demand an end to deceptive and irresponsible practices in the industry that target the very consumers making the world economy go round.
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It's happening. The Rudy Word has sunken to the depths of celebrity gossip. But in this blog it will be to debunk some recent sensationalism, and in future cases, if any, it will be to lampoon celebrities for their misdeeds (such as suggesting that Lindsay Lohan have every orafice on her body sewn shut to prevent her from ingesting drugs). In this blog I will be addressing the absolute hogwash printed in yesterday's Daily News about Paul McCartney.
