Third Party & Independents Archives

Credit Cards: Democrats Eying Shylocks

And its about time the green flush credit card industry got a mowing by our government. Deregulation of the credit card industries in the late 1970’s has seen an ever increasing, out of control, spiral of higher interest rates, higher debt limits, higher tolerance for high risk card holders, followed by higher interest rates. And this spiral culminated in a bankruptcy reform law passed by Republicans to better protect the credit card issuers in the event of consumer bankruptcy filing.

Corporate usurers capable of scalping millions more families of their last available dollar in interest rates as high as 36%, has Joan and John Q. Public finally speaking up. And for good reason. No working American in need of borrowing could hope to pay off the principle on a 30 to 36% interest note, without winning a state lottery.

It is as if the hero of every Republican and many Democratic politicians was Shakespeare's Shylock, demanding interest or a pound of flesh. Or in our case, payment or suffer a lifetime of servitude paying the principle and even interest off after successfully filing bankruptcy. Shylock has been very busy in the lobbying the halls of Congress inching up those usury rates to the point that America is witnessing the highest bankruptcy rates involving credit card debt in its history. It has become a bubble, and the mortgage industry meltdown is the pin that is bursting this Credit Card bubble.

Most middle class Americans today are but a major medical necessity, or several credit card interest rate bumps, or loss of job away from filing for bankruptcy relief from creditors. And this is not news. In 2006, the FDIC reported on a conference discussing the next potential recession. In their FYI publication they reported:

...there are at least three widely acknowledged areas of near-term concern that could pose risks to the economy going forward: a spike in energy prices, a decline in home prices, and a retrenchment in consumer spending arising from record consumer indebtedness. The consequences that any of these developments might have for economic growth could range from modest to severe, depending on how events play out over the next few years.

As 'bad luck' would have it, we are witnessing all three dire scenarios unfold simultaneously. It was not really bad luck. What it was was poor management, poorer regulation and intervention, and a Republican Congress and President transfixed on the positive economic data of international corporations to the exclusion of the rest of the economy and plight of consumers. To this day, the Bush White House still reports that the economy is strong, we are just going through some rough spots.

The simple fact is that we are entering a period when those Americans with the most life savings are entering retirement years in an environment that will eat their savings away in record time via energy and food inflation, unconscionable health care inflation when they need health care the most often, and when their working children will be facing enormous national and personal debt in a global marketplace that will continue to pressure their real wages lower.

The entitlement crisis looming threatens large increases in federal taxes or widespread financial and medical hardship for 10's of millions of Americans. At at time when we should be facing this crisis with enormous cooperative and creative national effort, and larger still financial set asides to meet looming demands, we are instead exporting 100's of billions of borrowed dollars overseas to benefit poor and wealthy alike in other nations favorable to our international corporation's profitability who increasingly employ foreign workers instead of American workers.

Someone needs to take a stand and begin defending America's future and American workers, their children and their retiring parents, and it has to begin somewhere. I can't think of a better place to begin than the usurers profiting from 30+ percent interest loans to millions of persons who should never have been issued unsecured debt in the first place. If this sounds familiar, this is precisely what critics have been saying about the sub-prime mortgage lenders who saw such profitability in lending to borrowers sums they could never hope to pay back a few years down the road.

The Credit Card lenders of usurious rates like Bank Of America who lured consumers in at 7 to 12% credit cards only to raise those rates to over 30% as credit limits were approached following President Bush's plea for help from consumers in supporting our troops by going shopping. It was a bubble or house of cards that has been building since the deregulation of the industry 3 decades ago.

And the Bankruptcy Reform of 2005 (PDF) is not going to save millions of Americans or lenders as consumers find themselves through unexpected life events turning to creditors out of desperation at any interest rate to buy that needed replacement vehicle, or pay those enormous uninsured medical expenses, or those months of gravely reduced income while looking for another job to replace the one just outsourced to India, China, or Malaysia. The cure is going to feel like the loss of a pound of flesh in one cutting. If only politicians would embrace an ounce of prevention as their guide, instead of a pound of cure, they would not find themselves apologizing for their Shylock campaign donors.

Yes, it is time our government turned an inspecting eye upon the Shylocks of the Credit Card industry, as they should have turned an inspecting eye upon the sub-prime mortgage industry back in 2006 when the FDIC reported this could have a very bad outcome.

Posted by Jeff Wyans at May 5, 2008 6:07 AM
Comments
Comment #252158
I can’t think of a better place to begin than the usurers profiting from 30+ percent interest loans to millions of persons who should never have been issued unsecured debt in the first place. If this sounds familiar, this is precisely what critics have been saying about the sub-prime mortgage lenders who saw such profitability in lending to borrowers sums they could never hope to pay back a few years down the road.

That is a double edged sword. In the home loan market, as I understand it, about .5% of all home loans are in foreclosure. While the rates of foreclosure have gone up, the number of loans in foreclosure is still very small.

Now, had the rules not been relaxed, millions of people would have not been able to purchase a home. An overwhelming percentage of those millions of people who were able to purchase a home under the relaxed constraints are still paying and keeping their houses because they were intelligent enough to not purchase beyond their means in case of economic hardship and with fixed loan rates. These are the people that the regulation you seek would, and will be, blocking from being able to obtain financial security.

These are usually the poor income or one time bad debt individuals that the government would be preventing from getting back on track.

As for credit card rates, it’s not the rates that are bad. I got an ‘offer’ from a credit card company the other day that was 9.9% interest. However, there was a $7 a month fee, a $28 a year membership fee, a one time $48 setup fee and some other fee that I don’t think I was able to figure out. Those fees went on the card and were THEN assigned interest.

Now, did I sign up for that card? Hell no. But I am not an idiot. However, apparently there are enough people who are or these offers wouldn’t be going out.

And that is the main problem. Yes, we could set up an agency that oversaw every single creditor and transaction and determined if the lendor and debtor should or shouldn’t enter into the agreement that they are both doing of their own free will (no one is forcing anyone to accept these high rates) but it makes MORE sense to me to spend the time, energy and money to EDUCATE people to be fiscially responsible so that they can made those educated decisions on their own.

But neither party wants to do that. The Republicans want to keep the sheeple compiant so that they will continue to spend their money (re: Barenaked Ladies’ song ‘shopping’). The Democrats want to keep the sheeple ignorant so that they can gain political power in being their protector from the big bad ‘corporation’.

There already is regulation of the credit card companies. There are state limits on interest rates and how they function. With the differences across the country being what they are, why do we think a national answer to the question is appropriate? Is the cost of living in Los Angelas the same as Birmingham? Should the laws governing those two different areas be the same?

Let’s solve the problem, not bandaid it. Not perpetuate it, which is what using regulation in this case would do. There *SHOULD* be regulation, but it should only come into play in the rarest of circumstances *IF* the population is properly education.

How many schools teach real life economics? I was taught in 6th grade by a teacher who went outside of the cirriculum about how to write checks, balance a checkbook, save money, live within a budget, etc. These should be REQUIRED courses in our schools, but for reasons I’ve already stated are rarely the case…

But, go ahead and look to the government to run your life for you (and everyone else) if you want, that’s the wave of the future apparently. One less thing to worry about so you can free your mind to figure out which American Idol to vote for this week!

Posted by: Rhinehold at May 5, 2008 9:59 AM
Comment #252164

Rhinehold:

Your concern and respect for your fellow man just shines throughout your post!

Posted by: womanmarine at May 5, 2008 11:17 AM
Comment #252166

Rhinehold, I agree with you. But, you need to catch up on your history. While states in theory can set rates, the Supreme Court’s ruling upholding offers in one state by another state’s company at their home state’s lower interest rate effectively did away with competitive state caps and regulation of interest rates. There virtually are no limits today, save for a couple of die hard states.

Rates so high as to preclude the principle ever being paid except by 3 or 4 times that amount in interest, is a modern version of indentured servitude. Jeff is right about this requiring a serious look by Congress. All societies dating back before the Roman Empire have imposed some varying limits on creditors and usurious rates. Plato had a few choice words on the topic as I recall.

The concept of a fair rate for a reasonable risk is the prudent concept both our government, and our creditors need to return to. It is prudent by avoiding the excesses of either usury or heavy handed government intervention demanded by the people taken unfair advantage of. Math education being what it is in America, prudence is certainly the least costly course in the long run, for all concerned, don’t you think?

Posted by: David R. Remer at May 5, 2008 11:30 AM
Comment #252167

Great topic, Jeff.

Back in 2006 I wrote about an impending potential recession and Market downturn resulting from the housing price bubble bursting, as one writer called it back then. Conservatives debated me for over a year that it just couldn’t happen and that Bush was right, our economy is strong.

There are sometimes great satisfactions to be returned for debating the issues here, especially with Republican supporters who insist on a pretty view of the world if the Republicans are at the helm, regardless of reality.

‘Mission Accomplished’ was just one of the better and more notable examples of a mindset that just won’t quit being wrong, time and time again. A mindset that says, if we did it, allowed it, or promoted it, it has to be right and good and second guessing is just rude and disloyal.


Here you are writing that there is another shoe to drop on our economy. It would be good if you were wrong. But, the evidence says you are right. Ignoring it will not make it go away. Dealing with it may lessen the consequences of neglect for so long.

Posted by: David R. Remer at May 5, 2008 11:48 AM
Comment #252173

“Most middle class Americans today are but a major medical necessity, or several credit card interest rate bumps, or loss of job away from filing for bankruptcy relief from creditors.”

Why is this a surprise? If I lose my job (and don’t get a new one) I will be bankrupt very soon. Every middle class and most of the higher income Americans are in this position because we are not independently wealthy. If we did NOT depend on our jobs for income, I doubt many of us would keep those jobs. We would be just rich.

So you have made a tautology sound ominous. It is like the one that half of all Americans earn less than the median income and the death rate for all humans is 100%.

Re credit card debt – just say no. If you don’t have enough money to buy something, wait.

You have two conflicting scenarios. If you extend credit to people who cannot handle it, you have trouble. If you refuse to extend credit to people who cannot handle it, you have trouble.

If you want to tighten credit, you can do that. You will have fewer bankruptcies and defaults. If you loosen credit you will have more of them. Choose your balance.

Lending to some people at any given rate is not worth the risk. If you lower the interest rates, you exclude some types of borrowers, almost always these are the poor.

People are in trouble because they are buying too much stuff. We have an embarassment of riches in our country.

Posted by: Jackj at May 5, 2008 1:02 PM
Comment #252174

Sorry about the Jackj thing. It is just plain Jack, but I type too fast when I hit tab to get to the email address.

Posted by: Jack at May 5, 2008 1:04 PM
Comment #252181

Jeff Wyans, good article!

Yes, there’s something very wrong here.

Borrowers bear some responsibility too.
The borrowers ignorance makes them prime targets for abuse.
But interest rates as high as 36% is usury, and demonstrates how greedy the bankers are.
A 36% interest rate on a $5000 balance is $150 per week interest alone, and the total interest alone would exceed the original $5000 in 4.3 years with a $190 payment per month.!
And there are many other dishonest tactics being used by many bankers to jack-up interest rates.
Sometimes for no valid reason at all.

Many courts prohibit loans in excess of 10% between individuals.
Why not for bankers?
Greedy bankers doubled (or more) some peoples’ home mortgage payments.
Many people say the bankers don’t want your house.
The bankers say they prefer to have the home owner continue making their mortgage payment.
If true, why do the bankers drastically raise interest rates (e.g. on Adjustable Rate Mortgages)?
Here’s why.
The bankers wants cash to make more loans to make more money on interest from the loans.
If the banker forecloses, it can still sell the house (discounted) to a wealthy investor, then have the cash, then borrow more cash from the Federal Reserve at low interest rates, and then make more money from subsequent loans and interest. Cha-Ching!

Thus, the Federal Reserve and member banks still do pretty good, by converting money printed out of thin air into real property and assets by confiscating foreclosed properties, and reselling them for more cash from wealthier investors swooping in to capitalize on the bursting of the bubble. Cha-Ching!

Especially when you consider that the Federal Reserve creates money out of thin air at a fractional ratio of 9-to-1 !
Must be nice to make money on money created out of thin air, eh?

And even if a member bank fails, the Federal Reserve is likely to bail it out.
The bankers get bailed out, and the tax payers get the bill.
Thus, the owners of the banks, hedge fund owners, and risky investors are still come out good, and the CEOs still have their multi-million dollar salaries, bonuses, stock options, and golden parachutes.

Since 14-JAN-2008), the Federal Reserve has pumped $395 Billion into the member banks: www.federalreserve.gov/newsevents/press/monetary/2008monetary.htm
And where did the $153 Billion for the economic stimulus come from?
The monetary system is a dishonest, usurious, inflationary upside-down pyramid-scheme.
Hence, the U.S. Dollar is falling like a rock (since 1999), and the debt monster grows and grows.
Inflation hurts the lower-income and middle-income groups the hardest, since inflation erodes their incomes, savings, retirement funds, and pensions.
Inflation creates instability and bubbles (e.g. stocks, real estate, bonds, gold, commidities, back to stocks, … ).
Who are the usual winners and losers?
Consider the following:

  • Year 1930: 1% of weatlhiest owned over 40% of all wealth.

  • Year 1976: 1% of weatlhiest owned over 20% of all wealth.

  • Year 2008: 1% of weatlhiest owns over 40% of all wealth.
The bubbles are a vicious circle that grows the nation-wide debt ever larger (now at $53.2 Trillion; 3.81 times the $13.86 Trillion GDP !).
However, as with all pyramid schemes, it can’t last forever.
Especially once the level of debt finally exceeds the ability to pay.
When that bappens, the entire pyramid is threatened.

David R. Remer wrote: Here you are writing that there is another shoe to drop on our economy. It would be good if you were wrong. But, the evidence says you are right. Ignoring it will not make it go away. Dealing with it may lessen the consequences of neglect for so long.
Yes, some painful consequences are probably already unavoidable (for many years to come).

It could take many years (or decades) to unfold.
We could be looking at many decades of a slow and gradual decline.
Without fundamental changes to stop a number of abuses (e.g. One-Simple-Idea.com/DisparityTrend.htm), the only solution to prevent the eventual collapse of the pyramid-scheme is to create more money out of thin air (and debt and inflation).
So the debt pyramid grows larger.
The nation-wide debt-to-GDP ratio is now about 4 times larger than 30 years ago!

  • Total Domestic Financial Sector Debt = $15.8 Trillion

  • Total Household Debt = $13.88 Trillion

  • Total Business Debt = $10.16 Trillion

  • Total Other Private Sector Foreign Debt = $1.8 Trillion

  • Total Federal Government National Debt = $9.4 Trillion

  • Total State and Local Government Debt = $2.2 Trillion

  • __________________________________________________

  • Total = $53.2 Trillion

  • Including the $12.8 Trillion borrowed and spent from Social Security, leaving it pay-as-you-go, with a 77 million baby boomer bubble approaching,
    the total is $66 Trillion! (over $216K per person; that is 4.76 times the $13.86 Trillion GDP!)

So, that leaves us with one simple question that no one seems able (or willing) to answer:

  • Where will the money come from to pay the interest on the current $53.2 Trillion in total nation-wide debt, much less the money to pay the principal (i.e. LOAN=PRINCIPAL+INTEREST), when that money does not yet exist?
Especially when 80% of all wealth in the U.S. is owned by only 17% of the total population, and we are finally unable to:
  • create more money as debt (since money is created as debt at 9-to-1 ratio from existing reserves),

  • or create more money out of thin air; i.e. not backed by any reserves (due to exponential inflation already),

  • or spend and borrow more (70% of the economy is consumer driven),

  • or immigrate more (i.e. cheap labor),

  • or procreate more,

  • or increase productivity, i.e. increase GDP more,

  • or lower taxes more,

  • or tax the wealthy more,

  • or decrease the abuses already causing the worst 17+ economic conditions ever and/or since the 1930s and 1940s.
NOTE: being weatlhy is not a crime. Mere redistribution of weatlh is not the issue. The issue is the abuses that are causing the worsening wealth disparity trend of the last 30 years.

Jack wrote: People are in trouble because they are buying too much stuff. We have an embarassment of riches in our country.
That is partly true. Ignorance is not a great excuse, and merely invites abuse.

However, there are other abuses at work here too: One-Simple-Idea.com/DisparityTrend.htm
Also, those 10+ abuses did not all come about by mere coincidence.

Lastly, few (if any) of the abuses are likely to be stopped as long as too many voters reward irresponsible incumbent politicians with 93%-to-99% re-election rates.
Regardless of who the next president is, what can the next president accomplish if sabotaged and saddled with the same irrsponsible and corrupt Congress?
Perhaps enough voters will vote more responsibly when enough of them are jobless, homeless, and hungry?
At any rate, the voters will have the government they elect, and deserve.

Posted by: d.a.n at May 5, 2008 1:56 PM
Comment #252221

“Shake-speare’s” Shylock was actually based on a real historical figure, Michael Lok:
www.civilization.ca/hist/frobisher
who financially ruined the guy who actually wrote the plays, through investments in an expedition to find the Northwest Passage, which, thanks to global warming, may soon shorten ocean shipping routes. Shylock is a play on shycock, a very small wary bird.

Posted by: ohrealy at May 5, 2008 8:48 PM
Comment #252232

BTW, while I think that people who enter into bad agreements should be held to them, I feel the same about the credit card companies.

One thing not mentioned in the article here, that I have found out in research, is that these companies are raising the rates to 33 and 34 percent and the applying the increased rates to the existing balance. Not only is this immoral but should be illegal if it is not. You can’t agree to a transaction and then ‘change the rules’ after the fact, on either side.

Posted by: Rhinehold at May 5, 2008 10:32 PM
Comment #252244

Rhinehold, yet that is what they have been doing for a great many years now. And yes, it is legal. The laws allow them to adjust the rates and send notice to the debtor, giving them the choice of closing the account and freezing the previous rate, or accepting the new rates on the entire balance.

For many Americans living on the margin, closing all credit card accounts literally makes them dysfunctional in our consumer society. Everything from airline tickets to some job employment criteria requires the possession of a valid credit card. Many businesses online accept only credit card transactions, and nearly all businesses advertising on TV require one.

We are of like mind on this issue with much common ground to share. A huge majority of laid off employees get themselves through the unemployed interim with the use of credit cards, which helps them avoid bankruptcy as a result of several months of unemployment at greatly reduced unemployment insurance income.

One of the great travesties of the last several decades is that automobiles no longer have a significant or viable life beyond the payment of the note to buy it in the first place. A couple of decades ago, one could by a used Volvo 145 and rest assured that it would last them 2 decades with minimum maintenance and repair outlays, many of which could be done by the owner in their driveway. Then planned obsolescence fell out of the public discussion as it was fully and completely adopted by all auto manufacturers.

Same was true of Jeeps. Today, Chrysler makes the heating control doors deep inside the dash and the electric window mechanisms with plastic stress points which have a life of around 5 years or less. Just long enough to pay off the note. The cost to repair a window with a 99$ part is now $450 at the shop. And the cost to replace the heating control doors broken plastic pivot pins every 5 years, a whopping $1200 in San Antonio, Texas.

A vast majority of working Americans jobs depend upon their having a reliable dependable vehicle. Yet, the vehicle is one of the primary consumers of credit card debt by the unemployed. When employed they don’t notice much the maintenance costs of their vehicles. But, upon becoming unemployed, those repair costs can spell large increases in their credit card debt, which Experian and other credit reporting agencies use to reduce FICO scores and justify credit card companies raising the rates on the newly unemployed.

It is a vicious consequence of American consumerism and manufacturing that so entirely embraced the planned obsolescence concept back in the 1980’s. It also partially accounts for Americans rejecting American made autos and becoming loyal consumers of Japanese made cars, whose planned obsolescence was extended out to 7 years, instead of the American 5 year window.

General Motors was the most egregious adopter of this planned obsolescence scheme to shore up profits in the face of Japanese competition. That accounts for why working class people no longer buy used Cadillacs. They have become infinite money pits with some of the highest maintenance costs of any car brand and shortest lifespan for parts to its electric controlled mechanisms.

Politicians and corporate investors in American manufacturers had better pray the unemployment rate does not increase further. Because for every 1 percent of newly unemployed, a million or more consumers will experience the rage that comes with repair and maintenance costs that arise during periods of unemployment. Maintenance occurs all the time, but, consumers don’t pay it much mind while they are employed and capable of working them into their budgets.

When they are unemployed, that vicious cycle of impoverishment kicks in with putting more maintenance on the credit cards, raising the debt levels, reducing the FICO scores, and causing interest rates on the card to rise, all while the person is struggling to make ends meet in the first place. The Credit industry loves to cite how credit is a safe harbor for temporary unemployment or unexpected emergencies. But, the truth is, credit used beyond a minimal point results in ever higher spiraling cost of credit for the people already strapped into using credit cards more.

Posted by: David R. Remer at May 6, 2008 12:58 AM
Comment #252250

David,

This speaks much more to the success of our economy than the failures. Because we have been so successful over the past several decades, we have changed our thinking into one of short term acquisitions. Had we not been as successful, had times not been as good as they have been, there is little doubt that we would never have accepted the behaviors of the companies now.

Companies do overstep their bounds from time to time and we must have regulations in place to ensure that the market is kept free, that each party to the transaction is fully aware of the terms of the agreements and those terms are not changed. However, they only can stay in business if they either prey upon stupidity (which we should be viligent about but focus on education more than blocking all valid uses for the same type of agreements) or keep enough people happy with their products or services to make it worth their while.

General Motors, without government intervention (tarriffs, assistance, etc) would have gone out of business long ago. But we, as a society, screamed for them to stay in business. How, then, can we say that the problem with General Motors is a free market economy? It was a blocking of real market forces that kept them in business long enough to be who they are today. And perhaps it was a good thing, perhaps not.

But that is the problem, isn’t it? When to interject and when not to? When to see that we are interjecting and when we aren’t. For example, we say we need to regulate the healthcare industry. But we already do! Government has been involved in healthcare for decades, little by little, increasing their involvement. Today, a doctor spends at least 2 days a week in time working with billing procedures, most of them put in place by these regulations and for protection for outrageous malpractice insurance/lawsuits. So do we need more or less? Do we need different? At what point are we interferring too much, as we did with GM?

And to be honest, if we were just talking about regulating healthcare so that people cannot be turned down for insurance and a maximum cost to the insurance was X, I wouldn’t be too concerned. But when the talk starts to move down the road of either forcing people to get insurance or making all people have the same cost insurance. Or talk of it being a ‘right’, one that would require the federal government to then violate other rights to ensure that people were becomming doctors and nurses, etc. That is when I have to step in and say NO. (btw, a nice book on this topic is “Crisis of Abundance: How We Pay For Healthcare”.

As for people ‘having’ to use Credit Cards. I’m sorry, but if a person is paying their bills, closing a credit card and opening another one up with another company, or better yet transferring that balance, is not at all hard to do. Most credit card companies are jumping at that chance. If your credit is not that good, who’s fault is that usually?

(disclaimer, I have had credit issues in the past myself, I have gotten myself out of them, I have not expected anyone else to solve my problems for me. I routinely help others in the same position, but expect the same from them. Acceptance that they are there because of their own actions, not those of anyone else.)

Posted by: Rhinehold at May 6, 2008 1:48 AM
Comment #252619

Rhinehold, spare me your anecdotal argument. Let’s look at the macro picture here.

Americans are forced to revolving credit card balances in ever greater numbers these days. Here are facts and sources:

“Consumer credit increased at an annual rate of 5-1/2 percent in the first quarter of 2008. In that quarter, revolving credit increased at an annual rate of 6-3/4 percent, and nonrevolving credit increased at an annual rate of 4-1/2 percent. In March, consumer credit increased at an annual rate of 7-1/4 percent.”
—Federal Reserve

Revolving consumer credit outstanding rose from 791.9 billion in 2003 to 944.1 billion in March of this year. Source: —Federal Reserve

Personal bankruptcy filings are up about 40% from a year ago. - PalmBeachCoast Business secton.

Medical bills account for almost half of all bankruptcy filings. Newstandardnews.net

There are public and general welfare issues. There is no liberty in poverty. The wealth gap is increasing, and the practices by some in the private sector are chief among the causes. Predatory lending, red tape even lawyers find daunting to wade through and understand, and wholesale usury by most of the non-bank Credit Card issuers can only be addressed by government regulation.

The government DOES have a role in regulating who wins and loses when that relationship is unjust and one sided in favor of powerful and wealthy corporate interests who can bring billions to bear in influencing public psychology and behavior through the trillion dollar industry of marketing and advertising of need fulfillment.

Posted by: David R. Remer at May 11, 2008 5:48 AM
Comment #252663

An interesting article on an old subject here.

http://seekingalpha.com/article/76554-what-if-we-d-been-on-the-gold-standard

Posted by: googlumpus at May 12, 2008 2:50 AM
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