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Monday, May 11, 2009

An economy built on unfettered spending cannot survive
Posted by Jill | 6:10 AM
So now we know on what the Bush-era economic boom was built: easy credit.

These days my snail mail consists largely of mail order catalogs. I pay most of my bills online, and I almost didn't notice when the relentless barrage of credit card solicitations stopped. I still get a few, mostly Discover card pitches for 13.74% interest rates. But the 0% for a year and a half with convenient balance transfer checks have disappeared, for which I'm truly grateful -- not because I was tempted, but becuase I get tired of shredding all that paper.

My FICO score is high, but not as high as it should be for someone who in 30 years of having credit cards and 13 years of a mortgage has never so much as made a late payment. I think it's because I do have a lot of cards, more than I need, as a result of playing the 10% discount game and the balance transfer game. The latter came in handy when I took a no-fee, purchase-rate advance for part of the cost of residing and reroofing our house and installing windows a few years back. I paid it off in eight months while not running up debt anywhere else, and that was that.

On Saturday I went to the 30% off all Elfa sale at Container Store, because I am as susceptible to the more consumerist aspects of Clean House as anyone. For around $400, I was able to get enough shelving and hanging bars for two closets. This means that I don't buy crop pants that I need until next month.

I know it's hard to sympathize with people who ran up $20,000 or $50,000 in credit card debt. It's not unlike the mortgage situation, in which you may have sympathy for someone who just wanted his own home and bought an overpriced fixer-upper in a dicey neighborhood just to have a place to call his own -- and now finds himself unable to pay the ballooned interest rate; but think the $30,000/year substitute teacher who bought a $700,000 McMansion with soaring ceilings, granite countertops, and a soaking tub, got what he deserved. There are those who used cards to buy Louis Vuitton handbags and 60" flat panel TVs and Denon home theatre sound systems and Caribbean vacations at top-line hotels who now find themselves over their heads, and we have no sympathy for them. But what about the guy who lost his job, couldn't afford COBRA, his kid got sick and the emergency room takes Visa? Or the woman whose 15-year-old Chevy blew a head gasket and she paid for it on credit card because she needs it to get to the temp agency she hopes will place her in a minimum-wage job for a few weeks? When you fall through the safety net, credit cards are the lifeline -- albeit one that only staves off the inevitable.

And now the credit card companies find themselves awash in bad debt they're unlikely to see repaid:
The unemployment rate has long mirrored banks’ loss rates on card balances. But Eddie Ward, 32 and jobless, may be one reason that rule of thumb no longer holds. For many lenders, losses are now starting to outpace layoffs.

Mr. Ward, of Arkansas, lost his job at a retail warehouse in April and so far has managed to make minimum payments on his credit card debt, which he estimates at $15,000 to $20,000. Asked whether he thinks he will be able to pay off his balance, he said, “Not unless I win the lottery.”

In the meantime, he said, “I’m just doing what I can.”

Experts predict that millions of Americans will not be able to pay off their debts, leaving a gaping hole at ailing banks still trying to recover from the housing bust.

The bank stress test results, released Thursday, suggested that the nation’s 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called a “worst case” economic situation.

But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capital One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour.

Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.

In the official stress test results, regulators published losses only on credit cards held on bank balance sheets. The $82.4 billion figure did not reflect another element in their analysis: tens of billions of dollars in losses tied to credit card loans that the banks packaged into bonds and held off their balance sheets. A portion of those losses, however, will be absorbed by outside investors.

What is more, the peak unemployment level that regulators used to drive their loss estimates is roughly what current rates are on track to reach. That suggests that if the unemployment rate gets much worse, credit card losses could be worse than what regulators projected.

And many economists expect the number of job losses to climb even higher. On Friday, the unemployment rate reached 8.9 percent as the economy shed 539,000 jobs. The unemployment rate and the rate of credit card charge-offs, or uncollectible balances, have been aligned because consumers who lose their jobs are more likely to miss payments.


Melina has had a post cooking in her head for quite some time on how the credit card companies have been trying to deal with this in the form of retroactive rate increases, narrowing of payment windows to the point that there is no possible way to pay on time because the due date is only a few days after when you get the bill (my electric utility has recently pulled this stunt too, and doesn't let even let you submit an online payment until you get the statement), and other stunts designed to get people who may already be underwater to help pay off the debts of others. Oh, and if you try to cancel your cards, or cancel more than, say, one every year (as I am doing with cards I no longer use)? Your FICO score goes down because they assume you're doing it because you are in financial trouble.

For years the credit card companies made it easy for people to get into trouble, and then exploited those who did, and now the piper is coming due. It's easy to say that one shouldn't get into debt one can't afford to pay back, but if you think those people who already can't pay back what they owe are going to do so, guess again. Like Willie Sutton robbing banks because that's where the money is. The credit card companies will raise YOUR rates and narrow YOUR payment windows -- because you have shown that you'll pay.

This week the Senate is taking up the Credit Cardholders Bill of Rights. Remind your Senator that he works for you, not the banks.

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3 Comments:
Anonymous joel hanes said...
My Senator is Dianne Feinstein. She works for the banks, not for me.
5/12/09, 2:30 AM  
Blogger Jayhawk said...
She's mine too. She also works for defense contractors.
5/12/09, 11:50 AM  
Blogger Melina said...
Mine are Dodd and Lieberman....I don't know who they work for, but I doubt its me.

No one I know is using their credit cards anymore....its funny how just about everyone I talk to, even people who don't carry balances, have noticed the little games being played to get another $39.95 late fee out of us. That money goes directly up to the CEOs for bonuses, as they scale back the smaller jobs to "save money."

I have a file of mailings with tiny writings on them and at the ends changing the terms of our "agreements"
at the end of each notice is a line about sharing my information with "trusted partners" unless I send them a letter.
So, now I have to sit down and write letters to just about everyone I do business with....not only are they fucking with me, but they are selling my information....and stealing my time!
So, yeah, I have a post...
I also own a property so I should be able to consolidate a debt that came from my grandfather being sick and taking care of 2 households/running back and forth, and other issues which will come to light sooner or later.

BUT I cant take a loan because they have suddenly lowered my score. I have always had a perfect score but the terms have changed on that too...and the income I have isnt income that is recognized...rental income...I dont know.

I will be able to pay it off sooner rather than later and I will then cut off these big banks totally.
I never again want to be associated with Chase of Bank of America. And I will probably add Citibank to that too.

I cant even sort it out...but its cookin'...and it will mean little because if we cant even look into former leaders getting on TV and confessing to war crimes, then how are we supposed to look at these banks.
I'm happy to see Elliot Spitzer out there talking...I hope he keeps talking...
someone has to represent the law!
the decks are stacked against us.
5/13/09, 11:37 AM  
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