Sunday, October 21, 2012

The REAL Debt Crisis

We are all familiar with the daily rant from the right that our mounting national debt is out of control, and will saddle our children and grandchildren with such a massive deficit that they will spend most of their working lives vainly trying to pay it off. As a father, grandfather, and even great grandfather, I am naturally tremendously concerned about the national debt and its possible impact upon future generations, because my "future generations" are not abstractions or projections, but real living and breathing human beings, with names and faces. But I am even more concerned that their proposed answer to this very real problem is even worse than the thing itself. They have even borrowed a name for their remedy from their counterparts across the seas--AUSTERITY. But for the radical right in the U.S., austerity is just a convenient smokescreen for their real agenda: to shrink the size and scope of government at all levels, to eliminate as many public services as possible, and to shred our hard won "safety net," which is comparatively full of holes to begin with. At the risk of sounding overly dramatic, their real aim is to destroy the economic and political power of the "middle working class," and to turn the "American Dream" into something between a fantasy and a nightmare.

Things have been trending that way ever since Reagan proclaimed "morning in America" during the early 1980s, but they accelerated exponentially during the Bush administration. (Remember George W. Bush? If you do, you are way ahead of most Republicans, who have apparently succeeded in pretending that he never existed, let alone run the country during the "lost decade" of the "aughts.") The Bush tax cuts of 2001 and 2003 obscenely widened the income gap between the super-rich and everyone else, while drastically reducing government revenues. They, along with two "unfunded" wars and the Wall Street bailout, sent the national debt skyrocketing into the stratosphere. More and more ordinary people became the victims of "outsourcing," "downsizing," and the "financialization," of capitalism", in which Wall Street and its allies conjured a way to produce "wealth" from economically unproductive speculation. Increasingly, money ceased to be a product of providing goods and services, and became instead a means of using paper to make more  paper. Just as alchemists tried to make gold out of base metals, they found a way to make gigantic profits out of DEBT!  As David Graeber recently charged, financiers discovered how to "to manipulate state power to extract a portion of other people's incomes"; the financial system inexorably became "an enormous engine of debt extraction." In particular, they conjured that "securatizing" good debts and bad into undifferentiated bundles and selling them as sure-fire money makers to buyers who had no way of evaluating the contents. This was especially true of mortgages, as lending institutions encouraged would-be homeowners to contract indebtedness beyond their capacity to carry over the long haul. Some brokers even had the chutzpah to recommend the lethal packages to clients, while simultaneously taking out insurance against their failure.

As former secretary of labor and Nobel economist Robert Reich has convincingly demonstrated, most Americans adopted a three-pronged strategy to maintain something like their normal standard of living. They resorted to working two or more jobs, or relying on the income of more than one wage earner. They "maxed out" their credit cards and shifted balances from one to keep up payments on another and, above all, they borrowed against the equity in their biggest asset--their own places of residence. After all, housing values would continue to rise until kingdom come, wouldn't they?  Then the "housing bubble" burst, real estate values tanked, large numbers of "homeowners" defaulted on their mortgages, or found themselves "underwater" or "upside down"--owing more on their mortgages than they were now worth. Foreclosures and "short sales" proliferated and many holders of toxic bundles found themselves forced into bankruptcy or receivership. The entire financial system was on the brink of collapse,until the Bush administration "bailed out" those institutions that were "too big to fail.," adding immensely to the national debt. Those "little enough to fail" were literally liquidated.

Those "too big to fail" greatly tightened their hold on the finance industry. During the first full year "after the recession," more than 90% of the total wealth created went to the super-rich. Incredibly, they blamed the victims for having the audacity to believe that they were entitled to become homeowners--and the federal government for encouraging them to do so. Those who had enticed borrowers with miniscule down payments, or Adjustable Rate Mortgages, absolved themselves of any blame. The rate of unemployment soared from 4.6% in 2007 to 9.6 in 2010 and has remained just short of double digits ever since.  (As everyone knows, or should know, the real rate of unemployment is seriously underestimated because you have held a job in the first place and be "actively seeking work." And then, there is "underemployment": the millions who work part time for less than a living wage.) Many of the newly unemployed who are too old or infirm to find a new job, or who lack the requisite skills or education,  may never find full-time employment again. Many others may eventually find work that is less rewarding, financially and otherwise. Between 2006 and 2010, the number of personal bankruptcies jumped from 597,965 to 1,536,799, while business failures soared from 19,695 to 56,282. The number of housing foreclosures increased from 34,000 in 2005 to 203,000 in April, 2009.

Perhaps as bad as the economic impact was the psychological toll on people who had never before been unemployed or missed a mortgage or utility payment, who "have played by the rules." The more fortunate quickly forget the cause of your downfall and begin to resent you as a "deadbeat" or a "freeloader," a view that you yourself may have held not too long ago.Strangely enough, credit card lenders classify those who pay their balance in full every month as "deadbeats." The "idle rich" are role models and idols in our culture; the "idle poor" are anathema. Maybe, deep down inside, a lot of people know that it could happen to them, even if they would never admit it--even to themselves. 

Even though the recession is "officially over," (although some wags insist that a recession is when others are unemployed, a depression when you are), there are still tens of millions of Americans who live on the edge of the abyss, and are forced to go into more debt periodically. According to David Graeber, roughly three out of every four Americans are saddled with some form of debt, "and a whopping one in seven is being pursued by bill collectors. As such,they fall prey to a variety of predatory lenders, only too eager to provide the necessary "services." Drive through the less affluent sections of any city, or watch television advertisements for any length of time. and you will see a plethora of businesses panting to loan people money, using only their next paycheck or their car title as collateral. They are all to often the only refuge for those without checking accounts or credit cards. Unlike more affluent Americans, they can't borrow it from family or friends, who are usually in the same straits. The short term interest rates at such places usually rival those of acknowledged "loan sharks." And then there are the late fees and penalties, which eat into your pay check when you do receive it. The ultimate nightmare is having to borrow money against your next pay check in order to pay off your previous loan. What statistical information is available, says Graeber, suggests that somewhere between 15 and 20 percent of average household income is "directly appropriated by the financial services industry in the form of interest, fees, and penalties."  If you factor out the quarter of the population that is either too rich or too poor to borrow in the first place, "it becomes considerably more."      

Somewhat more sophisticated and "respectable" are the loan consolidation companies whose ads saturate television. They promise either to consolidate all of you existing debt into "one easy monthly payment," or else to contact your creditors individually and get them to extend the terms of the loan, or to lower the interest rate--all, of course, for a healthy fee.( I once saved my youngest daughter from buying furniture at a "rent to own" business by showing her that she would end up paying more than twice as much over the long term). I hesitate to lump all such companies into the same bag, because some might actually perform a worthwhile service for a reasonable charge, but the idea itself defies logic--and human nature. (I confess that I once found myself in need of such services and was fortunate enough to get free help from a non-profit family services agency .A lot of people are not fortunate enough to find such an option )

My favorite, though, are the companies that offer to pay you a lump sum of cash in exchange for assuming your "structured settlement" or annuity. At the risk of singling out one from many, I particularly like the television ads, with outstanding production credits including operatic choruses,that you should have the cash when you need it now, and not wait for it to be doled out in monthly or annual increments, because "it's your money." (Except for the amount that they extract for services rendered.)  Some of these agencies may be legitimate, even helpful, but they neglect to mention one drawback which most of us--but no means all of us--understand: If you take the lump sum now you will no longer continue to receive the structured payments and you will forfeit all future rights to the original settlement or annuity. A variation on this theme are the companies that offer to intervene between delinquent taxpayers to the IRS. ("You have enough to worry about without dealing directly with the government.) I am just as scared of the IRS as the next guy, but you will  probably will get a fair shake--unless you are deliberately trying to deceive them. If  you need an intermediary, you should use a tax lawyer or accountant to go with you for your interview (interrogation?).         

One of the latest signs of our toxic indebtedness is the escalating reliance on "lay away" purchases at Walmart, KMart,Target, etc.. The promo ads usually feature customers who become ecstatic as soon as they find out that "layaways" are back just in time to "finance" their wants and needs for the upcoming holiday season. Indeed, they are usually so energized by the news that they run all over the store stocking up on additional purchases.According to a recent article in the New York Times, the practice originated during the Great Depression, when cash was scarce and credit cards were not yet invented, and almost became extinct with the proliferation of charge cards. They are making a big comeback,due largely to the same conditions that prevailed in the 1930s: shrinking discretionary income and tightened restr8ictions on credit cards. What makes "layaways" different is that the buyer does not get actual physical possession of the item until the entire purchase price has been made in installments--usually in the week before Christmas. It kind of reminds me of the origin of the Volkswagen (People's Car) in William Shirer's Rise and Fall of the Third Reich. Workers had payments taken out of their checks to pay for a car (designed by Ferdinand Porsche with considerable input from Der Fuhrer) that would not even be built until all of the money had been collected. Of course, none  rolled off the assembly line before the end of World War II, and the money accumulated lay in a Swiss bank account, until it was confiscated by the West German government and "the Bug" was born.) What will happen today if the customer is forced to default? I don't know for sure, but whatever the outcome, it will be the consumer who pays, even if she or he is never able to physically possess the object of her or his desire.

 Even more ubiquitous these days are the promos for "reverse mortgages."  They are usually touted on TV by "celebrities" who are recognizable only to people over 62. (Henry Winkler? Robert Wagner?) To say that reverse mortgages are too complex for them to comprehend goes without saying but, after all, that's why they call it "acting." I have no doubt that these "spokespersons" are at least as sincere as their younger counterparts hawking everything from beer to investments. They also probably need the money more than those celebrities who can still command "real work." Ideally, reverse mortgages enable homeowners to borrow money against the value of their houses and not pay it back until they move out or die. According to a recent article in the Times by Jessica Silver-Greenberg,, however, "federal and state regulators are documenting new instances of abuse as smaller mortgage brokers,including former subprime lenders, flood the market after the recent exit of big banks and as defaults on the loans hit record rates." Some brokers are "aggressively pitching loans to seniors who cannot afford the fees associated with them, not to mention the property taxes and maintenance." Some widows are facing eviction after they say that they were pressured to keep their names off the deed without being told that they could be left facing foreclosure after their husbands died. (Many lenders encouraged people to make the older spouse the sole borrower because they make more money on larger loans with the older person as the sole borrower. In loans where the borrower takes a lump sum, the interest charges are assessed monthly, so that, over time, the total debt can exceed the amount of the original loan. 

The newly minted Consumer Financial Protection Bureau is investigating more than 775,000  questionable loans and pressing for new rules that would provide more disclosure for consumers and stricter supervision of lenders.  Lori Swanson, the attorney-general of Minnesota, insists that what is happening with reverse mortgages mimics many of the same conditions as did the sub-prime mortgage scams of blessed memory: "There are many of the same red flags, including explosive growth and the fact that these loans are often peddled aggressively without regard to suitability." Although the numbers of reverse mortgages have declined in recent years (from 115,000 in 2007 to 51,000 in 2011), the default rate of 9.4%, up from two percent a decade ago, is at an all-time high. Three of the biggest lenders--Bank of America, Wells Fargo, and MetLife--have exited the field, citing the drop in home values and the difficulty in assessing the borrowers ability to repay.

Probably the most frightening debt of all is that resulting from student loans, which have surpassed credit cards as the largest single category of individual debt. The crisis in student loan debt is so corrosive because it strikes at the heart of our most sacred beliefs about our society and culture, whether you call it "American Exceptionalism," the "American Dream," or inter-generational "social mobility": the conviction (however naive or exaggerated) that ordinary people can rise above the circumstances of their origins through hard work, perseverance,and "playing by the rules;" that the generation will be better off than the present one; and that formal education is the surest road to the good life for most people. My brother and I lived that "dream," thanks to the sacrifices and encouragement of parents with only high school educations, and  began our working lives virtually debt free. So do today's young people in most developed countries. They realize something that our super-rich pseudo-capitalists seem unable to grasp: that in our highly competitive global economy the most important form of capital is Human Capital, which is primarily the result of a highly educated workforce at all levels of society. Therefore, they regard formal education as a Social Investment that benefits all of society, not just those whose families can afford it.
(Contrary to Romney's experience and belief, most would-be students can't just "borrow the money from their parents.) That is why universal higher education is one of the major cornerstones of most drvrloped societies and economies, and why they are willing to spend far more tax dollars to educate other people's children.  While the immediate beneficiaries of a system of universal higher education are clearly the students themselves, the benefits ultimately accrue to the entire society. In the process, they also avoid most of the negatives that a lack of universal education  ultimately imposes upon the entire society, even those in the upper echelons: a high crime and incarceration rate, the proliferation of "gated communities" and "exclusive neighborhoods," the staggering economic and social costs resulting from dealing with a plethora of problems post-facto, instead of preventing them in the first place. As we used to say back in the "olden days": If you think that education is expensive, try ignorance.        

The average college graduate n the U.S. today is $26,500 in debt, Most graduates report that it takes them the better part of a decade to pay off their student loan bills--and that is only if they are fortunate enough to have a steady job with decent pay during that time. Not surprisingly, nearly 6 million college graduates (1 in 6) have fallen at least 12 months behind in making payments. Being delinquent adds interest and penalties that many end up owing more than the amount of their original loan. Of those with loans in default, private for-profit schools account for 47%, with the University of Phoenix leading the way with more than 35,000. Public schools are not too far behind at 42%, while students at private non-profits account for most of the remaining 12%. The amount of defaulted loans is $76 billion --an amount "greater than the yearly tuition bill for all students at public two-year and four-year colleges and universities," according to a recent survey of state education officials.In addition, the Department of Education during the last fiscal year paid more than $1.4 billion to collection agencies to hunt down defaulters.If today's trends continue, most college graduates will labor for years under a modern form of "indentured servitude." As one community college graduate bemoaned, "It is the closest thing to debtor prison that there is on this earth."  According to the head of one credit monitoring service, "You are going to pay it or you are going to die with it."

To make matters worse, the burgeoning debt collection industry has recognized delinquent student loans as " a new oil well," at the very time when the once thriving business of credit card collection has diminished. Collection agencies have formed a trade association called Accounts Receivable Management, referred to among insiders as ARM (no pun intended?). Observing a student protest over loans at NYU, in which students wore tee shirts with the amount of their debt on the front, one debt collection official marveled that he "couldn't believe the accumulated wealth they represent--for our industry." Writing in the trade journal Inside ARM, he confided that "it was lip-smacking good"--for the industry.  Guarantee agencies are paid a "default aversion" fee, equal to 1 % of the loan balance. if they prevent a borrower from defaulting, but they make a much larger fee for collecting or rehabilitating a defaulted loan.  During the last fiscal year, the Feds and their hired guns collected some $12 billion, using wage garnishment, withholding of tax refunds, and "other methods."  If you wait long enough, one collector recently admitted, " you catch people with their guards down". Of the $1.4 billion paid by the federal government to debt collection agencies, $355 billion went to only 23 private companies. Naturally, individual horror stories abound!

It should be clear from this brief survey that the kind of debts discussed here pose far more danger to us and to our offspring than does the national debt that Romney, Ryan, Boehner, McConnell, constantly scream about. The federal government is neither a family nor a business. It has infinitely greater taxing and borrowing powers, resources,and responsibilities. We have known how to deal with a depressed economy since the 1930s. Government has the tools to turn millions of debtors into wage earners and taxpayers, but doing it will requiring challenging the hegemony of the super-rich, who benefit by keeping everyone else in a state of "indebted servitude."                   



1 comment:

  1. Wow I cannot believe the part about the student debt. I am in debt like almost everyone, so I have been looking into selling my structured settlement for cash. That's just how bad things have gotten some months. However, thanks for sharing! It opened my eyes a lot!