Credit Card Debt Absent the Mortgage Bubble

We tend to view credit card debt and mortgage debt in isolation, but its important to remember that the two are highly fungible. This means that when consumers leveraged up with mortgage debt in recent years, the were partially deleveraging their card debt. This means that but for the mortgage bubble, we'd be seeing much higher levels of credit card debt (and that's where we're headed).

The mortgage bubble of the past few years was largely a refinancing bubble, not a purchase money bubble (much less a first-time homebuyer bubble). When people refinanced, they were not just refinancing their mortgages. They were also refinancing their credit card debt. Or, more precisely, they were converting their unsecured high interest credit card debt into lower interest, but secured, mortgage debt. There was a brilliant framing in the subprime pitch—pay off your 22% CC debt with a 9% mortgage. Seems like a no-brainer when pitched that way. There were some folks who refinanced multiple times, each time paying off thousands, if not tens of thousands of dollars of credit card debt (and other non-mortgage debt).

This has an important implication that has escaped notice.

Should We Not Disclose Credit Card Information?

The paper Professor Richard Wiener (Univ. of Nebraska), a psychology professor, discussed presents findings that are completely contrary to economic predictions. Standard economic theory would predict that if consumers are given complete information, they will act rationally and not overspend where the costs of spending outweigh the benefits of consuming. However, the preliminary conclusions he and his co-authors reach in Limits of Enhanced Disclosure suggest that giving consumers additional credit card disclosures does not reduce consumer spending and, in some instances, may make consumers spend even more.

The Heady Conversation

After the lunch at the Debt conference on Friday, Professor Brian Knutson, a professor of Psychology & Neuroscience at Stanford, presented a paper on Brain, Decision, and Debt. The field of neuroeconomics (which has been around for about a decade) examines how the brain reacts when a person makes a decision, and how the brain causes individuals to make decisions. His research attempts to link the brain to debt – which he characterizes as a risk problem – and to show how people get into debt.

Maxed Out

The luncheon speaker for the conference was James. D. Scurlock, the director and producer of Maxed Out, which airs this month on Showtime. For those of you who haven’t seen the documentary, it’s a scathing, eye-opening depiction of how the financial services industry (most notably, credit card issuers, debt collection agencies) treats ordinary, hardworking Americans and how people are seduced into debt. He expressed his gratitude to the sponsors for inviting him to a conference where he was sure his talk wouldn’t be the most depressing.

The Very Big Men Who Sort Out Debt

During the last session this morning, Professor Stephen Lea (University of Exeter) provided a psychological perspective on debt in poor households in Britain. He initially listed the people he believes to be the cast of characters involved in debt. First, there are consumers, and their friends and families. On the creditor side, he made a distinction between business creditors (like utilities) and credit businesses (banks, debt collection agencies – whom he labels "the very big men who are left to sort out the mess"). Because of England’s long tradition of credit counseling, he also included credit counselors in the cast.

Consumption Is Too Important to Be Left to Consumers

Professor George Ritzer, another sociologist (University of Maryland), presented a hyper paper ("Hyperconsumption" and "Hyperdebt": A "Hypercritical" Analysis). He argues that it has now become part of our public duty to consume. We were asked to consume after 9-11. We have been encouraged (really, really, encouraged – just ask WalMart) to spend the stimulus tax checks some of us might be receiving over the next few weeks. While consumers aren’t dupes, he stressed, we are being encouraged to do what producers want us to do.

Homeownership Myth (Part II)

As I argue in the earlier posting, the Sunday Washington Post article raises a number of interesting points about the value of homeownership as an investment device.  I discuss many of these points in an article that will be published this Fall, and ultimately conclude that it is time to debunk some of the myths associated with homeownership. 

The Myth of Homeownership

An article in the Sunday Washington Post asks whether -- given the current housing crisis -- real estate or the stock market is the better investment.  Of course, the answer is -- it depends.  Formulating a longer, more sensible answer happens to be something I've been thinking about for the last several months and is the subject of my current research.  I'll discuss this article in two posts.  Here's the first one.

As the title of one of my forthcoming articles suggests ("The Myth of Home Ownership, and Why Home Ownership Is Not Always a Good Thing"), I challenge this country's obsession with Homeownership and the view that attaining homeownership is crucial to achieving the American Dream.  I'll discuss a few points raised in the Post article to explain how I've reached these somewhat heretical views.

Is Spending the Way2Save?

Financial institutions have begun to offer programs that appeal to consumers’ desire for assistance with disciplining their saving and spending decisions. These programs draw on the insight of behavioral economics and cognitive psychology that default rules have a powerful effect in shaping consumer behavior. For example, Richard Thaler and Shlomo Benartzi have proposed requiring people to opt-out, rather than opt-in to employer-sponsored savings plans in order to overcome bounded rationality and encourage higher savings rates.

The first financial institution I know of that offered a savings assistance program was Bank of America’s Keep the Change program, which has been well-critiqued around the web. Now Wachovia has a new program called Way2Save. On the surface the program looks great. But when probed, it isn’t clear whether consumers end up with meaningful savings—increased purchasing power. With all of these programs the question that we need to ask is how much does it cost you to save?

Same Solutions, Different Problems

Economists teach that if the economy is going into a recession, lower interest rates and give people money. That wisdom is so conventional that the only quibbling seems to be over timing, amount, and who gets the money.

But this recession has one very special feature:  Never in history have we hit a recession with the American consumer so loaded down with debt. Shouldn't that cause someone to pause before concluding that more consumer spending is the way out of this hole?

Consumer Spending

As the country contemplates a recession, economists are wringing their hands over a slow-down in consumer buying.  About two-thirds of the economy is driven by consumer purchasing.  Without that engine, economists fear that the economy will be in serious trouble.

But I haven't read much about the role that debt will play in slowing down consumer spending--recession or no recession.  The staggering debt burden that American families are carrying should have everyone worried.  The math is easy:  Every dollar that goes to paying interest is a dollar that is not used to buy socks or movie tickets or double lattes. 

Warren on Marketplace Morning Report

American Public Media's Marketplace Morning Report is running a series on whether the consumer economy is sustainable (see here). This morning's story featured Credit Slips' own Professor Elizabeth Warren on rising consumer debt. You can read the transcript of Professor Warren's interview or listen to the interview here.

Life Only Takes Visa, You Losers

If you use cash, then you're a loser. At least that's the impression Visa creates in a recent series of television spots from it's "Life Takes Visa" campaign. The one that first caught my eye, "Morning in Manhattan" (view it here), features a number of scenes as Manhattan comes to life in the morning.

While Strauss's "Blue Danube" plays in the background, we see morning papers being delivered, a restaurateur hosing down the sidewalk in front of his business, a person hailing a cab, and eventually more and more persons making their way to their places of work. Interspersed are scenes of people using a Visa card to make small purchases--a taxi fare, a cup of coffee, a newspaper, a doughnut. But WAIT! Stop the music. Someone puts cash down on the counter. The cashier glowers. Who dares to commit this affront to the social order? The camera pans up and we see the offender. It's your average doughy, dumpy, middle-aged guy. The message is clear: only a schlub pays with cash.

Watching TV for the Commercials

I recently saw an amazing commercial on CNN Headline News for an operation called 1-800-Credit Card Debt. It appears to be some sort of debt adjustment agency. The CEO, a guy named, Tom Cooke, I think, was speaking and said "Don't let bankruptcy even enter your thoughts." I sure hope these guys are not allowed to serve as a BAPCPA credit counselor. (What I believe to be their website is a bit more balanced.) The commercial, though, raises the question of whether there are any ethical guidelines for credit counselors? What about liability? Malpractice? I would think that a credit counselor should be obligated to neutrally inform people of their full range of options under the law. For some folks, filing for bankruptcy is a wise decision.

Senate Thinks About the Middle Class

For those of us who care about credit issues, yesterday's Senate Finance Committee hearing, called by Senator Baucus, was instructive.  The title: "Can the Middle Class Make Ends Meet?" I testified, along with a Brookings fellow, a social worker specializing in pediatric oncology, and the president of a tax-cut foundation.  Three of us thought the middle class was in trouble, and the fourth thought that thanks to tax cuts the middle class was doing great and the with more tax cuts they would be even better off.  (You can guess who took what positions.) 

While the senators focused mostly on specific issues like paying for college or the impact of a medical problem, everything said in that room (except maybe the tax cut stuff) was also about credit.  Rising debt, falling savings, bankruptcy, aggressive credit marketing, aggressive collection--it all plays out against the background of what's happening to the middle class.  If families could still afford to put away 11% of their incomes in savings, as they did in 1972, then the credit and bankruptcy issues we discuss would be very different.

"Brave" New World of Consumer Spending?/Borrowing?

The Atlanta Braves recently became the first sports franchise to offer a finance plan for their tickets. Articles here and here give some details. Essentially,if you are spending $200 or more, GE Money will offer so-called "90 days same-as-cash" financing. If you don't pay before 90 days, then the APR is between 20 and 25 percent. The Braves management says that they have lots of fans who "want the ticket package" but "don't have that amount of cash on hand." Is this what we mean when we say that the democratization of credit improves consumers' quality of life? Maybe the answer depends on whether you are a Braves fan, or even a baseball fan?

GE Finance announced that it anticipates that "a very high percentage of customers will pay these [loans] off" before paying interest. If that is correct, then some small fraction of people must incur substantial interest or the finance option comes with an up-front convenience charge. I assume that GE Finance is not "brave" enough (sorry!) to be losing money on this deal. As a side note, I wonder why consumers would choose this option when credit cards are available. Perhaps they need a 90-day float rather than a 30-45 day float and zero percent introductory rates are scarce these days. Or perhaps consumers believe that dealing with GE Finance is likely to be a more pleasant experience that working with a credit card company? My co-blogger Angie Littwin may have a few thoughts about this latter idea based on her research about credit preferences and substitution.

The King and Queen of Debt

John Leland published a fascinating article in today’s New York Times.  Debtors Search for Discipline via Blogs describes a new trend, blogging for willpower.  People publish the intimate details of their of personal debt in order to use the exposure and reader feedback to help them control their debt accumulation.  The bloggers believe that by forcing themselves to publish everything they spend, they will become more conscious of their spending and have a stronger incentive to do less of it.  As Tricia of www.bloggingawaydebt.com said, “I think about this blog every time I’m in the store and something that I don’t need catches my eye.”

For those of us who are interested in debt, a few interesting points emerge.  First, for these bloggers, stigma is alive and well.  They are using the Internet as a clever way to circumvent it and still obtain the help they need.  Many of these bloggers are revealing private information they conceal from their families and friends. One couple refused permission to use their names in the article because, “We don’t want our parents to find out and kill us.”  This same couple is even sharing information they find difficult to discuss with each other in person.  The self-titled “King and Queen of Debt” say that, although they have good communication skills in other areas, it is only by writing the blog that they have been able to communicate about their finances.

“Health Care Gluttons” in Bankruptcy

Yesterday New York Times blogger Judith Warner (registration required) asked a startling question:  What if the “health care glutton” is the new welfare queen?  This idea came at the end of a column addressing the recent efforts to scale back the Family and Medical Leave Act (FMLA), which provides workers with twelve weeks of unpaid leave to care for a personal illness, a new child, or a sick relative.  The statute’s critics want to tighten eligibility, allowing only workers with the most “serious” medical conditions to use the program.  Warner spends most of her column making the usual arguments that the FMLA cannot afford to be any more feeble than it already is.  The leave is unpaid, giving workers little incentive to take it unnecessarily, and the United States already has one of the weakest family leave systems in the world.  Our lack of paid maternity leave is on par with that of Liberia and Swaziland.

Warner derives the idea of the “health care glutton” from President Bush’s recent foray into the health-insurance debate, where he accused many American workers of having “overly expensive, gold-plated” health plans, and from the rhetoric of the National Coalition to Protect Family Leave (yes, that’s the group pushing to water down the law), which says that Americans are abusing the FMLA by taking leave for cosmetic surgery and “pink eye, ingrown toenails and colds.”  She conceives the “health care glutton” as the “villain du jour,” who “consumes doctor’s visits like so many donuts, sloughing off the burdens of his waste onto the hard-working and the health-care abstemious.”  She concludes by warning that if such rhetoric takes hold, the quality health insurance some American workers do have could go the way of welfare benefits.

If the image of the “health care glutton” takes hold, it could have a damaging effect on the consumer bankruptcy debate as well.  One of the central arguments for a generous consumer bankruptcy system is that vast majority of families who file for bankruptcy do so because of job loss, divorce, and/or medical problems.  But if the fact of having high medical bills becomes stigmatized in and of itself, where does that leave us?  Current bankruptcy critics argue that families who file are spendthrifts who acquire too many luxury goods.  I have nightmarish visions of future bankruptcy critics contending that these families are spendthrifts who acquire too much luxury health care.

The Department of Labor is accepting comments about the FMLA here until February 16.

It's All Up to You

National Consumer Protection Awareness Week (Feb. 4-11)

http://www.consumer.gov/ncpw/toolkit.htm

If you see a scam, say something....

This is a federal website!?

PIRG to the People!

I thought Credit Slips readers might be interested to hear that PIRG has come up with a telephone script to help consumers negotiate rate adjustments (i.e., lowerings) on their personal credit cards.   Some lenders interviewed for a newspaper article said, sure they lower rates sometimes, but they were (understandably) coy about giving specifics on quantities.

The Manifesto of the Communist Party in 2006

One of my favorite pieces to read (and reread) when I teach the theory component of my social inequality class is the "Manifesto of the Communist Party," written by Marx and Engels in 1848. My students are always floored at how applicable the manifesto is in today's world--they can't believe that it was written more than 150 years ago. My favorite passage talks about how the survival of the bourgeoisie (or capitalism) depends upon constant revolutionizing, constant change. Marx and Engels insist that it is imperative to the survival of the capitalist system that olds wants be replaced with new ones--and the more rapidly this happens, the better.

Every holiday season, the barrage of advertising reminds me just how right Marx and Engels were. For example, if you bought an IPod this past autumn, you are utterly uncool. The new IPod is so much better that using the old model is unthinkable (and to some young people, unbearable). The same goes for the GameBoys. And cell phones (god forbid that one's phone cannot take photos). And Christmas lawn decorations. And Elmos. And big screen tvs. And laptops. And, and, and....

Consuming as a Sense of Control

In 1989, Fiske wrote the following in his article "Shopping for Pleasure: Malls, Power, and Resistance": "Ownership is at present the only form of control legitimized in our culture." Could it be that Americans are consuming because, in large part, they feel that they otherwise have no control in their lives? As I ponder this, I look out my apartment window at the mall parking lot. (Living in an apartment overlooking a mall is not my idea of a great location, but....) Every day since November 24, that lot has been chuck-a-block full of the cars of shoppers. Mornings, evenings, weekdays and weekends---full to overflowing.

Credit Slipbits

A few short items of note from around the blogosphere:

• The Supreme Court heard arguments today in Watters v. Wachovia Bank, which considers whether the Office of the Comptroller of the Currency can preempt state consumer protection laws applying to national banks. We have previously discussed the case here and here. The Consumer Law & Policy Blog is closely following the case, and I hope for some updates from them. SCOTUSblog posts recaps of Supreme Court arguments and may have a recap in a few days.
• Credit Slips readers who also have interests in the business law area might be interested to know that UCLA law professor Stephen Bainbridge is back in the blogosphere with his Business Associations Blog. Professor Bainbridge has one of the leading textbooks in the field along with a treatise I often recommend to students: Corporation Law and Economics. The blog is well worth following.
• Houston Chronicle columnist Loren Steffy who often writes about consumer matters in his own blog has a column today reflecting on holiday spending and US consumers' addiction to debt. Steffy writes, "With so much easy credit available — a dozen or more offers a week, if your junk mail load mirrors mine — we can borrow to cover our crises as well as our whims. Debt, in other words, is the new saving." It's worth a read.

Old Holiday Favorites

With the aroma of oven-roasted turkey and fresh-baked pumpkin pies hanging in the air, it reminds me that the holiday shopping seasons is almost upon us, and we'll soon be enjoying seasonal music. One song that never fails to bring tears to my eyes is "It's Always Christmas Time for Visa." Thanks to the folks at Consumers Union and their Financial Privacy Now blog for sponsoring and reminding us about this great tune.

In a similar vein, Credit Slips contributors who shop at Wal-Mart will enjoy JibJab's "Big Box Mart" video. Our readers who haven't seen it will probably like it also. This is a Lawless family favorite. My 12-year old son could not sing the words to "O Susanna" if his life depended on it, but he can be heard to walk around the house crooning, "O Big Box-Mart, look what you've done to me . . . ."

Fake News Gets It Right

Today the satirical newspaper The Onion unwittingly parodied one of the central debates in consumer bankruptcy – whether American consumers are choosing to spend too much money on luxuries or being forced to spend too much money on necessities.  The "news article" is entitled "End-Life Crisis Marked By Extravagant Spending Spree" and describes the "indulgent" spending of a 75-year-old grandfather on items such as blood transfusions and visits to the cardiologist.  The article "quotes" friends and family members who criticize "all those fancy new breathing tubes he now wears" and ask, "What's he going to do next, gallivant off to some $10,000-a-day, all-inclusive hospice?"

Layaway is Laid Away

Okay, don't flame me, but I shop at Wal-Mart sometimes. On a recent trip, I noticed large signs at each entrance announcing that Holiday 2006 is the official end of Wal-Mart's layaway program. The sign explained that Wal-Mart's decision was based on declining customer demand for layaway and said that consumers are instead using "gift cards and no-cost credit alternatives." I found the reference to gift cards completely puzzling. If you have the money to buy a gift card, why would you need layaway? The no-cost credit alternatives suggest zero percent teaser rates on plastic are financing Santa's shopping. The credit card industry admits that it makes loads of money off seemingly "no cost credit" and that teaser rates are one of its greatest marketing inventions (Watch the Frontline special The Secret History of the Credit Card if you haven't seen it and hear the man who invented teaser rates talk about why they are incredibly profitable). Is the end of layaway something we should mourn? Did layaway offer a valuable "savings" program for people that ensured they didn't end up making purchases they could not afford? Or does the availability of enough credit to kill layaway signal a positive development--Santa's helpers don't have to worry before the holidays about paying for gifts. With "no cost credit," they can ring in the New Year with new debt.

Financing for Fourteen Year Olds

Whyville is a virtual world for children ages 8-15 years old. Nearly 2 million children and teenagers are members. The children participate in activities and games, for which they earn "clams," an on-line monetary unit, redeemable for virtual goods and services. If you run short of clams or lack the patience to save, there is a virtual borrowing system. As the Wall Street Journal reported on Nov. 9th, an exclusive licensing deal with Toyota means the only car now available in Whyville is a Scion XB. Children who want to finance the car meet with Eric, a virtual Toyota Financial Services adviser. I haven't tried it, but apparently if you fail to shell out enough "clams" to meet your payments, the site virtually repossesses the Scion and you have to take the bus to get around. The site claims to teach socially responsible behavior. Should this include borrowing? I'm wondering when the site will announce the ClamDay Lender, the Scion title loan, and the Whyville Refund Anticipation Loan.

Today's Feminism, Consumption-Style: The Perspective of a Young Feminist

Two blogs ago, I wrote about a young woman, Bthan Eynon; she and I are working together this quarter as she completes her Honor's thesis for her Bachelor's degree at Ohio University. She is examining the relationship between Third Wave Feminism and capitalism/consumerism. She is such a good writer and thinker, that I asked her to write a short summary of her work that I could share with the readers of our blog. I hope you enjoy her thoughts as much as I do.

In the early 1990s, an underground feminist movement called Riot Grrrl jumpstarted the idea of female empowerment. Shortly after, marketers began latching onto the catchphrase “girl power.” The most memorable example of “girl power” is the Spice Girls, a popular girl music group consisting of five women celebrating girlhood by singing songs about friendship while visually presenting a message of blatant sexuality. But unlike the women’s rock bands involved in Riot Grrrl, the Spice Girls were not about the music at all. With easily sold identities like Baby Spice, Posh Spice, Sporty Spice, Scary Spice, and Ginger Spice, the band became a merchandising phenomenon to the pre-teen demographic. Dolls, games, movies, CDs, and clothes were sold under the guise of girl power. Consuming the Spice Girls was easy—what little girl could resist proving her independence and confidence, plus getting a doll for it?

Consumption as a Means of Empowerment

I'm leading a tutorial with Bethan Eynon, probably one of the brightest college students I've ever encountered. She's working on an honor's thesis that explores the connection between feminism/women's empowerment and consumption/capitalism. Specifically, she's studying magazine ads to uncover how the empowerment of women (which includes the second and third waves of feminism) has been constructed as their penchant for consuming stuff.