Not sure what to make of this:
Credit card offers are surging again after a three-year slowdown, as banks seek to revive a business that brought them huge profits before the financial crisis wrecked the credit scores of so many Americans.
The rise is striking because it includes offers to riskier borrowers who were shunned as recently as six months ago. But this time, in contrast to the boom years, when banks “preapproved” seemingly everyone, lenders are choosing their prospects more carefully and setting stricter terms to guard against another wave of losses.
For consumers, the resurgence of card offers, however cautious, provides an opportunity to repair damaged credit and regain the convenience of paying with plastic. But there is a catch: the new cards have higher interest rates and annual fees.
Lenders are “tiptoeing their way back into the higher-risk pool of customers,” said John Ulzheimer, president of consumer education at SmartCredit.com.
In extending credit again to riskier borrowers, lenders are looking beyond standard credit scores, on the theory that some people who may seem to be equivalent credit risks on the surface may show differences in spending or other behavior — like registering on a job Web site — that suggest variations in their ability to keep up with payments.
I thought one of the problems in the current economic crisis is that legitimate businesses are finding it hard to get credit. Why on earth would banks choose to “carefully” seek out risky borrowers and shun legitimate business?
Buck
Obviously there’s more profit to be had. (as stooopid as that sounds)
Zifnab
There is more money in extending credit to a risky person and hitting him with a dozen fees and penalties than there is in extending credit to a safe person and getting paid back on time.
ChrisS
In my more libertarian thinking,I sometimes wondered if banking/credit regulations enacted during the New Deal didn’t allow the riskier bets to fail, which would further encourage risky betting.
Also, corporations are sitting on massive piles of cash, so natch’ they need bigger and better tax cuts to encourage investment, because of the uncertainty, you know.
malraux
Semi-risky borrowers are good profit if you decide to be careful. A solid business will understand that interest payments are bad and work to minimize those. Semi-risky borrowers are more likely to just care about minimum payments, not work to avoid extra fees, and generally give a whole lot of money to financial institutions.
The big mistake in the crazy years wasn’t lending to risky borrowers, it was letting risky borrowers borrow way way way too much along with pretending that risky borrowers weren’t risky.
mikefromArlington
“Why on earth would banks choose to “carefully” seek out risky borrowers and shun legitimate business?”
Better to reposes in an economy that is getting better rather than not. See, you could reposes a bunch of crap and a couple months later its worthless.
Now, if they do, they’ll hold something they can sell off an potentially make a profit….just like they did when housing kept going up and up. Who cares if their credit stinks! We get some quick upfront payments at no cost to us except for risk. But now that prices keep going up, the risk is gone!
jsfox
Fairly easy concept. High risk credit card holders usually maintain higher balances thus larger financing charges. Small businesses get to borrow at the lower rates of a fixed loan. So you tell me where do you think the banks make more money?
JWL
Well, I know what to make of it.
So does Bernie Sanders.
People who own and run credit card companies are racketeers and extortionists.
No lie.
aimai
@Zifnab:
Zifnab says what I was going to say. Becuase banks/credit card companies know that most people aren’t really a bankruptcy risk (and can’t discharge credit card debt through bankruptcy at this point) and that you can make more than your money back by hitting them with high interest rates, fees, penalties etc… during the lifetime of the card even if that lifetime is comparatively short. They aren’t intending to have a long term relationship with these customers just a short term gouge and out. What this tells you is that the profits on late fees etc… are just hellishly high.
aimai
Marty
Don’t forget that the banks are borrowing money at nearly 0% interest. Assuming that the economy is not getting worse, the weakest borrowers are probably not going to lose their jobs if they haven’t already. So with interest rates of more than 20% and plenty of late fees charged, it might just be possible for the bank to eke out a modest profit.
Pangloss
I’m getting a lot of them lately. Including from American Express, where I’m sure my name has been used as a perjorative around the hallways since 2003.
WereBear
I think loan sharking appeals to them.
JGabriel
John Cole:
Presumably because they are not seeking legitimate business; they are seeking to con people who don’t have the means to sue.
.
Michael
Credit scores are meaningless. You show me a borrower who has always paid his home and car and mostly on time, and I’ll deem him to be a decent credit risk regardless of the stupid alchemic math our brilliant raters use to determine credit scores.
Also, people with money and people who maintain the illusion of having money (white wingnut developers and financial planners) always slow pay obligations, in my experience. Credit scores mean nothing to them, and lenders remain happy to deal with them.
geg6
@aimai:
What you said.
After a couple of years of not getting any credit card offers in the mail, I had six of them in one day last week. And two of them were from credit card companies who I wrote to cancel my cards, along with the cut up cards, at least 2 years ago. I haven’t had a credit card since and I don’t miss them one bit.
Unfuckingbelievable.
Oscar Leroy
Probably because they think they’ll be bailed out by the government if they go bust. And they’re probably right.
You are correct. Our government pushed a huge pile of money to lenders hoping they would start lending again. But hope is not a plan, and there has been no lending.
Martin
@Zifnab: Dead on. Where’s that Warren chick when you need her?
RosiesDad
1. Higher profit
2. Security in knowing that the government will bail them out in the event that they end up irreconcilably under water (again).
gene108
As the article states:
Fees are a big revenue maker for banks. With new laws cutting off such fees as overdraft charges on debit cards and some other charges credit cards used to be able to hit consumers with, banks have to look for ways to make up for this lost revenue.
scarshapedstar
Because there’s no usury laws, so they can charge 80% interest if they want, and because you can never, ever, ever get rid of credit card debt thanks to Chris Dodd.
clone12
Couple of things:
A) “risky” here is with respect to your credit score. And while your FICO score is a good indicator of your riskiness, it isn’t and shouldn’t be a be-all end-all measurement of your ability to pay. For example, suppose the average likelihood default of a 680 FICO is 1%, then the average likeihood of default of a 650 FICO is a round 2%. the 650 is twice as likely as 680 but in theory there are still 98% of the borrowers who are perfectly legit! If banks have informations that credit bureaus don’t have- say for example, that the local banks knows that the place the hypothetical 650 FICO guy works at is pretty robust, then there is no reason why the bank shouldn’t give that guy a credit card. In fact I would make the argument the banks who don’t make that particular loan is actually hindering economic recovery because that person who is otherwise a legitimate person to lend to, got hamstrung by a FICO score he had nothing to do with.
B) Why are banks lending to these “risky” borrowers instead of businesses? Some possible reasons off the top of my head:
1) credit card losses are far smaller- if you give a $500 credit card to a 650 FICO customer, the most you’ll lose is $500. On the other hand, your $500,000 loan to a small business could completely go belly up.
2) you can of course charge a higher rate
3) It is much easier to model individuals than businesses- we have far better infomation on individuals- credit history, public records etc etc, that you can build a large statistical model using millions of records to come up with a pretty good estimate of lending risk. Bussinesses on the other hand are far more idiosyncratic- what is the likelihood that a mid-scale Chinese restaurant on main street run by a freshly minted-MBA go belly up?
4) finally, there is some secondary effects: the credit card extended to these risky borrower will impact the economy- some of them will now go eat at that hypothetical Chinese restauant above and the economy grows. So the first step of lending to individuals aren’t neccessarily exclusive to helping out businesses.
Poopyman
@Cole:
This? Why, you can make a hat or a brooch or a pterodactyl…
On topic though, it’s as simple as @Zifnab: said. It should be a crime for them to still be able to do it, but here we are.
AC
There’s a fine line between irresponsible borrowers who rack up finance fees and other penalties never go bankrupt, and those who are so far gone they end up defaulting and getting bled dry.
My guess is they’re aiming for the cash-cow side of that line.
c u n d gulag
“Why on earth would banks choose to “carefully” seek out risky borrowers and shun legitimate business?”
Because not everyone who’s not rich is bankrupt yet.* It’s a means to an end.
*It’s not often you get to write a convoluted sentence like that and it explains exactly what you mean about a convoluted practice.
And aimai, as usual, spot on!
For others, if you’re interested about usury, read about how and why it was only the Jews who were allowed to lend money at interest in the Middle Ages, and how that helped lead to their discrimination.
jayackroyd
Their doing this is consistent with emptywheel’s model of neo-feudalism. With the new bankruptcy laws, you can lock people into permanent debt, at quite nice yields, if they get in so deep they can’t pay it back.
amk
Why ? Shylocks rule baby, that’s why.
gene108
When our company was renewing our LOC, I was talking with our banker about how he was finding getting credit approved for businesses and he said that a lot of businesses he was dealing with didn’t have solid finances.
They didn’t have financial statements prepared per GAAP, so the bank could easily go through them and many weren’t profitable.
I think there’s a double whammy with regards to credit. Banks are less likely to lend money and also small businesses are hit harder by the recession, so they don’t have good financials to present to the banks.
You don’t want banks to make reckless loans, but you want them to loan to small business, where as the small businesses who really need a loan may not be considered credit worth post-2008 recession.
It’s sort of a death spiral-negative feedback loop-self-reinforcing negative sort of situation.
Odie Hugh Manatee
The banks are also going to be pushing as many of their old accounts to these ‘new’ ones so they can hit people with their ‘new’ terms. If I get any free return mail envelopes with cc offers, I’ll be sure to fill them with interesting things for them to look at (burning their money up with the wasted mail).
Hopefully they will taper off again after doing this. It usually works pretty good. :)
David
Besides the credit card profits from late fees, etc. there is a whole other scam with those offers you see and hear everywhere (especially on the radio) to “reduce your debt” or “debt settlement” or “help with your debt.”
They talk people into just stop paying on the credit cards and then they “negotiate” with the credit card companies. The credit card companies make a deal with those people to take a payment (like $2,000 on a $8,000 debt) and you pay the debt settlement company the $2,000 and a fee. The credit card companies send you a notice saying that $2,000 was received from the scammers but fail to mention that it does NOT go to reducing your debt — you still owe all $8,000.
It’s preying on desperate people — especially people whose first language isn’t English.
The credit card companies cooperate with them because they have nothing to lose. It’s repulsive.
Martin
The real question is why nobody is learning their lesson here? I have and use credit cards, never paid any kind of fee and never carry a balance. I treat it like a 30 day deferred debit card with liability protection. The banks get their merchant fees off of me, so they still make money.
Do so many people really lack the self-discipline to do this? Clearly almost everyone with a card can afford to do this, yet so few people I know actually do.
cervantes
Why on earth would banks choose to “carefully” seek out risky borrowers and shun legitimate business?
Very simple — they get to charge usurious interest rates and fees on top of them.
Southern Beale
Wow and I thought the credit card reform bill which went into effect at the beginning of this year was going to RUIN EVERYTHING and completely put the credit card companies out of business and no one would be able to get plastic ever again because the fees would just be waaaay too expensive.
Guess not.
cathyx
I know this has already been said, but it’s so obvious that it’s amazing the question needs to be asked. The government has proven that it will bail out the banks. The banks own the government and extending credit to bad risks is such a money maker that it must be done again.
THE
Interesting. Revolving credit outstanding continues to drop precipitously according to the latest data from the Fed.
Michael
BAPCA 2005…
The gift that keeps on giving.
Brachiator
Never give a sucker an even break.
W.C. Fields
More seriously, I know folks involved in various areas of commercial banking and lending (factoring, etc) and it is weird that there is very little lending to new or existing businesses, no matter how promising or successful.
By the way, the lack of lending makes the business stimulus in the compromise tax bill a bit of a joke. Business breaks don’t mean much if you can’t get the money to purchase equipment or expand operations.
Martin
@THE: Oh, well nevermind my comment then. Good on America. Keep driving that line down!
ItAintEazy
Wait, wasn’t one of Obama’s big achievements that us professional leftist just could not give him credit for (heh) the Credit Card Accountability, Responsibility, and Disclosure Act? Wasn’t it supposed to protect us from things like this, or is it starting to prove what a pusillanimous piece of warmed-over over-compromised legislation it really is?
Culture of Truth
Having your first language as English has little to do with understanding a credit card agreement.
Cat
Several years ago there were several p2p credit lending websites. It was all very novel IMHO.
It allowed microfunding your lending needs. You submitted your proposal and your credit details. People could then buy a slice of your loan at a certain rate. So you’d be funded by several different people dozens or more.
You could track the lenders and borrowers performance. The people who made the most money were those who lent to the riskier bets.
superking
As others have noted, risky borrowers create more profit than legitimate businesses. There is an idea out there that I have been kind of fascinated with recently. Succinctly put, it’s that bad credit drives out good credit. In recent years, before the collapse and after, we saw depository institutions begin to offer short term, high rate loans, sometimes payable on a post-dated check. In other words, sound banks and credit unions began to offer payday loans–a credit product that has for decades been relegated to sketchy storefront lenders. With mortgages specifically, during the bubble, we saw an increasing number of prime-qualified borrowers getting sub-prime loans.
Some of the expansion of payday loans is explainable by there being an actual demand for those products, but, like mortgages, it is really caused by the fact that the lenders can make more money off of them than they can off of traditional forms of credit. Eventually, good credit–at terms fair and beneficial to the borrower–becomes less available because the lenders prefer not to offer it. Bad credit, because it is more profitable, drives out good credit.
This is why it is essential that we have strong substantive standards on terms of credit. Usury laws were a traditional way of ensuring people didn’t get screwed–they were justified by moral outrage–but they were also effective public policy for regulating credit markets. I don’t think we need to see strict usury limits, but we do need limits on points and fees at a minimum, and we need to make sure people have full access to credit on terms determined by business-related costs.
Just my humble opinion.
JMC in the ATL
@Martin: That is pretty easy to do until shit happens. Like your cat gets a urinary blockage that costs 3K, and then the next month you have to self-fund a cross-country move after being unemployed for several months from a non-UI qualifying job loss.
(p.s. – not a hypothetical)
Ding Ding
“Why on earth would banks choose to “carefully” seek out risky borrowers and shun legitimate business?”
I run a legitimate business, and I don’t feel shunned at all. Credit is ridiculously cheap and abundant right now. SBA equipment loans are 3.5% and construction loans are 4.5%, neither with any fees.
Dave
I was about to make the requisite “It’s Obama’s fault.” snarky post and then noticed someone at 37 did it and meant it.
Jesus wept…
Culture of Truth
Americans were starting to save a dangerously high amount
Sentient Puddle
@Martin:
I find myself constantly asking the same thing. I honestly don’t get how difficult this is for so many people.
Ross Hershberger
Bingo. We haven’t carried a balance for years. I use cards for the convenience, security and perks for most purchases. With local small merchants and services I let them know I pay cash, which saves them on fees.
Cards have a legitimate use in a conservative person’s personal finances, but carrying a balance long term at a high rate (up to 18% in MI) is irresponsible.
Martin
@JMC in the ATL: No, I agree that there’s a place for carrying a balance, but according to THEs link people are still carrying $800B in these expenses? And they were able to eliminate $200B worth of these expenses in the last 18 months?
That doesn’t sound like emergency spending. That sounds like discretionary spending. It sure as hell shouldn’t be going down in a recession if its emergency, or does the deficit spending rule only apply to the government?
JMC in the ATL
To expand out from my specific: it’s easy to stay current until something(s) happen to make one not current, and once you start the death spiral it is almost impossible to stop it. Not unlike a black hole.
burnspbesq
I no longer have a bank credit card in my wallet on a regular basis. For everyday spending, I use AmEx. If I’m going out to make a major purchase, I may use the bank card, but pay it off immediately with a check from the money market fund. Makes no sense to be carrying debt with an interest rate higher than what I earn on the money market fund.
DPirate
This a rhetorical question?
Michael
Speaking for me and mine, we have learned our lesson. We’re finally at the point of attacking our CC debt. In the two year slog of carrying and maintaining budget-busting balances, we probably pay out around 8K a year in interest.
Now we can seriously attack the CC debt. Once that is gone, we’re going to pay down the house faster.
We’re no longer going to play the mutual fund sucker game, and will be buying homes for our kids instead of investing in the stock market.
We feel that it will be our own little boycott of the bankstas, stock swindlers and Masters of the Universe.
Ross Hershberger
Krugman points out that Americans are doing exactly the wrong thing with our personal finances WRT economic recovery.
We’re saving more and paying down debt, sacrificing spending to improve our debt and cash positions.
Ideally, people would get out there and consume, raising demand and stimulating part of the economy from that angle.
jrg
@Michael:
Damn right they are. There was an error in my Experian score, so I opened an account with them to “fix” it. Turns out that was a scam. Experian started taking $15 out of my account every month, and they still did not fix the problem. I had to call in a stop payment from my bank to keep them from fucking me out of money.
I even got screwed because I don’t have a credit card. They don’t care about your net worth, or your ability to pay… They actively create incentives to scam you and put you in debt slavery. Why the fuck should getting a $10k limit credit card help me get a mortgage? Shouldn’t having $10k in the bank make me LESS of a credit risk?
…and heaven help you if you have a mortgage with a credit union that does not report to all three major bureaus.
The whole thing pisses me off. Fuck the credit agencies.
Culture of Truth
Oddly, the article does not state the “higher interest rates”.
ChrisS
@Martin:
Do so many people really lack the self-discipline to do this?
Yes. When a person lives paycheck to paycheck (because reducing one’s standard of living, while rationally an easy decision, is much, much harder in practice), a necessary purchase or two (new tires, brakes, medical co-pay, etc.) will exceed one’s ability to pay the balance in full that month. The interest hits and then it’s a new month with new strains on the cash-flow begins.
$500 on a credit card may not seem too difficult to pay off, but it could take someone with limited income months and months to pay-off.
THE
@Martin:
Some of that might have been writedowns.
Michael
@Martin:
Some of us work for ourselves or on a commission basis, and thus have an uneven cash flow. Prior to the onset of the recession, I’d yoyo up and down on getting things paid off in the ebb and flow of routine cycles. The recession cycle was different though – a death spiral for many who’d been accustomed to having to deal with short term floats.
WereBear (itouch)
What about people who are forced to use credit cards for medical expenses?
There’s a lot of them. That would be me.
Martin
@Michael: If you have the means to do so, being the bank for your kids home is a pretty good win/win strategy. We have a friend who did this – they received a one-time eminent domain settlement from the state and used the windfall to finance their kids homebuying. Parents get a steady interest rate better than what the banks will offer, kids get a mortgage rate better than what the banks will offer and know that if they need to miss a payment or whatever they can work it out with mom and dad. That strategy worked out to be a very effective retirement plan for the parents. It doesn’t have the potential returns that playing the market does, but if your kids are responsible, it’s the kind of solid returns (and regular income) that you want for retirement planning.
Everybody wins.
Brachiator
@Ross Hershberger:
People live in the real world, not in economists’ models. If you fear losing your job, or your wages are stagnant as your living costs rise, you would be a fool to just spend and “consume.”
Every pundit who talks about spending and consuming should be kicked in his junk.
ItAintEazy
@Dave: Yes, I know perfectly well that the unspoken rule is to not blame Obama for these types of messes. There is only so much the man can do, and his magical Bully Pulpit isn’t going to create rainbow puppy dog farts out of thin air, right?
I am, however, bemused at the amount of undeserved credit he gets even when it’s plain that his signature financial legislation isn’t going to do much to protect us from predatory lending institutions.
Zifnab
@Dave:
Obama had a lot more opportunity back in ’09. Now that he’s lost his majority in the House and has the thinnest margins in the Senate, it’s going to be impossible to affect much legislative change. The question is whether he’ll bring executive authority to bare in the next two years.
Saying it’s “His fault” is silly. But he had a big break when he started his Presidency and he choose to play small.
JMC in the ATL
I’m guessing that part of it is writedowns and part of it is people paying down living expenses that were charged during a period of un- or under-employment and part if it is people realizing that they need to redefine “essential” spending.
Ross Hershberger
@Brachiator:
Yes. Krugman doesn’t say that it would be rational for people to go on a spending spree during a recession. He says that the natural, conservative reaction to uncertainty – reducing spending and paying down debt – is making the recovery slower.
Brachiator
OT: Sweet Mother of All that is Holy …
Have you seen Sarah Palin’s “Please, God, don’t Let these poor people touch me” tour? Sponsored by Fox News.
Her hair is perfect.
Martin
@Ross Hershberger: Consumption isn’t a uniform thing, however. I have the means to consume, but I’m not about to run out and buy a bunch of useless shit just for the sake of it. After all, years of not doing that is why I have the means to consume today.
That said, I will invest in things that will have some lasting value to my household, but it seems too early to do many of these things. I’ll replace items with more energy efficient ones, but the market isn’t getting them here fast enough because half the country is actively fighting that trend. I’ll upgrade the home entertainment stuff but cable is actively dying and there’s a flat-out lack of creativity and leadership on telling us what’s coming next. Even if I wanted to replace our cell phones, we’re on a 3G/4G inflection point.
For people like me that are happy to spend a premium on an item that will last, this is a really shitty market, mainly because US companies are so fucking lazy and shortsighted that there’s no sense of long-term direction, and no commitment to actually reforming any of these markets.
Martin
@ItAintEazy:
Well, since the consumer protection agency hasn’t even been set up yet, it’s hard to see how ‘plain’ your assertion is. So far, the only direct impact of that agency decision was that Obama killed the notary bill.
Stefan
Do so many people really lack the self-discipline to do this? Clearly almost everyone with a card can afford to do this, yet so few people I know actually do.
Over half of all Americans are overweight. Many Americans smoke, drink to excess, don’t get enough exercise, don’t save enough for retirement, etc. You can’t count on people’s self-discipline because, face it, most people don’t really have any (or they have it in some areas and not others). Saying “people should have more self-discipline”, while it may make you feel warm and virtuous about how much better you are then others, isn’t really all that helpful or insightful because it doesn’t address the systemic problem. Let’s just acknowledge that no, people don’t actually have self-discipline (a fact which any student of psychology already knows) and then, having acknowledged that, figure out how we’re going to help them.
cleek
here we go!
TPM has a “breaking” headline (no story):
Federal Judge Rules HCR’s Individual Mandate Is Unconstitutional
yay! let the fun begin!
stuckinred
@Stefan: The “systemic” problem is that people are human.
Culture of Truth
Wasn’t it supposed to protect us from things like this
Things like what?
ChrisS
@cleek:
Surely, Obama saw this coming.
The Republic of Stupidity
@Marty:
I’m assuming modesty or the desire to snark kept you from saying that in the first place…
I got into trouble w/ credit cards about 20 years ago… I’m STILL getting mail from collection agencies trying to make money off those debts… and the banks that issued the cards?
They ran $2K & $3K debts up to $10K & $12K (interest) before ‘writing them off’…
Years ago, in Terry Gilliam’s Time Bandits, once Satan, played by the great John Warner, is freed to return to Earth, one of the very first things he wants to know about is ‘revolving lines of credit’…
I personally refer to credit cards as Satan’s spawn…
pharniel
also credit card debt is hella hard to discharge
a business can always fold and the debt goes away, but cc debt (like student loan debt) is forever on the person. you’ll get your money one way or another.
Lending to an actual business would be risky.
Brachiator
@Zifnab:
What is it, exactly, that Obama should have done, or should do?
I’ve seen posters suggest that Obama should have nationalized the banks, but I’ve rarely seen any kind of solid policy proposal that would actually solve anything.
I’ve also seen banks and lending institutions play games by following a federal regulation to the letter, and then running circles around regulators by coming up with new crap not covered by overly specific regs.
And of course, there is the old fashioned way method of
briberycampaign contributions to friendly legislators, Democrat or Republican, to carve out exceptions.So far, the most significant thing coming out of the new regulations regarding consumer credit has been more paperwork explaining fees and charges.
I look forward to see what Elizabeth Warren may do (and note that the Obama Administration had to work some tricks just to get her in place).
cleek
@ChrisS:
of course he did. no 11-dim chess master couldn’t have.
ItAintEazy
@Martin: The first clue to the fact that the legislation is toothless is when the supposed targets of the legislation aren’t modifying their behaviors to fit the new reality. Hopefully the new agency won’t turn out to be an unmitigated disaster like HAMP.
The Moar You Know
@Michael: Good move. I did the same thing about six months ago; just stopped the 401k contributions completely. I’d probably have lost less money gambling – at least in a casino, they have to pay you out often enough to keep you in your seat, whereas with my 401k, they just were going to drain that fucker dry until I put all of it into a money market account. Now they can drain it dry slowly.
I don’t have kids so I just spend the extra paycheck money. Nice to be able to do that.
Got a .45 ACP retirement plan and that’s really all I need.
Console
With the advent of the check card, I’ve never really understood how credit cards appeal to anyone other than the working class. If you live pay check to pay check a credit card is your savior for something like a brokedown car. Who else could the banks prey on?
The Moar You Know
@Michael: Good move. I did the same thing about six months ago; just stopped the 401k contributions completely. I’d probably have lost less money gamb1ing – at least in a cas1no, they have to pay you out often enough to keep you in your seat, whereas with my 401k, they just were going to drain that fucker dry until I put all of it into a money market account. Now they can drain it dry slowly.
I don’t have kids so I just spend the extra paycheck money. Nice to be able to do that.
Got a .45 ACP retirement plan and that’s really all I need.
ItAintEazy
@Culture of Truth: Okay, I take it all back. With the new financial regulations in place, we have absolutely nothing to worry about.
Ruckus
@Martin:
Very small sample size but a lot of my customers tell me that instead of purchasing products they have been paying down their cc debt. And that they will start purchasing again once they have paid down and saved up enough to pay cash. I just sold 2 large ticket items for cash, no cc. I believe this is part of why the economy is lagging, many more are using cash and forgoing their cc. Our retail economy was built around cc use. Around being in debt. We can get back to a mostly prepaid (cash) instead of a debt economy but it will take quite a while to accomplish and it’s mostly the small businesses that will suffer and just disappear.
Brachiator
@Ross Hershberger:
This is a trivial, almost useless observation. It is also the typically backwards stuff that pundits, even Krugman, spew.
Cheap credit, new bankruptcy laws that stuck it to consumers, and persistently (almost unnaturally) high consumer interest rates helped kill the economy. And as a result of the financial meltdown, a significant number of people have had to dip into their pensions even as the total value of their retirement savings has declined.
To talk about consumers now reducing spending when both their current income and net wealth has significantly declined is comically reductive.
The way that economists and pundits talk about the economy does not reflect the reality of people’s lives.
GVG
The shortage of business lending and the increase in credit card lending are not nessesarily related.
Credit cards to “risky borrowers” is not nessisarily insane or bad business. It WAS the way it was being done before. If they are now doing it “correctly” it should be fine. I don’t know that it is (lack of detailed current info) but it could be. When a card company extends credit to a bunch of risky borrowers they should be calculating how many are going to never pay compared to how many will pay plus the fees and interest for being late etc. The amount the payers give should exceed the write off amount plus a % of profit. The profit % should be equal or more than the company could get doing something else with the money (opportunity costs) and the only thing keeping the profit % from being sky high is competition who also wants $ and if they make it too high people won’t ever use the credit card. If there is no credit for anybody who is some degree of risk, only poor people get hurt and everybody needs SOME credit some time. Risky credit lending does have risk and costs (some people never pay).
What WAS happening is that they were giving too many credit cards to too many risky people with high high limits that it was unrealistic to expect enough of them to repay. they got burned because they didn’t do their math right.
If they are now giving fewer (but not none) to people and correctly evaluating the risk and actually setting higher rates for higher risk people….then the math works and they’ll be OK. Which only means we shouldn’t (taxpayers=we) have to bail them out.
It isn’t great for the people with “risky” credit in that it will cost more & the credit limit will be lower but it is realistic. It should mean people try to avoid using the card unless its really nessesary ie major unplanned car repair or medical bill not a fun but not required thing like say a bigger TV. If that is how it plays out it wouldn’t even be commented on if we hadn’t got so used to the old way of anybody no matter what having access to $20,000 in credit cards.
On the other hand I am now too cynical to think this is likely. Probably the banks are just being fools again. I just can’t be sure yet.
Loaning to businesses has its own risk calculations. I suspect the economy overall that is not getting very better quickly means that all business lending is still too risky, more so than individuals so it will be slower to start back up. It should at some point also start increasing though.
Martin
@ChrisS:
Well, unfortunately that’s why it needs to be resisted. Those who are living paycheck to paycheck can least afford the added interest expense, and its an inflexible one. Put another way, if you can afford the interest in subsequent months than (in general) you could afford to put that much in savings in preceding months and save yourselves the 10%+, which *really* adds up. That doesn’t work in any given situation, but it works more often than people are willing to acknowledge.
I work alongside people that are stuck in the credit spiral and live paycheck to paycheck and they don’t know how to break out of it. One day they’ll ask me why I bring my lunch to work every day. I’ll buy lunch when out with my family but my daily routine, since I was 10, was to make a sandwich before I leave for school or work. I point out that I save $5 per day that I do this. $25 per week. $100 per month. $1200 per year. I was forced into the habit in elementary school because we were fucking poor, and bread and peanut butter was half of my daily calories. I kept doing it in college because I was paying my way, and after college it was how I paid off my loans quickly, and after that it was how I saved for a downpayment for my house, and now its how I save for my kids college. I point out that in every stage of my life, no matter how much I earn or have saved up, there have been more important uses for that $1200 than having a cheeseburger.
And the very next next day I see that person buy a cheeseburger for lunch. Almost everyone can cut their expenses. Growing up it was food stamps and the dented can store and clothes from Goodwill, and as much of the backyard converted into a vegetable garden as we could get away with. It’s hard and it’s miserable – no question. But when I was older I asked my parents what things were like through all of those years. They said it wasn’t so bad. It was hard, sure, but every month they managed to save a little money, and that’s what got them through. And when I needed stitches they could afford it (barely). And when we needed to move for a better job they could afford it (barely).
And there are people living right on the edge, but 90% of the people carrying credit balances aren’t those people, and those folks can solve this problem quite straightforwardly.
Ross Hershberger
@Brachiator:
I took it as merely noting that a large portion of the economy is based on consumer spending, and that in a recession this goes down sharply, slowing the broader economy down.
You can extrapolate from that to a wider scale and attribute some kind of agenda and intention to it but I thought it was a characteristically focussed and reasonable observation.
Culture of Truth
@ItAintEazy: That’s it? How boring.
Martin
@The Moar You Know: Yeah, I think the 401K situation is going to have some long-term adverse consequences for the nation regarding the willingness of people to save for retirement.
Mine are finally above where they were 3 years ago – but that’s solely due to dollar cost averaging – the stuff bought in 2009 is up decently, but the stuff bought from what, 2005 until then is still down. Straight S&P 500 index funds. Most mutuals fail to beat the S&P 500, so even with a rather conservative equity strategy we’re not seeing any real retirement headway, and anyone who went with sector funds or individual stocks is probably in worse shape, with some folks coming out big winners and many coming out massive losers. I wouldn’t blame anyone for feeling like they should just throw up their arms at this point – particularly if they’re over 50.
That’s not going to be good for the nation if we wind up with a generation or two of people that just said ‘fuck it’ and find themselves with Social Security as their main retirement income.
catclub
@Sentient Puddle:
Money of course is the last thing that American s have gotten around to talking about, and the people who do mind their finances (well) generally are not the ones to brag about it.
Whining about credit card bills is fashionable, however.
I actually think that the population keeping zero revolving debt is more common than it appears, but still less common than it should be.
ChrisS
@Martin:
Congratulations, Martin. You’re awesome.
Martin
@Ross Hershberger: I would point out that there are exceptions to this rule, and that accepting the rule as being inevitably true may not be wise.
Apple is a pure consumer spending company. What’s more, at least 90% of what they sell is totally discretionary. In the last 3 years, they have seen zero impact from the recession. Sales each quarter have gone up. Profits have stayed high. Not once did they cut prices to keep sales going, and barely run sales – and the sales they do run are laughably timid compared to competitors.
And few of Apple’s products sell at a discount to the market. Their iPods are hard to undercut on price, but iPhone is comparable to other products on the market or slightly higher, iPads are unique so that’s hard to compare, and Macs are unquestionably much more expensive, yet sales have been skyrocketing. And these aren’t sales just to the top income earners. Apple will likely sell 100 million iPhone 4s over it’s production run. That’s reasonably broad based.
My thesis here is that a too much of the past spending that the economy relied on was impulsive spending and disposable spending. Basically, a fair bit of spending for the sake of spending, with no durable value being acquired. But when you look at areas with more durable value, even if the individual cost is higher, those areas haven’t suffered and companies that have focused on delivering more durable value in their products, rather than just churning more shit out the door have done alright. And that’s sort of the problem I’m facing as a consumer – there’s a serious lack of durable value in what we’re offered in the market. It’s mostly cheap, disposable, impulsive shit – even in markets like home improvement where you wouldn’t normally find that stuff.
If US corporations would find their way back to providing good value in their products, I think they’d find spending come back much faster. But that would require hiring and investment, and, well, they’re too fucking stupid and cowardly to do that.
ciotog
My brother had $0 income last year. This year, because of a paying internship, his income will be about $3600. Needless to say, he’s living with a relative (me). He gets at least one credit card offer a week. I make almost twenty times what he makes, and have an excellent credit rating. I think I’ve gotten one offer all year.
Basically the credit card companies want to enslave you so that you’re in hock to them for the rest of your life.
catclub
@burnspbesq:
Please do a quick search on ‘Kasasa Checking’
Interest rates on money market funds (that I have) are about 0.08% , which is NOT 8% interest. While kasasa checking pays 3.56% on balances up to $25k. That is $800 over a year.
Not something to sneeze at.
WereBear
The carnie mentality of modern business would be funnier if it hurt only themselves.
And while everything you have said about sensible spending is true, it is all out the window with just one disaster. The $1200 not spent on cheeseburgers is a molecule in windstorm if someone needs chemo, or your house is destroyed and the insurance refuses to pay.
I know a lot of these people you describe; they go for the cheeseburger because they do not trust the system to pay off down the road. And I understand that attitude.
Insurance used to be a way of protecting one’s investments; now it’s simply a way to screw someone out of premiums.
gene108
Watching Bloomberg News and CNBC enough to see several economists come on and flat out state the problem with the economy is Americans have too much debt and until that is brought down, things aren’t going to really return to normal.
I don’t disagree. I don’t think anyone really disagrees, with that assessment.
What people disagree on is what should government do during this deleveraging process?
Liberals were hoping for a New Deal-esque massive investment to keep demand from crashing and reduce unemployment, while the debt works its way out of people’s lives.
Conservatives seem to think this crappy economy is the bitter medicine we need and we should all just suck it up.
I tend to side more with liberals, but people did go out on debt fueled spending binges the last couple of decades.
Unfortunately no ones finances will fix themselves until the underlying real problem within the economy gets address and that is wage stagnation for most people.
Wages have been stagnant since the 1970’s and there seems to be no incentive on anyone’s part to try to address this. Meanwhile the cost of living keeps going up faster than people can earn and the end result will be a significant decline in our standard of living.
chopper
@ChrisS:
meh, he’s got a point. i’m not going to go on some sermon about thriftiness or whatever but a lot of people in this country fell like they’re entitled to an easy life full of useless crap. there are plenty of people living hand-to-mouth that really do everything they can to cut back and live lean, but for many others it’s just habitual to waste money.
ChrisS
@chopper:
I think Martin is an engineer.
He asked a question about why people can’t just pay off their card every month. I posted that the reason being is that going backwards in standard of living is an extremely difficult pill to swallow. “Everything is going to change right around the corner …” “If we can make it to June, we’ll be alright …”
Working class wages have stagnated for thirty years, costs of living have been rising, and it’s a fucking bummer to say, at the extreme end, “well, we have to sell the house.” Or, “I guess we can try and get one more year out of the furnace.” and then when it dies, a person needs $5,000 for a new one. Luckily, they had been eating peanut butter sandwiches on dated bread for the last 4 years to afford it.
But it feels a lot better to just say that the poor people deserve a good ass-fucking because they’re stupid.
sparky
um, maybe it’s starting up again because that delightful CARD act has no limits on interest rates. thus anyone who signs a new contract could, theoretically have their rates hiked to, well, anything. so long as the issuer gives 45 days’ notice. that, of course was the important part, right?
Ruckus
@ChrisS:
A huge problem is that due to exactly what you stated, stagnant wages, it’s not just the poor people who are getting fucked any more. The poor have always been fucked over. The problems are pushing pretty hard up into the middle class. And that’s a lot more people. It’s pretty obvious that it’s not one thing, say crappy bank/credit card practices. Or people being overly willing to be in debt. Or people having the wrong education for the jobs available. Or living in the wrong place for the jobs available. Or hugely overpriced health care which can not be utilized without debt/bankruptcy. Or lack of manufacturing/jobs for the majority of the crap we purchase. I’m sure I could go on and on.
The reason is our short term outlook on money and politics. Looking for profits in the easiest and usually largest segment of a business, employees. Cut numbers, cut wages or at least keep them from growing. The short term numbers look good, the long term numbers can look good as well if the company is large enough to absorb the loss of productivity. And if they keep their numbers higher than the competition, they win.
jonas
@Martin: Yes, some people do treat credit cards like free money and don’t think about the consequences of racking up debt. But you should also count yourself fortunate that you haven’t found yourself in a situation where you’re living paycheck-to-paycheck and find there’s still two weeks to go in the month, the bank account’s empty, the heating bill is due, and you need new tires on your car or you’re going to have a blowout. You’re going to need at least $500 to get to the end of the month and all you have is the Visa card.
Play that over month, after month, after month for some people. And you wonder how people end up $25,000 in debt after a few years.
chopper
@ChrisS:
what does that have to do with it? and no, pointing out that many americans fetishize crap doesn’t mean you want poor people to ‘take it in the ass’.
chopper
this is a bit of a problem of dueling stereotypes. on one hand, you can point out that americans tend to be bad with money and buy crap, and people think you hate the working poor. on the other hand, you can point out that many poor people are trapped in the debt cycle, and people think you’re saying that everyone is broke and has no other choice.
let’s face it, lots of people got caught up in the vicious cycle due to circumstances beyond their control. but not every american is working poor or living hand-to-mouth, lots of people just shouldn’t be allowed near money.
ItAintEazy
@chopper:
Like the banksters?
Culture of Truth
ItAintEazy:
@Culture of Truth: Okay, I take it all back. With the new financial regulations in place, we have absolutely nothing to worry about.
Usually you have to go to a kindergarten playground for debate of this caliber.
chopper
@ItAintEazy:
especially the banksters.
Nathanael
What comment #2 said. The business model is debt slavery, period, end of story.
Nathanael
“What people disagree on is what should government do during this deleveraging process?”
Well, I think it should issue a debt jubilee to make sure that all the wealth doesn’t end up concentrated in the hands of the banksters. But that’s considered “socialist”. I guess Jesus was a socialist.
Platonicspoof
@Brachiator:
Maybe this NYT story was in another thread already, but it also fits in here with fees and Profit! and who’s regulating who:
Oh, and Monopoly!
Platonicspoof
Also possibly relevant, and also from the NYT, 12-09-10:
At this point, I should give a h/t to a well-known blogger, but after one of his bloody dog-eat-bloody dog L-word comments today, I’ll just say the market has spoken.
Nancy Irving
“At the end of every seven years you must cancel debts.” Deuteronomy 15:1.
Wonder what the GOPers would say about THAT!