Taking credit for a world in crisis

04/02/2009 - 22:00


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US Supreme Court ruling paved the way for financial meltdown.

STATE Scene visited several major American archives and historical society repositories during December and January, meeting a large number of learned people along the way.

And America's amazing public cable TV service, C-Span, also offered some interesting close encounters.

One program featured Elizabeth Warren of Harvard University's Law School, a bankruptcy expert and critic of the US's consumer credit sector.

She's written several books, including The Two-Income Trap: Why Middle Class Mothers and Fathers Are Going Broke.

Dr Warren criticises a range of practices she says credit card providers have embedded via fine print into agreements.

She's especially critical of anyone claiming that debt affects only a few and that such debtors help kick along the economy.

"Seventy per cent of American families last year said that they are carrying so much debt that it is making their family lives unhappy," Dr Warren said in a 2004 interview.

"Middle-class Americans, hard working, play-by-the-rules Americans, Americans who lost a job, who don't have health insurance, who are in the middle of a divorce - those are the Americans who are carrying enormous credit card debts."

She contends this is historically out of character for Americans, since their ancestors doggedly shunned indebtedness.

"Why do you think people left Europe to come to the United States?" she asked during the interview.

"They left because they were in debt. We like to describe it as, 'Oh, it was about religious freedom.'

"No, it was about debt. They were looking for a way to escape their debts."

During a televised C-Span Congressional Oversight Panel session, Dr Warren said average income for fully employed American males had remained static since the 1970s and was now $US800 less annually after adjusting for inflation.

Families today spend less on food, furniture and clothes, and more on electronics, housing, health care, transport and taxes.

In the 1970s the average American saved 10 per cent of net earnings.

Today comparable families - but with husband and wife working - carry debt.

Dr Warren said 50 million American families cannot pay-out credit card debt, so rather than saving they're permanently in the red.

Notwithstanding this, the cost of living index doesn't include credit card interest outlays.

It's precisely here that the seeds of last year's financial meltdown are found - with increasing levels of plastic card credit offered to growing numbers of Americans at the-sky's-the-limit interest rates, she said.

Dr Warren next outlined how, until 1978, American states could impose interest rate limits - usury caps - on credit card issuers based in their state to protect their own consumers.

Then the US Supreme Court ruled that a national bank could charge the highest interest rate allowed in the bank's home state to customers living anywhere in America, including states with usury caps.

Soon after, South Dakota raised its usury cap so as to attract 700 new jobs offered by a credit card agency that intended basing itself there.

Other states followed, meaning America's state legislatures lost control over interest on credit.

And within a decade the same began happening to the mortgage sector.

The typical credit card contract in 1971 had 1.5 pages of terms and conditions, according to Dr Warren.

Today's standard contracts have 31 pages of tiny print, with borrowers generally only reading those lines highlighting base interest rate.

Those nearly 30 extra pages carry what she's dubbed "tricks and traps", that is, all sorts of extra costs, penalties and charges that markedly boost revenue for lenders in the event of a consumer slip-up.

With usury caps now gone such agencies could charge over the base rate whenever credit card owners fell for one of the "tricks" or were snared by one of the "traps".

And similar "tricks and traps" have spilled over into mortgage contracts, which formed the basis of America's sub-prime housing bubble that's so catastrophically affected the global economy.

Dr Warren said American borrowers were denied the type of stringent protection they receive as consumers of processed food, electrical goods, and other goods and services - things that are taken for granted.

Here's how Dr Warren outlined this state of affairs in the 2004 interview referred to above: "What's changed is [that] when credit was deregulated in the early 1980s, the contracts began to shift.

"And what happens is that the big issuers, the credit card companies who have the team of lawyers, started writing contracts that effectively said, 'Here are some of the terms, and the rest of the terms will be whatever we want them to be.'

"And so they would loan to someone at 9.9 per cent interest.

"That's what it said on the front of the envelope.

"But it was 9.9 per cent interest ... unless you lost your job, or 9.9 per cent interest unless you applied for a couple of other credit cards, or 9.9 per cent interest unless you defaulted on some other obligation somewhere else that doesn't cost me a nickel.

"And at that moment, that 9.9 per cent interest credit suddenly morphs to 24.9 per cent interest, 29.9 per cent interest, 36.9 per cent interest.

"Well, you know ... nobody signs contracts to buy things that say, 'I'm going to pay you $1,200 for the big-screen TV unless you decide, in another month or two months, that it should really be $3,600 or $4,200 or $4,800.'

"But that's precisely how credit card contracts are written today."

This segment of her case certainly jelled with me because early last year I discovered my credit card issuer had fined me $25 for alleged late repayment, which I immediately queried by calling a so-called consultant to point out I'd in fact paid all owing on the due date.

What I was absolutely stunned to learn from the consultant was that the agency's computers debited me from midnight of the date the money was due, not after 5pm, the usual close of business.

I'd made my payment well before 5pm, so well and truly met the deadline as I understood it.

Although the consultant scrubbed the $25 penalty, I've wondered ever since how many millions of dollars this practice adds to the card companies' coffers annually.

Dr Warren's snappy phrase - "tricks and traps" - certainly stuck a chord with me.

As you'd expect, America's credit card agencies not only employ high-powered lawyers, but also lobbyists who ensure congressmen and women receive campaign funds that help guarantee no amendments are made to relevant state and national credit legislation.

Dr Warren told the Congressional Oversight Panel session that the US now has 117 million families, all of which are small economic units.

Australia probably has seven to eight million, such units using credit cards.

She next stressed that not all national financial problems and solutions are found on Wall Street.

Some, probably most, are found near Main Street, within those millions of family economic units' homes.

Clearly, if our politicians fail to ensure family based economic units are fully protected against powerful corporate interests, no amount of what was once called deficit budgeting - now dubbed 'stimulus' spending - will get our national economy back onto an even keel.

All Dr Warren's contentions need assessing by a federal parliamentary finance committee, and if the debilitating features highlighted are found in this country, remedial steps should be promptly taken as part of a comprehensive investigation into how and why Australia was a victim of the global meltdown.


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