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thepeel
Joined: 08 Aug 2004
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 Posted: Sat Dec 08, 2007 12:57 am Post subject: The Next Financial Crisis: Credit Cards |
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The Next Financial Crisis: Credit Cards
The next step in the growing financial squeeze�what the banking community likes to call the "soft landing"�is coming down in credit cards. Take a look at those offers you're getting in the mail. Gone are the promises of permanent low APRs on purchases or balance transfers. Instead, the companies are offering a low rate for 6 or maybe 12 months, and then it shoots up to 15 or 20 percent or higher. And there's usually a 5 percent transfer fee on your whole balance�the ceilings on transfer fees are disappearing. So even if you get, say, a 4.9 percent APR for 12 months, it's really 9.9 percent.
This week, the Senate Homeland Security and Governmental Affairs Subcommittee, chaired by Michigan's Carl Levin, held hearings with representatives of several large credit card lenders on an even more devious practice: Consumers whose credit scores fall even slightly�due to a single late payment, or a problem that has nothing to do with their credit cards�can have their APRs jacked up without warning. The credit card companies can even apply this high interest rate retroactively to already accumulated debt.
"Interest rates are going up, low teaser rates are disappearing, and the credit squeeze is going to get a lot tighter," Elizabeth Warren, the Harvard law professor and expert on credit card debt and personal bankruptcy, told Mother Jones this morning. She is an advisor to the campaign of John Edwards, who has made an issue of predatory lending practices and proposed a commission to regulate credit card rates.
What happens, I asked Warren, when people struggling to pay their mortgages go deep into credit card debt, and then can't pay? Do the credit card companies get to take their assets, including their homes? "Here's the deal: A credit card company can't seize your bank account or grab your car without going to court,'' she said. "BUT most credit card companies have put arbitration clauses into the fine print of your agreement, so they can go to arbitration, where they know the arbitrators and where they win more than percent of the time. They then take the arbitration award to a court and get a judgment on it, and the consumer can't do anything about it. If the arbitration was unfair, that's too bad�the credit card company wins. It is a scandal." (For another angle on this little-known scam, see my colleague Stephanie Mencimer's recent piece on car loans.)
Warren continues, "Alternatively, credit card companies can go directly to court and they often get a default judgment because the customer didn't receive adequate notice, didn't understand what the notice said, couldn't appear at that time, etc. Many credit card companies have figured out how to turn the court system into a cheap tool to collect from people in financial trouble.'"
So as the subprime crisis deepens, this other crisis is just waiting in the wings. And the new bankruptcy law passed in 2005 serves the interests of credit card companies and other lenders while screwing consumers in additional ways, leaving them no way out of the debt trap. |
http://www.motherjones.com/mojoblog/archives/2007/12/6478_the_next_financ.html |
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Octavius Hite
Joined: 28 Jan 2004
Location: Househunting, looking for a new bunker from which to convert the world to homosexuality.
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| Posted: Sat Dec 08, 2007 1:01 am Post subject: |
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I'm not surprised. I predicted this subprime debacle almost 3 years ago (the last time I ws back in Canuckistan) when all my friends were working at call centers and buying houses because banks were giving money away. Luckily Canada has so far avoided the mess because of our tighter rules about lending but watching people I know rack up huge amounts of credit card debt and the explosion of loan sharks, oops, I mean payday loans spells trouble in both America and Canada.
http://www.pbs.org/wgbh/pages/frontline/shows/credit/view/ |
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Kuros
Joined: 27 Apr 2004
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| Posted: Sat Dec 08, 2007 12:08 pm Post subject: |
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| Octavius Hite wrote: |
| I'm not surprised. I predicted this subprime debacle almost 3 years ago |
You and everyone else. This crisis was the most well prophecied economic crisis in economic history. |
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mindmetoo
Joined: 02 Feb 2004
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| Posted: Sat Dec 08, 2007 4:19 pm Post subject: |
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| Korea was hit by this several years ago. They set up that "bad bank" to consolidate the bad debt. |
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Mosley
Joined: 15 Jan 2003
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| Posted: Sun Dec 09, 2007 5:52 pm Post subject: |
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One of the worst offenders is Capital One. They mail out credit cards to every crackhead in N. America(as long as they're at least 18, that is) and then spend a fortune in contracts with collection agencies to try to get deadbeats to pay.
I remember the day when a person who qualified for a cc would take it out of his wallet to show his friends-it was really something to brag about! |
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thepeel
Joined: 08 Aug 2004
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| Posted: Mon Dec 10, 2007 9:58 pm Post subject: |
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| Mosley wrote: |
| I remember the day when a person who qualified for a cc would take it out of his wallet to show his friends-it was really something to brag about! |
Those days are around the corner again. |
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mindmetoo
Joined: 02 Feb 2004
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| Posted: Mon Dec 10, 2007 10:39 pm Post subject: |
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| thepeel wrote: |
| Mosley wrote: |
| I remember the day when a person who qualified for a cc would take it out of his wallet to show his friends-it was really something to brag about! |
Those days are around the corner again. |
I have my doubts. The high interest rates CC charge is a big source of profit and they will always take such risks, more so I would say now that you can't just walk away from CC debt in the USA by declaring personal bankruptcy. |
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thepeel
Joined: 08 Aug 2004
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| Posted: Mon Dec 10, 2007 11:00 pm Post subject: |
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You have your doubts because you don't understand the system. Being able to declare off cc debt has nothing to do with 1) being able or willing to pay 2) the availability of additional capital to lend or 3) the ability of the cc firms to litigate their assets back. Additionally, the profitability of CC when compared to other activities is small. Trading, investment banking, M&A etc etc all generate more income from capital. Credit cards obviously turn a profit, but when credit is tight, there won't be as much available capital. The rates will be unbelievably high and the firms will be more selective about who gets the cards.
The expansion in credit is a direct result of the expansion of global liquidity. The more cash in the system, the more available to lend. The less cash in the system, the less available to lend. "liquidity crises" or "credit crunch" should be your next google searches.
I know, I know. "oh well". Have patience. The financial system is a house of cards built on levels and levels and levels of debt. It is all going to come crashing down and inflation will do exactly the opposite. |
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mindmetoo
Joined: 02 Feb 2004
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| Posted: Tue Dec 11, 2007 1:00 am Post subject: |
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| thepeel wrote: |
| You have your doubts because you don't understand the system. |
No. I do, thanks.
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| Being able to declare off cc debt has nothing to do with 1) being able or willing to pay 2) the availability of additional capital to lend or 3) the ability of the cc firms to litigate their assets back |
CC debt is unsecured credit, traditionally. Hence the high rate of interest. If people could walk away from their CC debts, CC companies would be less likely to make future bad risks. If CC companies can recover bad loans... eventually... I don't see them reducing their lending by a great extent.
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| Additionally, the profitability of CC when compared to other activities is small. |
Really?
"The credit card industry is the most profitable one in the United States with annual earnings in the $30 billion range."
http://www.bcsalliance.com/creditcard_profits.html
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| The rates will be unbelievably high and the firms will be more selective about who gets the cards. |
I don't doubt CC companies would use this to justify even higher rates but I'm skeptical it would mean they curtail their CC approval
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| The financial system is a house of cards built on levels and levels and levels of debt. It is all going to come crashing down and inflation will do exactly the opposite. |
Your opinion. Not mine. Oh well. |
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thepeel
Joined: 08 Aug 2004
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| Posted: Tue Dec 11, 2007 1:14 am Post subject: |
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No. You don't. You still don't get that money markets are a supply/demand market.
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CC debt is unsecured credit, traditionally. Hence the high rate of interest. If people could walk away from their CC debts, CC companies would be less likely to make future bad risks. If CC companies can recover bad loans... eventually... I don't see them reducing their lending by a great extent. |
They don't choose how much they lend. They lend what is available for them to lend when the more profitable options by ROI are exploited. This is what you don't get.
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"The credit card industry is the most profitable one in the United States with annual earnings in the $30 billion range."
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http://www.bcsalliance.com/creditcard_profits.html
Credit cards are, in terms of absolute profits, the most profitable industry in banking. In terms of return on investment, they aren't. The most profitable industry in the United States full stop is oil field services, arms, pharmaceuticals and then financial services (including cc's).
The less cash (again, google credit crunch) that is available to be lent out the larger a % of that cash will go to the more profitable arms of an industry by return on investment.
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I don't doubt CC companies would use this to justify even higher rates but I'm skeptical it would mean they curtail their CC approval
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Again, you don't get that cash is in a market. There is a supply and demand for cash. The less there is, the more is costs. The more there is the less it costs. CC's have high interest even in times of low interest. What do you think happens when credit gets more scarce?
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| The financial system is a house of cards built on levels and levels and levels of debt. It is all going to come crashing down and inflation will do exactly the opposite. |
Your opinion. Not mine. Oh well.[/quote]
Then I encourage you to take your won and invest it in the financials. Money, mouth. Etc. Get back to me in November. |
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thepeel
Joined: 08 Aug 2004
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| Posted: Tue Dec 11, 2007 1:24 am Post subject: |
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The End of Consumer Credit as we know it
In an article this week that examined the troubles brewing in Citigroup�s mortgage business, the Wall Street Journal focused on Natalie Brandon, a 51 year old married woman from Granada Hills, CA, who is currently unable to make the payments on her $625,000 adjustable rate home loan from Citigroup, despite the fact that the rate will not even reset higher until June of next year. Amazingly, the Journal reported that Mrs. Brandon bought the house in 1985 for just $105,000, but had chosen to refinance five times over the past seven years, borrowing more than $500,000 and spending every single penny. While this may be an extreme example of American profligacy, it is by no means unique. Unfortunately this type of behavior typifies everything that is wrong with the modern American economy.
Had this homeowner behaved responsibly, as was typical for Americans of prior generations, her current monthly mortgage payments would likely be close to $600 and the remaining balance on her loan would be about $40,000. In eight more years she would have owned her home free and clear, and would likely be on track for early retirement. Instead, after 22 years of making mortgage payments, she is now $625,000 in debt. The article stated that she had recently tried to refinance into a 6%, forty year, fixed-rate mortgage, but it fell through. Even if she had qualified, she would have been obligated to make monthly mortgage payments of close to $4,000 until she was in her nineties.
For years, Wall Street and the media have been singing the praises of the heroic American consumer. To that end Mrs. Brandon could be portrayed as Wonder Woman. She did her part to power our consumer driven economy by borrowing and spending to her heart�s content. Her last refinance even allowed her to buy a brand new Lexus. As long as she could find a greater fool willing to loan her more money, there was no limit to what she could buy. As it turned out, Citigroup was the greatest fool, left holding the bag on a $625,000 mortgage on a house now likely worth only half that amount.
Is it any wonder that we have enjoyed such a vibrant consumer based economy when a working class couple with perhaps $60,000 per year of household income can borrow over $500,000 (tax free) and buy whatever they want with the money? As the bills come due and those who have been doing all of the lending finally realize they will never be repaid, this crazy consumption binge will finally come to an end.
As the losses mount, the credit crunch will spread from mortgages to auto loans and to all forms of consumer lending. The days of Americans borrowing to consume are finally coming to a long over due end. Although it seems like science fiction to Americans raised on credit cards, within a few years most will only be able to buy those goods they can afford to pay for with cash.
In the long run of course, this will be a very positive development. Borrowing to consume is a waste of savings and undermines legitimate economic growth. Money loaned to consumers is unavailable to finance capital investment. By squandering savings on consumption, a society undermines its future standard of living.
When businesses borrow to make investments, those investments generate returns which enable the principal and interest to be repaid. When individuals borrow to consume, no investment is made and the loans can only be repaid out of reduced future consumption. As a result, business loans, especially when collateralized by real assets, are likely to be repaid, while consumer loans, collateralized by nothing but a promise to consume less in the future are much more likely to end in default. As lenders finally figure this out, consumer credit will dry up, and the American economy will enter a prolonged and severe recession. Unfortunately, an economy that lives by consumer credit will die by it as well. Hopefully a more viable economy will eventually rise in its place. |
http://www.europac.net/archives.asp# |
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mindmetoo
Joined: 02 Feb 2004
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| Posted: Tue Dec 11, 2007 1:53 am Post subject: |
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| thepeel wrote: |
| Get back to me in November. |
I will, thanks. |
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Tiger Beer
Joined: 07 Feb 2003
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| Posted: Tue Dec 11, 2007 7:52 am Post subject: |
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Great article.
I've had credit cards for the last 15 years. They USE to be what they said they were and what they offered.
NOW it is totally different. Everything that article mentioned, I've experienced!
I'm overseas and I missed a payment, it shot up to 20% for the next bill!
I shopped around to transfer debt elsewhere to a low APR rate. Found one at 1.9% for one year. I went through the entire process (something I've done countless time without fees), but this one CHARGED ME several hundred dollars to transfer money. Then once it was transferred, they made another mistake (which I've been trying to fix for the last six months!). Instead of the agreed upon 1.9%, it's stuck at 9.9%. Still working that one out.
I remember back when they weren't so dishonest. Now every one I have, seems to try to screw me over somehow. |
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Kuros
Joined: 27 Apr 2004
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| Posted: Tue Dec 11, 2007 9:51 am Post subject: |
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| mindmetoo wrote: |
| thepeel wrote: |
| The financial system is a house of cards built on levels and levels and levels of debt. It is all going to come crashing down and inflation will do exactly the opposite. |
Your opinion. Not mine. Oh well. |
Thepeel is worth taking seriously regarding economics. But he has a tendency to overstate things. For example, his thread where he called Bush's subprime freeze plan 'Bush suspends capitalism.' But actually the Bush plan is pretty tame, given the circumstances.
So when thepeel says: 'the financial system is a house of cards built on levels and levels and levels of debt,' what I take from it is that there will be a credit delinquency problem. There will be a recession. It is unlikely there will be a full-stop economic collapse. |
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Ya-ta Boy
Joined: 16 Jan 2003
Location: Established in 1994
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| Posted: Tue Dec 11, 2007 12:54 pm Post subject: |
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| he has a tendency to overstate things |
A tendency?
You may get the prize for understatement this year. |
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