Richard Geisst, a Manhattan College finance professor and former investment banker published a new book, “Collateral Damaged: The Marketing of Consumer Debt to America.” In the book, Geisst traces America’s credit history and finds it riddled with sleepy regulators, congressional nit-wits and sinister financial firms making euphemistic lures to consumers. “A credit card offers $10,000 of credit, not debt. It has a friendlier ring,” he writes.
Consumer debt is at an all-time high, exceeding $2.5 trillion, or $8,000 per person, making it as American as apple pie and apparently equally tasty. But The Great American Debt Machine, as Geisst calls it, is hardly new. Sears established its consumer credit operation nearly 100 years ago, and automobiles have been sold “on time” since 1916. The American debt machine really began roaring in the ’20s, when consumer debt doubled. But fewer than 20% of the population bought anything on credit then.
Credit cards hit the scene with Charg-It after World War II, followed by Diners Club and American Express. Diners Club and American Express required payment in full, however, so their credit card holders couldn’t get in over their heads. Plastic as we know it began about 50 years ago, with Bank of America’s BankAmericard (now Visa) letting card holders finance purchases over time, paying interest on unpaid balances.
Geisst says there are several significant factors beginning in the 1980s played a major role creating the current financial chaos:
o •Variable-rate credit cards and adjustable-rate mortgages shifted credit risks from lenders to borrowers.
o •Financial firms gleefully packaged and traded their debt, making credit easier to obtain than at any other time in history.
o •The Tax Reform Act of 1986 abolished the deductibility of interest, except for mortgages, leading to a stampede toward home-equity loans, on which interest remains deductible, to finance credit card purchases.
In the ’90s, Geisst says, Congress and community activists encouraged excessive lending to low-income groups, expanding the subprime mortgage market. And a 1998 tax law increasing tax-free capital gains on residences to $500,000 per couple “proved to be an irresistible lure for those who thought they could flip their homes for a profit after two years.”
Debt cravings turned to crisis this decade, Geisst writes, as lenders packaged debts and cleared them off their books; regulators relied on bond rating companies to do their work; mortgage originations hit a record $4 trillion (over 13% were subprime also called bad credit mortgages); and bank card customers used plastic to pay for $4.34 trillion worth of purchases. “In order to achieve the American Dream, average American families were going into more debt given the low growth in incomes, factoring in inflation,” the author writes. But Geisst puts excessive blame on consumers without evidence of bad behavior. He maintains that large numbers of homeowners used home-equity loans to run up credit card charges, but he concedes that no statistics confirm this. And the author says the “average American has over 13 credit cards.” In truth, consumers have only about five cards on average, 42% of card holders don’t carry balances and about a quarter of Americans have no credit cards.
How to stop the insanity? Geisst calls for mandatory debt counseling for borrowers who pay only minimums on credit cards; tighter restrictions on tax-free residential capital gains, consumer credit and mortgage approvals; and new laws reinstating state usury ceilings, punishing predatory lenders and creating a Consumer Financial Protection Agency like the one the Obama administration has proposed. Government regulation may help stem America’s debt problems, but the recession will probably do even more to make consumers and lenders more cautious. Book Review and Article was written by Richard Eisenberg.
