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Thread: The 'Democratization of Credit' is over - Now it's Payback Time

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    Default The 'Democratization of Credit' is over - Now it's Payback Time

    from

    (snip)"NEW YORK -- Karen King owes nearly $36,000, more than she's ever earned in a year.

    All day long, bill collectors call. She hunts for a second job, sometimes skips meals, and stays with other family members at a grandfather's crowded apartment, trying to get out of debt and turn her life around.

    She largely holds herself at fault. "Years ago, I lived for now. It was so stupid," the 28-year-old says. "It's depressing, but I can't live that life anymore." Now, she says, "I basically want to live for the future."

    The recession has forced a financial reckoning for Americans across the income spectrum. The pressure is especially acute for the low-income Americans who relied on borrowing for daily expenses or to gain the trappings of middle-class life. Shifting credit practices over several decades had enabled them to live beyond their means by borrowing nearly as readily as the more affluent.

    But the financial crisis and recession have reversed what some economists dubbed the "democratization of credit," forcing a tough adjustment on both low-income families and the businesses that serve them.

    "We saw an extension of credit to a much deeper socioeconomic level, and they got access to the same credit instruments as middle-class and mainstream Americans," says Ronald Mann, a Columbia University law professor. Now, "it will be harder for families at the bottom of the income ladder to get credit cards," he says.

    The financial crisis has forced lenders to be especially cautious with the riskiest borrowers, a category that low-income families often fall into because their debt tends to be higher relative to income and assets. The ratio of credit-card debt to income is 50% higher for the lowest two-fifths of Americans by income than for the top two-fifths, Federal Reserve data show.

    For families with incomes between about $20,500 and $37,000, the ratio of debt to assets rose to 18.5% in 2007 from 14.4% in 1998 -- more sharply than the increase among the overall population -- according to the Fed's Survey of Consumer Finances. In addition, the chances of default and delinquency on home mortgages are higher among lower-income households, according to data from Equifax and Moody's Economy.com.

    The democratization of credit began decades ago. Federal legislation in the late 1970s required banks to avoid discriminatory lending and meet the needs of local communities, spawning a wave of home buying and entrepreneurship in lower-income neighborhoods. The rate of homeownership in families with incomes in the bottom two-fifths rose to nearly 49% by 2001 from below 44% in 1989, according to Fed data analyzed by Mr. Mann at Columbia.

    Credit-card borrowing took a similar path. One cause was a 1978 Supreme Court decision that let banks charge whatever interest rate was legal in the state where their card operation was headquartered. The ability to charge higher rates made it more profitable to offer cards to risky borrowers. Adding oomph to both credit-card and mortgage lending was the growth of markets where lenders could sell their loans.

    By 2007, 35% of Americans in the bottom two-fifths of income had a credit card with a balance, up from just over 21% in 1989. And use of these cards increased. The median balance on the cards, adjusted for inflation, grew 180% over that period for people in the bottom fifth of income and 80% for those in the next higher fifth.

    When the recession struck, banks that had eagerly wooed new credit-card customers reversed course. "Rather than keeping accounts that have high loss potential and limited revenue opportunity, the mission becomes to close out those customers' active lines and drive them off the books," said a report from TowerGroup, a research firm. By June 2009, banks were closing credit-card accounts at a rate of 14% or 15% annually, double the rate of a year earlier.

    Government policy, in some ways, has reinforced lenders' business imperative to pull back. A new credit-card law limits banks' freedom to raise interest rates without 45 days' notice. Anticipating this and other changes, card companies took aim at delinquent accounts and shed customers deemed most at risk of default, says Chris Stinebert, president and chief executive of the American Financial Services Association, a trade group.

    "Banks and credit issuers are looking at their own debt and trying to collect as much as they possibly can," he says.

    Backers of the card legislation say one goal is to erect some obstacles to both the lending and the borrowing excesses of recent years. Treasury Secretary Timothy Geithner, testifying before Congress in July, said: "We now know that millions of Americans were...unable to evaluate the risks associated with borrowing to support the purchase of a home, a car or an education."

    All this means a new reality for consumers like Ms. King. Most of the credit cards she had were maxed out by 2004. She would sometimes just let the bills pile up and not pay the minimum. "I would start paying it, and then my sister almost got evicted from her old apartment, or my grandfather decided he couldn't pay the rent. They needed help," she says.

    Later, the store cut her work hours. As she fell further behind, issuers canceled her credit cards and handed the debts over to collectors. Ms. King's credit score slid to 576, a level that deems her a high-risk borrower.

    Last fall, wanting to buy gifts for her mother and sister and clothes for a young niece, she applied for credit and was rejected at Macy's and Dress Barn, finally getting a card with a $250 limit at the Children's Place.

    Her biggest chunk of debt, $26,000, stems from student loans to pay for her two-year associate's degree from a community college -- loans now in the hands of collectors. The remaining $10,000 or so includes old credit-card balances, debt to a store that rents furniture, utility bills and back taxes. Another obligation is $400 a month she contributes to the rent on her grandfather's two-bedroom apartment, where her mother, uncle and sister also live."(snip)


    One interesting take on this story is this ... what good are 5% mortgage rates or 6% auto loan rates or 8% credit card rates if nobody will approve the mortgage / auto loan / credit card ?

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    Default Re: The 'Democratization of Credit' is over - Now it's Payback Time

    Perhaps the people will once again demand the right thing - the ability to EARN their money.

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    Default Re: The 'Democratization of Credit' is over - Now it's Payback Time

    Why do they have to personalize important articles with temporary and unique anecdotal information?

    This is caused in a large part by the exploitive marketing tactics and philosophy of the credit industry and by the marketing of consumer items an a laissez faire, free-market government. And of course by gullible people. And it occurred during and since the Reagan administration when so many business-friendly laws were expanded. It really bugs me because it has caused so many costs to increase and is at the heart of the current huge recession.
    I loved going to strip clubs; I actually made some friends there. Now things are different for the clubs and for me. As a result I am not as happy.

    Customers are not entitled to grope, disrespect, or rob strippers. This is their job, not their hobby, and they all need income. Clubs are not just some erotic show for guys to view while drinking.

    NOTE: anything I post here, outside of a direct quote, is my opinion only, which I am entitled to. Take it for what you estimate it is worth.

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    Banned Melonie's Avatar
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    Default Re: The 'Democratization of Credit' is over - Now it's Payback Time

    some 'disturbing' professional opinion on the topics in this specific article ...

    (snip)"The article goes on for another thousand or so words, detailing the hardships of people who now have to choose between years of extreme frugality and bankruptcy, and ends with:

    "I was a social person. I had interest in a lot of things," she says. "I had dreams. Now I'm just paying off the past."

    Some thoughts:

    1) The designation of American citizens as “consumers” was always a little bizarre, but now it seems dangerously archaic. A nation of people who buy things will always lose out to people who create things, or who adhere to and spread an ideology, or who save and invest. Duh.

    2) The “democratization of credit” was never analogous to civil rights or voting rights. By handing out home mortgages and credit cards indiscriminately, we didn’t empower anyone. Instead, we created a generation of people who were an illness, layoff, or blown transmission away from default. Much better for them if instead of paying interest, they’d banked that money until they had the cash to enter the middle class through the front door.

    3) There’s no way for “good” bankers to stop this kind of credit bubble. When a government is printing paper currency and handing it to banks, the banks have to do something with it. Sitting on it is not an option because that lowers their return on assets, which leads to 1) current management being fired and replaced by more aggressive executives or 2) the bank being bought out by Citigroup or B of A, which then leverage the newly-acquired assets to the hilt. So in the same way that bad money drives good money out of circulation, it also chases away good bankers and replaces them with Angelo Mozilo and Chuck Prince. This is one of those “hidden forces of economic law” that Keynes referred to in his famous quote:

    "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.""(snip)

    from

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    Default Re: The 'Democratization of Credit' is over - Now it's Payback Time

    Perhaps the people will once again demand the right thing - the ability to EARN their money
    To be honest I don't understand your point.

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    Default Re: The 'Democratization of Credit' is over - Now it's Payback Time

    Quote Originally Posted by Melonie View Post
    ...Some thoughts:

    1) The designation of American citizens as “consumers” was always a little bizarre, but now it seems dangerously archaic. A nation of people who buy things will always lose out to people who create things, or who adhere to and spread an ideology, or who save and invest. Duh.

    2) The “democratization of credit” was never analogous to civil rights or voting rights. By handing out home mortgages and credit cards indiscriminately, we didn’t empower anyone. Instead, we created a generation of people who were an illness, layoff, or blown transmission away from default. Much better for them if instead of paying interest, they’d banked that money until they had the cash to enter the middle class through the front door.

    3) There’s no way for “good” bankers to stop this kind of credit bubble. When a government is printing paper currency and handing it to banks, the banks have to do something with it. Sitting on it is not an option because that lowers their return on assets, which leads to 1) current management being fired and replaced by more aggressive executives or 2) the bank being bought out by Citigroup or B of A, which then leverage the newly-acquired assets to the hilt. So in the same way that bad money drives good money out of circulation, it also chases away good bankers and replaces them with Angelo Mozilo and Chuck Prince.
    This is of course the one major where we agree with one exception.

    Point #1 - We were designated consumers at a time when we were also manufacturers. Now we're just credit junkies.

    Point #2 - Marketing 'experts' were called in to allow banks to push credit to the limit. The bank management wanted this to happen; so did their stockholders. Government could/should have limited this; obviously usurous interest rates did not. Nuts, isn't it?

    Point #3 - Money has been printed for a long time and banks have wanted a credit-intensive economy. And this mess is the consequence of that.

    ------------------------
    Moral of the story: the cheapest way to buy something costly that is not an investment is to save up for it. You will pay for your impatience.
    I loved going to strip clubs; I actually made some friends there. Now things are different for the clubs and for me. As a result I am not as happy.

    Customers are not entitled to grope, disrespect, or rob strippers. This is their job, not their hobby, and they all need income. Clubs are not just some erotic show for guys to view while drinking.

    NOTE: anything I post here, outside of a direct quote, is my opinion only, which I am entitled to. Take it for what you estimate it is worth.

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    Banned Melonie's Avatar
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    Default Re: The 'Democratization of Credit' is over - Now it's Payback Time

    We were designated consumers at a time when we were also manufacturers. Now we're just credit junkies
    This speaks to the author's point of 'entering the middle class through the front door'. Arguably, back when the US was still a manufacturer, middle class people were able to pay their loan obligations and thus were truly able to afford their 'middle class' lifestyle. But arguably for the past decade at least the vast majority of new entrants into the 'middle class' lifestyle were only able to do this by being extended credit levels that their real world 'value added' earning power could not afford or justify. The reasons this was allowed to happen does not solely rest with big banks ... and arguably didn't even originate with big banks ... but that's beside the immediate point.

    The immediate point is that a large percentage of today's US 'middle class' are not going to be able to sustain their 'middle class' status if additional consumer credit / the ability to roll over existing consumer credit is cut off ... resulting in a very real drop in their standard of living.

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