Heads They Win, Tails We Lose
“It is true, I earn my living.
But, believe me, it is only an accident.
Nothing that I do entitles me to eat my fill.
By chance I was spared. (If my luck leaves me
I am lost.)
To have a sense of how banks and other financial entities have entangled American families in ever more complex economic arrangements, it will be useful to remind ourselves of what an average family’s financial life looked like as recently as two generations, or forty years, ago. In general, a family had two outstanding debts: a mortgage on their home and a car loan. A small percentage of families took out an additional loan to help pay for a child’s college expenses. The chances are excellent that the family got the mortgage from a local bank that would keep the loan until it was paid off and bought the car at a local lot.
Many families had a breadwinner, or sometimes two, whose jobs provided pensions and health insurance, among other benefits. Almost no families had credit cards. Only a minority of families had investments in the stock market. Therefore, at any particular moment, it was clear to the family where they stood — they knew how much they owed and to whom, what their interest rates were, and when their loans would be paid in full. They could also plan for retirement.
Not coincidentally, before ATM cards and the Internet, banks and stores had regular hours and were sometimes closed, on Sundays for instance. People were more likely to think in advance about what they were going to spend and would be reluctant to spend money they did not have.
How far we have come! A modern family, if it is one of the millions of families unlucky enough to have bought a house during the recent real estate bubble, probably has either a mortgage with a very high fixed rate or an adjustable-rate mortgage which began with a low teaser-rate, to encourage the family to buy, and subsequently rose to an unmanageable level.1 The family could have had no way of knowing that the mortgage broker and the realtor and the bank representative and any lawyers involved had no interest in their ownership of the home or whether they could afford to pay for it or what would happen in one or two years — because all of these parties had collected their fees and the mortgage had been sold off to other interests. Most people had no knowledge or understanding of “securitization” and had no idea that their mortgage was now an entirely different financial product from the mortgage of their parents or grandparents.
In a naive way, we all tend to think, “People who lend money want to be paid; they wouldn’t lend it if they didn’t seriously expect to be paid.” But of course this is no longer the case. Loans are made because the lender makes money from the debt and from fees associated with arranging for the loan — whether or not the borrower eventually defaults. We are suspicious when a stranger on the street offers to sell us a Rolex watch for fifty dollars, but why would we have had those same suspicions about the largest mortgage company in the U.S.A., Countrywide? One of many outrageous tactics of mortgage brokers was to steer families with good credit into signing for a subprime loan, at much worse rates, because the broker would then make a bigger profit.2 When home prices were rising, a number of families with regular fixed-rate mortgages were encouraged to take out second mortgages or home equity loans, which were open to all of the same manipulations to generate higher fees as initial mortgages were. As we all now know, when the housing bubble deflated, many homeowners were caught paying exorbitant amounts for mortgages that were now valued at far more than their houses were worth. Thus it happened that what used to be considered the major forward-looking purchase in a family’s life became, instead, a financial trap that a family could not escape without, at best, ruining its credit and, at worst, ending up homeless.
Car purchases also used to be more straightforward, although buyers have always been somewhat wary of car dealers. Now among the many ways a family can buy a car are:
- PCP or Personal Contract Purchase in which the buyer pays an agreed-upon amount for a fixed number of months and then has a hefty final payment before gaining ownership
- HP or Hire Purchase loan, which is similar to a PCP agreement but has some different features
- Borrowing from an online financial institution, with associated complexities and the lack of any particular person to explain the terms
- Using the money from a second mortgage or home equity loan
- Using a credit card
- Arranging the loan through the dealer
So our average American family has had two financial balls to juggle. And almost all families now have a third: credit cards.
The Normalization of Buying on Credit
Even though credit cards existed before the 1980s, a comparatively small number of people had access to them and used them. They were originally intended for customers with good credit as a convenience, to encourage them to do business with the issuing bank or institution. Diners Club cards, introduced in the 1950s, were one of the first general purpose cards (as opposed to department store charge cards). Complicating the introduction of credit cards that could be available to most Americans was the fact that interstate banking laws prohibited banks in one state from lending to customers in another, and each state set its own interest rate ceiling.
In 1978, however, the Supreme Court ruled, in the case of Marquette National Bank of Minneapolis v. First of Omaha Service Corp, that nationally chartered banks could do business across state lines and, most importantly, could charge people in other states the interest rate set in the bank’s home state.3 Bank deregulation had begun for real! This meant that banks could issue cards with more or less uniform high interest rates after they had incorporated in states like South Dakota that placed no limits on the interest banks could charge. By the 1980s, the proliferation of credit cards and their use and abuse began in earnest. Soon it seemed that everyone from heads of families to college freshman had at least one and sometimes many credit cards, and they used them a lot.
Note that our average family is already paying for a mortgage and a car and has severely limited discretionary funds. But credit cards enable this family to buy more goods and services, and thus to go further into debt, since most people do not pay their full credit card bill each month and are charged interest on the unpaid balance — interest as high as 29.99%.4 Also, most people use more than one credit card. Often those cards are not used for flat-screen televisions or new clothes but, instead, for necessities like medical bills and food. A further complication of credit cards comes when the card holder is late with or misses a payment. Even though many people are aware of the high rates of interest they are being charged on their cards, they are often unaware of how large the late fees are and how these get added to their overall bill. Then these additional fees start to accrue, just as they do if payment is late for a mortgage or a car loan.
This would be the time to reflect on the fact that salaries for most American workers have remained stagnant or have even gone down in the last two generations. Median earnings for prime-age (25-64) working men have declined from 1970 to 2010, falling by 4%. But this statistic only accounts for working men, not those on disability or incarcerated or unemployed. The real decline is much greater.5 Women have made more progress, but of course they started at a lower pay level. However even women’s wages are down by 6% since 2000. It becomes more and more obvious that credit cards have been used to take up the slack. It is also obvious that credit card issuers, which are primarily the major banks, have made enormous profits from credit card interest payments and late fees. So we have a neat transfer of wealth from regular families to financial institutions—specifically to the people who work at the upper levels of those institutions or who own stock in them.
Possibly our average family has a child, and perhaps more than one, who is ready for college. Our society has told young people and their families over and over that college is a necessity if they want to have any kind of respected and reasonably paid job; they are considered irresponsible if they opt out of higher education. But very few families have enough money to pay for college expenses without borrowing. One of the more sobering statistics about credit cards is that around one-third of college students pay all or part of their tuition this way.6 They will only be able to make partial payments on these cards for years.
Most students also take out some combination of federal loans with interest of 6.8% and private loans with varying interest rates. Students often have all three kinds of debt by the time they graduate, and the amounts they owe are truly extraordinary: average student debt at the time of graduation is around $27,000,7 but students who have attended law school, medical school, or other graduate programs often owe many times that much.
In generations past, college graduates could usually find a job and begin paying a reasonable amount on their loans each month. Now the situation is very different. Not only is there high unemployment or underemployment for recent graduates, but the amount they must pay on their debts each month is insupportable. Everyone knows graduates who have moved back home to live with their families after college because, even if they have been lucky enough to find work, they can’t pay off their college loans and also pay for a place to live and a car. These young people are not saving to buy a home or to start a family or a business; at the beginning of their adult lives, they are struggling just to get by.
What Happened To The Benefits?
In 1980, two out of three American workers were in defined-benefit pension plans provided by their employers, with guaranteed lifetime benefits.8 By 2011, that number had shrunk to fewer than one in five workers, and it is continuing to go down. Now workers are expected to enroll in 401(k) plans through their employers or set up an Individual Retirement Account (IRA) on their own. There are four big problems for a family trying to provide for retirement through one of these financial instruments:
- The money in these funds is at much greater risk than money in traditional pensions, as we all saw during and after the financial crisis of 2008. A family can lose an enormous amount of retirement savings overnight.
- A family with no particular financial expertise has to figure out how to invest. Just as the markets and finance are becoming more complicated and less transparent, regular people are forced to gamble with their future.
- Families often ask financial advisors to help them sort through the various possibilities. But of course these advisors must be paid, with money that could have gone into the retirement account.
- In a crisis, a family sometimes withdraws money from these accounts and pays steep penalties — not only the taxes that had been deferred, but also an additional fee of 10%.
So our average American family, with mortgage debt, car debt, credit card debt, and student loan debt, also has no idea of how much will be in their retirement fund when it is time to retire — assuming they have not withdrawn the funds before that time for an emergency. They could be lucky — the stock market could be up and their mix of stocks and bonds could be performing well -or they could be wiped out. Ultimately, they have virtually no control over the outcome.
The other benefit that workers relied on was employer-provided health insurance, not just for themselves but also for their families. After World War II, because of wage controls, employers offered health benefits in order to compete for workers. The number of employers offering this benefit grew until the early 1980s. However, as health care costs increased, employers cut back on various benefits, health care among them. In 2010, only 55.3% of American workers had employer-based health insurance, and workers were paying more for it.9 This means that almost half of all working people don’t get access to health care through their jobs. Even when they do have such benefits, coverage is often seriously inadequate and the deductible — the amount the family must pay before they receive any insurance assistance — is very high.
A 2009 study in The American Journal of Medicine reported that, of people who declared bankruptcy because of medical bills, 75% were covered by health insurance.10 And employers, particularly non-union employers, can change the coverage they offer at will, as can the health insurance corporations. Walmart, which had been heavily criticized for not providing health insurance and for paying workers so little that they were actually eligible for Medicaid, announced that it was improving its health insurance policies in 2006.11 However, by 2011 Walmart rescinded most of those changes, particularly those which covered part-time workers. As we know, many companies deliberately keep workers’ hours below the number at which they would be eligible for benefits. In other words, they intentionally add more part-time workers rather than increase the hours of the workers they already have in order to avoid paying for benefits. If our average family is fortunate, at least one breadwinner has employer-provided health insurance which also covers the spouse and children, but there is a one-in-two chance that this is not the case.
Historically, pensions and health insurance were offered to workers in lieu of pay raises. Now, the productivity of Americans has increased, but their salaries have not gone up and their benefits have been seriously eroded. What, we hardly need to ask because we already know the answer, has happened to the money that could have paid higher wages and decent benefits?
Blood From A Stone
So far we have been discussing the increasing financial burdens on an average American family. But what about the burdens on the millions of families that survive on less than $30,000 a year, sometimes much less? Their situation is truly desperate — but not so desperate that various businesses cannot make money from their distress. The general name for this sector of the economy is Alternative Financial Services, which covers everything from check-cashing stores to payday loan providers. What is most interesting about these “alternative” services is how closely they are connected to regular, mainstream institutions like JPMorgan Chase.
Unless a bank depositor maintains an average monthly balance, usually of more than $1,000, he or she will be charged a monthly fee and various additional fees for checking and other services. Many people who are unable to maintain a large enough balance are therefore driven to use check-cashing services, for which the fee is usually 1.5% to 3.5% of the face value of the check. They also have to figure out how to pay their bills without a bank account, often using money orders or other expensive options. Walmart and Kmart now offer check-cashing services at their stores, illustrating how “alternative” quickly becomes normalized when there are profits to be made.
Since the Credit Card Act went into effect in 2010, placing some restrictions on credit card issuers, the use of prepaid cards has exploded. These cards are most often used by people who can’t get regular credit cards. They are not yet regulated in the same way as regular credit cards, so, naturally, charges and fees that are not initially disclosed to the buyer are common. The buyer of a General Purpose Reloadable (GPR) card purchases the card which has a certain amount of money on it — but of course the card, and the service, comes for a fee. Other fees include monthly charges, a fee to activate, balance inquiry fees and dormancy fees, among others. A different kind of card, issued by the government to pay benefits, is the Electronic Benefit Transfer (EBT) card. We are not surprised to learn that the banks that are contracted to service these cards charge a variety of their own fees.
People who live paycheck to paycheck sometimes cannot quite make it through the week or two weeks between checks, and so they take out payday loans. Everyone, including the people asking for these loans, knows that they are a terrible, last-ditch option, but sometimes getting such a loan is a necessity. They can carry annual interest rates of over 500%. There are now many Internet-based payday lenders that can automatically withdraw payments from a borrower’s checking account. JPMorgan Chase, Bank of America, and Wells Fargo, among others, permit this practice. If the payday lender tries to withdraw money and it is not in the account, a fee is charged. So the borrower is paying not only extraordinary interest charges, but also excessive bank fees.
These are only some of the ways in which our largest institutions bleed money out of our most vulnerable citizens, and surely right now, at this very moment, new and ostensibly legal possibilities for turning some people’s debt into other people’s investment opportunities are being created. Exploitation never sleeps.
Is One Person’s Profit Another Person’s Loss?
We are used to thinking of ourselves as a rich country — rich in land, rich in natural resources, rich in the creativity and willingness of our people to work hard. Perhaps because of this, we have allowed ourselves to believe that large fortunes can be made by a few people and no one will be the worse for it. We refuse to make the connections between how money is made and what is happening in our society. How has great wealth affected our values and what is important to us in life? How has it affected our politics? How has it affected our environment? And most important, how has it affected not only our citizens but also other people in other countries?
We have slid, at first slowly and then rapidly, into making wealth our only measure of value, and we have encouraged our financial sector in its drive to find more and more ways to turn the necessities of life into profits. But there is a price to be paid. Some people are paying now and paying dearly. For the rest of us, the cost may be delayed — but the bill will come due.
1. Katalina M. Bianco, “The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown,” Commerce Clearing House (CCH), 2008.
2. Charlie Savage, “Wells Fargo Will Settle Mortgage Bias Charges,” New York Times, July 12, 2012
3. Marquette Nat. Bank v. First of Omaha Svc. Corp.—439 U.S.299 (1978)
4. Connie Prater, “Issuer of 79.9% interest credit card defends its product,” creditcards.com, February 12, 2010.
5. Michael Greenstone and Adam Looney, “The Uncomfortable Truth About American Wages,” New York Times, October 22, 2012.
6. “Study finds rising number of college students using credit cards for tuition,” Sallie Mae. Inc, April 13, 2009. (www.salliemae.com)
7. Chris Denhart, “How The $1.2 Trillion College Debt Crisis is Crippling Students, Parents and the Economy,” Forbes, August 7, 2013.
8. Thomas Geoghegan, “No Pension, No Chance,” New York Times, February 9, 2011.
9. Brian Mauersberger, “Tracking Employment-Based Health Benefits in Changing Times,” Bureau of Labor Statistics, January 27, 2012. (www.bls.gov).
10. Reed Abelson, “Insured, but Bankrupted by Health Crises,” New York Times, June 30, 2009.
11. Steven Greenhouse and Reed Abelson, “Wal-Mart Cuts Some Health Care Benefits,” New York Times, October 20, 2011.