Maxed Out: Hard Times, Easy Credit. James Scurlock D.
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everything he owned. He would hold a garage sale, call his credit card company and renegotiate his interest rate, and probably get rid of the SUV, unless the disciples ponied up some dough for the gas, maybe.
I leave Antioch admiring Steve’s spirit but with no more understanding of why Christians, like everyone else in America, are drowning in debt. Except for the obvious—that some of them have left his seminar with an extra $36 on their Visa card. For all of their good intentions, the financial gurus that Americans turn to offer just as many contradictions as solutions. A pastor I’d visited in South Central Los Angeles, for example, chastised his congregants for driving cars they couldn’t afford—as we cruised South Central in his Range Rover. Suze Orman, the nation’s bestselling financial adviser, has done ads for Cadillac (which have among the worst resale values of any automobile). Dave Ramsey has his sponsors (the pawnshop and discount luxury mattress place come to mind) because he’s got to pay the rent too. And when Jerry Falwell holds himself up as an example for tithing 30 percent and being plenty prosperous, it’s more than a little self-serving. When he tells his congregants that giving his ministry more money will erase their financial troubles—a strategy he calls “spiritual mathematics”—it’s just plain slimy.
Yet, I’ve come to learn that, for all of their apparent contradictions, the financial gurus are a pretty accurate reflection of the times. We live in a country where the government tells us that the economy is getting better and better, but most polls show that we believe it’s getting worse and worse. A country where foreclosures and bankruptcies have skyrocketed, while the numbers of millionaires and bank profits have increased year after year. A country whose citizens can afford the brand-new Hummer H2 and H3, but whose soldiers are expected to fight a war with the old ones (and with no body armor). Is it really possible that all of these catch-22s will be eliminated by holding biweekly garage sales and skipping the a.m. latte? Where is Susan Powter to jolt us out of our collective denial? Stop the Insanity!
Several months after I visited Tennessee, Hurricane Katrina rolled over New Orleans. A day later the city flooded. And then for seven long days, as the world watched, the people of New Orleans begged for help. Hundreds drowned in their own homes. Babies died in their mothers’ arms for lack of water. And I watched in amazement as conservatives demanded answers to the questions many of us had been asking for some time. How could extreme poverty exist in a country of such enormous wealth? Why hadn’t we taken better care of our infrastructure? Where was the money going to come from to fix it and pay for the war in Iraq and pay for Social Security and Medicare and all of the other entitlements? Was bankruptcy reform, which President Bush had just signed (really bad timing, Karl), too harsh? Katrina had changed everything, I told myself. People were finally asking the tough questions. Americans were beginning to realize that credit was not the same as wealth—that a generation of debt surfing had left us extraordinarily vulnerable.
The president gave a dramatic and hopeful speech in the French Quarter, shouting out to the huddled masses who’d been ignored for too long. But then he seemed to lose interest. The telethons came and went. New natural disasters and new scandals took center stage. The death toll in Iraq passed 2,000. A bill to exempt hurricane victims from bankruptcy reform died in the House, as did a measure to offset the costs of rebuilding New Orleans with budget cuts. Insurance companies refused to rebuild homes because they claimed the damage resulted from hurricane-induced flooding and not from the hurricane itself.3 Private companies, which owned most of the hospitals in New Orleans, expressed doubts that they would ever rebuild. The Small Business Administration offered loan guarantees, but only to those with near perfect credit—a cruel joke which has so far shut out 80 percent of those who have applied for help. The most hopeful sign was the return of white real estate speculators.
In other words, the status quo quietly eased back into place. The government would take on more debt to rebuild what it could. And the people would take on more debt to do the same. The only difference would be that that debt would be more expensive than before. In other words, we would surf the hurricane, even though the waters were getting far more treacherous. Why? We have no choice.
The federal government—and the majority of Americans—can no longer get by a single day without taking on additional debt. And as more borrowing goes to simply pay off old debt, or to make interest payments, the new debt does little more than increase banking profits. Eventually the higher levels of debt will lead to higher interest rates, which will lead to more debt, creating a cycle as vicious as it is inevitable. Over the past generation, banks and credit card companies have made trillions of dollars of high-interest, unsecured debt available, and Americans have scooped it up. Our incomes have risen an average of 1 percent in real terms, while our household debt has increased over 1,000 percent. As a result, we no longer save4 We have no choice but to keep spending until our credit is exhausted and we own nothing. As Marriner Eccles, the legendary Fed chairman during the Great Depression, noted, “The economy is like a poker game where only a few people control the chips and the other fellows must borrow to stay in the game. But the moment the borrowing stops, the game is over.”
How did we allow this to happen? How could we be so shortsighted? How could banks keep lending to people who can’t afford to pay them back? Doesn’t that fly in the face of tradition, if not common sense? Don’t bank executives realize that they are sowing the seeds of their own destruction? After all, when most Americans can no longer stay afloat, the banks will sink alongside them as they did back in Marriner Eccles’s day.
The simple answer is that Americans are a lot like the cowboy with the guitar. While the banking industry has gone through its most profound change since the Venetians invented modern finance hundreds of years ago, Americans have clung to old assumptions. In particular, we’ve continued to believe that banks wouldn’t extend us credit unless we could handle it, and that banks want us to save. Yet, the big banks realized more than a generation ago that they make far more money teaching us to spend than to save. They’ve also learned that making money upfront, mostly in the form of fees, is a lot more fun than waiting for a revenue stream to trickle in. The reason is simple: Fees can be booked as profits immediately; revenue streams take years. This is why most mortgages, car loans, and even credit card receivables are bundled together and sold off, sometimes instantly, to Wall Street.
Take Enron as an example. Enron executives didn’t want to wait for their brilliant ideas to bear fruit. So they used an accounting gimmick called “mark-to-market,”5 where they decided how much an idea was worth, booked it as immediate profit, and then collected a bonus on that profit—all in the same quarter. When these new businesses instead generated huge losses, executives turned to the world’s largest banks to hide those losses—for a fee. Enron would “sell” the losses to a large bank before reporting its financial results, then buy them back afterward at a greater loss. The bank collected a fee without taking a risk, the bankers got a bonus based on generating that fee, and, most important, the Enron execs rewarded themselves with huge bonuses based on phony—but consistently growing—profits. Of course, mark-to-market guaranteed Enron’s eventual failure. But consider that the top ten CEOs in America now earn more than $100 million per year, and you realize how quickly short-term gimmicks can create vast fortunes.
The same gimmicks are now being applied to consumer debt. Most mortgages, car loans, and credit card debt are packaged and sold off to investors at a profit within a short period of time, sometimes seconds. Banks create an estimate of how much the credit card debt is worth and sell it to investors, pocketing a profit. There is no banker carefully tending to your mortgage or your credit card down at the local branch, any more than there is a record executive strolling down Broadway Street searching for the cowboy.
But there is an even greater misconception at work. A misconception that debt is not what it used to be. That there is “good” debt, for example, and “bad” debt. Tune in to Suze Orman, for example, and she will tell you that a single number, your credit score (aka, FICO),6 is the key to your financial future. But while a good credit score gets you better rates on your mortgage and credit cards, it also opens up the floodgates for more “good”—i.e., cheap—credit to pour into your life, and this credit does not usually remain good or cheap for too long. The idea that one should stay out of debt, period, is now considered unrealistic. After