However, the credit card crisis may prove more serious than the mortgage one. 40% of American families have admitted that they constantly spend more than they earn. Almost a quarter of card users admit that they have exhausted their credit limits. Another 11% (though likely many more) do not hide that their card debts are already being handled by collection agencies. Such a number of individual bankruptcies in the richest country in the world could ultimately destroy the global financial system.
Looking Back
Nowhere in the world have credit cards become as widespread as in the United States. A typical picture: in a grocery store or pharmacy, neat old ladies or disheveled schoolchildren paying for a $23 purchase with a card. Statistics, which, according to Ilf and Petrov, knows everything, estimates the number of the 20 thousand varieties of credit cards in circulation in the US at 1.2 billion, an average of 813 per family.
It was in America that the plastic card house was born. First as an idea - from the American writer and, what is especially interesting, socialist Edward Bellamy, who in his utopian novel about the year 2000 "Looking Backward", written as early as 1887, uses the phrase "credit card" 11 times. And then in practice. In 1914, Western Union began issuing cards to customers who frequently used its services. In 1938, the first experiments occurred when companies began accepting each other's cards. In 1950, the modern concept of paying with one credit card for various goods and services emerged thanks to Ralph Schneider and Frank McNamara, the founders of Diners Club. This payment system was followed by Carte Blanche, and eight years later American Express gave rise to the global system of plastic money. With the advent of the Internet, the industry underwent a real revolution, reaching practically every home, fully demonstrating both its advantages and disadvantages.
The advantages of plastic cards are obvious. And the main one is the availability of credit. However, these benefits can only be fully enjoyed by living within one's means, paying each monthly plastic bill in full. Alas, such disciplined cardholders are not so many in the US. True, about a quarter of Americans for various reasons do not have credit cards. But half of the remaining 75% do not even consider it necessary to hide that they are living beyond their means. The US Treasury calculated: if in the 1980s the average family saved 8.5% of its income, by the beginning of 2008 this figure at best reached 0.2%. US personal debt expert Paul Bannister says that according to polls, 9 out of 10 citizens claim they are completely unconcerned about their credit card debts.
Almost Communism
One reason for this carefreeness is the financial infantilism of Americans. Spoiled by generous government programs, they strive to maintain an inflated social status: they say, in this country everything is possible. 'Consumers have accumulated such large debts, especially over the past few years, because they felt rich or, at least, just one step away from true wealth,' believes economist Chris Thornberg from Beacon Economics.
Until recently, lawmakers also indulged these false feelings. In the 1990s, I encountered among new Russian emigrants in the US characters who instantly appreciated the opportunities opened up by the then version of the bankruptcy law. They maximally obtained bank cards, maximally exhausted credit limits, and then declared themselves bankrupt in accordance with the law and felt on top of the world. According to the bankruptcy protection procedure, the court first of all canceled the debts on credit cards. Then it actually wrote off all other debts, since the main source of income for the borrower was either a social pension or unemployment benefits, and they lived in a municipal apartment that was not subject to foreclosure. That's the kind of card communism. The most cunning managed to carry out such operations every three years, after which the bad credit history was 'reset.' Now this legislative gap has been closed, but the dependent psychology remains, especially among African Americans and other national minorities.
The carelessness with which many Americans treat the terms of using credit cards is simply astonishing. Millions, contrary to simple arithmetic rules, continue to believe that by making the minimum monthly payment on their card debt, they will someday be able to pay it off. Suppose a young couple allowed themselves a cruise to Hawaii for two thousand dollars and paid for it with card credit at an 18% annual rate. If they only make minimum monthly payments, they will be able to pay off the trip no earlier than 30 years later. Moreover, on the two thousand for the honeymoon, they will have to add five thousand dollars, which the bank will receive as its share. If they regularly contribute 4% of the remaining balance to repay the debt, they can settle it three times faster with interest of only $1,100.
But these and many other examples, promoted by consumer advocates, are like a voice crying in the wilderness. 'Financial illiteracy in America is terrifying,' emphasizes Professor Donathan Orszag of the University of Southern California. 'There are people who deliberately do not want to know anything about the interest rates on their debts, let alone about fines and penalties.'
Brazen Cunning
Moreover, the banks themselves, using all means of communication, lull humanity into a "golden dream", simply put, they tirelessly pull the wool over clients' eyes. In my mailbox every week I find from 5 to 12 offers to fill out the attached form and get a new credit card on "extremely favorable terms". Just like in Arthur Hailey's "The Moneychangers", where banker Alex Vandervoort reads sample ads for his bank: "Accounts become painless when you say: I pay with credit cards."
And what do you think? People take the bait. Although in the same novel, Vandervoort's friend Margo scolds him: 'Have you ever personally seen such brazen treachery? This is an outright and shameless imposition of extra debts on people.' The catchers of card souls via the Internet even reach children. There are countless stories on this subject. Here is the most recent one, from a Cleveland newspaper. One family is in shock: two years ago, their 16-year-old son somehow obtained a credit card, on which he accumulated $7,000 in debt, mainly by paying for video games over the Internet.
And a veritable bacchanalia of the credit card flywheel ramping up began last fall. The mortgage and financial crises knocked out the last footholds from under unshakeable American optimism: homes, the first and main pride of Americans, depreciated. Hundreds of thousands of housing units are passing into the ownership of banks and other creditors, since debtors have nothing to pay. In this situation, citizens went on a final assault, using credit card loans issued at huge interest rates to pay off mortgage debts, whose interest is minimal. This means a complete loss of the economic meaning of the financial system. Bankruptcy of almost half of the US population is becoming a reality, which will inevitably collapse the banking system as well.
Plastic Dust
True, since August-September, a campaign under the conditional slogan "Live within your means" began in the United States. Thousands of people share their experience of cutting expenses in the media. Restaurant visits have noticeably dropped. Retail trade volume in October fell by a record 2.8%, which is almost $365 billion in savings.
Banks initially followed the usual path, increasing fines and raising interest rates in some cases to 3,035% per annum for those who are late with payments. Then they came to their senses. Of course, you can drive fines sky-high, but what good is that if there is mass insolvency all around? Put them in debtors' prison? That would be even more expensive: the prisoners would have to be fed somehow. So recently, an alliance uniting more than a hundred of the largest banks, brokerage firms and insurance companies, as well as the U.S. Consumer Federation, approached the Treasury Department with a proposal for an anti-crisis social program that would allow writing off about 40% of the debt for those consumers who have no chance of repaying it. The regulatory authorities rejected the proposal, but the alliance's vice president, Scott Talbott, says that efforts to find solutions will continue.
Of course, banks have their own strategy. Pointing to the monstrous debts of credit card holders, bankers are trying to get close to state financial aid. American Express has gone the furthest along this path, having urgently transformed itself from a payment system into an ordinary commercial bank. So far, this has not helped it, and American Express shares continue to fall. Nevertheless, the leaders of a competing firm, the card corporation Discover, are also thinking along the same lines.
The crisis with plastic money is not only an American problem. Britons owe 55 billion pounds sterling on cards, residents of the Green Continent owe 41 billion Australian dollars... 'For a radical solution to this problem, we need to invite Edward Scissorhands, the charming hero of Tim Burton's film, into every family and ask him to cut all these plastic talismans into small pieces,' suggests Washington economist Antonia Bodnar.
However, before that, the issue of a trillion-dollar debt that threatens to collapse not only American finances must be resolved. Perhaps the future administration of Barack Obama will handle this. It is not for nothing that the U.S. president-elect is called a socialist, like the utopian who coined the term 'credit card', Bellamy. So, there is hope that the White House will pay the debts of Americans who abused consumption.