Legalized Loan Sharks : Usury With Fangs

"Shark Attack," pen and ink illustration by Tom Grady / Pulse.
The spoils of credit card 'reform':
Unregulated interest rates skyrocket

By Ted McLaughlin / The Rag Blog / December 21, 2009

According to the Oxford American Desk Dictionary, the definition of a "loan shark" is a person who lends money at exorbitant rates of interest. Earlier in our history, most loan sharks were underworld figures making illegal loans. If you weren't able to pay the loan back, you ran the risk of some broken bones. It was a very lucrative business for the mob.

But that was before the financial institutions realized just how much money they were missing out on by not engaging in loan sharking. Today, the mob has been replaced by so-called "legal" financial institutions.

For many years, this was kept somewhat in check by state laws that limited yearly interest rates to 35-42%. That still sounds like loan sharking to me, but at least there was a limit. However, in 1980 the United States Congress proved their fealty to corporate financial interests by passing the Depository Institutions Deregulation and Monetary Control Act.

This law exempted federally chartered savings banks, installment plan sellers and chartered loan companies from having to obey state usury laws and limits. And since there is no federal usury limit, that meant there was no longer a limit on what interest rates could be charged.

Since then then interest rates have steadily crept up. This is especially true of the credit card companies (many of whom are also based in states that have eliminated interest rate limits). I guess it was only a matter of time before one or more of them began to throw caution to the wind and go above their normal 30-40% interest rates. Now one of them has done it, and I'm sure more will follow.

First Premier Bank has been offering credit cards with a credit line of $250. Of course that offer comes with first year fees of $256. That is an obvious rip-off to get a credit card where the entire credit limit is taken up with fees owed to the issuer. Congress tried to fix this kind of problem by passing a new law regarding credit card fairness. The new law caps fees like this at 25% of the credit limit.

Well, that should keep First Premier Bank from ripping off its customers, shouldn't it? Wrong! Congress only half did the job of trying to rein in the credit card companies. They refused to put any limit on the amount of interest a card company can charge.

First Premier Bank was quick to take advantage of the loophole left by Congress. They upped their credit limit to $300 and lowered their fees to $75 (the maximum 25%). Then they took the rather shocking move of raising the annual interest rate for the card to 79.9%.

They try to justify the outrageous new interest rate by saying the cards are offered to people who have credit problems. To me, that excuse just doesn't fly. To take people who are already having money problems in the middle of a recession and slap an 80% interest rate on them is not just wrong -- it's immoral, unethical and should be illegal.

This is nothing more than legal loan sharking. While these companies may not break any limbs for failure to pay on time, they can certainly ruin the credit rating of a person struggling to repair his/her credit and keep their head above water -- and that might be worse. With rates like this, how is a person supposed to get ahead?

Now that First Premier Bank has set an 80% interest rate, how long will it be before other credit card companies follow suit? Most may not instantly go to 80%, but I could see them raising a rate even for good customers to 50% or 60% and continue to creep toward that 80%. Why wouldn't they? They have already shown they care little for consumers by past actions. If First Premier Bank can get away with it, why shouldn't the others follow suit?

I wish we could count on Congress to protect consumers, but it doesn't look like we can. They have "reformed" both credit cards and health care, and consumers are worse off than ever. I don't think we can afford any more help from our pathetic corporate-owned Congress.

Each year our economy moves closer to exclusive use of electronic funds and credit and away from cash. How much time is left before we are all credit-slaves to the corporations?

[Rag Blog contributor Ted McLaughlin also posts at jobsanger.]

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A Dog's Life : America's Financial Mess

A walk in the park: Scout and Missy take a breather. Photo by Larry Ray / The Rag Blog.

A walk in the park:
A Felliniesque view of our financial mess

By Larry Ray / The Rag Blog / November 27, 2009

Walking my dogs under a crisp, cool, bright blue sky a few days ago in a nearby wooded park, I had an unusual, Felliniesque daydream. It all started when the peace and tranquility of the walk was broken by someone talking loudly on his cell phone, for all to hear, which is all too common today. A young fellow was totally absorbed in a verbal replay of his loss, recent physical pain and a love affair gone badly. He urgently shouted the details into his cellphone.

We picked up our pace to get away from the intrusion, but it seemed that he had decided to take the same trail behind us. He was detailing how he had cracked his ribs in some sort of a fall and how that had not hurt nearly as much as breaking up with the woman he still loved. He finally branched off on another trail leading away from us, the cell phone drama slowly fading out.

A relaxed free-form daydream began as we walked the familiar path. It turned into a Woody Guthrie moment for me. In a surprising flash, I had the title for a new country song: "That fall broke my ribs, but she broke my heart!" I hummed part of a stock three chord country western melody and tried out a couple of lines. It slowly became the sound track for the open-ended Fellini movie getting underway in my head.

It's getting tough out in this old world/
my back's against the wall/
The bank just took my house away/
now them credit cards ain't no good at all/
When I fell off that stock room ladder/
and landed hard on the concrete floor,/
They laid me off that afternoon.../
and I don't work at Walmart any more/
Then my wife took off and left me/
everything is falling apart/
That fall broke my ribs.../
but she broke my heart.

Hell, I've heard worse, and Woody might even have liked it. I bet the guy on the cell phone probably would have liked it too. I pictured this young man, working class, maybe in his late-twenties, probably a high school graduate, with maybe even a year or so of community college, as a metaphor for greedy banks, self-serving spineless politicians and millions of average folks just like him.

The daydream was also being fed with scenes from "The Card Game" a Frontline-New York Times co-production on PBS I had watched the night before. It laid bare the whole sorry, wild west story of the evolution of the American credit card and the half-hearted attempt to finally rein it in after almost a half century of unregulated abuse.

Frontline showed how banks have gotten away with predatory credit card practices and how a proposed Credit Card Control Act of 2009 was written with gaping loop holes that banks can use to continue exploitation of credit card holders... and still generously fund political campaigns.

I bet if I had actually talked to the fellow in the park and learned more about him other than what I was forced to overhear, he would have been a perfect example of what credit card issuers call the "unbanked market." People living from paycheck to paycheck who use credit cards as though they were money... money that people refuse to realize they don't have.

The whole credit card industry is designed to trap and exploit those people who don't read the fine print in their contracts and who run up huge balances, making only minimum payments from one card to another. They rack up ever-changing penalty fees with huge loan interest rates in a scheme better than Machiavelli could have ever imagined. According to the Federal Reserve Bank, 40% of American families spent more than they earned in 2008.

Certainly no bank has forced anyone to use a credit card. But a "free" credit card seems so innocent, so easy, and "we can always just pay off the balance" is a reassuring rationalization. Credit cards quickly became as American as imitation apple pie with two-thirds of the population owning one or more in 2008. Too many folks were living high on the hog with bank credit card loans that weren't legally considered "bank loans," thereby allowing them to remain unregulated with nary a peep from Capitol Hill. Most all existing governmental financial regulation put in place after the Great Depression of the 1930's had already been peeled away by the 1990's.

Even though there were no Flappers or speakeasies, the giddiness of our recent boom times was just like the 1920's, and just as imprudent. Americans with only modest incomes had learned to spend like they were making six figure salaries. Wallets are even designed to hold a dozen or so credit cards that slip in and out of an accordion fold of pockets for the mag-striped mañana money.

At the same time, home values were increasing at a record rate with no end in sight... but who was looking? Things seemed so good that second mortgage home loans were used to pay off huge credit card balances. Then in a blink, before the Republicans could get out of office in time, the inflated silver-dollar-studded Potemkin village blew over like a long line of doomed dominoes.

In no time folks were shouting their own Woody Guthrie lyrics over cell phones across the country. Homes now were valued at half of what they were mortgaged for. Americans again were jobless, out on the streets and forced to face harsh realities. Eighty-eight million accounts and credit lines, representing $751 billion in credit, have been closed since September of 2008.

My daydream in the park shifted to a classic Fellini scene with two huge cauldrons of smelly political broth bubbling and stewing up on Capitol Hill. They were both made from the same old soup stock. Senators in stained, flowing robes warned that the health care insurance gumbo may ultimately be indigestible. On an adjoining burner the low fat, credit card control consommé seemed way too thin but the Senators weren't in the least concerned. A parade of morbidly obese, angry people brandishing illegible placards passed by the cauldrons and Senators, demanding that they be left alone to just govern themselves. "No big cauldrons. No big cauldrons," they chanted.

The daydream is then jarred by a ticker tape crawl across my field of vision with endless data in large scrolling letters, "In September 2009 Americans currently owed $917 billion on revolving credit lines and $69 billion of it was past due, according to Federal Reserve statistics." In the daydream I then realized that was just a couple of months ago, and I was jarred back to reality briefly. Soon the dream slowly returned as a classic Fellini black and white wide shot of a totally empty beach with waves slowly rolling in and I expected to see "Fine" or "The End" in Italian dissolve in over the meaningless empty beach.

Instead, the Border Collies were tugging insistently on the leash, literally yanking me out of my free-running reverie. The guy that had been shouting into his cell phone was now walking toward us, looking down at the edges of the path. He nodded to me and asked, "You haven't seen a ring of keys have you?" I said I really hadn't been paying much attention but that I would keep an eye out for them. For a moment I wondered it there was yet maybe another song in that somewhere? How about, "I was looking for my keys while they towed away my truck." Woody, America could use you about now.

[Retired journalist Larry Ray is a Texas native and former Austin television news anchor. He also posts at The iHandbill.]

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A Nightmare on Wall Street

The credit crunch is morphing from an American-centred financial crisis into a global economic crisis," says David Bowers of Absolute Strategy Research...

'Borrowing our way to prosperity'
By Roger Baker / The Rag Blog / August 29, 2008

Damnation! The problems we create when our bankers gamble on maintaining exponential growth on a finite planet. Borrowing our way to prosperity using Chinese loans by pledging our houses as collateral does not seem to be working so well lately. Who would have thought somebody would expect to be paid back before they would lend us some more?

Fortunately all we have to do is print up a ton of money and we can make the problem go away. And with bank bailouts we don't even need to mess around with all those messy printing presses, do we?

And aren't you glad this will all have a happy ending with a man like Obama as president?

A Nightmare on Wall Street
Aug 28th 2008

Why the credit crunch has lasted so long

LIKE a Hollywood monster that is impervious to bullets, the credit crisis refuses to lie down and die. The authorities have bombarded it with interest-rate reductions, tax cuts, special liquidity schemes and bank bail-outs, but still the creature lumbers forward, threatening new victims with every step. Global stockmarkets are suffering double-digit losses this year, and credit markets are once again gummed up.

For investors who cut their teeth in the 1980s and 1990s, the persistence of the crisis must be a surprise. Prompt action by central banks, after Black Monday in 1987 (when America’s stockmarket fell by almost 23%), or following the collapse of Long-Term Capital Management, a hedge fund, in 1998, suggested it was always worthwhile to “buy on the dips”.

One reason why things are different this time is that there has been a double shock. On top of the decline in house prices and the associated drop in the prices of asset-backed securities, the markets have also had to face a surge in commodity prices. That has constrained central banks from easing monetary policy as much as they might have done, particularly in Britain and the euro zone. Even in America, rates might now perhaps be 1% (as they were in 2003) without the commodity boom.

In addition, the combination of the two shocks has created uncertainty about the direction of monetary and regulatory policy. Will the central banks be forced to “do a Turkey” and adjust their inflation targets upward (implicitly or explicitly) to reflect reality? Alternatively, will they crack down so hard on inflation that they force their economies into recession? And will the price of investment-bank rescues be a harsh new regulatory regime that restricts the scope for future credit (and economic) growth? In the face of all this uncertainty, investors can hardly be blamed for being cautious.

The way that the crisis has centred on the banking industry also explains its duration. Stephen King, an economist at HSBC, points out that the financial crises of the 1990s were also prolonged, from the savings and loan collapses in America through the Swedish banking rescues to the extremes of Japan’s debt deflation. As Mr King says, “if banks are unable or unwilling to lend, monetary policy doesn’t work so well.”

Worse still, bank problems create a feedback loop with the rest of the economy. When banks get into difficulty, they restrict their lending. That in turn makes life more difficult for companies and consumers, causing them to cut their spending and making it harder for them to repay their debts. That forces further caution on the banks.

Recent economic data have highlighted how the gloom is spreading. Neither Germany nor Japan enjoyed a credit boom earlier this decade but both economies are suffering. Business confidence in Germany fell to its lowest level in three years, according to the latest Ifo survey, released on August 26th. “The credit crunch is morphing from an American-centred financial crisis into a global economic crisis,” says David Bowers of Absolute Strategy Research, a consultancy.

Another reason why the crisis is lasting so long stems from the nature of the previous boom. Everyone was borrowing money, from homeowners buying houses they could not afford in the hope of capital gains, to investors buying complex debt products with high yields because of the extra “carry”.

These investors were, directly or indirectly, beholden to the banks. Even when money was borrowed from “the market”, the lenders may well have been hedge funds, conduits or structured-investment vehicles, all of which had themselves borrowed money from banks in the first place. That former wellhead of finance has now run fairly dry.

In turn, that explains the absence of bargain hunters, particularly in the debt markets. Investment-grade debt might look attractive on a five-year view, if all you have to worry about is the risk of default. But most investors in that market have a three- or six-month view; they cannot afford for things to get worse before they get better, in case they are forced into a fire-sale of their assets.

So the markets (and the developed economies) are waiting for a catalyst for recovery. Lower commodity prices helped for a while, and may help further if they encourage central banks to cut rates. Evidence of a bottom in the American housing market may also do the trick. But the crisis seems certain to linger into 2009, and could even make it into the following year. Successful horror movies tend, after all, to have several sequels.

Source / The Economist

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The Next Bubble Is on the Way : Credit Card Debt

Why are we all complicit in our own economic servitude?
by Danny Schechter / August 11, 2008

Let me try a few words out on you: “Charge It,” “Swipe It” and “Priceless.”

You know exactly what I am talking about. We all have credit and debit cards. We all use them, and many of us keep our lives going because of them.

That is, until the bill becomes due.

The sad truth is that we are all complicit in our own economic servitude even if, at bottom, it’s not our fault because we live in a consumption society, and don’t feel we could live without them.

While many eyes are focusing on the housing meltdown and its hugely negative effect on an economy clearly moving into recession, few are paying attention to the next bubble expected to burst: credit cards. You would never know it by watching those slick VISA card ads on the Olympic TV broadcasts.

Combined with the subprime losses, such a credit card nightmare has the potential, experts say, of bringing down the entire financial system and global economy.

You and your credit card have become key players in the highly unstable financial crunch. Mortgage lender cupidity and bank credit card greed wedded to financial institution deregulation supported by both political parties, have been made manifestly worse by Bush administration support-the-rich policies. It has brought us to a brink not seen since just before the Great Depression.

While campaigning in Edinburg, Texas, in February, Barack Obama met with students at the University of Texas-Pan American. “Just be careful about those credit cards, all right? Don’t eat out as much,” he said. After the foreclosure crisis, he warned, “the credit cards are next in line.”

The coupling of home equity debt and credit card debt has gone hand in glove for years. The homeowners at risk can no longer use their homes as ATM machines, thanks to their prior re-financings and equity loans, often used in the past to pay off their credit cards. Indeed, homeowners cashed out $1.2 trillion from their home equity from 2002 to 2007 to pay down credit card debts and to cover other costs of living, according to the public policy research organization Demos.

To compound the problem, fewer people are paying their credit card bills on time. And, to flip the old paradigm, more are using high-interest credit card cash to pay at least part of their mortgages instead of the other way around.

Younger people are being crushed by this debt burden as college students and new consumers. Emma Johnson of MSN Money reports that “Generation Y” is broke.

“The democratization of credit has really generated a competitive spending culture, and plastic has allowed for material goods not had in the previous generation,” says Bob Manning, author of Credit Card Nation. “Most of us grew up in a home with just one or two bathrooms for the whole family, he points out; today, new homes usually have at least one bathroom per bedroom.”That change has happened so fast,” Manning says.

“This generation feels that somehow or another they’re going to figure out some technological advancement that’s going to get them out of their financial troubles and outsmart the market,” says Manning, who served as adviser to the documentary In Debt We Trust. The documentary paints a picture of national financial crisis stemming from the personal-debt burden. (See InDebtWeTrust.com)

Happily, this issue is finally being addressed by Congress and the Federal Reserve Bank. When asked for comments, the public overloaded the Fed’s website as the New York Times commented:

When the Federal Reserve asked for comments on its proposed rules on abusive credit card practices, an astonishing 56,000 poured in. Most were from outraged consumers. They told of interest rates skyrocketing when they paid an unrelated bill late. They complained of unwarranted late fees and pushed-up due dates. One Pennsylvania customer fumed: “I’m fed up with credit card company tricks that drive us deeper in debt.”

This anguished deluge should send a clear message to leaders in Washington. The Federal Reserve should swiftly adopt its proposed rules against unfair or deceptive credit card practices. But the real burden to curb these abuses falls on Congress.

This discontent is being organized to press Congress to act by groups like the Consumer Federation of America and the Center for Responsible Lending. And Congress is listening:

WASHINGTON (Reuters) - Legislation aimed at curbing credit card billing practices that surprise borrowers with unexpected interest rate increases and fees was approved on Thursday by a U.S. House of Representatives committee.

The bill approved by Financial Services Committee mirrors Federal Reserve proposals that would effectively end double-cycle billing — in which card companies reach back to prior billing cycles to help calculate the interest charged in the current cycle.

These reforms are a start but much more needs to be done because it’s not just billing practices that is at issue — it’s high interest changes, deceptive marketing, and arbitrary rules. On top of that, there are other loans that need scrutiny including payday lenders and student loans. And of course our own addiction to shop until we drop.

Also, let us not forget that our credit card companies have been colonizing markets throughout the world. As the New York Times explained in a series on debt, “As the American blessing of credit cards became widespread, so did the American curse of debt.”

Bear in mind the experience of another addicting industry — tobacco. As they came under restraints in the US, they escalated their poison pushing worldwide.

Debt is a global issue and has to be treated as such.

Just as groups like NACA provide help to homeowners in distress, we need a major effort to help the victims of credit cards — with practical assistance and political demands for regulation and relief.

[News Dissector Danny Schechter made the film In Debt We Trust (InDebtWeTrust.com). His new book PLUNDER: Investigating Our Economic Calamity is out later this month from Cosimo. (Newsdissector.com/Plunder) Comments to dissector @mediachannel.org.]

Source / CommonDreams

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