The Wild and Cruel Gap Between Debtors and Creditors
The word “inequality” is much in vogue these days. We hear almost daily about the inequality of wealth, income and wages between the richest top 2 or 3 percent of people and the majority of the country’s wage earners. But not much attention is given and not many marches and other protests are addressing the huge inequalities between creditors and debtors.
Of course the aforementioned inequalities, especially of wages and income, worsen the plight of individual debtors. One more distinction needs to be made – that between corporate debtors who receive many favored legal entitlements (even in bankruptcy) and individual debtors who are slammed and harassed by debt collectors.
Start with the Federal Reserve’s low-interest policy of the last five years with no end in sight. Savers who used to get interest of 4 to 5 percent from their bank or money market now get, if they are lucky, ¼ of one percent on their savings. This Fed policy is supposed to stimulate the economy but doesn’t work very well if there is not enough consumer demand in a recession to attract new investment. Meanwhile, the hundreds of billions of dollars held by small, middle to low income savers are generating no interest to help pay their living expenses.
The situation is bad and getting worse. These savers are being turned into “lockbox customers” in peril of having to actually pay the banks to hold their money. The Financial Times reports that “leading US banks have warned that they could start charging companies and consumers for deposits” if the Federal Reserve cuts interest rates further.
Why don’t all those bellowing Congressional deregulators of health and safety standards ever object, except for the pure Ron Paul libertarians, to the overreaching Federal Reserve, the biggest market regulator of them all?
Look at how the U.S. government has treated students borrowing for their education. When the government was not guaranteeing the gouging interest rates and fine-print traps of Sallie Mae and other corporate lenders that still have the iron collar around millions of college graduates, Uncle Sam was directly making money from students with interest rates around 6 percent. Other western nations offer tuition-free higher education as a great investment for their societies.
Skyrocketing student loans now exceed credit card loans outstanding – $1.2 trillion in student loans compared to $1 trillion in credit card loans. With her proposed “Bank on Students Loan Fairness Act,” Senator Elizabeth Warren wants to reduce the student interest rate to the same rate paid by large banks borrowing from the Federal Reserve Bank, less than one percent.
It is stunning how shortsighted this policy of gouging student borrowers is for the health of the economy. Their loan burden after graduation is such that they are less able to buy homes and cars in their twenties and thirties.
In his fine new book Debtors’ Prison, Robert Kuttner recounts the history of debt, including the centuries when under Anglo-American law debtors were imprisoned or executed. He also describes how large corporate debtors today get bailed out or go through bankruptcy proceedings that save the company under a sweetheart rebirth process, complete with allowing executive compensations past and present.
The individual debtors, however, are driven deeper into debt with fiendishly high interest rates (as high as 30% on unpaid credit card balances to over 400% on rolled over payday loans and rent-to-own rackets). Then there are the hundreds of different fees, penalties and costly fine-print impositions that ravage consumer borrowers.
The profits from the credit industry were illustrated this week by MasterCard’s announcement. Its stock is up twentyfold to nearly $800 per share since it went public in 2006. Its profits are enormous, its dividends are surging, stock buybacks robust and there is no end in sight for its upward spiral. For a supposedly staid banking function, MasterCard acts like Apple.
The sheer complexity of borrowing, paying, and getting some so-called relief or refinancing camouflages its own kind of costly exploitation.
If the debtors object, particularly in a persistent manner, over such obvious greed, their credit scores – the new serfdom – can go down and put more burdens on their pocketbooks and future livelihood.
A split U.S. Supreme Court endorsed the compulsory arbitration clause in these fine-print contracts that attaches more shackles. A report by Public Justice (“Wake Up!” can be seen here) found compulsory arbitration allowed predatory lenders to violate federal and state laws that protect consumers and blocked vulnerable elderly patients who had been abused in nursing homes from adequate access to the courts.
Rays of help are coming from the enforcement of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 by the young Consumer Financial Protection Bureau (CFPB). Over-limit fees and repricing actions are mostly eliminated and the dollar amount of late fees is down. Bait-and-switch to higher pricing once the borrower has signed on the dotted line has been diminished.
In its latest report on the law (The CARD Act Report can be seen here), the CFPB recognizes other areas that “may warrant further scrutiny.” These include “add-on products” to credit card users, “fee harvester cards,” “deferred interest products,” and other problems stemming from the relentless ability of corporate lawyers to game and obfuscate the regulatory process and escape prohibitions with new avaricious coercions.
Credit unions, with their ninety million members who are allegedly the owners, should be taking the aggressive lead in denouncing bad practices and thereby bringing even more consumer cooperators into their organizations. Less imitation of commercial banks and more dedication to cooperative service principles should be what members demand from this potentially large reform institution in our country.
Ralph Nader is a consumer advocate, lawyer and author of Only the Super-Rich Can Save Us! He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, published by AK Press. Hopeless is also available in a Kindle edition.