Debt and the elusive American Dream // July 22, 2008

Hopefully, (God willing and the dust don't rise...) I'll be leaving Iraq in a day and a wake up. We've folded the colors and the 603D mission here is done. What few of us are left just sit about waiting for the cue to get on the bird to leave Baghdad.

This has given me much time to catch up on some reading and some vegging in front of the computer. I finished up "Backwater" - very scary and am knee deep in M. Scott Peck's, "Different Drum." Fascinating.

I also read an article today that I wanted to comment on from the NY Times.

Given a Shovel American Dig Deeper in Debt

"Life takes Visa"

"The American Dream - Priceless"

Really? So, in order for me to get the "American Dream" or even "Live" I have to be in debt? It would seem so from the marketing. Indeed, so many have bought this ideology that whenever it comes up and and for whatever reason I note that my wife and I made some sacrifices to get out of debt entirely, many people our own age scoff.

Why? Cause we rent a house? Cause we save up for things? Cause we choose to buy things used? Cause we put things off till we can buy them cash instead of on payments?

Here are some gems from the article:
(by the way, I'm all about people living up to the choices they make. I do NOT believe in the "victim culture" however, I also believe that many people who would capitalize on consumer's bad choices are in fact enablers of bad behavior, thus bear a great deal of the blame for the problems that plague consumers. People are responsible for their choices, however, if there are no real choices - are they still wholly to blame? Furthermore, should I the taxpayer, be forced to bail out a corporation that did the same thing? A great read about an average American entrepreneur who chose to live up to his debts instead of taking the easy way out can be found here - read the comments at the bottom of the post - great stuff!)  (my comments are bold)

Years of spending more than they earn have left a record number of Americans like Ms. McLeod standing at the financial precipice. They have amassed a mountain of debt that grows ever bigger because of high interest rates and fees.

While the circumstances surrounding these downfalls vary, one element is identical: the lucrative lending practices of America's merchants of debt have led millions of Americans -- young and old, native and immigrant, affluent and poor -- to the brink. More and more, Americans can identify with miners of old: in debt to the company store with little chance of paying up.

A reference to an old song that my dad taught us growing up...


But behind the big increase in consumer debt is a major shift in the way lenders approach their business. In earlier years, actually being repaid by borrowers was crucial to lenders. Now, because so much consumer debt is packaged into securities and sold to investors, repayment of the loans takes on less importance to those lenders than the fees and charges generated when loans are made.

Lenders have found new ways to squeeze more profit from borrowers. Though prevailing interest rates have fallen to the low single digits in recent years, for example, the rates that credit card issuers routinely charge even borrowers with good credit records have risen, to 19.1 percent last year from 17.7 percent in 2005 -- a difference that adds billions of dollars in interest charges annually to credit card bills.

The point is that the lenders, instead of recognizing the danger in bad human behavior and stopping people, decided to cash in on their addictions - of course, if this were tobacco, there would be marches in the street and class action law suits. Instead, the taxpayer is tagged to bail out Fannie Mae.

Average late fees rose to $35 in 2007 from less than $13 in 1994, and fees charged when customers exceed their credit limits more than doubled to $26 a month from $11, according to CardWeb, an online publisher of information on payment and credit cards.

Mortgage lenders similarly added or raised fees associated with borrowing to buy a home -- like $75 e-mail charges, $100 document preparation costs and $70 courier fees -- bringing the average to $700 a mortgage, according to the Department of Housing and Urban Development. These "junk fees" have risen 50 percent in recent years, said Michael A. Kratzer, president of FeeDisclosure.com, a Web site intended to help consumers reduce fees on mortgages.

"Today the focus for lenders is not so much on consumer loans being repaid, but on the loan as a perpetual earning asset," said Julie L. Williams, chief counsel of the Comptroller of the Currency, in a March 2005 speech that received little notice at the time.

Lenders have been eager to expand their reach. They have honed sophisticated marketing tactics, gathering personal financial data to tailor their pitches. They have spent hundreds of millions of dollars on advertising campaigns that make debt sound desirable and risk-free. The ads are aimed at people who urgently need loans to pay for health care and other necessities.

I find this particularly interesting. I read that a new emerging market for debt companies are those that just recently went bankrupt or consolidated credit - not because they are people that will repay loans but because they are more likely to generate fees.

For decades, America's shift from thrift could be summed up in this familiar phrase: When the going gets tough, the tough go shopping. Whether for a car, home, vacation or college degree, the nation's lenders stood ready to assist.

Companies offered first and second mortgages and home equity lines, marketed credit cards for teenagers and helped college students to amass upward of $100,000 in debt by graduation.

Every age group up to the elderly was the target of sophisticated ad campaigns and direct mail programs. "Live Richly" was a Citibank message. "Life Takes Visa," proclaims the nation's largest credit card issuer.

Eliminating negative feelings about indebtedness was the idea behind MasterCard's "Priceless" campaign, the work of McCann-Erickson Worldwide Advertising, which came out in 1997.

"One of the tricks in the credit card business is that people have an inherent guilt with spending," Jonathan B. Cranin, executive vice president and deputy creative director at the agency, said when the commercials began. "What you want is to have people feel good about their purchases."

Mortgage lenders took to cold-calling homeowners to persuade them to refinance. Done to reduce borrowers' monthly payments, serial refinancings allowed lenders to charge thousands of dollars in loan processing fees, including appraisals, credit checks, title searches and document preparation fees.

As the profits in this indebtedness grew, financial companies moved aggressively to protect them, spending millions of dollars to lobby against any moves lawmakers might take to rein in questionable lending.

Just two generations ago, America was a nation of mostly thrifty people living within their means, even setting money aside for unforeseen expenses.

Today, Americans carry $2.56 trillion in consumer debt, up 22 percent since 2000 alone, according to the Federal Reserve Board. The average household's credit card debt is $8,565, up almost 15 percent from 2000.

College debt has more than doubled since 1995. The average student emerges from college carrying $20,000 in educational debt.

Household debt, including mortgages and credit cards, represents 19 percent of household assets, according to the Fed, compared with 13 percent in 1980.

Even as this debt was mounting, incomes stagnated for many Americans. As a result, the percentage of disposable income that consumers must set aside to service their debt -- a figure that includes monthly credit card payments, car loans, mortgage interest and principal -- has risen to 14.5 percent from 11 percent just 15 years ago.

By contrast, the nation's savings rate, which exceeded 8 percent of disposable income in 1968, stood at 0.4 percent at the end of the first quarter of this year, according to the Bureau of Economic Analysis.

More ominous, as Americans have dug themselves deeper into debt, the value of their assets has started to fall. Mortgage debt stood at $10.5 trillion at the end of last year, more than double the $4.8 trillion just seven years earlier, but home prices that were rising to support increasing levels of debt, like home equity lines of credit, are now dropping.

The combination of increased debt, falling asset prices and stagnant incomes does not threaten just imprudent borrowers. The entire economy has become vulnerable to the spending slowdown that results when consumers like Ms. McLeod hit the wall.

There is a lot of talk about America being "addicted to oil" - which I would more or less agree with but the addiction to debt is destroying families every day.