Friday, August 15, 2008

Column #17 "REVOLVERS" & "DEADBEATS"

(Week 3 - Friday Aug. 15)

So far this week I have described the credit card phenomenon as a great engine of money (and therefore "debt") creation that has been handed over to (some say foisted upon) the common citizen, and is pressuring many into an unmanageable "debt" burden. In my view, this remains true, but there is another side.

There is a great loophole in the credit card scheme. That is, if one pays off one's balance in full when the bill arrives at the end of the month, then one does not have to pay any charges for "interest," fees or penalties. That means that by borrowing money from a bank using a credit card, and then paying off the full balance at the end of every month, one is causing to be issued into circulation money on which an "interest" or other charge is never paid (admittedly for only a month, but when multiplied by millions of such cardholders the numbers add up).

This is the only significant source of "interest-free" money currently entering into circulation that I know of, and it comes directly from the use of the instrument of finance that is greasing the slide of the less fortunate and the nation as a whole most speedily into "debt."

This loophole has not gone unnoticed by the banks and credit card companies. In fact, there was talk in the industry about lobbying for legislation that would shut down this obvious free ride, but that has abated largely because its beneficiaries tend to be of the wealthiest and most politically-connected segment of the population. So, naturally, the cost of the system would just have to be borne by those in the middle or near the bottom of the economic totem, especially the one's that experience the need to rely on the card for necessities.

This apparently disproportionate burden would be exacerbated by the passing of a new bankruptcy law (in 2005) that would insure that even the relief offered by that extreme measure would become more expensive and difficult to access.

By the way, the credit card profession has a name for those who pay up their debt every month - "deadbeats." For customers, they very much prefer the late-paying-trying-to-survive-on-their-way-to-bankruptcy"revolvers" (those struggling to make minimum monthly payments). From what I have seen, card-company practices are evidently designed to nudge as many of their "deadbeat" customers as possible into the "revolver" category.

This adds a twist of irony to the words of a credit-card industry spokesman I once saw on TV testifying to a congressional committee about the proposed industry-sponsored "bankruptcy reform bill." He said, in effect, that it was needed to protect their reliably-paying customers from the costs occasioned by the irresponsible behavior of those that were having difficulty in 'meeting their obligations.' (i.e. to protect the "deadbeats" from the "revolvers").

Lest I leave the impression that I am being moralistic, permit me to give the issue another twist. I would say that for those "deadbeats" that can afford to charge on their card and pay off their living expenses every month, let them do it (I did when I could afford it). The money that they bring into circulation thereby will help not only their personal finances, but also serve to bring into circulation the only significant sum of currency in the money supply for which nobody in the society is paying an "interest" charge to keep it there. That could be deemed as a boon to everyone.

To wrap it up let me say that I am not offering anyone moral or financial advice. That is not what I do. What I am trying to accomplish is to draw a picture that will bring into focus the profoundly paradoxical effects and implications of credit card use as currently practiced, and how the credit-card phenomenon is a microcosm of the monetary system itself in the present era. Tomorrow's final column of the week about the credit card will examine what is perhaps the greatest paradox of all.

Richard Kotlarz
richkotlarz@gmail.com

The complete set of columns from this series is posted at thefollowing websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm

2 comments:

enkain said...

I'm wondering if the current foreclosure rate (news report yesterday said foreclosures were up 55%) is part of a scheme to force people "off the land".

It appears to me almost like the land-lords and serfs of days past. Force the lower people into rental units, divvy up the land between 'those that can afford it' after knocking the market down, and squeeze another segment of the population "off the land".

If we don't alter the course we're on, will this 'land grab' be part of the scheme?

I'm trying to sort the reasons of this; when people 'rent', they pay for years and end up owning nothing. The next person along does the same. A profit margin for the land-holder is built into rental costs, and provides a continual stream of income 'from the poor to the wealthier' over time.

Is this actually occurring on a fairly large scale across America? If so, who is instigating it?

Thanks!

richkotlarz said...

The financial system at present can perhaps be thought of as a long drawn out scheme to force people “off the land” (i.e. deprive them of their property), but it is likely not a conscious scheme in the minds of most. I wrote earlier in these columns that when we make a payment on a bank loan, it is divided into two parts when it reaches the bank. One part is applied to reducing the principal of the loan (actually paying off the loan), and the other is credited towards the “interest” payment. This part that goes to for “interest” is actually deposited in the bank account of an “investor” (“speculator”) who obtained the rights to re("to giving the issue another twist."), ceive the proceeds from the “interest” by buying the contract by which the loan was secured. Typically, this “investor” will not spend this money for goods and services, but will look for an opportunity to “re-invest” it. One of the primary “re-investment” opportunities is to buy real estate.

Let us trace the whole cycle. A working person borrows money to buy a home. On a typical mortgage contract, the bank will demand to be paid back, not only the loan itself plus a small fee to cover the banks actual costs of handling the transaction, but a compounding fee called “interest” whereby the cost of the home is doubled or tripled by the time the loan is paid off. If the cost is tripled, as it would be typically for a 30-year mortgage, then 2/3 of the payments the homeowner makes goes for “interest.” The “investor” that receives this money will look for a chance to re-invest it, and there is a good chance that he may chose to reinvest it in real estate.

This extra money pouring into the real estate market tends to push up prices in that market. By the end of 30 years when the homeowner has paid off the mortgage, the prices of housing, including the house our homeowner lives in, may have multiplied manifold. Our homeowner may feel pretty good about that. After all, didn’t he make a wise “investment?” The problem is that the only way that that later price can be supported is if his children or grandchildren (or the generations thereof) are effectively obliged to pay this inflated price if they aspire to get a house to raise their families. They take out their mortgage, but it is likely to be of the variable-interest, sub-prime type which they can barely afford, if at all. As these mortgages start to exhibit a wave of defaults, the collateral that supports them (their home) goes over to the “investor” that owns the mortgage contract, and is collecting the “interest” payment.

Now the only option is to “rent,” and what was originally a “home-ownership” society becomes a modern version of a “landed-aristocracy” society. We the people become serfs on our own land, and the irony is that we worked hard to for it (by virtue of the “interest” payments). If one were to trace this cycle, one could easily call it a “scheme,” but each agent in the unfolding, when seen up close, is very likely to be acting out of motivations that are not nearly as adverse to people’s true interests as the controlling principle at the heart of the scheme itself. We become unconscious agents for the scheme, which is why we need to wake up to it if we are to do anything about it.