The Necrotizing Fasciitis of Credit Card Default
The economic boom of the later two decades of the 20th century was fuelled on a massive extension of credit at high interest. It was also fuelled on the shrinking of real earnings coupled with inflation and the hope for improvement in the future. As production shrank and moved offshore where conditions allowed for greater profiteering, the replacement came by way of promoting of mass consumerism and loans of all kinds, such as student loans, mortgages, car loans, payday loans and credit cards. The future for the present of the past, became mortgaged to the promise that debts could be paid by future income where we have now arrived. As jobs and income withered, credit cards were presented as a devised solution for the shortfall. Bit by bit, people used them to achieve dreams and/or to make ends meet. Like an addiction, a small habit ballooned into a life threatening disease. Fast credit became an encroaching disease on the body finance of the working people. When one line of credit ran out and bankruptcy emerged, faster and more expensive lines opened to those who could least afford it. It began as a small pain that intensified and now threatens misery and death of the entire working class as the infected credit bubble is set to explode and burst. The first sign was the foreclosure epidemic that erupted in all its fury in 2008 and spread rapidly around the world. The collapse of the sub-prime bubble led to austerity around the world, while banks, big business and governments were bailed out.
Out of the post WWII boom, many people had high per-capita disposable income and they bought into the American dream of a home, car and higher education. Working people could actually save money and had a surplus of credit. This collateral allowed them to take out loans for high end consumer goods like houses, cars or boats. Easy credit at low interest was given on mortgages and big ticket items. This then tied up the collateral until loans were paid in full along with the compounded interest. For the workers of the 1940s to the 1960s, that was feasible. But then as money began to get tight, particularly in 1971 with the move off the gold standard and in 1973 with the OPEC oil embargoes. This is the point were things began to unwind. It was also the point where credit cards began to emerge. At first, choices were limited and ceilings were low. As the typical family was set up with the husband at work and the wife as domestic, credit cards were issued to women who did most of the family shopping. This is where the trouble started to creep in. Through the 1970s the coming trouble was not apparent then as the economy was generally booming.
However, during the early 1980s, particularly in 1983, financing was deregulated by eliminating the Glass-Steigel Act in order to encourage investment in the stock exchange and loosen up credit even more. This was during the Reagan administration that coined the term voodoo economics. Little did people know, it was in this era that was to ultimately backfire. The deregulation allowed for extended fractional reserve banking, derivatives, leveraged buy-outs, debt swapping and stock speculation. It also meant that looser lending criteria would allow for such things as home loans to people who were ultimately unable to pay down the mortgages. It also allowed for unsecured loans where there was no collateral to back them up, such as to students at school and for food. Most credit cards fell into the category of unsecured loans. Credit cards were extended to most people who could prove they had any kind of income and could make minimum payments. The banks actually preferred minimum paying customers as the unpaid balance accrued compounded interest charges, late charges and a lot more. Credit cards were also extended to corporations who could use much higher debt ceilings to get established on something more than a shoestring budget. The thinking was to encourage consumerism and increase profitability. For a while, this appeared to work until people started to max out and fall behind in payments on all fronts. More credit cards were offered, encouraging people to “rob Peter to pay Paul”. Some made a success by borrowing from one credit cared to pay off another before the grace period expired and interest charges initiated. This was a minority of cases and most people too busy to track multiple accounts quickly got into trouble.
The first wave began to build around 2006 with the sub-prime mortgage scandal. More and more homeowners began to default and go into foreclosure. Not even credit cards could help as most of these were maxed out. By late 2008, the housing bubble burst when Lehman Brothers went bankrupt with a huge debt load of sub-prime toxic assets. This led quickly to trouble with other financiers and insurance companies such as Chase-Manhattan, JP Morgan, Fannie Mae, Freddy Mac, AIG, Western Union and many others. It took massive bailouts in the trillions to prevent “too big to fail” corporations from going instantly bankrupt. From America, the trouble quickly spread to Europe. A new form of banking was to rise out of the chaos and that was extreme high interest payday loaners, which Western Union got involved with. During the same time, the issuance of credit cards was liberal to the point where just about anyone could get pre-approved cards in the mail. Some boasted cards for dead family members and pets.
Corporations, such as GM decided to pull out of America lock, stock and barrel and set up in China and Asia where costs were lower and controls non-existent. Assets were quickly pulled out to avoid a fatal hemorrhaging of credit and were transferred offshore. People in the millions lost their jobs and suddenly could not make payments on anything. While the working person lost all, the assets of big business were kept intact and they set up shop in China, India and other Asian countries where economies boomed instead of busted. In America, the UK and the developed world, credit cards soon emerged as the new emergency financing. Personal and collective credit card debt mushroomed as people used them to obtain groceries and eat at restaurants. It has only become possible to use credit cards in grocery stores within the last decade. Prior to that, one needed cash or a store specific card. The use of credit cards by an unwitting public ended up making most of them debt slaves, unable to pay off the cards due to other unsecured loans like for higher learning. What started as small, now threatens to entire country with a second round of economic collapse.
Ballooning credit default threatens the financial world like Necrotizing fasciitis threatens the entire body by starting off as a small sore that ends up generating so much toxin that the person goes into septic shock and could die unless quick and massive critical intervention occurs, often with surgical removal of a limb and/or infected body tissues coupled with a massive use of anti-biotics. As austerity increases, people become less able to afford even minimum payments and some turn to payday loan companies that can charge as much as 1,700 % in the UK and 740 % in the US. Taking out revolving loans is a formula for disaster. Not only is there no progress on credit card payment, but there is a fast ballooning debt with short term lenders. Though loan sharks are not common today (they in fact still exist), the short term lender at extreme interest is a kind of deregulated and legal loan shark. They may not be able to chop off a hand or kill the borrower, the end result in homelessness and destitution is a direct threat to life. There are plenty of warnings with trillions of dollars in non payable credit card defaults. There is no collateral to collect on unsecured loans such as houses. How does a bank collect on something like higher education where the student is unemployed? How do they collect on past meals long since devoured and forgotten?
Will debt slaves suddenly find themselves subjected to hard labour to pay down their credit card defaults? There are those who suggest the use of prisons as work houses for the destitute to pay down their creditors. They will be able to set the tempo and timing of the pay down. Given what has happened up to now, it is unlikely that there will be any term less than life for most people. The consumerist dream ended up profiting only the manufacturer and big business. For the average worker, that dream has gone up in smoke and turned into a nightmare. Unlike big banks and businesses too big to fail that got massive bailouts, the homeless and destitute are unlikely to get them. Unlike necrotizing fasciitis that can be cured it caught in time, there appears to be no cure for the credit card default bubble set to burst.