Wall Street and the banks on Main Street exist entirely on the leverage of credit, why shouldn't consumers?
In response to another of the usual attacks on the American family for borrowing, I sent the following response to the head of an association of bankers.
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It’s great to save, but families have to leverage their assets to survive in a culture where taxes are oppressive and the cost of living is high. Even so, most Americans save via their IRA because there is an incentive. Outside that one break, there are few savings opportunities. Meanwhile life continues to be too expensive as government grows and inflation ravages. And while income taxes are lower than a generation ago, local taxes and fees are eating up any extra cash a household is able to save.
On the other side of the coin (to coin a phrase – a double entendre) we have been living in a low interest rate environment for over a decade. Your bank members offer 1.5% interest savings and no compound interest that I can locate. Where is the incentive to save?
The good side of this is that the stock market, which represents the economic engine of the nation, is kept from tanking entirely in bad times because money has to come back because there is no advantage in cash investments with rates so low.
And on the macroeconomic level, too much saving dulls the economy. Japan has this problem.
But here is the real issue to me. The investment world on Wall Street and the banks on Main Street exist entirely on the leverage of credit. So it’s okay for Bear Stearns to borrow $50 to $100 million a week to invest for themselves and their clients, but anathema for a couple to do the same so they have a car, a washer-dryer and a health club membership – or have to send their kids to private school. Your local bank members borrow from each other and other sources to achieve their goals too. And the government does not step in to save householders as it does banks when they can’t pay back.
Our culture maligns ordinary people for leveraging in order to survive – and condemns them with credit agency ratings that brand them like unhealthy cattle – while ignoring the entire financial system’s addiction to credit until the credit house of cards collapses, as just happened.
It is hypocritical in the extreme for bankers to berate the people of this nation and state for borrowing money on a small level while your entire industry borrows on a gigantic level, setting the stage for inflation and headlong plunges when credit dries up – carrying the rest of us poor suckers down with you.
Worse, family borrowers are subjected to the vilest sort of usury and collection tactics while Wall Street and Main Street executives walk off with golden parachutes and a life of ease based on the obscene income they generated for themselves by – you guessed it – borrowing money to make money.
Whatever sins accrue to the banks or Wall Street are irrelevant to the issue of whether people should exist on borrowed money. Two wrongs don’t make a right.
“families have to leverage their assets to survive in a culture where taxes are oppressive and the cost of living is high.”
That is false and many if not most don’t live that way. People have to bear the individual responsibility to live within their capabilities and budgets. That is being an adult.
I have never borrowed for anything other than a home and never not payed a credit card in full. I was raised to understand that you can’t have what you can’t afford. You work hard and you save money for a rainy day. If you don’t have the do re mi, you shouldn’t buy it.
If immoral is too strong a word for people who feel that they need cable tv or video games so bad that it requires paying the 16-20% interest that credit cards ask, I will substitute the word stupid. They are people who will never advance in life and never leave anything to their progeny. It seems like you are trying to apologize for over indulgence or imply that because banks do it, people can.
Two problems:
Unlike consumers who usually have little of value to “leverage”, banks have underlying assets to secure their debt.
Unlike consumers, when banks borrow money, it is used to create even more money. That’s how bankers make a profit.
What you’re doing is conflating business lending with consumer credit. There is a difference. You’re also overlooking the fact that, customarily, banks, lending institutions, and businesses are forced to go out of business when they incur debts they cannot repay, just the same as consumers are forced to declare bankruptcy. This is exactly as it should be. Rather than lionizing the irresponsible who overburden themselves with consumer debt, we should be defending the free market principle of failure as it regards both banks and consumers. Rail against government intervention in the market; don’t defend irresponsibility on the part of individuals to spite corporations.
Patrick:
I presume you are arguing with Bernie’s view and not myself. I agree with the distinction between consumer and business.
As a business owner, I must note that I had no problem in just this last month getting $15,000 with 0% APR, on credit card offers so, honestly, it is not too tight from my vantage.
Bernie referred specifically to “…families have to leverage” and “….couple to do the same so they have a car, a washer-dryer and a health club membership… ” so my presumption is that he is talking about consumers.
My personal worry is that the next shoe to drop is going to be the credit card industry as so many people have been using their home equity to borrow to pay credit cards. I don’t know that there is a similar product like mortgaged back securities in the personal credit industry, but I wouldn’t be surprised if the big credit card companies like B of A , Chase, and Citi have enormous credit card exposures.
Before I was married, my girlfriend would get continual credit card offers despite having very low income. It made no sense. Most of these were 0% APRs which after x amount of time reverted to typical 15-20% interest. The banks essentially were offering close to free money in the hopes that people would borrow beyond their means and then get stuck when the 0% period ran out and end up paying 15-20% credit card interest I have been taking out these 0% for some time because I can easily pay them back and why turn down free money, but how many people have spent the money and are now going to default on their credit cards.
It is worrisome, and like you say, a matter of personal responsibility. The politicians like to pander to Main Street, but it is equally culpable.
Yonkel,
Yes, that was directed to the original article, not to your comment.
Response to posts from the author, Bernie Reeves:
You are missing a fundamental element here. Businesses must grow to survive. Growth requires capital. They can either raise equity or borrow. You say businesses should go under if they have bad patches, but what about the employees and the vendors?
Even with assets for collateral, small businesses find banks are not interested in lending. In the past, 15 years ago or so, bank loan officers were paid for loan production so they worked with business owners.
The local board of the bank approved loans based on fiscal characteristics but also on other factors such as the reputation of the borrower and knowledge of his role in the community.
This is no longer the case. The bank is peopled with apparatchiks who make their quotas refinancing homes for a fee. The bank upstreams the loan and makes another fee servicing the loan.
The need to grow applies to families as well. In the old days, banks offered debt consolidation loans and 90-day notes. This banking environment combined with the mortgage bubble in which households managed to survive with equity
lines of credit on their homes.
Families are discouraged from saving to meet needs since interest rates are low – and compound interest is no longer available. The cash corpus in a savings instrument loses value daily.
It’s true some people can live constantly within their means. But this omits the things that happen in life: sudden serious disease; big rises in property taxes; the need for special schooling; legal problems; unexpected
debt issues with kids; increases in household bills, such as health insurance premiums etc.
Banks are charted in states to provide a role to the community. New banks can raise money with fewer legal and SEC restrictions for this reason.
As the public is learning, banks today are focused in fee income and leveraging assets to invest in world markets – and not on assisting their communities by providing credit – the thing that makes the world go around.
Businesses should go under not when they have “bad patches”, but when they make fundamentally bad decisions that destroy their ability to continue operating. I was referring to banks that over leveraged mortgage securities and issued bad loans – the people who are getting bailed out with taxpayer “capital”. Your original premise seemed to be that consumers deserved to have their bad decision making subsidized because these businesses have their bad decision making subsidized – tit for tat. The reality is that neither group should be shielded from their poor decision making. That’s how the market works.
Once again in your response, you are conflating consumer debt with business credit. Racking up $20,000 on your plastic at 18% interest to make your car payment when you can’t afford to pay it back is a lot different than using short or long term financing to invest in your business and create new money. The former does nothing to grow business in real terms, and harms consumers who overextend themselves, while the latter does grow business and create value. Individuals are more than welcome to engage in the same type of financing that businesses do, but unless they are using their consumer debt to grow their wealth, they are not going to achieve the same results. And there lies the difference between consumer and business credit. There is no argument that can make irreponsible consumer borrowing virtuous.
I agree that consumer borrowing is out of control and certainly anything but virtuous; however, the idea of lefty, Ivy League illuminati politicians regulating Wall Street is disturbing. The corruption behind closed doors of lending institutions mind-boggling. Wall Street and bankers would tell us as consumers, “Do as I say, not as I do”? Uh, yeah, no.
It is not a bank’s fault that taxes are too high. No more than it is their fault that gas is too expensive or that Junior got in a car accident. They have to make money to survive, and to pay their customers interest on the money THEY’RE borrowing.
If you ask me for 100 dollars and then tell me you can’t ever pay it back, no rational person would justify that. I loaned you money in good faith and you refuse to repay? On an individual level that’s a lawsuit. On a banking level, they should take the hit? No.
And finally it is not the banks job to make savings “attractive”. Where else can you make money by not doing anything but setting money aside…no risk? Nowhere? Well by golly then 1.5% is a deal.
What populist nonsense.
BTW, I did discover that there are asset backed securities based on credit card debt. And my cause for concern seems to be shared:
http://money.cnn.com/2008/10/03/news/economy/credit_cards/index.htm?postversion=2008100307
There is good and there is bad regulation. Without regulations the markets would not exist.
For example, the current crisis is significantly due to the overrating of the mortgage backed security bonds by Moodys and S & P, which have inherent conflicts of interest since they are paid by the bond originators. If these bonds were given the junk ratings they deserved than they would not have been bought up by so many banks and would have been of value to speculators only.