Looming Crisis: America's Credit Card Debt Bubble-Burst

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If you are one of the millions of Americans locked into long term
debt service, your road to debt serfdom was likely paved by a mortgage,
home equity loan, credit cards, or a combination of all three.

When the U.S. economy began to melt down in 2007 and entered a
rapid period of decline in 2008, all eyes were fixed on the subprime
mortgage crisis. Though the mortgage crisis, triggered by spurious
lending practices and unprecedented risky investment bank practices,
was undoubtedly the dominant factor affecting the American consumer
in 2008, credit card debt and default was also making a contribution
to the deteriorating economy and collapsing standard of living.
As the subprime mortgage crisis accelerated, the increasing number
of people falling behind on payments or defaulting on credit card
debt was largely ignored by the media, with only a sporadic story
or two being aired or printed by the major news outlets. Stories
finally started receiving vastly more media attention in 2009 as
the problem became too large to ignore. Credit cards, once a status
symbol and the prized possession of the American consumer, had quickly
become the bane of the American consumer.

Credit cards, while omnipresent now, were not always widely used
by consumers to make purchases. At one time the credit card was
seen as a novel and trendy idea, with a limited number of cardholders
who were in effect members of a special club. Now, credit cards
are viewed as essential purchasing tools that everyone must have,
for status, transactional ease, and even necessity in some instances.
Many purchases, particularly those related to travel and lodging,
absolutely require credit cards. The overwhelming majority of Internet
vendors require a credit card for the purchases. In essence, it
is nearly impossible not to have a credit card in the 21st century.
The credit card has come a long way in its short history.

Many people today may think that the credit card rapidly and dramatically
transformed American society. In fact, it did not. The explosion
of credit offers to adults and minors alike from the mid-1970s until
the bursting of the credit bubble in 2008 may lead some to believe
that the credit card was an overnight phenomenon. It was not. Credit
cards did not burst onto the American financial scene in the same
dramatic way that prepackaged sliced bread did in the 1930s. They
did not catch on with consumers in wildfire fashion after an enlightened
Eureka moment as did 3M’s “Post-Its,” which were
in high demand and selling all across the United States within three
years of 3M figuring out how to mass produce them. Credit cards
found their way more carefully and slowly onto the world stage and,
nearly 60 years after their creation, contributed to one of the
largest debt bubbles in history. This massive debt bubble, inextricably
linked to the housing market bubble, began to unravel in 2007 and
is now sending America into one of the worst economic downturns
since the Great Depression.

This downturn threatens the prosperity of generations to come and
will likely result in a permanent reversal of fortune for the United
States unless it takes substantial steps to ensure the survival
and relative prosperity of the middle class – America’s
largest socioeconomic group, and the engine that drives America’s
economy through consumer spending. Since consumer spending accounts
for about 70% of the US economy, and the middle class is responsible
for the bulk of consumer spending, the US will undoubtedly experience
painful contractions for the foreseeable future.

Though credit cards were slow to catch on after their creation
in 1949, thirty years later Madison Avenue would be put to work
to help drive the expansion of Americans’ use of the cards.
There was a lot of money to be made by collecting fees for debt
creation and debt service, and the largest banks wanted in on the
action. Clever marketing campaigns led the public to believe that
it could access luxury items and vacations that were once thought
to be out of reach, and fueled a growing desire among many Americans
to live life like the wealthy. People could purchase the 10-day
Caribbean cruise or expensive diamond ring that was once restricted
to those with higher income levels. People were starting to feel
as if they could live like royalty as credit card marketing created
the illusion that debt was equal to wealth. People appeared to care
more about how high their credit line was than how much debt they
had. As a result, credit cards were soon at the heart of a new materialist
culture that had people of widely varying income levels and ages
going into debt to fuel their desire for more stuff. Debt drove
a lucrative credit card industry which became even more lucrative
for credit card issuers after it received favorable court rulings
in 1978 and 1996. More on these rulings will be discussed later
in this article.

Americans’ debt trajectory rose rather gradually from the
1940s through the 1970s, but began to escalate much more quickly
in the 1980s as the “yuppie” came to prominence in American
popular culture. Yuppies (young, upwardly mobile professionals)
became iconic in the 1980s as credit cards made more luxury products
and services available to more people through the creation of debt.
Yuppies were professionals in their 20s and 30s who found new wealth
in a rising stock market – which was seeing a large influx
of cash due in part to the growing prominence of 401k plans and
mutual funds, which opened the financial markets to the public at
large for the first time in history – and the rising use of
credit. Additionally, those working in the upper echelon of corporate
management saw an increase in corporate profits and high-level employee
bonuses, which were made possible by increasing worker productivity
and the corresponding flattening of wages for mid-level, blue collar
and nonprofessional workers. The rich were taking it all for themselves
and letting the good times roll – and everyone who wasn’t
rich wanted to be or act as if they were rich.

Interestingly, the yuppie was an odd sort of counterweight to the
young hippie of the 1960s and 70s because they pursued money and
status but in some ways adopted the socially liberal trait of the
hippie. Hippies rallied against the traditional, conservative, stuffy,
and elitist financial and cultural “establishment,” but
yuppies, though young and socially open like hippies, became a part
of the financial establishment. They were into money and materialism,
but were more open to and less judgmental of new and different social
experiences than their conservative parents were. Their passion
for “things and flings” drove a cultural shift in the
United States wherein it became ever-more important to prove your
status to others. The proof came in the form of luxury cars, projection
televisions, boats, remodeled kitchens, and extravagant vacations.

The 1980s was the age of a paradigm shift in American politics.
The US transformed itself into a country where the profit motive
supplanted the public good. Profit driven business had always been
a trait of America’s political and economic culture, but when
the profit motive of the 1980s was unveiled, it appeared to be more
individualistic, more personal, more pervasive, and more accepted
than at any time before. America moved away from the its traditional
embrace of serving the public interest and even farther from the
emergent communal ideals advanced by the 1960s and 1970s progressives,
and wholeheartedly embraced a vibrant consumer culture and all the
trappings that came with spending. The rise of the consumer culture
had a direct correlation to the decline in Americans’ saving
rate, which would eventually put further strain on households some
30 years later.

Saving money used to be a prudent exercise that was valued by society
as a whole. In the 1970s and 1980s, America did not have a chorus
of financial pundits on television encouraging citizens to be consumers
and speculative investors. The conventional wisdom of the time was
to always set aside ten percent of your income as savings. Prior
to the rise of the consumer culture, Americans put a large amount
of their money in the bank, and did so quite proudly. The savings
would provide financial stability in case of a catastrophe, money
for their kids to go to college, money for a vacation, and would
serve as an extra cushion – on top of a pension – for
retirement. Americans, from generation to generation, were encouraged
to save and did. When they had to pay for something, they paid with
cash. In cases where cash was not sufficient, they took out loans
that were based installment credit, not revolving credit. The notion
of paying for something with cash seemed to have become a foreign
concept by the 1990s as the value of credit card debt reached new
heights, and in dramatic fashion. In 2005, America’s 164 million
credit card holders charged $2 trillion to their credit cards –
amounting to $12,500 per credit card holder. This contributed to
massive consumer debt, which rose over seven times in 28 years –
from $355 billion in 1980 to $2.6 trillion in 2008. By 2008, consumer
debt increased seven times, while the savings rate was seven times
lower than in 1980.

Clearly, banks and other financial institutions that issued credit
cards benefited from the public spending frenzy and made –
and continue to make – billions of dollars on the fees and
interest paid on credit card debt. These institutions enlisted the
help of Madison Avenue advertising agencies to come up with ads
that appealed to the new consumerist mentality that came to dominate
American culture in the 80s, 90s, and early 2000s. Commercial advertisements
telling viewers that their credit card is accepted “everywhere
you want to be,” became omnipresent as did commercials set
to popular music such as the rock band Queen’s song, “I
Want it All,” promising that if you “want it all”
and “want it now,” you could in fact get what you want
merely by swiping your credit card. These commercials broadly appealed
to the new consumer mentality. It could be said that commercial
advertisements appealed to the Id that Sigmund Freud defined in
his psychoanalytic theory. The Id acts according to what Freud termed
the pleasure principle, seeking immediate gratification by satisfying
psychological needs without accounting for reason or reality. Americans
were all too ready to be governed by the pleasure principle because
parents and society at large had created an environment that was
safe for a narcissistic, greedy, and self-serving new generation
of young adults. Sadly for everyone, this culture has not held back
in contributing to America’s economic downfall. The stories
of financial strife that have begun to emerge are both shocking
and horrific.

the rest of the article

6, 2010

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