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

     

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.

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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.

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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.

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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.

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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.

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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.

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March 6, 2010