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THE GREED MARKET AND THE GROWTH DECEPTION
12/18/2007
Not being an economist, I can't predict whether or not 2008 will bring a recession. But according to five experts writing yesterday in the New York Times, neither can economists. But I do know one thing: the middle class and the poor are getting screwed and have been getting screwed for decades by the so-called free market, and things aren't going to get better any time soon.
From my laywoman's perspective, I am afraid that what economists call "growth" has been based on a deception that cannot continue. That "growth" reflected in the stock market which in turn reflects gains in banks, credit card companies, mortgage brokers, oil companies, arms contractors, etc., has largely been built on the backs of the working and increasingly struggling classes. In fact, we are beginning to see the entire economic house of cards, based primarily on seducing consumers into purchasing things they cannot afford, making them pay exorbitant prices for things they need, and recently forcing them to support a war they do not want, come crashing down.
It started in the 1950s with the use of credit cards by large numbers of citizens. There were limited-use credit cards issued in the 1920s by hotels and gas companies, but the types of cards that could be used in multiple locations didn't really come into wide use until the 50s. Diners Club was the first, followed by American Express and BankAmericard. Over time, more types of cards were issued and more and more people, not just the well-off, were being issued cards. By the time I graduated from college in 1970, graduates with no money and no credit history were routinely offered credit cards. Now it is high school graduates who receive offers. After all, college students without buckets of cash need credit to pay for keggers, condoms, and designer clothes.
The credit card did three things: it allowed people to purchase items that were beyond their means, putting a lot of them in permanent debt; it made money for the banks and credit card companies; and it contributed to the perception of healthy economic growth.
Prior to the advent of the credit card, the only way you could purchase consumer goods (other than a house or car) that you couldn't really afford was by using "layaway." Each week you gave a small amount to the store, which held onto the item in a back room until you made your final payment. With credit cards, you didn't have to wait. The credit card company paid the store for your purchase and you paid the credit card company. The credit card made you feel richer than you actually were, so you would be content and not complain about your low wages or inadequate living circumstances.
Unfortunately, the lure of the credit card ultimately spelled disaster for many ordinary Americans, who spent up to the limit, paid only the minimum amount each month, and got into serious financial difficulties. Because banks and credit card companies made it a practice to send out cards to those who had no business using them, too many Americans got themselves into financial trouble. Few credit card users understood how long it would take to pay off their balance if they only paid the minimum each month, and many ended up taking offers from other credit card companies just to pay off balances of cards they couldn't afford in the first place. Of course, replacing one balance with another balance didn't ultimately help, and many users ended up filing bankruptcy.
Today we see Americans using credit cards to buy groceries and even to pay their rent or house payments. With the ability to get cash advances from credit cards, one can borrow to pay for almost anything. Many people did not understand (and still don't understand) just how much trouble they were getting into and others thought that over time their salaries would go up and they would eventually be able to get out of the hole they had dug. Unfortunately, that didn't happen for many people, making bankruptcy their only hope. In 2005, however, the Congress passed a bankruptcy reform act which made it much harder for these debtors to file bankruptcy and start over. Nothing, however, was done to discourage credit card companies from sending cards and card offers to low income Americans who should not have been offered these cards in the first place and who got into trouble not just because of their spending, but also because of the exorbitant fees charged by the credit card companies.
The big winners in the increased use of credit cards were the banks and card companies who earned money from both the retail stores, who pay fees with each credit card transaction, and the consumers who pay interest and other fees (late fees, cash advance fees, balance transfer fees, etc.). Even if many consumers eventually default on their payments, most do not do so until the credit card companies have made money off of them, and anyway there are still enough paying credit card users to give a high profit to the credit card companies. Therefore, there is nothing to discourage credit card companies from offering cards to unqualified consumers.
One thing the credit cards did, however, was enable many companies to sell their goods to people who otherwise could not afford them, thus ensuring financial success to many of them. Separating the bank that collected payment from the business that sold the goods allowed both businesses and banks to succeed and grow, contributing to the economic growth numbers in the country, even though those numbers were deceptive, and even as many individuals suffered financial disaster associated with buying too many goods on credit.
Over time, credit card companies increased interest rates and added many high fees for things like late payments and charging over the credit limit of the card. This only added to the misery of people who were already in over their heads, making it impossible for increasing numbers of them to pay their bills.
This wasn't enough, however, for the greed of the money handlers in this economy. There was more money to be made on the backs of people by allowing a housing bubble to develop and by creating irresponsible lending practices to unqualified homeowners. Over the past few years, as real estate prices climbed dramatically, three things happened. Many speculators bought property and rented it out, foolishly thinking the prices would rise indefinitely, and that in a few short years they could sell and make an amazing profit. These buyers increased demand for houses and helped to further drive up home prices. They were also the first to bail out when home prices started dropping.
An example: last year in Southern Riverside County, a greedy mortgage broker, wanting to take advantage of the rapidly rising housing prices, hatched a get rich quick scheme that he sold to fellow church members. He got them to sign blank mortgage applications and he filled in the numbers, secured home loans for more than the houses were worth, banked the extra money, rented the homes at a rate lower than the monthly mortgage payments, made up the difference with the money in the bank, and planned to sell in a year or two, making himself and his clients millionaires. As the value of the homes started to drop, he stopped making mortgage payments on behalf of the homeowners who were his clients, and put himself and others in legal and financial jeopardy.
Another thing that happened was that mortgage brokers and lenders decided they could mine a new source of income by offering new types of loans to buyers who did not qualify for standard loans on homes that had become so expensive. Either these buyers didn't have adequate income to qualify for a loan in this market, or they lacked a down payment, or both. Mortgage brokers therefore developed loan packages that did not require down payments and offered low interest rates for the first few years. They also offered loans without checking credit history and proof of income.
This practice was not that different from offering credit cards to people who did not qualify, and the result was the same: people eventually could not pay. Just as the credit card companies raised fees and interest, these specially arranged mortgages had low teaser interest rates that were scheduled to go up in a few years, raising the monthly payment of the homeowner, often to a level he could no longer afford. Foreclosures began and the housing market was flooded with unoccupied homes that had been repossessed by the bank. Housing prices started coming down.
A final thing that happened was that homeowners used the rapidly increasing equity in their homes to take out loans to purchase cars, other property, and various expensive consumer goods. Again, there was no consideration that home values would come down. Everyone thought the bubble would expand indefinitely and someday all these homes would be worth even more. As we know, this didn't happen, and today many families find themselves owing far more on their homes than the homes are worth. As we know, the whole mess is snowballing and millions of low and middle income Americans have lost or are in danger of losing their homes.
Once again, conservatives want to blame consumers, who in their opinion, bear the full blame for buying homes they could not afford. "They should have known better," is the mantra. Once again, conservatives are unwilling to see the greed that fueled the practice of lenders offering loans to people who could not repay them, and then bundling those loans and selling them to hedge funds. Shouldn't the lenders be the ones who "should have known better?"
I predict conservatives will balk at the possibility of regulating the real estate and mortgage industries so this doesn't happen again. Heaven forbid anyone should tamper with the "free market," especially when they can point to "growth" in the economy. But this growth is deceptive. It is based partly on a "war economy" which cannot continue, and partly on borrowing, which may be coming to an end as more and more Americans are so deep in debt they can no longer borrow, and will have to begin living within their meager means and curtail their buying.
It is time to ask the big question: if the "free market" is really the "greed market," and consumers just become patsies of the big corporations that know how to manipulate, use, and then discard them, is the "free market" really all that praiseworthy?
If the "free market" has become nothing more than a market to make the rich richer, while using and abusing the poor and working classes in deceptive financial proposals they don't understand and shouldn't be expected to understand, tempting and luring them into wanting the things the upper and upper middle classes can afford, convincing them they "deserve" these things, and offering them creative ways to possess them, only to penalize them later because they could never afford them in the first place, then it is a market controlled by powerful, unconscionable forces that must be held accountable. It is a market that is neither "free" nor "fair." It is a predatory market, a market that could eventually crush the middle class.
Without a middle class, we cannot have a democracy, for it is only the middle class that has the time and interest to maintain a democracy. The wealthy don't care about maintaining a democracy, as long as their interests are protected. The poor have no time to study the issues and participate as citizens as they are too busy trying to survive. It has traditionally only been in societies where there are vibrant middle classes that democracy survives. Therefore, if we love our country, and want to preserve our democracy, the patriotic thing to do is to realize what a monster our particular interpretation of the "free market" has become, and to implement regulations to bring it back to some semblance of fairness and ethical practice.
-Ellen Terich
All content © 2005 outragedcitizen.com
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