Kidding ourselves about high price of debt

Gene Lyons

Posted on Wednesday, July 30, 2008

Credit cards, as most people theoretically understand, can turn
into the 21st century equivalent of sharecropping. First, you borrow
from The Man to get your cotton planted (or maybe to buy that new
flat-screen HDTV). Comes picking time (or the warranty runs out) and
you’re likely to discover, in the words of an old country song, that you
“owe your soul to the company store.” Not to mention late fees and a big
jump in the interest rate. Meanwhile, you’re getting letters daily
offering you a new card at temptingly low rates for the first six
months. Why not double down? Hey, your 15-year-old’s being offered a
platinum card with the logo of his high school’s mascot. Shoot, I’ve got
a Charolais calf named Layla who’s probably eligible for EZ-Credit
today. Basically, anybody who can walk and chew cud at the same time can
end up owing a half-dozen company stores. But why worry? Money? They’re
practically giving it away. And if the payments get too steep, what with
$4-a-gallon gasoline and $5 milk, all you’ve needed to do over the past
dozen years or so, in the immortal words of George W. Bush, is borrow
more to “make the pie higher.”

Refinance with an adjustable rate mortgage, pull some cash equity out of
your house, pay off a couple of credit cards and then repay the home
loan with tax-deductible cash. Sweet. See, you’re going to trade the
dump in on a fancier house to borrow against before the interest rate
resets anyway, pushing your monthly payment into the stratosphere.
Because as everybody used to know, real estate can’t go anywhere but up.

Until recently, spending money you didn’t have was your patriotic duty.
Wasn’t it the same George W. Bush who advised Americans to respond to
the 9/11 terrorist massacres by heading to the mall? When the going gets
tough, everybody laughed, the tough go shopping.

Never mind that it was also Bush who inherited a $128 billion budget
surplus and turned it into a $482 billion deficit—an estimate,
incidentally, that leaves out the costs of the wars in Iraq and
Afghanistan. They’re off the books, a bit like Enron’s money-losing
“partnerships.” In retrospect, the Enron collapse clearly predicted the
fiscal consequences of Bushism.

Psychiatrists call it magical thinking. Today it defines American
culture. For decades GOP propagandists have endlessly pushed the fantasy
that cutting taxes invariably brings more revenue into the treasury.
Because it’s so counterintuitive, it makes people who think Rush
Limbaugh is an intellectual feel smart. So they get their big $247. 32
tax cut; Scrooge McDuck gets a few millions more to paddle around in;
the pie theoretically gets higher and higher.

It’s the Republican equivalent of Marxist cant about the “withering away
of the state” under communism: An objectively false belief that’s
repeated with ever more fervor as its bad consequences become harder to
deny.

The effect of such self-delusion on individual lives was recently
illustrated in a fascinating article by New York Times financial editor
Gretchen Morgenson. She profiled a 47-year-old divorced Philadelphia
woman, Diane McLeod, driven into bankruptcy by spiraling credit card
debt, by mortgage rates that adjusted her right out of her home, by
unforeseen medical expenses and by rapacious lenders equally indifferent
to reality.

McLeod admitted being her own worst enemy. She even put $19,000 on her
credit cards buying expensive handbags and other useless gewgaws on the
Home Shopping Network while lying in bed recovering from surgery.

“In 2007,” Morgenson reports, “when she earned $48,000 before taxes, she
was charged more than $20,000 in interest on her various loans.”

To keep up, McLeod repeatedly refinanced her modest house to the point
where, after the real estate bubble burst, she owed far more than it was
now worth. Then she lost her job and couldn’t make payments.

The mortgage company is foreclosing and will itself lose maybe $100, 000
on the deal; hence, the need for a taxpayer bailout of Fannie and
Freddie, the two giant public/private mortgage banks that find
themselves holding untold amounts of worthless paper. Also for decades,
Republicans and many Democrats have pushed the equally fallacious notion
that the financial industry needs no regulation because free markets
correct themselves and because wise investors invariably exercise due
diligence in advancing loans. In reality, Morgenson shows, many lenders
no longer care about repayment. They make their money on “fees and
charges generated when loans are made.” Their relationship to the
world’s Diane McLeods is that of a coyote to a chicken. Next, the loans
get repackaged as securities and sold to investors just now waking up to
the fact that they’re worthless. The upshot of it is that whether or not
you and I and Layla have run up huge credit card debts, we’re paying for
them anyway.

—–––––• –––––—Free-lance columnist Gene Lyons is a Little Rock author
and recipient of the National Magazine Award.