Tuesday, August 16, 2011

They Got Bailed Out, We Got Sold Out: How the Banks Profit from the Lack of Jobs

They Got Bailed Out, We Got Sold Out: How the Banks Profit from the Lack of Jobs

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Amidst a lot of indicators that say we could be heading for another round of recession—before the so-called recovery even reaches most people, let alone our millions of unemployed—June saw a jump in consumer borrowing, three times as much as expected, according to Bloomberg News. The $15.5 billion increase in credit was the biggest since August 2007, and revolving debt, which includes credit cards, was up by $5.21 billion, the most since March 2008.

In a consumer-dependent economy, that's a good thing, isn't it? After all, borrowers must have some confidence in their ability to pay back their debt, right?

Not so fast.

During the debt ceiling drama, we heard a lot about the need for the government to “live within its means,” comparing the government's spending to a household shelling out money for unneeded things.

The analogy didn't work out too well—imagine a household spending half its income on defense, for instance—but it had another purpose. It reiterated the idea that working Americans, burdened with debt, were themselves to blame for their financial woes. Just live within your means, the argument goes, and you won't have those pesky credit card bills.

Of course, that's not even close to true. In an economy in which real wages have been stagnant or even in decline for years, credit has had to make up the difference. Banks and credit card companies have profited off the rest of the country's debt. “America is a nation whose growth in recent decades has been predicated on a model of consumption. From a nation that used to save to invest, we now borrow to consume,” wrote Moses Kim at Naked Capitalism back in 2009.

When credit froze up after the financial crash and working people could no longer borrow to spend, the economy took another hit. It doesn't take an economist to tell you that spending isn't back to where it was before the crisis. Catherine Rampell at the New York Times pointed out, “With fewer jobs and fewer hours logged, there is less income for households to spend, creating a huge obstacle for a consumer-driven economy.”

So why the jump in buying on credit, if people still don't have money to spend? Carlos X. Alexandre at Seeking Alpha explained:

“...the most logical interpretation is that as other sources of cash are drying up – jobs, equity lines, etc. -- consumers are now turning to credit cards for basic expenses, and as credit lines become exhausted another round of defaults is in store. Some may say that cash sales are not reflected in the data, but the American way of life and the core economic engine has been plastic-based for as long as we can remember, and is not about to change anytime soon.”

In other words, a jump in consumer credit isn't a sign of confidence, but of desperation.

“When you look at unemployment being above 9 percent, housing prices not really coming back to a good space, that will impact the mood and the consumer confidence,” MasterCard Chief Financial Officer Martina Hund-Mejean told Bloomberg. “It’s impacting it today and it will impact tomorrow.”

Hund-Mejean's company, meanwhile, is profiting handsomely, whatever the reasons for the uptick in consumer borrowing. Bloomberg notes that MasterCard, “[t]he world’s second-biggest payments network reported that its second-quarter profit rose 33 percent. Its U.S. debit- card spending surged 19 percent in the second quarter to $98 billion from a year earlier, and U.S. credit-card climbed 6.1 percent to $129 billion.”

Credit cards are far from the whole story. $10.3 billion of the rise in borrowing was in non-revolving debt, which includes student loans, car loans and mobile homes. (The report doesn't include mortgages and home equity credit.)

I wrote back in June about the student loan bubble:

“Those bright, shiny new degrees simply aren't worth the paper they're printed on all too often. The cost of a college degree is up some 3,400 percent since 1972, but as we all know too well, household incomes haven't increased by anything close to that number -- not for the bottom 99 percent of us, anyway.
Pell Grants for students have shrunk drastically in relation to the ballooning cost of a four-year college, and Paul Ryan wants to cut them even more, pushing some 1.4 million students into loans, more of which come each year from private lenders with little to no accountability.”

Getting a degree to get a better job or returning to school to ride out the recession won't help if there are no jobs to get when you get out, saddled with thousands in debt from private companies whose only interest is profit.

Borrowing created the crisis, it's not going to make it better. But as long as we favor solutions that treat the ongoing economic slump as the fault of the individuals who borrowed, we're never going to get out of it. Mike Konczal wrote inJanuary:

“There’s a lot of morality talk about how American consumers overbinged on credit; but that makes no sense – they were rationally reacting to price mechanisms and increases in the supply of credit. The question is why did so much credit get lent out?”

The answer, of course, is profit—profits like those MasterCard, AmEx, and JPMorgan Chase are reporting. AmEx, which caters to more affluent customers, reported record spending by those cardholders, and is looking to expand beyond its wealthy base. (Even credit card companies eventually find that there's only so far they can grow depending solely on the well-off.)

Debt keeps American workers on the hamster wheel, scrambling just to make minimum payments on credit cards, student loans, and mortgages. As Konczal noted in the New York Times, credit lending now relies on fees, interest rate hikes, and lock-ins in contracts for its profits rather than just the interest it makes on your borrowing. “With a profit model that depends on people rolling over their debt endlessly (like a 21st century form of debt peonage), it is no surprise that savings rates are down — people’s “savings” mostly go towards maintaining debt.”

So working people wind up trapped, paying far more for goods and services than they would have if they'd had the cash to pay outright rather than deal with interest and credit card fees, and the economy, desperate for the consumer spending on which it is built, staggers. Credit, as before, fills in the space between wages and expenses, but now there's little extra spending to cut for families looking to “live within their means”. A new recession, Rampell points out—and we should add, another freeze on credit-- “would force families to cut from the bone.”

Another slide for the economy, and more people wind up out of work, dependent on their credit cards for necessities, racking up more debt.

But Citigroup (bailed out for $45 billion of taxpayer dollars) and JPMorgan Chase (bailed out for $25 billion) are reporting billions in profits on credit cards, so why worry?

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