Credit Cards, the National Debt, and a Massive Hangover

Everybody knows that loans are a lot harder to get since the economy crashed.  Banks don't want to lend to small businesses, credit cards are cutting back, and even people and businesses with good credit are finding it hard to borrow.

On October 10, the Wall Street Journal wrote of a New York City native named Karen King who owes nearly $36,000, which is more money than she's ever earned in a year.

The Journal explains:

The recession has forced a financial reckoning for Americans across the income spectrum.  The pressure is especially acute for the low-income Americans who relied on borrowing for daily expenses or to gain the trappings of middle-class life.  Shifting credit practices over several decades had enabled them to live beyond their means by borrowing nearly as readily as the more affluent. [emphasis added]

The financial crisis was decades in the making:

Federal legislation in the late 1970s required banks to avoid discriminatory lending and meet the needs of local communities, spawning a wave of home buying and entrepreneurship in lower-income neighborhoods.

The government wanted to expand minority home ownership regardless of ability to pay mortgages.  We've explained how the New York Times warned nearly ten years ago that allowing the federal government to buy riskier mortgages made a crash more likely.

The Credit Bubble

Credit card lending started expanding to lower income people in 1978 when the US Supreme Court ruled that credit card interest charges were limited by the state in which the issuing bank was located.  Banks rushed to open branches in bank-friendly states because being able to levy high interest made up for the higher risks of lending to lower income people.  The good times rolled as lower income people could borrow "nearly as readily as the more affluent."

When the crash came, the people being hurt most are the lower-income people whom the government wanted to help.  As Mr. Geithner, the admitted tax cheat who heads the US Treasury, explained in testimony to Congress:

"We now know that millions of Americans were... unable to evaluate the risks associated with borrowing to support the purchase of a home, a car or an education." [emphasis added]

The only thing wrong with Mr. Geithner's statement is, "We now know...;" bankers knew the risks all along.  The only reason banks were willing to make sub-prime mortgage loans at all was that they could sell these defective loans to Fannie and Freddie, the government-sponsored mortgage agencies.  Now that the government has passed laws limiting banks' ability to charge higher interest for riskier credit card holders, banks are shutting down credit to lower-income people.

We 'Aint Seen Nuttin' Yet

With her credit cut off, Ms. King has taken on a drastically reduced lifestyle.

"I was a social person, I had interest in a lot of things," she says.  "I had dreams.  Now I'm just paying off the past."

Ms. King is suffering the hangover of spending beyond her means.  The reckoning was decades in coming, but when it came, it hurt.  It's not clear whether she'll ever pay off her debts, but either way, she won't be able to spend more money than comes in for years to come.

The imperative of living withon one's means over the long term applies to cities and states as well as to individuals.

We've documented California's financial crisis which was caused by high taxes, over-regulation, and overspending.  Californians will either have to pay very high interest rates to borrow more money or the state will have to cut spending to live within its income.

Which brings us to the United States as a whole.  We're heading for a national train wreck as federal and state pension bills come due along with all the other bills the Obama administration is running up.  We're already seeing the leading edge of the social security wave.  On October 2, USA Today printed "Social Security recipients up by 19%," which opened:

WASHINGTON - The number of retired workers who began collecting Social Security benefits jumped by a record 19% in the 2009 fiscal year that ended Wednesday as aging Baby Boomers and the unemployed chose to retire early.

"There are just not enough jobs for older people," says Richard Johnson, senior fellow at the non-partisan Urban Institute.  "They have no choice but to go on Social Security."

Mr. Johnson neglected to mention the fact that there aren't enough jobs for the younger people who ordinarily pay into Social Security either.

The number of disabled workers receiving first-time benefits also soared to nearly 1 million, an increase of 100,000 over the previous year, according to Social Security Administration records.

Those two factors are putting new pressure on Social Security's finances.  The program paid out $6 billion more in August than it took in.  It's projected to run in the red for the next two years before returning to a surplus in 2012.

The assumption that Social Security will be back in surplus in 2012 is based on the Obama Administration's optimistic estimates of the number of jobs that will be created during the recovery, already long since proven utterly wrong.  If more old people who'd like to work can't find jobs, Social Security payments will increase.  If young people can't find jobs, their payments into the Social Security system won't happen.

We at Scragged believe that, having gone into deficit, Social Security will never again show a positive balance unless the government raises taxes a great deal, raises the retirement age, or both.

What has Social Security to do with credit cards?  Having credit card debt cut off is forcing individuals to make drastic reductions in their life styles.  Social Security, other government pensions, health care, and Mr. Obama's monster deficits are running up our national debt.  What will happen when our debt, as a nation, is cut off?

When the Music Stops

Ms. King was able to enjoy living beyond her income only as long as the credit card companies were willing to extend her credit.  Although she professes regret now, saying that she was "stupid" to spend more than she made, we'd wager vast sums that she'd still be spending in the same old way if the card companies hadn't abruptly pulled the plug.

Similarly, we see Mr. Obama swearing that he'll cut the deficit and pay back all the borrowing real soon now, maybe, starting in 2015, or perhaps later after he's safely out of office.  We also see him browbeating the Congressional Budget Office, which is supposed to provide honest estimates of the costs of proposed government programs, into saying that his health plan won't increase the deficit.

As with Ms. King, we don't believe that our politicians will cut spending to live within our national income unless the nations that have been lending us money simply stop buying our Treasury bills.  As with Ms. King, it'll take a massive cut-off from the nations to whom we owe so much money to get us to mend our ways.

As with Ms. King, the reckoning will be painful - the more so because, unlike her, America can print its own money and keep the music playing until inflation destroys the economy beyond repair.  Ms. King said, "I had dreams.  Now I'm just paying off the past."

In the past, Americans had dreams.  Are we going to let irresponsible politicians destroy the American dream so that all we can do is pay off the past, or not even that?  Looks like it.