It seems like pretty much everybody – homeowners, students, those who are ill and without health insurance, and, of course, credit card holders – is up to their neck in debt that can never be repaid. 77% of US households are seriously indebted and one in seven Americans has been pursued by debt collectors. The major banks are bigger and more profitable than before the 2008 crash, and legislators are all but powerless to bring them to heel.
Andrew Ross, the author of Creditocracy (excerpted below), contends that we are in the cruel grip of a creditocracy – where the finance industry commandeers our elected governments and where the citizenry have to take out loans to meet their basic needs. The implications of mass indebtedness for any democracy are profound, and history shows that whenever a creditor class becomes as powerful as Wall Street, the result has been debt bondage for the bulk of the population.
Following in the ancient tradition of the jubilee, activists have had some success in repudiating the debts of developing countries. The time is ripe, Ross argues, for a debtors’ movement to use the same kinds of moral and legal arguments to bring relief to household debtors in the North. After examining the varieties of lending that have contributed to the crisis, Ross suggests ways of lifting the burden of illegitimate debts from our backs. Just as important, Creditocracy outlines the kind of alternative economy we need to replace a predatory debt-money system that only benefits the 1%.
Credit cards: Why the banks want us to be "revolvers" rather than "deadbeats"
[Let's] consider the technique of revolving credit, pioneered in the 1960s with the customer accounts of department stores, adopted thereafter by issuers of credit cards, and now among the most profitable vehicles of consumer lending. Under the terms of revolving credit, users appear to be in control of their own borrowing, and so they choose what they repay on a monthly basis. Credit managers, relying on judgments of “character,” no longer vet borrowers or decide on their repayment schedule. They still set credit limits, but are all too happy to mail us a new pre-approved card when we max out (a billion and a half cards are in use in the U.S., almost five for every person). The mental trap set for revolvers is so sweet that, for the most part, we are not aware that when we use plastic for purchases or other payments we are, theoretically, borrowing money from the banks. On the one hand, payback morality demands that we try to make good on the repayments, and also that we take responsibility for the underlying behavior that triggers our failure to make minimum payments. On the other hand, the last thing that issuing banks want to see is their customers clearing their Visa and MasterCard balances at the end of each month. Bankers’ profits depend on the continuous flow of merchant fees and late payment penalties in order to extend the debt indefinitely, and, as users increasingly employ their credit cards to service student, medical, and housing debts, that unbroken revenue stream is a sure thing. With APRs currently around 15%, credit card issuers are collecting $2277 annually from the average debtor (who owes $15,185) in finance charges and penalty fees. This transfer of wealth is a consequence of debtors’ desperation, yet it proceeds in an automatic manner, and behaves as if it were a form of tax collection.
Even the leeway given to users is an illusory choice. As the responsibility for paying for social needs like education, shelter, and healthcare falls more and more on individuals, the private debt-financing of those basic goods is unavoidable and all but mandatory. The state’s withdrawal from its obligation to make their provision affordable means that the revolving credit card has become the operational lifeline for individuals or families struggling to keep their heads above the water. They may want, or intend, to pay the monthly balance but they usually fail to make ends meet. In the banking industry, these “revolvers” in particular – numbering more than 60% of users – are the commercial sweet spot. They are also the ideal citizens of a creditocracy. By contrast, those who can afford to pay off the balances are known as “deadbeats,” who shirk their duties because they get credit for free. There are other market segments, of course, but by far the most sought-out customers are the long term revolvers, as opposed to those who used to be favored because they combined “good character” with the prospect of future financial stability. Today, borrowers who diligently repay in full and have good credit scores are less desirable, though they are effectively being subsidized by the revolvers. To fully thrive, a creditocracy needs a precariat that lacks the wherewithal to make good on its full promissory obligations.
This reshuffling of the merits attached to citizenly conduct is quite telling. Indeed, in the lending business, deadbeat was a label that used to be reserved for defaulters whose assets were repossessed. In a society that prized productivity, the promotional reward for model citizens with a strong work ethic was that they would clearly see, even if they did not always achieve, a thrift-driven pathway to upward mobility. By contrast, a society in thrall to monopoly rents tends to value the chancer, skilled in small-time debt arbitrage, who juggles his or her credit options, consolidates loans, or borrows more to keep the wolf from the door. If these debtors are unbanked, they may be cycling through payday loans and pawnshop credit to make the rent on time. The more creditworthy are groomed to be revolvers in their own right, indefinitely rolling over their debts and their employment options in order to stave off bankruptcy. The masters of these dodgy arts are the professional arbitrage traders at the hedge funds and private equity firms, strategizing with the accounts (of other peoples’ money) at their disposal to steal a march on the markets through dicey wagers and other speculative plays.
Nor is there all that much free will attached to these newly ascendant roles. Credit card purchases yield detailed records of our daily life patterns and these are mined and analyzed to assess and further shape our data profiles as debtor-citizens. Again, the ideal is to prolong the duration of our payments and to cultivate us as lifelong debtors. After all, if we die or actually succeed in ever paying down the principal, we are no longer useful. Not surprisingly, then, the burden of household debt is shifting toward the elderly, and even to the debt-abhorrent generation with family memories of the Great Depression. In the postwar model of life-cycle lending, it was more or less assumed that we would earn the right, in our senior years, to live debt-free. That is no longer the case. On the face of it, overall U.S. household debt has decreased in the years since the 2008 financial crash – debt service, which reached more than 14% of after-tax income by the end of 2007, had fallen to 10.5% by April 2013. But that decrease was largely the result of defaults and not repayment, as banks have written off seriously delinquent debts. Moreover, liability has tilted disproportionately toward seniors, whose debts have increased over that same period. Despite their frugal tendencies, many now have little alternative but to co-sign their children and grandchildren’s loans, especially the student loans. According to the Federal Reserve Bank of New York, 2.2 million Americans aged 60 or older owed $43 billion in federal and private student loans at the end of the first quarter, up from $15 billion in 2007.
Our relationship to revolving credit is often pathologized as a form of addiction, providing “debt porn” as content for reality TV-style entertainment. Some users go to extreme lengths to alleviate this condition in the understanding that it is primarily self-inflicted, and symptomatic of a deep character flaw. There is no personal malady here, however, and least of all one that can be “cured” by getting rid of the plastic. In fact, the new social contract encourages us all to behave exactly like revolvers. Flexile overspending on a lifestyle that is always beyond our reach is a preferred mode of consumer conduct, and one that is actively courted and nurtured by the banking industry. The postwar contract was a pact between government, capital, and labor aimed at sustaining wages and corporate profits alike. Consumer credit was loaned on the basis of income growth in the future. Under the neoliberal contract, income is no longer a given, the government performs its guarantor role to the banks alone, and permanent debt is the only future certainty. The late payers who are weaned so carefully on revolving credit are more like elective role models than consumption junkies who might kick their habit if they only developed the will and the fortitude to do so.
The above is an excerpt of the book Creditocracy, published by Or Books.