The word “inequality” is much in vogue these days. We hear almost
daily about the inequality of wealth, income and wages between the
richest top 2 or 3 percent of people and the majority of the country’s
wage earners. But not much attention is given and not many marches and other protests are addressing the huge inequalities between creditors and debtors.
A woman protests against student debt. (Photo: Metrix X / cc via Flickr)
Of course the aforementioned inequalities, especially of wages and
income, worsen the plight of individual debtors. One more distinction
needs to be made – that between corporate debtors who receive many
favored legal entitlements (even in bankruptcy) and individual debtors
who are slammed and harassed by debt collectors.
Start with the Federal Reserve’s low-interest policy of the last five
years with no end in sight. Savers who used to get interest of 4 to 5
percent from their bank or money market now get, if they are lucky, ¼ of
one percent on their savings. This Fed policy is supposed to stimulate
the economy but doesn’t work very well if there is not enough consumer
demand in a recession to attract new investment. Meanwhile, the hundreds
of billions of dollars held by small, middle to low income savers are
generating no interest to help pay their living expenses.
The situation is bad and getting worse. These savers are being turned
into “lockbox customers” in peril of having to actually pay the banks
to hold their money. The Financial Times reports that “leading US banks
have warned that they could start charging companies and consumers for
deposits” if the Federal Reserve cuts interest rates further.
Why don’t all those bellowing Congressional deregulators of health
and safety standards ever object, except for the pure Ron Paul
libertarians, to the overreaching Federal Reserve, the biggest market
regulator of them all?
Look at how the U.S. government has treated students borrowing for
their education. When the government was not guaranteeing the gouging
interest rates and fine-print traps of Sallie Mae and other corporate
lenders that still have the iron collar around millions of college
graduates, Uncle Sam was directly making money from students with
interest rates around 6 percent. Other western nations offer
tuition-free higher education as a great investment for their societies.
Skyrocketing student loans now exceed credit card loans outstanding –
$1.2 trillion in student loans compared to $1 trillion in credit card
loans. With her proposed “Bank on Students Loan Fairness Act,” Senator
Elizabeth Warren wants to reduce the student interest rate to the same
rate paid by large banks borrowing from the Federal Reserve Bank, less
than one percent.
It is stunning how shortsighted this policy of gouging student
borrowers is for the health of the economy. Their loan burden after
graduation is such that they are less able to buy homes and cars in
their twenties and thirties.
In his fine new book Debtors’ Prison, Robert Kuttner recounts the
history of debt, including the centuries when under Anglo-American law
debtors were imprisoned or executed. He also describes how large
corporate debtors today get bailed out or go through bankruptcy
proceedings that save the company under a sweetheart rebirth process,
complete with allowing executive compensations past and present.
The individual debtors, however, are driven deeper into debt with
fiendishly high interest rates (as high as 30% on unpaid credit card
balances to over 400% on rolled over payday loans and rent-to-own
rackets). Then there are the hundreds of different fees, penalties and
costly fine-print impositions that ravage consumer borrowers.
The profits from the credit industry were illustrated this week by
MasterCard’s announcement. Its stock is up twentyfold to nearly $800 per
share since it went public in 2006. Its profits are enormous, its
dividends are surging, stock buybacks robust and there is no end in
sight for its upward spiral. For a supposedly staid banking function,
MasterCard acts like Apple.
The sheer complexity of borrowing, paying, and getting some so-called
relief or refinancing camouflages its own kind of costly exploitation.
If the debtors object, particularly in a persistent manner, over such
obvious greed, their credit scores – the new serfdom – can go down and
put more burdens on their pocketbooks and future livelihood.
A split U.S. Supreme Court endorsed the compulsory arbitration clause
in these fine-print contracts that attaches more shackles. A report by
Public Justice (“Wake Up!” can be seen here) found compulsory
arbitration allowed predatory lenders to violate federal and state laws
that protect consumers and blocked vulnerable elderly patients who had
been abused in nursing homes from adequate access to the courts.
Rays of help are coming from the enforcement of the Credit Card
Accountability, Responsibility and Disclosure Act of 2009 by the young
Consumer Financial Protection Bureau (CFPB). Over-limit fees and
repricing actions are mostly eliminated and the dollar amount of late
fees is down. Bait-and-switch to higher pricing once the borrower has
signed on the dotted line has been diminished.
In its latest report on the law (The CARD Act Report can be seen
here), the CFPB recognizes other areas that “may warrant further
scrutiny.” These include “add-on products” to credit card users, “fee
harvester cards,” “deferred interest products,” and other problems
stemming from the relentless ability of corporate lawyers to game and
obfuscate the regulatory process and escape prohibitions with new
Credit unions, with their ninety million members who are allegedly
the owners, should be taking the aggressive lead in denouncing bad
practices and thereby bringing even more consumer cooperators into their
organizations. Less imitation of commercial banks and more dedication
to cooperative service principles should be what members demand from
this potentially large reform institution in our country.
© 2013 Ralph Nader
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