Five Financial Truths Defy Wall Street Madness: John F. Wasik
Mon, Sep 22, 2008
Sept. 22 (Bloomberg) -- The duality of human nature embraces the idea of debt. It delights when it helps us buy homes, investments, entertainment appliances and vacation condos. It's a demon when it consumes us.
American International Group Inc. prompted a federal takeover because of debt's dark side. Lehman Brothers Holdings Inc., which filed for bankruptcy last week, was immolated by it. Other firms will be torched by it. There's no reason you should.
The institutional-debt firestorm and credit crisis has raged through world financial markets with a vengeance and no one knows when or how it will end. While the U.S. Treasury and legislators have announced a temporary plan to insure money-market funds and buy mortgage securities, it's unclear whether this will curb Wall Street's fears. Has consumer debt become the latest flash point?
As the economic reckoning continues, some 10 million Americans have filed for bankruptcy since 2000. One in seven families is dealing with a debt collector. In the past two years, more than 3.5 million have received foreclosure notices.
Most Americans are tapped out after an orgy of borrowing during the Age of Froth, a time in which credit was handed out to anyone with hemoglobin.
The bacchanal was enormous: Some $1.2 trillion in home equity was borrowed against from 2002 to 2007, says the public- policy group Demos in New York. That debt was created to largely cover other obligations such as credit-card bills, which total almost $1 trillion or $17,000 per household for those carrying a balance, according to the Federal Reserve Board.
Credit-Card Rules
The debt-frenzied financial-services industry made it easier for almost everyone to get into debt while making it more difficult and expensive to get out of it.
Ordinary borrowers were singed. While housing markets receded, foreclosures rose and the general economy weakened last year, individual credit-card holders knew the deck was stacked against them and started complaining.
They filed more than 11,000 complaints with the U.S. Comptroller of the Currency, the obscure regulator of federally chartered banks.
What made all those people contact a watchdog most Americans don't even know exists? They felt abused by what Harvard Law School Professor Elizabeth Warren calls ``a dangerous thicket of tricks and traps.''
Not only can too much leverage cause trouble, if financial intermediaries get greedy -- as evidenced by onerous credit-card charges -- it locks debtors into an unrelenting, vicious cycle of increasing repayment charges and ultimately increases defaults.
Debt became a trap for millions. This is a truth that the financial industry doesn't like to advertise.
Source: http://www.bloomberg.com/ |
