I don’t know how to properly balance mercy and justice. I know that it is good to spare others the full consequences of their actions; we do this for our children on a daily basis. And I also know that it is good to suffer the consequences of our actions, so that we’ll learn to act prudently and to be considerate to others. But if there is an exactly right line that divides too harsh from too soft, I never know where it is. And it gets even harder when trying to decide how much one should suffer for an action which was taken because of the unjust actions of others.
As the current economic crisis unfolds, I worry that the conservative distain for people who have gotten themselves into dire economic straits is verging on social Darwinism. On one side of the scales we have foolishness, gullibility, ignorance, and a touch of greed, on the other we have unimaginably punitive financial obligations. We assume that the scales balance because, after all, ignorance and gullibility and foolishness and greed are simply no excuse. But I think we need to remember that it is we ourselves that assign the relative weights to these things so that the scales balance, not some biblical standard or some cosmic law. Folks in other times and places have assigned the weights quite differently.
I spend a lot of time thinking about the just consequences for exhibiting weakness, and the just consequences for preying on weakness, and whether consequences for the weak should be tempered because of the strength of the temptation. I don’t have any answers yet, but I have a growing appreciation for just how irresistable the economic forces are that thrive when ordinary people stumble, and only when they stumble.
In a recent column, Joe Nocera reprints an email from a bank executive who has become disgusted at the lending practices of the past ten years. (All emphasis added.)
I received a catalog today from Casual Living and in big bold print on the front page, it said “BUY NOW, PAY NOTHING”. Then in significantly smaller print underneath, it said, (until April). That mantra has been sung throughout the credit markets over the last 10 years. The banks waive a carrot in front of the consumer and reel them in and encourage them to go deeper and deeper into debt. They do this by prescreening customers through credit reporting agencies, mailing offers to apply, and to transfer balances at teaser rates or zero percent financing. They base it on credit score and not on capacity to repay. A good credit score does not equate to the ability to repay debt.
It is important to remember that last sentence as you think through the responsibilities of the various parties involved. The executive goes on:
Over my career, I have seen thousands of consumers that have credit card lines in excess of their annual salaries. Some are sinking under their burden. Some have been fiscally responsible and have minimal amounts outstanding. My 21-year-old daughter, who’s in college, gets pre-approved offers all the time. She has no ability to repay debt, yet the offers flow in just the same. We all know how these lines are accumulated. The banks, in their infinite stupidity, keep upping credit lines because the customer pays the minimum payments on time. My daughter’s credit line started at $1,000 and has been increased over the last two years to $4,400. She has no increased earnings to support this. But the banks do it without asking. And without being asked. The banks reel in the consumer, charge interest rates higher than those charged by the mob, increase lines without the consumer asking and without their consent, and lure them into overextending. And we can count on the banks to act surprised when they aren’t paid back. Shame on them.
Out of curiosity, I totaled up our own credit limit. We have four credit cards that we keep for convenience. In 1989 (!) we got our first card, from Discover. Six or seven years ago we got a second Discover card to help us keep business and personal expenses separate (it didn’t help, and now we only use one of them). A couple of years ago Amazon was offering $25 or so to anyone who would sign up for their Visa card, so we did that, using it for Amazon buys plus other occasional purchases where Discover isn’t taken. And then Kroger offered a good cash gift when you took out one of their new MasterCards, so we got one of those (but stopped using it when we began doing the bulk of our grocery shopping at Wal-Mart.)
So, four cards, three of them lightly used, none requiring any stringent review of our finances. Credit limits?
- Discover 1: $18,000
- Discover 2: $13,500
- Amazon Visa: $8,300
- Kroger MasterCard: $9,000
Total credit limit: $48,800. Available at a moment’s notice, offered to us by people who have no clear idea of our current financial situation. Which I guarantee you doesn’t deserve even one-tenth as much unsecured credit.
How is it that our credit limit is so far out of line with our ability to repay?
As a banker, let me describe what we do wrong when we accept and review an application for a credit card. First, we don’t verify income. The first ‘C’ of credit: Capacity to repay, is completely ignored by the banks, just as it was in when they approved subprime mortgages. Then we ask for “household income” — as if other parties in the household could be held responsible for that debt. They cannot. And since we don’t ask for any proof of income, the customer can throw out any number they think will work for them. Then we ask if they rent or own and how much they pay. If their name is not on the mortgage, they can state zero. If they pay $1,000 in rent, they can say $500. (Years ago we asked for a copy of the lease to verify this number.) And finally, we don’t ask how much of a credit line the consumer is looking for. The banker can’t even put that amount into the system. There isn’t any place on the application for that information. We simply put unverified information into a mindless computer and the computer gets the person’s credit score and grants them the biggest line that score and income (ha!) qualifies for.
I recently had a client apply for a credit card. She is a homemaker, with no personal income. The house she lives in is in her husband’s name. She would have asked for a $3,000 credit line, just to pay miscellaneous expenses and to establish some credit on her own. So the computer is told that her household income is $150,000; her mortgage/rent payment is zero. The fact is that her husband’s mortgage payment is $7,000 a month (which he got with a no income verification loan). She had a good credit score, but limited credit since she has only lived in this country for the last three years. The system gave her an approval for a $26,000 line of credit!
I understand that all this is legal. And I understand that someone who falls prey to the temptations being pressed on them has made a mistake and should rightly suffer some consequences. But are the consequences in line with the mistake?
More than once while reading about yet another person who took a mortgage they obviously could never repay, the reason given was, “I figured that they wouldn’t have given me the loan if I couldn’t be expected to repay it.” Is that an unreasonable assumption?