Humor: From The New Yorker

Continuing Mortgage Woes

The stock market may be leveling out for now, but as the New York Times reports today real estate prices continue to plummet. Now there are new concerns about mortgage backers Fannie Mae and Freddie Mac. These corporations were created by Congress but are privately owned, and in recent months they have been providing some stability to the shaky mortgage market. Now there are new concerns that Fannie and Freddie do not have enough cash on hand to secure their investments and have been using questionable accounting practices in an effort to satisfy shareholders.

Because Fannie Mae and Freddie Mac are independent of the government, no taxpayer funds are currently obligated in any collapse of these institutions, but given their importance in the mortgage market, it is unlikely the Fed would just stand by. As Charles Duhigg, author of the Times article, put it: “ if Fannie or Freddie fail, taxpayers would probably have to bail them out at a staggering cost.” That phrase “staggering cost” is more than a bit worrisome. The graphic accompanying the Times article (see below) shows that Fannie Mae’s liabilities alone include $2.1 trillion dollars in mortgage guarantees and another $800 billion in outstanding debt. Freddie Mac holdings are similar. Yikes!

So, we are not out of the woods yet, and other shoes may drop before the subprime mess bottoms out.

Today in Krugman

Today Paul Krugman sums up the current state of the financial markets in a column called “Success Breeds Failure.” He attributes the recent market panic to the introduction of new financial instruments by institutions that escaped regulation because they managed to avoid being banks. Operating in a new frontier, these institutions took great risks, and when things began to come apart at Bear Stearns, Fed Chairman Ben Bernanke was forced to act quickly.

Krugman praises Bernanke’s response to Bear Stearns and credits him for what appears to be the current stabilization of the market. But Krugman also worries that the motivation for much needed regulatory oversight has ebbed away with the crisis and that, as a result, the next debacle will be much worse. Krugman is undoubtedly correct. We seem to live in a political-financial world that responds only to today’s financial drama, and the financial services industry, believing that everything has worked out OK, is back to vigorously fighting the threat of regulation.

Of course, stabilizing the market is only one part of our current financial problem. Those who are not in the investment class are still losing their homes and jobs in great numbers. Where is the relief for them?

Why is the Fed Attacking Credit Cards Now?

This morning the Washington Post reports that the Federal Reserve, which has previously been reluctant to regulate the credit card industry, has announced plans to eliminate many abuses, such as universal default. Credit card bills have been introduced in both houses of congress and hearings were recently conducted in the House of Representatives. So now federal-level attacks on the industry are coming from three directions.

Why is the Fed taking action (or promising to take action) now? First, consumer anger about credit cards has been building for some time, and the subprime lending crisis has drawn attention to the problem of predatory lending generally. Second, I suspect the Fed is also responding to criticisms that its recent bailout of Bear Stearns was a big, expensive move that served the upper end of the economy—Wall Street investors—and did little for consumers who happen to be really hurting as real estate values plummet, gas prices skyrocket, and a recession looms. So here was an issue that has suddenly become rather uncontroversial, and the promise of action now might polish the Fed’s image with consumers. They might have waited to make this announcement until the end of the year, when the details of the regulations “could be” finalized, but the Fed needs some image enhancement now.

Rep. Carolyn Mahoney (D-NY) expresses considerable skepticism about the seriousness of the Fed’s resolve. She has recently introduced a Credit Card Holders’ Bill of Rights in the House, and she is undoubtedly concerned that the Fed’s actions will take votes away from her bill. Worst case scenario: regulatory bills do not pass through congress, and the Fed’s actions end up being an inadequate response to the problem. A reasonable concern.

What is the least surprising aspect of this story? You guessed it, the credit card companies object.

Our Future Financial Selves

Today NPR’s Morning Edition carried an Interesting report on debt (you can find the story and audio here). Economist and Financial Times reporter Tim Harford described credit and saving in terms of our future and present “selves.” Harford said: "Debt is your future self sending you money back in time.“ (Economist Thomas Schelling also uses the symbolic conflict between our current and future selves to describe problems of self-control.) Harford gets at the crux of the issue when he goes on to say: ”So the question is, are you and your future self both happy with the deal?“

Only your present self is in the position to make decisions and take actions, and yet the choices you make in the present often obligate your future self. So what would we say about all those financial decisions looking back on them with the wisdom of the future? Harford also described saving as your present self sending money to your future self, and argued that it is possible to save too much (when you have little income). Unfortunately, not being able to save enough, rather than too much, is the problem for far too many Americans. But Harford is exactly right when he says the challenge is to find the right balance between the needs of our present and future selves—a particularly difficult challenge in a world as uncertain as this one.

Something Happened in the 1970s Redux. The graphic below, which was posted on the NPR website to accompany this story, shows two interesting things. First, as I discussed in an earlier blog entry, the real uptick in consumer debt begins in the mid-1970s. This would be even easier to see if the graph extended farther to the left, perhaps beginning in 1950. Second, because the graph superimposes periods of economic recession, it shows that consumer debt often increases even in bad economic times. This is particularly obvious in the most recent recession of the early 2000s, but it can also be seen in the period of 1981-83. We have a troubled relationship with debt that transcends the current economic environment.

Indian Debt Collectors & More

Today’s New York Times has an article by Heather Timmons about debt collection agencies using phone banks in India to make calls to delinquent credit card customers in the US. Delinquencies were up to 4.5 percent of accounts in the fourth quarter of 2007, from 3.5 two years earlier. Foreign collections calling represents a small fraction of the overall collection business, but bill chasing is just the latest industry to be outsourced to India. These are boom times for the financial misery business, and the influx of well-paying call center jobs has created a group of Indian workers who, as Timmons writes, “are amassing some of the status symbols that probably got their clients into trouble in the first place— new scooters, iPods, Swatch watches and exotic vacations.”

The movement of collections jobs to India is news, but the article includes a couple of other points that I find much more interesting:

1. Collections agents are targeting customers’ economic stimulus package rebate checks. On the one hand, this sounds like a ruthless collections technique. You know the debtor is expecting a windfall, so you ask him or her to turn that money into a payment on a credit card. On the other hand, this is precisely what these people should do with their rebate checks. The stimulus package is supposed to be a bit of fuel for the consumer economy, given out in the hope that people will continue spending. But spending is what got delinquent credit card customers into trouble, so they would be much better off paying down debt. This won’t help the economy, but debt-ridden consumers have already done more than they can afford for the sake of the economy. It is time for them to take better care of their personal economies. Collections callers are a hated group who often employ abusive and unethical techniques to track down and intimidate their prey, but here is an unusual case where the interests of both the collection agency and customer are in concert.


2. According to Timmons’ article, industry analysts are seeing a new trend: “People are walking away from their homes and hanging on to their credit cards, because that is their lifeline.” If this is a valid observation—and I think it is—it shows the centrality of credit cards in our lives, a point I made in a recent op-ed, “Our Love-Hate Relationship With Plastic.” I also believe that, unlike the current foreclosure trend, the bankruptcy boom of a few years ago was a renters’ phenomena. Renters have no choice but to give up their credit cards. They are a lower income group who are more likely to be living in relatively inexpensive housing, and their debts are credit cards and other forms of commercial loans. Many of those who are now in trouble with their mortgages may be people whose incomes are not really sufficient to handle home ownership: homeowners who should be renters. But it is interesting to note that, for debtors who have a choice, walking away from the home and mortgage—as difficult as that decision must be—is often more attractive than giving up credit cards.

A final random bit: the novelist Stanley Elkin wrote a wonderful novel or short story about a telephone bill collector, but for the life of me, I can’t remember the title. Will do some more research and report back.

Priceless: Good Debt, Bad Debt

MasterCard has a new version of its Priceless advertising campaign in Condé Nast magazines. This long-running promotion is noteworthy for its attempt to encourage a very different attitude toward borrowing.

Once all lending at interest was taboo. The word usury was applied to any loan that required interest payments, and usury was prohibited by all the world’s great religions. Somewhat ironically it was Calvin and the Puritans who removed much of the stigma associated with lending, and today Islam is the only popular religion still maintaining that “Money does not beget money.”

But even as borrowing and lending began to come out from behind the veil of shame, there was a clear distinction between good and bad borrowing. Adam Smith, the 18th Century Scottish economist and father of classical free market philosophy wrote in his Wealth of Nations:

  The man who borrows to spend will soon be ruined.

Until the early 20th Century, there was a clear distinction between “productive” and “consumptive” lending. It was considered acceptable to borrow money to purchase durable goods of lasting value or to invest in something that would bring future income, but borrowing money merely to spend was reckless and immoral.

I suspect that part of this view of good and bad debt stems from a wise assessment of human nature. Most consumptive acts pass quickly—long before the debt is likely to be repaid. In contrast the durable good or the income derived from investment lasts longer and stands as a reminder of the loan. The homeowner who enjoys living in her house each day pays her mortgage to sustain that enjoyment. Similarly, each time the college graduate gets paid, he has a reminder of the value derived from his student loans. In contrast, meals bought with a credit card are forgotten long before the bill arrives.

MasterCard’s ongoing Priceless campaign has sought to change our attitudes about borrowing in two ways. First, it promotes the normality of indulging in luxuries with images of people happily enjoying extravagances. These are not things we need; these are crazy imaginings of desire. The current Priceless Search campaign has people searching for their own priceless indulgences. The magazines include a heavy paper envelope stuck between the pages that contains a card—essentially a lottery ticket—that might mean you have won a wonderful, priceless indulgence. The prize offered in my New Yorker was a commissioned portrait of me painted by Julian Schnabel. My card said “Keep Searching” and told me that I had not won. I suppose I should go out and buy another magazine.

Perhaps most importantly, the Priceless campaign promotes the view that it is acceptable—even admirable—to use credit to pay for fleeting experiences. Taking your kids on an expensive outing is “priceless.” The other prizes offered in the Priceless Search campaign are a multi-continent culinary tour with noted chef David Bouley and a globe-trotting trip for two to explore the seven wonders of the world. Although these are contest prizes, the message is obvious. Indulgence is an acceptable way to use credit. Peek experiences are worthy goals and justifiable objects of indebtedness. Unfortunately, for many Americans Adam Smith’s words are more instructive. Borrowing to spend is—and has been—the road to ruin.