Joint Select Committee on Deficit Reduction (Deficit
"Supercommittee") USA
The Joint Select Committee on Deficit Reduction
is a bipartisan, 12-member panel created by
the deal struck by President Obama and Congressional leaders
in late July 2011 to allow the government to raise the federal debt ceiling.
January 31, 2012 The New York Times By ROBERT PEAR and JOHN H. CUSHMAN Jr.
WASHINGTON — The United States economy will remain sluggish
for the next few years, with unemployment high, but budget deficits are starting
to come down, the Congressional Budget Office said on Tuesday in its latest
formal outlook.
The deficit in the current fiscal year is expected to be $1.1 trillion, the
budget office said, the fourth year in which it would exceed $1 trillion.
But it just might be the last such year, at least for a while. Unless Congress
passes new legislation changing the course on spending or taxation — changes
that are a distinct possibility, but no basis for a forecast — projected
deficits would “drop markedly” starting next year and for a decade to come.
That is because current laws would allow the Bush-era tax cuts to expire, the
alternative minimum tax to reach ever more taxpayers and federal spending to
decline modestly under newly imposed spending caps, at least until the aging of
the population and rising costs for health care tilt the balance of spending
upward again.
If Congress leaves current law unchanged, the report said, the deficit will fall
to $585 billion in 2013 and $345 billion in 2014. In other words, doing nothing
might be the most straightforward way for Congress to slash the deficit, a goal
espoused by lawmakers in both parties.
However, the budget office said, such policy — implying higher taxes and
constraints on spending — would crimp economic growth so that the unemployment
rate, now 8.5 percent, would climb to 8.9 percent in the last quarter of this
year and 9.2 percent in the final quarter of 2013.
Representative Eric Cantor of Virginia, the House Republican leader, called the
deficit and unemployment news reason enough for a course change.
“We know that President Obama’s policies have failed to produce the economic
growth needed to pay down these massive deficits that are creating uncertainty,
preventing economic recovery, and harming job creation,” he said. “When
something doesn’t work, you change it. Let’s try something new.”
The report’s economic outlook was a bit gloomier than a year ago both because
the tax increases and spending cuts required under current law would dampen
growth — and because economic troubles abroad may spill over to the U.S.
economy.Douglas W. Elmendorf, director of the Congressional Budget Office, said
that the fiscal tightening “will hold back economic growth” next year, but could
add to the strength of the economy in the long run.
Assuming no change in current law, the budget office expects the economy to grow
2 percent this year and just 1.1 percent in 2013 (measured by the increase in
the gross domestic product, after adjusting for inflation).
As a percentage of gross domestic product, this year’s deficit of $1.1 trillion,
compared with last year’s $1.3 trillion shortfall, “will be 7.0 percent, which
is nearly 2 percentage points below the deficit recorded last year but still
higher than any deficit between 1947 and 2008,” the annual report said. “Over
the next few years, projected deficits in C.B.O.’s baseline drop markedly,
averaging 1.5 percent of G.D.P. over the 2013-2022 period.”
In the next few years, the deficit would still drop below $1 trillion and
decline as a percentage of GDP even if Congress extended the Bush tax cuts and
reversed other budget-balancing policies, according to the office’s alternative
scenario, which uses assumptions other than the status quo. But the improvements
would be less pronounced and would not endure as long.
The improving but still tepid performance of its baseline projection is
reflected, too, in the share of the gross domestic product taken up by the
national debt.
“With deficits small relative to the size of the economy, debt held by the
public drops — from about 75 percent of G.D.P. in 2013 to 62 percent in 2022,
which is still higher than in any year between 1952 and 2009.”
Some say that this year — or perhaps next year, after the election — changes are
virtually certain to occur, one way or another.
Even under current law, the budget office said, the government will need to
continue borrowing to fill the gap between spending and revenues, and the total
federal debt — the accumulated total of such borrowing — will rise to $21.6
trillion in 2022, from its current level of $15.2 trillion. And net interest
payments on the debt would nearly triple, to $624 billion, the report said.
The budget office said it would cost $5.4 trillion to continue major tax cuts
enacted in 2001 and 2003 under President George W. Bush and scheduled to expire
at the end of this year. President Obama and some Democrats want to continue
many of those cuts for individuals with incomes under $200,000 a year and
couples with incomes under $250,000 a year.
Many lawmakers say Congress must block impending cuts in Medicare payments to
doctors, who face a 27 percent reduction in fees in March. Just to maintain
Medicare payment rates at current levels, without an increase, would cost $372
billion over 10 years, compared with spending expected under current law, the
budget office said.
The number of people receiving Social Security disability benefits has been
increasing in recent years, and the budget office predicts that the disability
trust fund will run out of money in 2016.
In addition, the budget office estimates that Medicare’s hospital insurance
trust fund will be exhausted in 2022, two years earlier than the Obama
administration predicted last May. Congress is considering a variety of steps to
slow the growth of Medicare spending, but most provoke sharp disagreement
between Republicans and Democrats.
January 26,
2012
The New York Times
By ROBERT PEAR
WASHINGTON
— The Senate voted on Thursday to allow a further increase in the federal debt
limit, permitting President Obama to borrow $1.2 trillion more to operate a
government that spent about 55 percent more than it collected in revenue last
year.
The 52-to-44 vote generally followed party lines, with Democrats supporting the
increase in borrowing authority and Republicans opposed.
In the House last week, Republicans passed a “resolution of disapproval” to stop
the increase in the debt limit. But the Senate refused on Thursday to take up
that measure.
The upshot is that the debt limit will rise immediately to $16.4 trillion, from
the current ceiling of $15.2 trillion.
House Republicans, led by Speaker John A. Boehner, boast that they have changed
the conversation in Washington so that lawmakers focus on how to cut spending.
But Senator Tom Coburn, Republican of Oklahoma, complained that the Senate was
allowing the debt limit to rise in a perfunctory way, with little debate.
“Little has changed in Washington in the last five years,” Mr. Coburn said.
“We’ve argued, debated and lamented on how to rein in the federal government’s
costs and out-of-control spending. All the time that was going on, we were on a
spending binge, spending money we do not have on things we do not need. Even
though we knew we had to borrow more money, Congress has done nothing to avoid
raising the debt limit further. Nothing.”
The 2009 economic stimulus law set the debt limit at $12.1 trillion. Congress
increased the limit in December 2009 and February 2010 and again last summer, as
part of a bipartisan budget agreement.
Senator Max Baucus, Democrat of Montana and chairman of the Finance Committee,
defended the new increase in the debt limit, saying it would not authorize
additional spending, but just ensure that the United States could honor past
commitments.
“Increasing the debt limit permits the Treasury Department to pay the bills we
have already incurred,” Mr. Baucus said.
Senator Richard J. Durbin of Illinois, the No. 2 Senate Democrat, said that many
Republicans who voted against the increase in the debt ceiling had also voted in
recent years to spend more on the wars in Iraq and Afghanistan and on domestic
programs.
Mr. Durbin admonished his colleagues: “Don’t vote for the spending if you won’t
vote for the borrowing, because we know now that they are linked together. They
are one and the same.”
In an address to Congress in February 2009, a week after signing the economic
stimulus law, Mr. Obama said he would “cut the deficit in half by the end of my
first term in office.”
Republicans said Thursday that Mr. Obama was far from that goal. The deficit —
$1.3 trillion in each of the last two fiscal years — has declined slightly from
2009, when it totaled $1.4 trillion.
The federal budget deficit is the difference between money spent and money
collected by the government in a single year, while the debt represents amounts
borrowed by the government over many years to fill those gaps.
With the latest increase in the debt limit, Republicans said, the debt will
cross a significant threshold, as it will be roughly the same size as the
economy, measured by the gross domestic product.
About two-thirds of the debt is held by the public in the form of Treasury
bills, notes and bonds. The rest consists mainly of special-issue government
securities held by trust funds for Social Security, Medicare and other programs.
The Treasury still finds that it can borrow at extraordinarily low interest
rates. But Senator Orrin G. Hatch, Republican of Utah, said the United States
should learn from the experiences of European countries that spent beyond their
means.
Blundering
Toward Recession: Beyond the Debt Stalemate
July 15, 2011
The New York Times
“Catastrophic.” “Calamitous.” “Major crisis.” “Self-inflicted wound.” Those are
some of the ways Ben Bernanke, the chairman of the Federal Reserve, has
described the fallout if Congress fails to raise the debt limit by the Aug. 2
deadline.
In Congressional testimony this week, Mr. Bernanke also warned that the Fed
would not be able to fully counter the damage from a default, including the
possibility that spiking interest rates would roil borrowers worldwide and
worsen the federal budget deficit by making it costlier to finance the nation’s
debt.
That’s not all of it. Brinkmanship over the debt limit is only one of many epic
economic policy blunders now in the making. Even if lawmakers raise the debt
limit on time, the economy is weak and getting weaker, as evidenced by slowing
growth and rising unemployment.
Instead of coming up with policies to strengthen the economy, the Republicans
are demanding deep, immediate spending cuts, which would only add to current
weakness. The White House, meanwhile, has suggested cuts should be phased in
slowly and has said that more near-term help would be good for the economy. That
is a better approach. But President Obama has done too little to argue the case,
on Capitol Hill or with the public.
Upfront spending cuts could make sense if the budget deficit were the cause of
the current economic weakness. If it were, interest rates would be rising, not
at generational lows, as the government competed with the private sector. The
real cause is lack of consumer demand in the face of stagnant wages, job
uncertainty and the continuing payback of household debt from the bubble years.
Without strong and steady consumer demand, businesses will not hire, and a
self-sustaining recovery cannot take hold.
In such a situation, government must fill the gap with spending on relief and
recovery measures. Premature spending cuts will only make things worse by
pulling dollars out of a frail economy. Contrary to the claims of Republicans,
and some Democrats, that the nation cannot afford new spending, the government
could, and should, borrow cheaply at today’s low rates in an effort to bolster
demand and, by extension, support jobs.
A place to start would be to extend what little stimulus remains on the books,
including the $57 billion-a-year federal unemployment insurance program and the
$112 billion payroll tax cut for employees. Both are scheduled to expire at the
end of 2011, despite the fact that conditions have deteriorated since they were
enacted last year.
Another crucial step would be to reauthorize the highway trust fund, at least at
existing levels. The fund, which is paid for mainly by the federal gasoline tax,
will allocate $53 billion to states in 2011 for roads and mass transit,
supporting millions of jobs. The House version of the highway bill calls for
deep cuts, and the better Senate version has not garnered enough Republican
support to pass.
It is also past time for lawmakers to move forward with plans for a federal
infrastructure bank to provide seed money for major public works.
In his testimony, Mr. Bernanke emphasized that the deficit was a serious
problem, but not an immediate one. He is right. It can be solved over time, with
spending cuts and tax increases, as the economy recovers.
Recovery, however, requires the creation of millions more jobs, starting now,
than the current economy is capable of generating. It is time for the government
to step up. If it doesn’t, the weakening economy is bound to become even weaker.
Obama
warns of worse crisis if no debt ceiling rise
WASHINGTON | Sun May 15, 2011
9:52am EDT
Reuters
By Jeff Mason
WASHINGTON (Reuters) - President Barack Obama warned Congress that failing to
raise the debt limit could lead to a worse financial crisis and economic
recession than 2008-09 if investors began doubting U.S. credit-worthiness.
In remarks recorded last week and broadcast by CBS News on Sunday, Obama
repeated his stance that Republicans should not link the debt ceiling decision
to spending cuts as part of deficit-reducing measures.
"If investors around the world thought that the full faith and credit of the
United States was not being backed up, if they thought that we might renege on
our IOUs, it could unravel the entire financial system," Obama told a CBS News
town-hall meeting.
"We could have a worse recession than we already had, a worse financial crisis
than we already had."
The White House and congressional Republicans are locked in a debate over the
deficit and the debt ceiling.
The Treasury Department is expected to hit its $14.3 trillion borrowing limit on
Monday, making it unable to access bond markets again.
Republican leaders, who have said they agree the limit must be raised, say they
will not approve a further increase in borrowing authority without steps to keep
debt under control.
A deal may not emerge for several months.
The Treasury Department says it can stave off default until August 2 by drawing
on other sources of money to pay its bills.
Obama said he was committed to deficit reduction but discouraged a link between
that and the debt limit.
"Let's not have the kind of linkage where we're even talking about not raising
the debt ceiling. That's going to get done," he said. "But let's get serious
about deficit reduction."
A report from the think tank Third Way to be released on Monday supports Obama's
warnings. It says the United States could plunge back into recession if inaction
in Washington forced a debt default, with some 640,000 U.S. jobs vanishing,
stocks falling and lending activity tightening.
Vice President Joe Biden is leading talks between the White House and lawmakers
over how to reduce massive U.S. budget deficits and raise the credit limit. He
told reporters on Thursday that progress was being made but it was too early to
be optimistic about a deal.
(Additional
reporting by Andy Sullivan; Editing by Peter Cooney)
At a recent
gathering of House Republicans, lawmakers made it clear that they intend to hold
an increase in the nation’s debt limit hostage to major spending cuts.
Clearly, the Republican aim is to demonstrate their fiscal prudence, as well as
their new political power in the Republican-controlled House. Don’t be fooled.
When it comes to debating the debt limit the facts matter little. It’s all about
posturing.
The debt limit is a cap set by Congress on the amount the nation can legally
borrow. The current limit, $14.3 trillion, will be hit sometime this spring.
Unless Congress raises it before then, the government will have to resort to
temporary tactics, like freeing up money to pay current bills by delaying
payments to federal retirement funds. The longer a standoff endures, the worse
the choices are. For instance, the government might defer other payments, like
tax refunds, as it husbands resources to avoid a default on the public debt.
All that would surely be disruptive and could be disastrous if the nation’s
creditors began to doubt America’s reliability.
The debt limit is a political tool, not a fiscal one. First enacted in 1917, it
was intended to make lawmakers think twice before voting for tax cuts and
spending increases that run up the debt. Unfortunately, it has never worked that
way. Federal debt is high despite the limit because lawmakers repeatedly enter
into expensive and recurring obligations without a plan to pay for them — in
recent years that includes two wars, the George W. Bush-era tax cuts and the
Medicare drug benefit.
As the costs pile up, the debt limit must be increased — not to make room for
new spending, but to raise money to pay for past commitments.
It is, of course, utterly disingenuous to vote for policies that drive up the
debt and then rail against raising the debt limit when the bills come due. It is
akin to piling up purchases on credit and then threatening to bounce the payment
check. But that is what Republicans are saying they will do unless they win deep
cuts in future spending in exchange for a debt-limit increase today. So much for
fiscal prudence.
A better approach would be to pay for legislation when it is enacted, generally
by raising taxes or cutting other spending. The new House leadership has
rejected that approach when it comes to their No. 1 priority: cutting taxes.
They have passed new budget rules that allow taxes to be cut without offsets to
replace the lost revenue. The new rules also forbid raising taxes to pay for
major new spending, like Medicare expansions, requiring instead that any such
spending be offset by cutting other programs. That is a recipe for fiscal
irresponsibility.
House Republican leaders have not said which spending cuts they will demand for
a debt-limit increase. They know that voters don’t want to hear about losing
college aid, environmental safeguards or investor protections. They may try to
call for overall spending caps that would let them take credit for spending
reductions without explaining or defending particular cuts.
What is known is that deep immediate spending cuts would be unwise at a time
when the economy and so many Americans are still struggling. President Obama and
Congressional Democrats need to push back by challenging House Republicans on
the hypocrisy of their new budget rules and by making it clear that playing
games with the debt limit is irresponsible.
January 26,
2011
The New York Times
Filed at 11:58 p.m. EST
By THE ASSOCIATED PRESS
WASHINGTON
(AP) — Far from slowing, the government's deficit spending will surge to a
record $1.5 trillion flood of red ink this year, congressional budget experts
estimated Wednesday, blaming the slow economic recovery and last month's tax-cut
law.
The report was sobering new evidence that it will take more than President
Barack Obama's proposed freeze on some agencies to stem the nation's
extraordinary budget woes. Republicans say they want big budget cuts but so far
are light on specifics.
Wednesday's Congressional Budget Office estimates indicate the government will
have to borrow 40 cents for every dollar it spends this fiscal year, which ends
Sept. 30. Tax revenues are projected to drop to their lowest levels since 1950,
when measured against the size of the economy.
The report, full of nasty news, also says that after decades of Social Security
surpluses, the vast program's costs are no longer covered by payroll taxes.
The budget estimates will add fuel to the already-raging debate over spending
and looming legislation that would allow the government to borrow more money as
the national debt nears the $14.3 trillion cap set by law. Republicans
controlling the House say there's no way they'll raise the limit without
significant budget cuts, starting with a government funding bill that will
advance next month.
Democrats and Republicans agree that stern anti-deficit steps are needed, but
neither Obama nor his resurgent GOP rivals on Capitol Hill are — so far —
willing to put on the table cuts to popular benefit programs such as Medicare,
farm subsidies and Social Security. The need to pass legislation to fund the
government and prevent a first-ever default on U.S. debt obligations seems sure
to drive the two sides into negotiations.
Though the analysis predicts the economy will grow by 3.1 percent this year, it
foresees unemployment remaining above 9 percent.
Dauntingly for Obama, the nonpartisan agency estimates a nationwide jobless rate
of 8.2 percent on Election Day in 2012. That's higher that the rates that
contributed to losses by Presidents Jimmy Carter (7.5 percent) and George H.W.
Bush (7.4 percent). The nation isn't projected to be at full employment —
considered to be a jobless rate of about 5 percent — until 2016.
The latest deficit figures are up from previous estimates because of bipartisan
legislation passed in December that extended George W. Bush-era tax cuts and
unemployment benefits for the long-term jobless and provided a 2 percentage
point Social Security payroll tax cut this year.
That measure added almost $400 billion to this year's deficit, CBO says.
The deficit is on track to beat the record of $1.4 trillion set in 2009. The
budget experts predict the deficit will drop to $1.1 trillion next year, still
very high by historical standards.
Republicans focus on Obama's contributions to the deficit: his $821 billion
economic stimulus plan, boosts for domestic programs and his signature health
care overhaul. Obama points out that he inherited deficits that would have
exceeded $1 trillion a year anyway.
The chilling figures came the day after Obama called for a five-year freeze on
optional spending in domestic agency budgets passed by Congress each year.
Republicans were quick to blame Obama for the rising red ink. Rep. Jeb
Hensarllng of Texas, chairman of the House Republican Conference, said the
report "paints a picture that is more dangerous than most Americans could
anticipate."
"What is our leader in the White House doing about it? Asking Congress to raise
the debt ceiling, proposing new spending and sticking future generations with a
multi-trillion dollar tab," Hensarling said.
Democrat Kent Conrad, chairman of the Senate Budget Committee, pointed to a
problem lawmakers are sure to keep facing:
"When the American people are asked what they want done and to prioritize what
they want, they want the deficits and debt dealt with. But when they are asked
very specifically, will they support changes in Social Security, the polls say
no. Changes in Medicare? The polls say no. Changes in defense spending? The
polls say no."
"I would've liked very much if the president would have spent a bit more time
helping the American people understand how really big this problem is," added
Conrad, D-N.D.
Republicans are calling for deeper cuts for education, housing and the FBI —
among many programs — to return them to the 2008 levels in place before Obama
took office.
But those nondefense programs make up just 12 or so percent of the $3.7 trillion
budget, which means any upcoming deficit reduction package — at least one that
begins to significantly slow the gush of red ink — will require politically
dangerous curbs to popular benefit programs. That includes Social Security,
Medicare, the Medicaid health care program for the poor and disabled, and food
stamps.
Neither Obama nor his GOP rivals on Capitol Hill have yet come forward with
specific proposals for cutting such benefit programs. Successful efforts to curb
the deficit always require active, engaged presidential leadership, but Obama's
unwillingness to thus far take chances has deficit hawks discouraged. Obama will
release his 2012 budget proposal next month.
"The proposals we've seen so far from the president and congressional
Republicans amount to little more than tinkering around the edges," said Concord
Coalition Executive Director Bob Bixby.
"Somebody is going to have to bite the bullet and get this process going," said
Maya MacGuineas of the Committee for a Responsible Federal Budget, a bipartisan
group that advocates fiscal responsibility. "And that somebody has to be the
president."
Obama has steered clear of the recommendations of his deficit commission, which
in December called for difficult moves such as increasing the Social Security
retirement age and reducing future increases in benefits. It also proposed a
15-cents-a-gallon increase in the gasoline tax and eliminating or scaling back
tax breaks — including the child tax credit, mortgage interest deduction and
deduction claimed by employers who provide health insurance — in exchange for
rate cuts on corporate and income taxes.
CBO predicts that the deficit will fall to $551 billion by 2015 — a sustainable
3 percent of the economy — but only if the Bush tax cuts are wiped off the
books. Under its rules, CBO assumes the recently extended cuts in taxes on
income, investment and people inheriting large estates will expire in two years.
If those tax cuts, and numerous others, are extended, the deficit for that year
would be almost three times as large.
Tax revenues, which dropped significantly in 2009 because of the recession, have
stabilized. But revenue growth will continue to be constrained. CBO projects
revenues to be 6 percent higher in 2011 than they were two years ago, which will
not keep pace with the growth in spending.
UK budget deficit reached record £23bn in November
• City expected November budget deficit of less than £17.4bn
• Analysts warn trend points to a deficit of £155bn for the year
Larry Elliott
Economics editor
Guardian.co.uk
Tuesday 21 December 2010
18.20 GMT
This article was published on guardian.co.uk at 18.20 GMT on Tuesday 21 December
2010.
A version appeared on p21 of the Main section section of the Guardian on
Wednesday 22 December 2010.
It was last modified at 00.01 GMT on Wednesday 22 December 2010.
George Osborne received a blow as it emerged that state borrowing soared to
the highest on record for a single month despite the government's austerity
measures to rein in the deficit.
News that higher spending on defence, the NHS and contribution to the European
Union had left Britain in the red by £23.3bn stunned the City, which had been
expecting the early fruits from the chancellor's spending restraint to cut the
deficit from the £17.4bn recorded in November 2009.
Sterling dipped to its lowest level against the US dollar in three months
following the release of the official data amid fears that the coalition would
struggle to meet its targets for reducing a deficit that rose sharply during the
longest and deepest recession Britain has suffered since the interwar period.
Figures from the Office for National Statistics showed that despite robust
economic growth in the second and third quarters of 2010, public borrowing has
shown virtually no improvement on last year. In the first eight months of the
2010-11 financial year, net borrowing stood at £104.4bn, compared with £105.1bn
in the same period of 2009-10.
Analysts said the public finances tended to be volatile from month to month, and
that it was possible that the highest monthly deficit since modern records began
in 1993 was a freak. They added, however, that if the trend seen so far
continued, the deficit was likely to total £155bn by the end of the financial
year, £7bn higher than predicted by the government's fiscal watchdog, the Office
for Budget Responsibility.
Today's borrowing figures were the third disappointing piece of news in the past
week for the government, following the surprise increase in inflation and the
rise in unemployment to more than 2.5m.
The City and academic economists believe growth in the final three months of
2010 is unlikely to match the 0.8% seen in the third quarter, and that activity
will weaken further in early 2010.
Osborne believes that the poor state of the public finances vindicates his
decision to announce the biggest four-year fiscal squeeze since the second world
war. "November's borrowing figures show why the government has had to take
decisive action to take Britain out of the financial danger zone," a Treasury
spokesman said.
David Kern, Chief Economist at the British Chambers of Commerce (BCC), said:
"These figures are much worse than expected and show a significant increase in
the deficit compared with the same month a year ago. Britain's fiscal position
is very serious and it is essential for the government to implement its tough
strategy aimed at stabilising our public finances.
"British business supports these measures and wants to see the government
continuing to focus on spending cuts rather than tax rises. But, in order for
this policy to be successful the austerity measures must be supplemented by a
credible growth strategy so that businesses can drive a lasting recovery."
Michael Derks, chief strategist at FxPro, said: "More than anything, these
figures reinforce just how important fiscal consolidation is, and reiterates how
hard the process can be. The much-vaunted spending restraint that formed such a
critical part of the Chancellor's fiscal austerity has not started, based on
these latest figures. The pound may give the chancellor a couple more months'
leeway on the spending side, but thereafter it will want to see hard evidence
that restraint is actually working."
A breakdown of the ONS figures showed that spending in the first eight months of
the year was 6.8% up on the same period of 2009-10, compared to the 6% growth
projected by the Treasury. "Some departments may have to trim their spending in
the months ahead to stay within planned levels," said Stephen Lewis of Monument
Securities. "There is a risk, as a result, public services will suffer, in a way
that could erode popular support for the coalition's policies. In such
circumstances, it could become more difficult for the coalition to hold
together. These uncertainties are likely to be reflected increasingly in risk
premiums in sterling asset markets."
Peddling Relief, Industry Puts Debtors in a Deeper Hole
June 18, 2010
The New York Times
By PETER S. GOODMAN
PALM BEACH, Fla. — For the companies that promise relief to Americans
confronting swelling credit card balances, these are days of lucrative
opportunity.
So lucrative, that an industry trade association, the United States
Organizations for Bankruptcy Alternatives, recently convened here, in the
oceanfront confines of the Four Seasons Resort, to forge deals and plot
strategy.
At a well-lubricated evening reception, a steel drum band played Bob Marley
songs as hostesses in skimpy dresses draped leis around the necks of arriving
entrepreneurs, some with deep tans.
The debt settlement industry can afford some extravagance. The long recession
has delivered an abundance of customers — debt-saturated Americans, suffering
lost jobs and income, sliding toward bankruptcy. The settlement companies
typically harvest fees reaching 15 to 20 percent of the credit card balances
carried by their customers, and they tend to collect upfront, regardless of
whether a customer’s debt is actually reduced.
State attorneys general from New York to California and consumer watchdogs like
the Better Business Bureau say the industry’s proceeds come at the direct
expense of financially troubled Americans who are being fleeced of their last
dollars with dubious promises.
Consumers rarely emerge from debt settlement programs with their credit card
balances eliminated, these critics say, and many wind up worse off, with
severely damaged credit, ceaseless threats from collection agents and lawsuits
from creditors.
In the Kansas City area, Linda Robertson, 58, rues the day she bought the pitch
from a debt settlement company advertising on the radio, promising to spare her
from bankruptcy and eliminate her debts. She wound up sending nearly $4,000 into
a special account established under the company’s guidance before a credit card
company sued her, prompting her to drop out of the program.
By then, her account had only $1,470 remaining: The debt settlement company had
collected the rest in fees. She is now filing for bankruptcy.
“They take advantage of vulnerable people,” she said. “When you’re desperate and
you’re trying to get out of debt, they take advantage of you.” Debt settlement
has swollen to some 2,000 firms, from a niche of perhaps a dozen companies a
decade ago, according to trade associations and the Federal Trade Commission,
which is completing new rules aimed at curbing abuses within the industry.
Last year, within the industry’s two leading trade associations — the United
States Organizations for Bankruptcy Alternatives and the Association of
Settlement Companies — some 250 companies collectively had more than 425,000
customers, who had enrolled roughly $11.7 billion in credit card balances in
their programs.
As the industry has grown, so have allegations of unfair practices. Since 2004,
at least 21 states have brought at least 128 enforcement actions against debt
relief companies, according to the National Association of Attorneys General.
Consumer complaints received by states more than doubled between 2007 and 2009,
according to comments filed with the Federal Trade Commission.
“The industry’s not legitimate,” said Norman Googel, assistant attorney general
in West Virginia, which has prosecuted debt settlement companies. “They’re
targeting a group of people who are already drowning in debt. We’re talking
about middle-class and lower middle-class people who had incomes, but they were
using credit cards to survive.”
The industry counters that a few rogue operators have unfairly tarnished the
reputations of well-intentioned debt settlement companies that provide a crucial
service: liberating Americans from impossible credit card burdens.
With the unemployment rate near double digits and 6.7 million people out of work
for six months or longer, many have relied on credit cards. By the middle of
last year, 6.5 percent of all accounts were at least 30 days past due, up from
less than 4 percent in 2005, according to Moody’s Economy.com.
Yet a 2005 alteration spurred by the financial industry made it harder for
Americans to discharge credit card debts through bankruptcy, generating demand
for alternatives like debt settlement.
The Arrangement
The industry casts itself as a victim of a smear campaign orchestrated by the
giant banks that dominate the credit card trade and aim to hang on to the
spoils: interest rates of 20 percent or more and exorbitant late fees.
“We’re the little guys in this,” said John Ansbach, the chief lobbyist for the
United States Organizations for Bankruptcy Alternatives, better known as Usoba
(pronounced you-SO-buh). “We exist to advocate for consumers. Two and a half
billion dollars of unsecured debt has been settled by this industry, so how can
you take the position that it has no value?”
But consumer watchdogs and state authorities argue that debt settlement
companies generally fail to deliver.
In the typical arrangement, the companies direct consumers to set up special
accounts and stock them with monthly deposits while skipping their credit card
payments. Once balances reach sufficient size, negotiators strike lump-sum
settlements with credit card companies that can cut debts in half. The programs
generally last two to three years.
“What they don’t tell their customers is when you stop sending the money,
creditors get angry,” said Andrew G. Pizor, a staff lawyer at the National
Consumer Law Center. “Collection agents call. Sometimes they sue. People think
they’re settling their problems and getting some relief, and lo and behold they
get slammed with a lawsuit.”
In the case of two debt settlement companies sued last year by New York State,
the attorney general alleged that no more than 1 percent of customers gained the
services promised by marketers. A Colorado investigation came to a similar
conclusion.
The industry’s own figures show that clients typically fail to secure relief. In
a survey of its members, the Association of Settlement Companies found that
three years after enrolling, only 34 percent of customers had either completed
programs or were still saving for settlements.
“The industry is designed almost as a Ponzi scheme,” said Scott Johnson, chief
executive of US Debt Resolve, a debt settlement company based in Dallas, which
he portrays as a rare island of integrity in a sea of shady competitors.
“Consumers come into these programs and pay thousands of dollars and then
nothing happens. What they constantly have to have is more consumers coming into
the program to come up with the money for more marketing.”
The Pitch
Linda Robertson knew nothing about the industry she was about to encounter when
she picked up the phone at her Missouri home in February 2009 in response to a
radio ad.
What she knew was that she could no longer manage even the monthly payments on
her roughly $23,000 in credit card debt.
So much had come apart so quickly.
Before the recession, Ms. Robertson had been living in Phoenix, earning as much
as $8,000 a month as a real estate appraiser. In 2005, she paid $185,000 for a
three-bedroom house with a swimming pool and a yard dotted with hibiscus.
When the real estate business collapsed, she gave up her house to foreclosure
and moved in with her son. She got a job as a waitress, earning enough to hang
on to her car. She tapped credit cards to pay for gasoline and groceries.
By late 2007, she and her son could no longer afford his apartment. She moved
home to Kansas City, where an aunt offered a room. She took a job on the night
shift at a factory that makes plastic lids for packaged potato chips, earning
$11.15 an hour.
Still, her credit card balances swelled.
The radio ad offered the services of a company based in Dallas with a soothing
name: Financial Freedom of America. It cast itself as an antidote to the
breakdown of middle-class life.
“We negotiate the past while you navigate the future,” read a caption on its Web
site, next to a photo of a young woman nose-kissing an adorable boy. “The
American Dream. It was never about bailouts or foreclosures. It was always about
American values like hard work, ingenuity and looking out for your neighbor.”
When Ms. Robertson called, a customer service representative laid out a plan.
Every month, Ms. Robertson would send $427.93 into a new account. Three years
later, she would be debt-free. The representative told her the company would
take $100 a month as an administrative fee, she recalled. His tone was
take-charge.
“You talk about a rush-through,” Ms. Robertson said. “I didn’t even get to read
the contract. It was all done. I had to sign it on the computer while he was on
the phone. Then he called me back in 10 minutes to say it was done. He made me
feel like this was the answer to my problems and I wasn’t going to have to face
bankruptcy.”
Ms. Robertson made nine payments, according to Financial Freedom. Late last
year, a sheriff’s deputy arrived at her door with court papers: One of her
creditors, Capital One, had filed suit to collect roughly $5,000.
Panicked, she called Financial Freedom to seek guidance. “They said, ‘Oh, we
don’t have any control over that, and you don’t have enough money in your
account for us to settle with them,’ ” she recalled.
Her account held only $1,470, the representative explained, though she had by
then deposited more than $3,700. Financial Freedom had taken the rest for its
administrative fees, the company confirmed.
Financial Freedom later negotiated for her to make $100 monthly payments toward
satisfying her debt to the creditor, but Ms. Robertson rejected that
arrangement, no longer trusting the company. She demanded her money back.
She also filed a report with the Better Business Bureau in Dallas, adding to a
stack of more than 100 consumer complaints lodged against the company. The
bureau gives the company a failing grade of F.
Ms. Robertson received $1,470 back through the closure of her account, and then
$1,120 — half the fees that Financial Freedom collected. Her pending bankruptcy
has cost her $1,500 in legal fees.
“I trusted them,” she said. “They sounded like they were going to help me out.
It’s a rip-off.”
Financial Freedom’s chief executive, Corey Butcher, rejected that
characterization.
“We talked to her multiple times and verified the full details,” he said, adding
that his company puts every client through a verification process to validate
that they understand the risks — from lawsuits to garnished wages.
Intense and brooding, Mr. Butcher speaks of a personal mission to extricate
consumers from credit card debt. But roughly half his customers fail to complete
the program, he complained, with most of the cancellations coming within the
first six months. He pinned the low completion rate on the same lack of
discipline that has fostered many American ailments, from obesity to the
foreclosure crisis.
“It comes from a lack of commitment,” Mr. Butcher said. “It’s like going and
hiring a personal trainer at a health club. Some people act like they have lost
the weight already, when actually they have to go to the gym three days a week,
use the treadmill, cut back on their eating. They have to stick with it. At some
point, the client has to take responsibility for their circumstance.”
Consumer watchdogs point to another reason customers wind up confused and upset:
bogus marketing promises.
In April, the United States Government Accountability Office released a report
drawing on undercover agents who posed as prospective customers at 20 debt
settlement companies. According to the report, 17 of the 20 firms advised
clients to stop paying their credit card bills. Some companies marketed their
programs as if they had the imprimatur of the federal government, with one
advertising itself as a “national debt relief stimulus plan.” Several claimed
that 85 to 100 percent of their customers completed their programs.
“The vast majority of companies provided fraudulent and deceptive information,”
said Gregory D. Kutz, managing director of forensic audits and special
investigations at the G.A.O. in testimony before the Senate Commerce Committee
during an April hearing.
At the same hearing, Senator Claire McCaskill, a Missouri Democrat, pressed Mr.
Ansbach, the Usoba lobbyist, to explain why his organization refused to disclose
its membership.
“The leadership in our trade group candidly was concerned that publishing a list
of members ended up being a subpoena list,” Mr. Ansbach said.
“Probably a genuine concern,” Senator McCaskill replied.
The Coming Crackdown
On multiple fronts, state and federal authorities are now taking aim at the
industry.
The Federal Trade Commission has proposed banning upfront fees, bringing
vociferous lobbying from industry groups. The commission is expected to issue
new rules this summer. Senator McCaskill has joined with fellow Democrat Charles
E. Schumer of New York to sponsor a bill that would cap fees charged by debt
settlement companies at 5 percent of the savings recouped by their customers.
Legislation in several states, including New York, California and Illinois,
would also cap fees. A new consumer protection agency created as part of the
financial regulatory reform bill in Congress could further constrain the
industry.
The prospect of regulation hung palpably over the trade show at this
Atlantic-side resort, tempering the orchid-adorned buffet tables and poolside
cocktails with a note of foreboding.
“The current debt settlement business model is going to die,” declared Jeffrey
S. Tenenbaum, a lawyer in the Washington firm Venable, addressing a packed
ballroom. “The only question is who the executioner is going to be.”
That warning did not dislodge the spirit of expansion. Exhibitors paid as much
as $4,500 for display space to showcase their wares — software to manage
accounts, marketing expertise, call centers — to attendees who came for two days
of strategy sessions and networking.
Cody Krebs, a senior account executive from Southern California, manned a booth
for LowerMyBills.com, whose Internet ads link customers to debt settlement
companies. Like many who have entered the industry, he previously sold subprime
mortgages. When that business collapsed, he found refuge selling new products to
the same set of customers — people with poor credit.
“It’s been tremendous,” he said. “Business has tripled in the last year and a
half.”
The threat of regulations makes securing new customers imperative now, before
new rules can take effect, said Matthew G. Hearn, whose firm, Mstars of
Minneapolis, trains debt settlement sales staffs. “Do what you have to do to get
the deals on the board,” he said, pacing excitedly in front of a podium.
And if some debt settlement companies have gained an unsavory reputation, he
added, make that a marketing opportunity.
“We aren’t like them,” Mr. Hearn said. “You need to constantly pitch that. ‘We
aren’t bad actors. It’s the ones out there that are.’ ”
July 3, 2009
Filed at 11:21 a.m. ET
The New York Times
By THE ASSOCIATED PRESS
WASHINGTON (AP) -- The Founding Fathers left one legacy not
celebrated on Independence Day but which affects us all. It's the national debt.
The country first got into debt to help pay for the Revolutionary War. Growing
ever since, the debt stands today at a staggering $11.5 trillion -- equivalent
to over $37,000 for each and every American. And it's expanding by over $1
trillion a year.
The mountain of debt easily could become the next full-fledged economic crisis
without firm action from Washington, economists of all stripes warn.
''Unless we demonstrate a strong commitment to fiscal sustainability in the
longer term, we will have neither financial stability nor healthy economic
growth,'' Federal Reserve Chairman Ben Bernanke recently told Congress.
Higher taxes, or reduced federal benefits and services -- or a combination of
both -- may be the inevitable consequences.
The debt is complicating efforts by President Barack Obama and Congress to cope
with the worst recession in decades as stimulus and bailout spending combine
with lower tax revenues to widen the gap.
Interest payments on the debt alone cost $452 billion last year -- the largest
federal spending category after Medicare-Medicaid, Social Security and defense.
It's quickly crowding out all other government spending. And the Treasury is
finding it harder to find new lenders.
The United States went into the red the first time in 1790 when it assumed $75
million in the war debts of the Continental Congress.
Alexander Hamilton, the first treasury secretary, said, ''A national debt, if
not excessive, will be to us a national blessing.''
Some blessing.
Since then, the nation has only been free of debt once, in 1834-1835.
The national debt has expanded during times of war and usually contracted in
times of peace, while staying on a generally upward trajectory. Over the past
several decades, it has climbed sharply -- except for a respite from 1998 to
2000, when there were annual budget surpluses, reflecting in large part what
turned out to be an overheated economy.
The debt soared with the wars in Iraq and Afghanistan and economic stimulus
spending under President George W. Bush and now Obama.
The odometer-style ''debt clock'' near Times Square -- put in place in 1989 when
the debt was a mere $2.7 trillion -- ran out of numbers and had to be shut down
when the debt surged past $10 trillion in 2008.
The clock has since been refurbished so higher numbers fit. There are several
debt clocks on Web sites maintained by public interest groups that let you watch
hundreds, thousands, millions zip by in a matter of seconds.
The debt gap is ''something that keeps me awake at night,'' Obama says.
He pledged to cut the budget ''deficit'' roughly in half by the end of his first
term. But ''deficit'' just means the difference between government receipts and
spending in a single budget year.
This year's deficit is now estimated at about $1.85 trillion.
Deficits don't reflect holdover indebtedness from previous years. Some spending
items -- such as emergency appropriations bills and receipts in the Social
Security program -- aren't included, either, although they are part of the
national debt.
The national debt is a broader, and more telling, way to look at the
government's balance sheets than glancing at deficits.
According to the Treasury Department, which updates the number ''to the penny''
every few days, the national debt was $11,518,472,742,288 on Wednesday.
The overall debt is now slightly over 80 percent of the annual output of the
entire U.S. economy, as measured by the gross domestic product.
By historical standards, it's not proportionately as high as during World War
II, when it briefly rose to 120 percent of GDP. But it's still a huge liability.
Also, the United States is not the only nation struggling under a huge national
debt. Among major countries, Japan, Italy, India, France, Germany and Canada
have comparable debts as percentages of their GDPs.
Where does the government borrow all this money from?
The debt is largely financed by the sale of Treasury bonds and bills. Even
today, amid global economic turmoil, those still are seen as one of the world's
safest investments.
That's one of the rare upsides of U.S. government borrowing.
Treasury securities are suitable for individual investors and popular with other
countries, especially China, Japan and the Persian Gulf oil exporters, the three
top foreign holders of U.S. debt.
But as the U.S. spends trillions to stabilize the recession-wracked economy,
helping to force down the value of the dollar, the securities become less
attractive as investments. Some major foreign lenders are already paring back on
their purchases of U.S. bonds and other securities.
And if major holders of U.S. debt were to flee, it would send shock waves
through the global economy -- and sharply force up U.S. interest rates.
As time goes by, demographics suggest things will get worse before they get
better, even after the recession ends, as more baby boomers retire and begin
collecting Social Security and Medicare benefits.
While the president remains personally popular, polls show there is rising
public concern over his handling of the economy and the government's mushrooming
debt -- and what it might mean for future generations.
If things can't be turned around, including establishing a more efficient health
care system, ''We are on an utterly unsustainable fiscal course,'' said the
White House budget director, Peter Orszag.
Some budget-restraint activists claim even the debt understates the nation's
true liabilities.
The Peter G. Peterson Foundation, established by a former commerce secretary and
investment banker, argues that the $11.4 trillion debt figures does not take
into account roughly $45 trillion in unlisted liabilities and unfunded
retirement and health care commitments.
That would put the nation's full obligations at $56 trillion, or roughly
$184,000 per American, according to this calculation.
Friday 6 February 2009
10.41 GMT
Guardian.co.uk
Larry Elliott, economics editor
This article was first published on guardian.co.uk at 10.41 GMT
on Friday 6
February 2009.
It was last updated at 10.48 GMT on Friday 6 February 2009.
Personal bankruptcy hit a record level and company failures soared by 50% as
the collapse in the economy in the final three months of 2008 took its toll,
official figures showed today.
Data from the Insolvency Service revealed that the steepest decline in output in
almost 30 years led to 19,100 people being declared bankrupt - a 22% increase on
the fourth quarter of 2007.
A further 10,000 people took out individual voluntary arrangements (IVAs) under
which interest on debt is frozen in exchange for set repayments each month.
The total of 29,444 people being declared insolvent was up 18.5% on a year
earlier and was higher than during the recession of the early 1990s.
The 1.5% contraction in the economy in the wake of the financial market mayhem
last autumn also claimed 4,607 companies - a 52% increase in liquidations on the
October to December period of 2007.
Economists warned that the level of bankruptcies was set to increase as
unemployment rose and the problems caused by the credit crunch meant people were
no longer able to borrow their way out of trouble.
Howard Archer, chief UK and European Economist at IHS Global Insight, said:
"Unfortunately, the marked rise in the number of individual insolvencies in the
fourth quarter of 2008 is a harbinger of what is very likely to be seen through
2009.
"Deep economic contraction, sharply rising unemployment, higher debt levels,
lower equity prices, and more and more people being trapped in negative equity
will exact an increasing toll over the coming months.
"While the substantial cuts in interest rates by the Bank of England will
obviously help some people, they are likely to be insufficient to save many from
insolvency."
Alan Tomlinson, partner at licensed insolvency practitioners Tomlinsons, said:
"I have been an insolvency practitioner for over 25 years and have never seen so
many companies, from all sectors, going to the wall. Trading conditions have
never been so tough and given the bleak economic outlook it could be some time
yet before they begin to improve.
"The appalling economic conditions are claiming more and more victims, as
companies in all sectors make redundancies or simply fail.
"What is especially interesting is that more people have gone down the
bankruptcy rather than the IVA route, which is a reflection of the fact that
lenders have tightened up the criteria for the acceptance of IVAs."
The Insolvency Service figures also showed a 75% jump in the number of people
declared insolvent in Scotland during the final quarter at 5,807, although the
figure was slightly down on the total for the previous quarter.
In Northern Ireland insolvencies increased by 39% year-on-year to 443 during the
three months to the end of December.
Nick O'Reilly, president of insolvency professionals' trade body R3, said: "What
today's figures mean is that in 2008 we saw a staggering 350 people becoming
insolvent in the UK every day. For 2009 our members believe this number will
reach in excess of 430 people a day for the whole of the UK.
"The outlook is bleak for the next two years, when insolvency practitioners
expect to see in excess of 158,000 personal insolvencies annually.
"We'll start to see the knock-on effects of increasing business failures and
redundancies on personal financial situations."
Sunday 25 January 2009
The Observer
Heather Stewart
This article was first published on guardian.co.uk at 00.01 GMT on Sunday 25
January 2009.
It appeared in the Observer on Sunday 25 January 2009 on p27 of the Focus
section.
It was last updated at 00.14 GMT on Sunday 25 January 2009.
Official figures from last week showed that the government had
run up total debts of £697.5bn, or 47.5% of GDP, by the end of 2008. That
includes just over £100bn for the nationalisation of Northern Rock and the
recapitalisation of Royal Bank of Scotland.
How does that compare with other countries?
Ranked by our debt-to-GDP ratio, we came 18th of 28 members of the Organisation
of Economic Co-operation and Development in 2007, clocking in at 30.4% on the
OECD's measure. A number of other major economies had higher levels of
borrowing: Japan's debt was worth 85.9% of its GDP, for example, and Italy's
well over 100%. Debt levels in many countries are likely to explode in the years
ahead, too, as governments spend billions of dollars on recapitalising their
financial sectors, and boosting public spending to kick-start the economy.
Is the debt mountain about to get much bigger?
Yes: the Office for National Statistics has said that the liabilities of RBS,
thought to be around £1.7tn, will soon have to appear on the government's
balance sheet, because its shareholding, of almost 70%, gives it enough
managerial control over the battered bank to make it a public institution.
However, the minutiae of the statisticians' rules mean that although RBS's
liabilities will turn up on the books, many of its assets - such as the homes on
which mortgages are secured - will not. So the eye-watering debt figures we are
likely to see over the next year are a bit misleading. Even without the banking
rescues, though, public debt has already hit 40.4% of GDP, bursting through the
40% limit the prime minister laid down as one of his fiscal rules when Labour
came to power. And as recession eats away at tax revenues, and the government
spends billions of pounds on Keynesian fiscal stimulus, the chancellor's
forecasts show debt peaking at more than £1tn, or 57.4% of GDP by 2012-13.
What about Alistair Darling's latest bank rescue package?
The government announced last Monday that it would introduce a taxpayer-backed
insurance scheme, allowing the banks to cap their losses on so-called "toxic"
assets, if the loans go sour. That could potentially expose the public to vast
losses and the unknown size of the black hole helped to send sterling into a
tailspin last week. But the Treasury insists that many of the loans will
eventually come good - and the banks are paying the government a fee for its
trouble.
Is Britain at risk of "going bankrupt"?
It is highly unlikely. The government currently borrows about 35% of its total
debts from foreign investors and there is as yet little evidence of them heading
for the door: the German and Greek governments have had more problems borrowing
money in the capital markets in the past few weeks than the UK. However, if
foreign investors do go off gilts, then yields will be driven up - so, in
effect, taxpayers will end up paying higher interest rates to borrow money.
Much of the cash the government needs can continue to be borrowed from taxpayers
at home - pension funds such as government bonds, or gilts, because they can
match the fixed returns against their liabilities, and cash is pouring into
National Savings, which are invested in gilts as nervous savers shun risky
looking banks. If overseas investors lose confidence in the UK, we will have to
fund the debts ourselves, in effect, borrowing from our own future income. That
could prolong the downturn and force the Bank of England to keep interest rates
lower, and for longer, than it otherwise might have done, to compensate for the
tightening of fiscal policy, but it doesn't mean we are "bust".
Will we have to "call in the IMF", as David Cameron claimed last week?
Again, it's not impossible, but highly unlikely: it would only happen if the
government was unable either to meet a debt repayment, or to roll over, or
"refinance" the debt with investors, in the capital markets. Ireland, Turkey and
Greece all look much closer to that extreme than the UK. The verdict of credit
ratings agency Moody's last week was that increasing borrowing in the
short-term, in order to limit the length and severity of the recession, is a
"calculated risk," which it doesn't think endangers the UK's creditworthiness.
Spain and Greece have had their ratings downgraded, however, and Ireland has
been warned that it could face the same fate.
If the problem in the first place was too much borrowing, isn't it dangerous to
try to fix it by borrowing even more?
Yes, but the government believes the risk of allowing the credit markets to
seize up, potentially driving the economy into full-blown depression, is even
greater. As Mervyn King, governor of the Bank of England, put it last week:
"This is the paradox of policy at present - almost any policy measure that is
desirable now appears diametrically opposite to the direction in which we need
to go in the long term."
July 20, 2008
The New York Times
By GRETCHEN MORGENSON
The collection agencies call at least 20 times a day. For a
little quiet, Diane McLeod stashes her phone in the dishwasher.
But right up until she hit the wall financially, Ms. McLeod was a dream customer
for lenders. She juggled not one but two mortgages, both with interest rates
that rose over time, and a car loan and high-cost credit card debt. Separated
and living with her 20-year-old son, she worked two jobs so she could afford her
small, two-bedroom ranch house in suburban Philadelphia, the Kia she drove to
work, and the handbags and knickknacks she liked.
Then last year, back-to-back medical emergencies helped push her over the edge.
She could no longer afford either her home payments or her credit card bills.
Then she lost her job. Now her home is in foreclosure and her credit profile in
ruins.
Ms. McLeod, who is 47, readily admits her money problems are largely of her own
making. But as surely as it takes two to tango, she had partners in her
financial demise. In recent years, those partners, including the financial
giants Citigroup, Capital One and GE Capital, were collecting interest payments
totaling more than 40 percent of her pretax income and thousands more in fees.
Years of spending more than they earn have left a record number of Americans
like Ms. McLeod standing at the financial precipice. They have amassed a
mountain of debt that grows ever bigger because of high interest rates and fees.
While the circumstances surrounding these downfalls vary, one element is
identical: the lucrative lending practices of America’s merchants of debt have
led millions of Americans — young and old, native and immigrant, affluent and
poor — to the brink. More and more, Americans can identify with miners of old:
in debt to the company store with little chance of paying up.
It is not just individuals but the entire economy that is now suffering.
Practices that produced record profits for many banks have shaken the nation’s
financial system to its foundation. As a growing number of Americans default,
banks are recording hundreds of billions in losses, devastating their
shareholders.
To reduce the risk of a domino effect, the Bush administration fashioned an
emergency rescue plan last week to shore up Fannie Mae and Freddie Mac, the
nation’s two largest mortgage finance companies, if necessary.
To be sure, the increased availability of credit has contributed mightily to the
American economy and has allowed consumers to make big-ticket purchases like
homes, cars and college educations.
But behind the big increase in consumer debt is a major shift in the way lenders
approach their business. In earlier years, actually being repaid by borrowers
was crucial to lenders. Now, because so much consumer debt is packaged into
securities and sold to investors, repayment of the loans takes on less
importance to those lenders than the fees and charges generated when loans are
made.
Lenders have found new ways to squeeze more profit from borrowers. Though
prevailing interest rates have fallen to the low single digits in recent years,
for example, the rates that credit card issuers routinely charge even borrowers
with good credit records have risen, to 19.1 percent last year from 17.7 percent
in 2005 — a difference that adds billions of dollars in interest charges
annually to credit card bills.
Average late fees rose to $35 in 2007 from less than $13 in 1994, and fees
charged when customers exceed their credit limits more than doubled to $26 a
month from $11, according to CardWeb, an online publisher of information on
payment and credit cards.
Mortgage lenders similarly added or raised fees associated with borrowing to buy
a home — like $75 e-mail charges, $100 document preparation costs and $70
courier fees — bringing the average to $700 a mortgage, according to the
Department of Housing and Urban Development. These “junk fees” have risen 50
percent in recent years, said Michael A. Kratzer, president of
FeeDisclosure.com, a Web site intended to help consumers reduce fees on
mortgages.
“Today the focus for lenders is not so much on consumer loans being repaid, but
on the loan as a perpetual earning asset,” said Julie L. Williams, chief counsel
of the Comptroller of the Currency, in a March 2005 speech that received little
notice at the time.
Lenders have been eager to expand their reach. They have honed sophisticated
marketing tactics, gathering personal financial data to tailor their pitches.
They have spent hundreds of millions of dollars on advertising campaigns that
make debt sound desirable and risk-free. The ads are aimed at people who
urgently need loans to pay for health care and other necessities.
It is not just financial conglomerates that are profiting on consumer debt
loads. Some manufacturers and retailers can generate more income from internal
financing arms that lend to their customers than from their primary businesses.
Tallying what the lenders have made off Ms. McLeod over the years is revealing.
In 2007, when she earned $48,000 before taxes, she was charged more than $20,000
in interest on her various loans.
Her first mortgage, originated by the EquiFirst Corporation, charged her $14,136
a year, and her second, held by CitiFinancial, added $4,000. Capital One, a
credit card company that charged her 28 percent interest on her balances, billed
$1,400 in annual interest. GE Money Bank levied 27 percent on the $1,500 or so
that Ms. McLeod owed on an account she had with a local jewelry store, adding
more than $400.
Olde City Mortgage, the company that arranged one of Ms. McLeod’s loans, made
$6,000 on a single refinancing, and EquiFirst received $890 in a loan
origination fee.
Such fees and interest rates are a growing burden on Americans, especially those
who rely on credit cards to make ends meet.
And recent changes in the bankruptcy laws, supported by financial services
firms, make it all the harder for consumers, especially those with modest
incomes, to get out from under their debt by filing for bankruptcy.
But with so many borrowers in trouble, some bankruptcy experts and regulators
are beginning to focus on the responsibilities of lenders, like requiring them
to make loans only if they are suitable to the borrowers applying for them.
The Federal Reserve Board, for instance, recently put into effect rules barring
a lender from making a loan without regard to the borrower’s ability to repay
it.
Henry E. Hildebrand III, a Bankruptcy Court trustee in Nashville since 1982 and
one of the nation’s busiest, has seen at first hand what happens when lenders do
not take some responsibility for loans that go bad. “I look across the table at
people who are right out of school and have more debt than they can handle, and
they are starting out life in a bankruptcy,” he said.
Ms. McLeod used debt to keep going until she was fired from her job in March for
writing inappropriate e-mail messages. Since then, she has been selling her
coveted handbags and other items on eBay to raise money while waiting to be
evicted from her home.
“I think a lot of people in this country have a lot more debt than they let the
outside world know,” Ms. McLeod said. “I worked in retail for five years. And
men, women would open up their wallets to pay and the credit cards that were in
some of the wallets just amazed me.”
Borrowing to Shop
For decades, America’s shift from thrift could be summed up in this familiar
phrase: When the going gets tough, the tough go shopping. Whether for a car,
home, vacation or college degree, the nation’s lenders stood ready to assist.
Companies offered first and second mortgages and home equity lines, marketed
credit cards for teenagers and helped college students to amass upward of
$100,000 in debt by graduation.
Every age group up to the elderly was the target of sophisticated ad campaigns
and direct mail programs. “Live Richly” was a Citibank message. “Life Takes
Visa,” proclaims the nation’s largest credit card issuer.
Eliminating negative feelings about indebtedness was the idea behind
MasterCard’s “Priceless” campaign, the work of McCann-Erickson Worldwide
Advertising, which came out in 1997.
“One of the tricks in the credit card business is that people have an inherent
guilt with spending,” Jonathan B. Cranin, executive vice president and deputy
creative director at the agency, said when the commercials began. “What you want
is to have people feel good about their purchases.”
Mortgage lenders took to cold-calling homeowners to persuade them to refinance.
Done to reduce borrowers’ monthly payments, serial refinancings allowed lenders
to charge thousands of dollars in loan processing fees, including appraisals,
credit checks, title searches and document preparation fees.
Not surprisingly, such practices generated dazzling profits for the nation’s
financial companies. And since 2005, when the bankruptcy law was changed, the
credit card industry has increased its earnings 25 percent, according to a new
study by Michael Simkovic, a former James M. Olin fellow in Law and Economics at
Harvard Law School.
The “2005 bankruptcy reform benefited credit card companies and hurt their
customers,” Mr. Simkovic concluded in his study. He said that even though
sponsors of the bankruptcy bill promised that consumers would benefit from lower
borrowing costs as delinquent borrowers were held more accountable, the cost of
borrowing from credit card companies has actually increased anywhere from 5
percent to 17 percent.
Among the most profitable companies were Ms. McLeod’s creditors.
For Capital One, which charges her 28 percent interest on her credit card, net
interest income, after provisions for loan losses, has risen a compounded 25
percent a year since 2002.
GE Money Bank, which levied a 27 percent rate on Ms. McLeod’s debt and is part
of the GE Capital Corporation, generated profits of $4.3 billion in 2007, more
than double the $2.1 billion it earned in 2003.
Because many of these large institutions pool the loans they make and sell them
to investors, they are not as vulnerable when the borrowers default. At the end
of 2007, for example, one-third of Capital One’s $151 billion in managed loans
had been sold as securities.
Officials at General Electric declined to comment. Capital One did not return
phone calls.
As the profits in this indebtedness grew, financial companies moved aggressively
to protect them, spending millions of dollars to lobby against any moves
lawmakers might take to rein in questionable lending.
But consumers are voicing anger over lending practices. A recent proposal by the
Federal Reserve Board to limit some abusive practices has drawn more than 11,000
letters since May. Most are from irate borrowers.
A Rising Tide of Bills
Just two generations ago, America was a nation of mostly thrifty people living
within their means, even setting money aside for unforeseen expenses.
Today, Americans carry $2.56 trillion in consumer debt, up 22 percent since 2000
alone, according to the Federal Reserve Board. The average household’s credit
card debt is $8,565, up almost 15 percent from 2000.
College debt has more than doubled since 1995. The average student emerges from
college carrying $20,000 in educational debt.
Household debt, including mortgages and credit cards, represents 19 percent of
household assets, according to the Fed, compared with 13 percent in 1980.
Even as this debt was mounting, incomes stagnated for many Americans. As a
result, the percentage of disposable income that consumers must set aside to
service their debt — a figure that includes monthly credit card payments, car
loans, mortgage interest and principal — has risen to 14.5 percent from 11
percent just 15 years ago.
By contrast, the nation’s savings rate, which exceeded 8 percent of disposable
income in 1968, stood at 0.4 percent at the end of the first quarter of this
year, according to the Bureau of Economic Analysis.
More ominous, as Americans have dug themselves deeper into debt, the value of
their assets has started to fall. Mortgage debt stood at $10.5 trillion at the
end of last year, more than double the $4.8 trillion just seven years earlier,
but home prices that were rising to support increasing levels of debt, like home
equity lines of credit, are now dropping.
The combination of increased debt, falling asset prices and stagnant incomes
does not threaten just imprudent borrowers. The entire economy has become
vulnerable to the spending slowdown that results when consumers like Ms. McLeod
hit the wall.
That First Credit Card
Growing up in Philadelphia, Diane McLeod never knew financial hardship, she
said. Her father owned six pizza shops and her mother was a homemaker.
“There was always money for everything, whether it was bills or food shopping or
a spur-of-the-moment vacation,” Ms. McLeod recalled. “If they worried about
money, they never let us know.”
Hers was a pay-as-you-go family, she said. Although money was not discussed much
around the dinner table, credit card debt was not a part of her parents’
financial plan, and sometimes personal purchases were put off.
When Ms. McLeod married at 18, she and her husband carried no credit cards. She
stayed at home after her son was born, but when she was 27 her husband died.
She remarried a few years later and continued as a homemaker until her son
turned 13. Between her husband’s job laying carpets and her own, money was not
exactly tight.
In the mid-’90s, Ms. McLeod got several credit cards. When the marriage began to
founder, she said, she shopped to make herself feel better.
Earning a livable wage at Verizon Yellow Pages, Ms. McLeod finally decided to
leave her marriage and buy a home of her own in February 2003. The cost was
$135,000, and her mortgage required no down payment because her credit history
was good.
“I was very proud of myself when I bought the house,” Ms. McLeod explained. “I
thought I would live here till I died.” Adding to her burden, however, was about
$25,000 in credit card debt she had brought from her marriage. Because her
husband did not have a regular salary, all the cards were in her name.
After she had been in the house for a year, a friend who was a mortgage broker
suggested she consolidate her debts into a new home loan. The property had
appreciated by about $30,000, and once again she put no money down for the loan.
“It was amazing how easy it was,” she recalled. “But that’s a trap, and I didn’t
know it then.”
Naturally, the refinance had costs. There was an $8,000 penalty to pay off the
previous mortgage early as well as roughly $1,500 in closing costs on the new
loan.
To cover these fees, Ms. McLeod dipped into her retirement account. Only later
did she realize that she had to pay an early-withdrawal penalty of $3,000 to the
Internal Revenue Service. Short on cash, she put it on a credit card.
Soon she had racked up another $19,000 in credit card debt. But because her home
had appreciated, she once again refinanced her mortgage. Although she was making
$50,000 a year working two jobs, her income was not enough to support the new
$165,000 loan. She asked her son to join her on the loan application; with his
income, the numbers worked.
“Boy, would I regret that,” she said. The decision would drive a wedge between
mother and son and damage his credit profile as well.
Almost immediately after she refinanced, in late 2005, the department store
where she worked her second job, as a jewelry saleswoman at night and on
weekends, cut back her hours. She quit altogether, and her son moved out of the
house, where he had been helping with the rent, to live with a girlfriend. Ms.
McLeod was on her own and paying $1,500 a month on her mortgage.
Because the house had been recently appraised at $228,000, she said, she felt
sure she could refinance again if she needed to pay off her credit card. “You
felt like you had a way out,” she said.
But as happens with many debt-laden Americans, an unexpected illness helped push
Ms. McLeod over the edge. In January 2006, her doctor told her she needed a
hysterectomy. She had health care coverage, but she could no longer work at a
second job.
She made matters worse during her recovery, while watching home shopping
channels. “Eight weeks in bed by yourself is very dangerous when you have a TV
and credit card,” Ms. McLeod said. “QVC was my friend.”
Later that year, Ms. McLeod realized she was in trouble, squeezed by her
mortgage and credit card payments, her $350 monthly car bill, rising energy
prices and a stagnant salary. She started to sell knickknacks, handbags,
clothing and other items on eBay to help cover her heating and food bills. She
stopped paying her credit cards so that she could afford her mortgage.
A year ago she was back in the hospital, this time with a burst appendix. Her
condition worsened, and she lost the use of one kidney. She spent 19 days in the
hospital and six weeks recuperating. Her prescription-drug costs added to her
expenses, and by September she could no longer pay her mortgage.
When her father died in early January, she was devastated. About a month later,
on Feb. 14, Ms. McLeod was suspended and soon afterward fired from Verizon.
Toting up her financial obligations, Ms. McLeod said she owed $237,000 on her
home mortgage. Of that, sheriff’s costs are $4,350, and “other” fees related to
the foreclosure come to $3,000. A house of similar size down the street from Ms.
McLeod sold for $153,000 in January.
Her credit card debt totals around $34,000, she said. Each month the late fees
and over-limit penalties add to her debt. Ms. McLeod said she would probably
file for bankruptcy.
Patricia A. Hasson, president of the Credit Counseling Service of Delaware
Valley, said Ms. McLeod would probably wind up having to repay 40 percent to 60
percent of her credit card debt. The owner of her mortgages could come after her
for the difference between what she owes on her loan and what her house
ultimately sells for. The first mortgage was sold to investors; Citigroup
declined to say whether it held onto the second mortgage or sold it to
investors.
A sheriff’s auction of her home on June 12 received no bidders, Ms. McLeod said.
The bank will soon evict her.
“Oh, I definitely have regrets,” Ms. McLeod said. “I regret not dealing with my
emotions instead of just shopping. And I regret involving my son in all this
because that has affected him and his finances and his self-esteem.”
Ms. McLeod says she hopes to be living in an apartment she can afford soon and
to get back to paying her bills on time.
She does not want another credit card, she said. But even though her credit
profile is ruined, she still receives come-ons.
Recently an envelope arrived offering a “pre-qualified” Salute Visa Gold card
issued by Urban Bank Trust. “We think you deserve more credit!” it said in bold
type.
A spokeswoman at Urban Bank said the Salute Visa is part of a program “designed
to provide access to credit for folks who would not otherwise qualify for
credit.”
The Salute Visa offered Ms. McLeod a $300 credit line. But a closer look at the
fine print showed that $150 of that would go, as annual fees, to Urban Bank.
