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The Great Plastic Meltdown

author: Claas Tatje
Apr 04, 2008 06:13

The real estate crisis turned out more serious than the bank's risk divisions estimated. The price for new homes fell twelve percent in December 2008. The assets of private households shriveled around two trillion dollars within a year.

THE GREAT PLASTIC MELTDOWN

After the homebuilders, American credit card debtors are in distress. Banks fear new losses

By Claas Tatje

[This article published in: DIE ZEIT 07, 2/7/2008 is translated from the German on the World Wide Web  http://www.zeit.de.]


In the last years, businesses relied most on the US consumer. On average he was 48.6 years old, drove two cars, earned $58,712 before taxes and cannot stop shopping. He spends $46,409 a year. The bursting internet bubble at the turn of the millennium, September 11, 2001 and the price of gasoline did not stop him.

In the spring of 2007, the largest bank of the US, Bank of America, saw a huge mortgage crisis approaching. "Although consumer debts increase relative to income, assets were never as great and grow at healthy rates," risk analyst Amy Brinkley announced to investors at that time.

This was a misjudgment. Firstly, the real estate crisis turned out more serious than the bank's risk division estimated. For example, the prices for new homes fell twelve percent in December 2007 compared to 2006. The assets of private households shriveled around two trillion dollars within a year - with corresponding effects on buying propensity.

Secondly, another bubble soon burst in the American economy. Many households could not pay their credit card debts any more. The stricken institutions must now write off billions because their customers still go shopping but cannot pay their monthly bills.

Last quarter Bank of America reported almost two billion dollars more credit card losses than in the comparative time period last year. Five percent of its customers could not pay their debts; a year ago it was four percent. This was similar with the big banks JP Morgan Chase and Citigroup.

The banking branch obviously reacts in an unconventional way. "Since the summer of 2007, many banks have loosened their standards for issuing credit cards," says Christian Weller who has watched the market for years with the American Progress think tank. A fourth or fifth credit card was issued. The average US citizen has three.

For a long time, incurring additional debts was not a problem. When consumer credit debts grew uncontrollably in the past, many increased their home mortgage. Since the fall of 2007, the market for mortgage credits has completely collapsed. Debts on credit cards cannot be simply postponed.

Consumer protection activists and politicians today denounce the long-running business practice of US banks to distribute more and more credit cards and frighten with exorbitant interests and penalties for non-payment. Hearings before committees of the US Congress were held again and again. While little happened, consumer protector Ed Mierzwinski from the US consumer lobby US Public Interest Research Group said "the political system after the mortgage debacle is closely watching what drives businesses."

Wesley Wannemacher from Lima, Ohio visited the US Senate. In a hearing, the family father told his story in the spring of 2007. He overdrew his credit card by $200 in 2001 for wedding photographs and a few bouquets of flowers. He owed JP Morgan Chase $3200. In vain, he tried to pay in installments up to 2007 although he had returned more than $6300 to the bank. "I was to repay another $6110," Wannemacher said. Fees and interests led to that sum. Before the hearing, a co-worker at the bank called and told the perplexed customer that the bank would not make any more demands. Richard Skednicki, head of Chase's credit card division, tried to play down the incident at that time.

Many households had similar experiences. The credit card debt of every American is estimated at $2150, 63 percent higher than in 1989. This happens because of the many charges of financial institutions and because customers borrowed all this money. "Whoever buys a Disney card from JP Morgan Chase and earns a `Disney dream dollar' with every purchase, pays $29 when he exceeds his credit limit and another $34 along with 28 percent interest if he pays bills over $1200 too late.

Many consumers depend on credit cards to maintain their lifestyle. The disposable income of many families falls while prices for food, gasoline and medicines soar drastically. "For many, indebtedness with credit cards is the last way out."

"We will see double-digit failure rates in 2008 for the first time in over a decade," says David Robertson, editor of the Nilson Report, a credit card service. With foresight, banks in the last years did intensive lobby work. In 2005, Washington made private bankruptcies more difficult. This is not a new tactic. Nevertheless the number of private bankruptcies doubled in 2007.

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