Monday, July 21, 2008

The Responsibility Hustle
I read something in the Times last night that bothered me quite a bit. As part of an ongoing series called "The Debt Trap," reporter Gretchen Morgenson tells the story of a 47 year-old Philadelphia-area woman named Diane McLeod, whose life is in ruins after incurring hundreds of thousands of dollars in debt.

There are really two stories at work here: McLeod's own misjudgments and irresponsible behavior, and the enabling actions of creditors that, to paraphrase the article's title, gave her more and bigger shovels with which to dig herself deeper into debt. Morgenson seems more interested in the systemic problem:

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.

Through her early 40s, McLeod had no significant problem with debt: she alternated between stay-at-home motherhood and relatively stable employment, and she purchased a home in 2003 that appreciated, as they're supposed to. (I wouldn't know myself.) The easy credit terms of that purchase--because her credit was good, no down payment was required--wound up doing her no favors, of course. Nor did the refinancing she obtained a year later to consolidate $25,000 in credit card debt, which required about $9,500 in costs. To meet those expenses, McLeod withdrew from her retirement account, an action that bears an early-withdrawal tax penalty of $3,000, which she put on a credit card.

This is all bad enough. But the case Morgenson is setting out here only holds if, at the same time, liberals and others who deplore the enabling behavior of McLeod's "partners in her financial demise" grasp that she bears some culpability as well. After another couple turns of bad luck--losing her second job as a jewelry saleswoman, and a hysterectomy--McLeod really did herself in: "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.'"

The article doesn't disclose how much additional debt McLeod ran up while convalescing. But in all, it notes that she owed $237,000 for her mortgage--more than half again the original purchase price of the house, thanks to two refinancings--plus about $34,000 for credit cards. That number continues to rise as late fees and overage charges mount each month. She is likely to file for bankruptcy--as a rising number have done over the last nine quarters.

The real problem I see here is that while both McLeod (and the millions like her) and the corporations acted irresponsibly, only the individual suffers for it. The businesses are rewarded, to an obscene extent, for very similar behavior.

1 comment:

Dr. Catloaf said...

I think the real problem is actually financial, as Morgenson points out. Just like the mortgage meltdown, the issue here is the securitization of debt:

"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."

It's not only the McLeods who are suffering. When she cannot pay off her credit cards, the company that originated the debt may get off the hook, but those who hold the securitized debt - including investors, retirement funds, etc. all over the world - are also paying the price, albeit in a more diffuse way.