Who Stole the American Dream? (15 page)

Pam Scholl’s nightmare of sinking into ever-deepening debt is a microcosm of middle-class experience. When you combine credit cards, auto loans, home mortgages, student loans, and other forms of credit, the average debt for every adult man and woman in America has nearly quadrupled since the 1950s. “
We have gone from a society where most consumer borrowing was episodic and for special purchases, to a society where many families have to use credit to pay for ordinary household expenses and are permanently indebted,” University of Illinois bankruptcy professor Robert Lawless told Congress.

The reason is that debt and bankruptcy follow the rise of easy credit.

“
Just a generation ago, the average family simply couldn’t get into the kind of financial hole that has become so familiar today,” observed
Elizabeth Warren. “The reason was straightforward: A middle-class family couldn’t borrow very much money. High-limit, all-purpose credit cards did not exist for those with average means. There were no mortgages available for 125 percent of the home’s value and no offers in the daily mail for second and third home equity loans. There were no ‘payday lenders,’ no ‘live checks,’ no ‘instant money,’ and certainly no offers to ‘consolidate’ all that debt by moving it from one credit card to another.”

“
The single biggest determinant of bankruptcy rate is how fast consumer credit goes up,” adds Professor Lawless. After Congress deregulated consumer lending in the 1970s and 1980s, the market was flooded with complicated, high-interest, and potentially dangerous credit products that were sold to unwary consumers untutored in the fine print of credit fees and charges that kept them sinking into the debt quagmire.

But the single biggest cause of exploding private debt, Lawless contends, was a U.S. Supreme Court decision in 1978 in the Marquette National Bank case. “
That really opened the floodgates,” Lawless told me. “It’s the court decision that has had the most effect on people’s lives, that no one has ever heard of. It effectively deregulated the credit card interest rates. Banks hail that as ‘democratization’ of credit. Their attitude was, we can now charge 30 percent to people who would not qualify for a loan before, because they were too high a risk. For banks, these vulnerable borrowers are the most lucrative borrowers.”

For the finance industry, the steep-interest credit card and, even more, the debit card became the ideal vehicles to sell to people with bad credit records, who would get mired in debt and would forever feed bank profits by making the minimum payments while interest and card fees dragged them deeper into debt.

“
If they make the minimum payment,… then that loan will take
almost 20 years to pay back,” said Shailesh Mehta, whose firm, Providian Financial, helped pioneer marketing credit cards to low-income people—“bankrupts … no credits,” Mehta called them. He admitted to PBS
Frontline
correspondent Lowell Bergman that Providian never wanted these bad-risk borrowers to pay off their cards because the firm made so much money off high-penalty fees. They hooked customers, Mehta said, by offering 0 percent interest for a few months. “We made it look like it’s a giveaway and took it back in the form of … ‘penalty pricing’ or ‘stealth pricing,’ ” Mehta said. “In a strange way, the banks were charging [these] borrowers higher interest rates in order to give the wealthy people a break … because the people who have money were paying in full, and they were getting the break at the expense of the people who couldn’t pay in full.”

“
More than 75 percent of credit card profits come from people who make those low, minimum monthly payments,” Elizabeth Warren and Amelia Warren Tyagi reported in
The Two-Income Trap
, “and who makes minimum monthly payments at 26 percent interest? Who pays late fees, overbalance charges, and cash advance premiums? Families that can barely make ends meet, households precariously balanced between financial survival and complete collapse. These are the families that are singled out by the lending industry, barraged with special offers, personalized advertisements, and home phone calls, all with one objective in mind:
get them to borrow more money
.”

Once the lid was off interest rates because of congressional deregulation, the banks had a field day. They sold as much debt as possible. In the early 2000s, banks and
credit card companies blanketed the nation with preapproved credit card offers totaling $350,000 per family. This profligate policy represented a complete reversal in lending strategy. A generation earlier, banks were extremely careful, almost stingy, about granting credit. They were quick to shut it off
if a borrower got in trouble. But by the 1990s, banks had come to see slow-paying borrowers who were in financial peril as their most lucrative targets.

As Pam Scholl’s story illustrates, one way to get off the treadmill of endless credit or debit card debt is to file for bankruptcy and get a second chance financially, much the way bankrupt corporations do. But as personal bankruptcies rose through the 1990s, banks and credit card companies saw the bankruptcy process as depriving them of the most profitable segment of their business.

In the early 2000s, the financial industry began lobbying Congress to close the bankruptcy door, or at least tighten the terms for going bankrupt. They told Congress that “
high-income deadbeats” were using bankruptcy to welsh on credit card debt. “The idea,” explained Professor Lawless, “was to make it harder for people to get to bankruptcy court. The harder it is, the more expensive it is, the longer people put off filing for bankruptcy, the longer they pay the big penalty fees to the banks.” Consumer advocates protested, saying the banks were squeezing helpless debtors who didn’t have the funds to pay with. The banks countered that they were targeting the “high-income deadbeat,” not the “honest and unfortunate debtor” who had truly run out of money.

In 2005, the financial industry got what it wanted. Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which raised the legal and financial barriers to bankruptcy filings. As expected, the number of personal bankruptcies plunged from just over 2 million in 2005 to about 750,000 in 2006. But after a few years, bankruptcy filings climbed sharply again in the wake of mass layoffs and high unemployment. By 2010,
bankruptcies were back over 2 million a year, evidence that even with tougher barriers to bankruptcy, financial distress among the middle class was more acute than five years earlier.

What’s more, when experts examined who was filing for bankruptcy, it turned out that the banks and their lobbyists had misled Congress. As the financial industry had urged, the law was designed to block supposed high-income deadbeats from improperly filing for bankruptcy by instituting a financial “means test.” With the means test as a filter to weed out high-income filers, the average income of bankruptcy filers should have fallen. But that didn’t happen. Researchers saw no significant change.

So instead of filtering out high-income cheats, the new law was actually creating obstacles for honest, financially busted debtors, just as consumer advocates had feared. As Professor Lawless put it, the law “
functioned like a barricade, blocking out hundreds of thousands of struggling families indiscriminately.” So by the time people got to bankruptcy under the new law, they were in far more desperate straits than before. “
The families in bankruptcy are much more deeply laden with debt,” one study found. “Their net worth, which has always been negative, sank further…. Families filing for bankruptcy are in ever-increasing financial distress.”

Once again, the New Economy altered the old rules of the virtuous circle economy, and average Americans got hurt. In the Old Economy, bankers issued credit just to strong, creditworthy customers who typically paid off their debts. The go-go New Economy went for easy credit and higher debt for all, especially people with risky credit records, and many more people wound up in bankruptcy. Over the past five years, as the housing market nosed down and twenty-five million Americans lost solid, full-time jobs, more and more middle-class families turned to easy credit to try to stay afloat. That added to the profits of banks and credit card companies, but the more money they made, the more middle-class and working families sank into financial ruin.

So the new credit system, coming on top of the great burden shift on pensions and health care, has contributed to the unraveling of the American Dream for average Americans and to America’s ever-widening wealth gap.

Rescuing average Americans from the New Economy credit trap
will require reversing course—steps such as reimposing ceilings on interest rates and requiring down payments on houses. But the determined efforts of Wall Street banks and congressional Republicans to hamstring the operations of the new U.S. Consumer Financial Protection Bureau shows how hard it will be to do that—unless the middle class demands it.

IN THE FALL OF
2005, Citigroup put out a glossy investment brochure with a boldfaced heading,
WELCOME TO THE PLUTONOMY MACHINE
,
that advised its clients: “There is no ‘average consumer’ in a plutonomy…. Economic growth is powered by and largely consumed by the wealthy few.”

Citigroup was steering savvy investors to exploit America’s growing economic divide by investing in businesses that cater to the luxury consumption of the super-rich in the world’s greatest plutonomy, the United States. As another Citigroup financial brochure put it, “
the rich now dominate income, wealth and spending” in America. In fact, Citigroup’s pitch suggested that the world had not seen such an eye-popping concentration of wealth since sixteenth-century Spain or seventeenth-century Holland.

To the magazine
Advertising Age
,
a wealthy American plutocracy was a golden opportunity. It urged ad agencies and marketing gurus to abandon mass marketing to the middle class, and even to the affluent upper middle class, and to concentrate on the hyper-rich. “
The top 1% alone control nearly 40% of the wealth,” advised the
Ad Age
blog. “And while the social and political effects of this inequality may be cause for concern, the accrual of wealth among the very few is of great consequence for marketers, since … a small plutocracy of wealthy elites drives a larger and larger share of total consumer spending and has outsize purchasing influence….”

It was true. Even with the economy in a stall in the summer of 2011,
luxury goods were selling well in Manhattan.
The New York Times
reported that Nordstrom had a waiting list for a Chanel sequined tweed coat retailing at $9,010. Mercedes said July sales of its high-end S-class sedans, which cost $200,000 or more, had jumped nearly 14 percent—its best July sales in five years. Tiffany’s first-quarter sales were up 20 percent to $761 million. Markups in designer clothing and shoes were hot. Higher prices made for hungrier buyers, advised Arnold Aronson, former CEO of Saks. While most of the retail economy was flat, the luxury category recorded its tenth consecutive month of rising sales.

Americans, far more than people in the advanced economies of Europe and Asia, accept and even endorse economic inequality as an
integral feature of modern capitalism. Americans believe in material incentives for hard work and talent.

Even so, very few people grasp the dimensions of the economic schism that divides America today. People know that CEOs take home more, but they don’t imagine how much more. In a 2007 nationwide survey,
most people estimated the pay of an average big-company CEO at $500,000, when in fact CEOs of companies in the Standard & Poor’s 500 were then averaging $14 million a year.

Although most people underestimated the wealth gap, most Americans thought income inequality had gone too far.
Eleven different polls from 1984 to 2007 found that a 60 to 30 percent majority of Americans, including majorities of Republicans and high-income earners, thought that money and wealth in America should be more evenly distributed.

The explosive
Jack-and-the-Beanstalk growth of a new economic oligarchy in America took off in the late 1970s, along with the power shift in Washington and the dawn of downsizing in Corporate America. As I mentioned earlier, it spawned the third wave of great private wealth in U.S. history. First came the robber baron era of railroad, oil, and mining fortunes during the Gilded Age, which left average Americans in what historians call “the long depression” of the 1880s and 1890s. Then came the wildly bullish flapper era of the Roaring Twenties that ended with the disaster of Black Monday, the 1929 stock market crash, and the Depression. The new Gilded Age emerged during the Reagan 1980s, when “Go for the Gold” was the official U.S. slogan for the 1984 Los Angeles Olympics and the unofficial mantra for economic Darwinism on Wall Street and in Corporate America that ended in the financial collapse of 2008.