Credit Cards: The Plastic Trap

by: Dominique Nora, Le Nouvel Observateur

Some Americans have no choice, Dominique Nora recounts, but to pay $35.50 for a two-week $200 payday loan, an annualized rate of over 468 percent. (Photo: Kevin Steele / Flickr)

    "It was too easy."

    After houses, consumer credit? While bankers plug up the breaches created by the mortgage earthquake as best they can, another bubble threatens them: Americans have been living their dreams on credit. And, having overheated up their cards, millions of households will have problems making their payments ...

    Maria, a housekeeper in a San Francisco clinic, came to the Polk Street Money Mart to borrow $150 (110 Euros) on her October month-end salary. Yet the usurious rate practiced by this boutique is posted in big letters on the wall: $35.50 for $200! But Maria has no choice: "I don't have anything to buy diapers with for the baby; the fridge is empty ..." This young woman who is raising her son alone has already gone through the ceiling of two credit cards: "I've got close to a 6,400 Euro balance, while I earn barely 1,400 Euros a month." In the beginning, Maria used her Bank of America card for exceptional expenses only, such as the pediatrician's bill. Then she got into the habit of paying the grocery with it ... "It was too easy." Today, she is suffocating. Because in the United States, credit cards are commonly used to borrow. And everything pushes you to repay no more than a minimum amount every month.

    Thus do millions of Americans find themselves caught in the "plastic trap." And experts are predicting a new deflagration. "In fact, there's a double financial bubble. The real estate credit bubble has exploded ... The next will be about consumer credit," warns Robert Manning, finance professor at the Rochester Institute of Technology, and author of the best-seller, "Credit Card Nation." The two problems are linked: "Because of the tax advantage, Americans repaid 250 billion Euros of credit card balances with money drawn from real estate between 2001 and 2006," he explains. "During that period, in defiance of the laws of economic gravity, people's real income declined ... but the price of real estate doubled, which completely distorted their perception of their debt capacity." The global balance on American credit cards is up to 700 billion Euros. Now that their houses can no longer be used as "cash machines," and economic activity is slowing down and unemployment rising, what proportion of this debt will turn out to be toxic? In the second quarter of 2008, the national default rate jumped to 7.3 percent. But it seems that that's only the beginning: according to the firm Innovest Strategic Value Advisors, credit card issuers will have to write off 29 billion Euros of losses this year and 69 billion more in 2009.

http://www.truthout.org/102808E