DEBT PEONAGE

Posted in Rants on May 21st, 2009 by Ed

On Wednesday the House passed an important piece of legislation tightening regulations on credit cards, legislation that we can safely assume would not have come within 1000 miles of passage under Republican leadership. The bill raised less of a fuss than I expected – although maybe I should withhold judgment until Talk Radio and the wingnut blogosphere has had a few days to settle on a talking point and go into pant-shitting rage about the encroaching socialism of it all. What objections have been raised are as predictable as they are confusing.

The primary criticism issuing from the lenders is that the new regulations will make it very difficult to extend consumer credit to "risky borrowers" and that it will dampen consumer spending, further wounding the already battered retail sector of the economy. Both of these complaints are patently silly. Regarding the first, that is precisely the intent of the legislation. The fact that lenders are complaining about this is indicative of just how much of their profitability relies on lending money to people who stand absolutely no chance of repaying it. The second claim is spurious, implying that debt is a prerequisite to consumption. If only we could think of some way to have people buy things without borrowing the money to do it.

Encouraging less borrowing and less debt-fueled consumption will force people, for better or worse, to live within their means. Because of this fact Congress and the lending industry have been like two men pressing guns to one another's foreheads regarding loose credit and government regulation. Representatives of both parties know this is the right thing to do (witness the 90-5 vote in the Senate on this bill) but have always been afraid to do it explicitly because it will force people to realize just how little wealth they possess. Since real wages stopped growing thirty years ago the political system has relied on the complete abandonment of sound lending practices to placate the unwashed masses with easy credit; as I've said many times on these pages, "Sure, you can have a raise" was gradually phased out in favor of "We're cutting your salary, but here's another MasterCard!" So throughout the last few decades the lending industry has refused to blink, knowing full well how harsh the political retribution would be, primarily for the Republicans, if the working poor and middle class suddenly realized exactly how much of the American Dream they can really afford.

I'm not painting the Democrats as heroes here; current events have more to do with the increased regulations than any show of political will. But it is going to be interesting to see how the lower income and overextended middle class voters so crucial to the 1994-2004 Republican majorities react. It can't be easy to realize just how financially unstable one is when ability to go balls-deep in debt is taken away, an ability that has been the key to maintaining the illusion that our generation is not the first to be less financially successful than our parents.

The downside of this legislation for the lenders is that they lose a very profitable component of their business – banging honest borrowers with fee hikes and charging non-payers substantial penalties. I'll try not to lose sleep over that while reminding them, amidst their whining, that there is no Constitutional right to maintain the profit margins they enjoyed before this crisis. To claim that regulating dishonest, gray area practices by lenders will (further) bankrupt the banks and bring lending to a halt is approximately as logical, and as true, as claiming that laws against stalking and rape mean there will be no more sex.