The Shelby Star
Opinion
Guest Column

20 February 2003

By O. Max Gardner III

Even more frightening than the amount of our current consumer debt is the prospect of ever paying off this much debt.  The math is quite simple.  If every American were to stop credit-card spending tomorrow and cut-up every card, then it would take them more than five decades to wipe out the $700 billion dollar tab.  Specifically, assuming an annual percentage rage of 20% and a minimum payment of 2%, it would take 601 monthly payments-or 50 years-for the American consumers to pay off that much debt, racking up more than $3 trillion in interest in the process.

Why have the banks allowed Americans to incur such astronomical charges on their credit cards?  Simply stated, because the credit card business is the most profitable legal enterprise in the United States.  Even though the banks wrote off $3.9 billion in credit-card debt in the third quarter of 2002 (July, August and September), the Federal Deposit Insurance Corporation reported that bank profits were up 34.8% during these same three months.  You see the banks can buy their money from the Government at a low rate of 1.25% and then mark it up to consumers at 22%, 25%, or even 29% on some cards.  This huge profit margin ensures safety for the banks because the profits continue to roll in notwithstanding the losses as long as the people keep making their minimum payments.

Of course, with unemployment rates at historic levels, with the majority of the states facing serious financial deficits, with many sub-prime lenders filing bankruptcy, the biggest financial problem may not be the cards but the ticking time bomb of home mortgages.  The Federal Government has determined that more than 60% of every home mortgage requires two incomes.  What happens if one spouse gets sick?  What happens if one spouse is laid-off and cannot find new employment?  And, in the worse case scenario, what happens if the prime rate rises and all of the adjustable rate mortgages follow suit?  Even now, the Mortgage Brokers Association of American is reporting that foreclosures account for 4 in every 1000 home sales, a level unseen in the 30 years of tracking this type of data.  And seriously delinquent loans, those well past due and on their way to foreclosure, now account for 5% of all mortgage loans-the highest levels since the last major recession. 

Mortgage defaults and credit card debt were major factors in the 1.5 million consumer bankruptcy filings that were recorded over the last 12 months.  In fact, more than three million people have gone through personal bankruptcy in the last 24 months.  And, even though President Bush and the Republicans in Congress will most assuredly pass a law this year that will make it much more difficult for consumers to file for bankruptcy, most experts predict that the number of new bankruptcy filings will break all records.

Ultimately, as long as the banks are allowed to make more money than Tony Soprano, there will be little incentive to put the breaks on the problem of consumer debt.  And, as long as the banks keep printing more plastic money the further we move down the road to financial ruin. For instance, take this problem out 10 years and you will have millions of baby boomers who will not be able to retire because they are carrying all of this debt.  At that point, they simply will not have enough money in their retirement plans to service their debts and to buy gas and groceries.  Then, when the boomers hit 65 the medical insurers will cancel their health insurance and their medical services will be on a "cash and carry" basis.  The boomers will they find themselves stuck in the Bermuda triangle to too much debt, no medical insurance, not enough money and too little time to get enough money.

It's the Perfect Storm and it's coming!