We’re all aware that one of the biggest problems of today and hindrances to economic recovery is DEBT. How did this happen? Are people these days less fiscally responsible? Is it consumerism? I’m in the middle of reading Elizabeth Warren’s The Two-Income Trap: Why Middle-Class Mothers and Fathers are Going Broke and it really sheds light on how we got to the predicament we’re in today. Though she covers many factors of the economic downturn, she goes over two myths: the over-consumption myth and the evil debtor myth. The bottom line is that our perception that our society consumes itself into debt then tries to get away with paying that debt off is incorrect.
What is rarely discussed is how banks have changed over the past few decades – namely that they have been deregulated. Also, in 1978, the Supreme Court in Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp., 439 U.S. 299 (1978), held that state anti-usury laws are unconstitutional because they violate the interstate commerce clause. Now, people are struggling to pay interest that simply continues to mound. No wonder we can’t get out of debt — our debt grows exponentially. And banks profit on that. In her book, and in the documentary Maxed Out, Ms. Warren discusses how CitiBank hired her as a consultant and demonstrate to the bank how they can minimize their losses and decrease defaults. When she suggested that banks not lend to debtors who are in obvious financial trouble, one senior executive raised his hand and noted that ‘We have no interest in cutting back on our lending to these people. They are the ones who provide most of our profits.’ (Pg. 139).
Banks prey on people who are already in a debt-hole by sending them offers for lines of credit and when someone is in trouble. They get offers to take out a second mortgage. At this point and often in desperation, consumers figure it is the best chance. ‘When things get better, we’ll pay it back.’ But then things don’t get better. Things get much worse. To add insult to injury, banks have hidden fees and charges that incur when a debtor defaults.
After all is said and done, one group of is taking advantage of another. Some lament that debtors are taking advantage of banks, but after exhaustive research, the opposite is clear: the rich are taking advantage of the poor by making it impossible to get out of debt thus obligating the poor to continue to pay to the banks. How else can we explain the fact that in this ‘recession’ the rich are still getting richer and the poor are getting poorer?