It’s hard to understand how a major financial news outlet, at this late hour, can discuss the “democratization” of consumer credit, without mention of two big reasons for spiking consumer debt levels, namely, declining median family incomes, a fact documented in the outlet’s very own news pages, and a deregulated and unhinged banking sector.
But this WSJ story manages to avoid both, and that’s too bad.
It also should be noted that the story’s main anecdote doesn’t support the idea that Americans have been living “beyond their means,” an old business-news chestnut that the story revives.
I applaud the paper for the shoe-leather expended in reporting this story. I don’t expect everyone to agree with me, to include everything, or to write a story according to my specs. But still, the use of the term “democratization” of credit is a deliberate choice to describe the transformation of retail lending in the last decade. Even in quote marks, that term deserves much more scrutiny that this story provides:
The ‘Democratization of Credit’ Is Over — Now It’s Payback Time
The story start with tour bus operator who holds herself largely responsible because she is drowning in $36,000 of debt and says:
The recession has forced a financial reckoning for Americans across the income spectrum. The pressure is especially acute for the low-income Americans who relied on borrowing for daily expenses or to gain the trappings of middle-class life. Shifting credit practices over several decades had enabled them to live beyond their means by borrowing nearly as readily as the more affluent.
But the financial crisis and recession have reversed what some economists dubbed the “democratization of credit,” forcing a tough adjustment on both low-income families and the businesses that serve them.
The story runs through stats on rising debt-to-assets levels and homeownership among low-income people and says (my emphasis):
When the recession struck, banks that had eagerly wooed new credit-card customers reversed course. “Rather than keeping accounts that have high loss potential and limited revenue opportunity, the mission becomes to close out those customers’ active lines and drive them off the books,” said a report from TowerGroup, a research firm. By June 2009, banks were closing credit-card accounts at a rate of 14% or 15% annually, double the rate of a year earlier.
Boy, that packs a sea change in the consumer debt business into a single clause; rather than lending money in the hopes that consumers would pay it back, banks began to sell debt in the hopes that they wouldn’t. Anyone who had a credit card in the last decade knows this.
The piece quotes a trade industry official, but not a consumer advocate. Is this a fatal omission? No, but it’s telling enough.
And most people acknowledge by now that stagnating incomes led people increasingly to use credit to cover day-to-day expenses, the rising cost of housing, education and health care, and as a safety net for emergencies. Put that together with an unregulated lending sector that used practices that everyone, even the Federal Reserve, now recognizes as deceptive, and you are looking at an expansion of credit. I’m not sure I would call it “democratization.” That’s a banking industry term. How about “expansion.”
As for the anecdote, we learn in the first paragraph that the $36,000 in debt faced by this bus driver is more than she’s ever earned in a year:
She largely holds herself at fault. “Years ago, I lived for now. It was so stupid,” the 28-year-old says. “It’s depressing, but I can’t live that life anymore.” Now, she says, “I basically want to live for the future.”
But we have to read all the way down in the story to get to this:
Her biggest chunk of debt, $26,000, stems from student loans to pay for her two-year associate’s degree from a community college — loans now in the hands of collectors. The remaining $10,000 or so includes old credit-card balances, debt to a store that rents furniture, utility bills and back taxes. Another obligation is $400 a month she contributes to the rent on her grandfather’s two-bedroom apartment, where her mother, uncle and sister also live.
So most of the debt is for student loans. How is that living “for now”? The other $10,000 is for back taxes, utility bills, and other unnamed expenses. I suppose I live for now, too, since I pay utility bills and taxes. The particular subject was forced to take on debt because her earnings were not enough to keep up with what was a not-very-wild lifestyle, which included obligations to support family members who are also struggling.
To see this as the end to some kind of democratization is to look through the narrowest frame possible.