Wednesday, February 11, 2009

The Credit Card Bubble (reposted from 2007)

Here is post from March 27, 2007 that bears repeating.

Let’s put ourselves in the banker’s chair. Suppose the credit situation is getting more strung out. People are not paying on time and charging more on their cards. How could you hide it? Ans. by issuing more cards. This would make the debt per person seem reasonable and at the same time your creditors would loan you more to do the same thing, give people free money to buy more stuff.

What we have is a balloon that is inflating ever more rapidly. The reason it’s inflating more rapidly, is that it’s a real Ponzi scheme. As long as the credit card companies can pay the interest and the defaults haven’t killed them, they are still in business. More “new” customers keep the game going (how many cards do you have?).

The credit card companies shouldn’t have much of a problem paying the maintenance fees, to service the debt. They are charging 18% interest to the credit card borrowers. So they need to give their lenders of good faith 7% off of the top. That leaves them a net of 11% return during good times. So as long as times are good, the lenders to the credit card companies are getting a 7% return and the Credit card companies are getting 11% for managing unsecured debt.

Notice as with a Ponzi scheme, it’s the float that keeps the thing going. As long as there are more investors putting money in, there isn’t much worry. It’s when loan renewals stop exceeding cash demands that a problem arises.

What happens when big money decides not to renew their loans to the credit card companies? It could be considered a contraction of the money supply. That 11% float would be used to pay off any called loans. Its when you realize that the 11% in good times might only be about 3% in bad times with credit card write offs.

So let’s see, 2 trillion of unsecured credit card debt. Now, if you are a retirement fund manager and decide the risk is too great, and decide to not renew your note with a credit card bank, what happens next? Remember, how the sub prime and alt-A 100% loans disappeared? Hmmmmm!!!!

It was the banks in 1929 that bit the dust, this time “it’s different,” it could just be the credit card companies. The government is not going to bail them out. That amounts to paying off Joe Six-pack’s wide screen Plasma TV and the sex change operation.

The real problem at this point, is the problem created by giving everybody a credit card. The amount owed on a lot of the issued cards will probably not be paid. The interest on the debt was the only concern of the consumer. When payment is called for, it’s just not there. There is cash to pay the interest, but nothing to pay the principle. The people who loaned to the credit card companies have secured debt. Secured by 'what' is kind of a joke. It’s kind of like a rock, paper, scissors game, only this time its rock, paper, scissors, and caca.

Nah, it’s probably just my imagination running wild again. . . . … . .

35 comments:

Anonymous said...

Hey, Jim, I love to read what you have to say. BTW, check this article out. I think you'll enjoy reading it: The Federal Reserve's Self-Imposed Dilemma by Gary North.
I'm going to have go back and reread it a couple of more times myself.

You can see it here:

http://news.goldseek.com/LewRockwell/1233759640.php

BTW, I believe that North is one that sympothizes with the Ludwig Von Mises people. Rockwell is with the Ludwig Von Mises' Institute.

Anonymous said...

sorry, I meant to add this:

an anonymous concerned citizen

Dan Mac said...

Jim,

This makes sense but what I don't understand is why the lag? Shouldn't the unsecured CC problem have either led or been neck&neck with the mortgage mess (esp; sub-P)? At least there is "some" collateral in the latter.

Why has this been so under the radar and thus far not a problem? I don't get it.

Anonymous said...

Jim. This is important. You are really misinformed regarding the Fed Reserve. You need to read some factual books on this subject. This is one of the core reasons for all of our problems. It is a common denominator. Read the Feb 12 3:37 post to the article before this one.


The Fed Reserve is a non-government, private organization with the names of its shareholders kept secret. It charges the US Treasury to print its money. It controls the central banking system. It intervenes in our economy and our business by manipulating interest rates and by other monetary policies (it prints money and causes inflation, or pulls money out of the money supply causing deflation). It came into being in 1913 along with income tax. The Globalists (Rothschild being one of them) sent Warburg to the US in 1911 to put this into effect (Aldrich, Wilson and others were complicit in this). It was passed during the holidays when hardly anyone was in Congress. The bill was written by a banker not a legislator.

It was actually income tax and The Fed's and the government's interference in business that caused the Great Depression. The Fed is as federal as Federal Express. They took that name so the masses would think they are part of the government. Rothschild was behind this. He said, "Give me control of a country's currency and I care not who makes the laws."

They tried this 3 times. Twice they were thrown out (Andrew Jackson through them out the last time). These Globalist/Central banker types got in again in 1913 and they've become imbedded and have been slowly tightening their grip on the country. They've been in for 103 years. We've all been born into this which is why we accept it as "normal government and system". It isn't.

It totally violates our Constitution. The government is the only one that is supposed to mint/print and control our money. And the government is supposed to see to it we maintain a strong currency based on commodities, resources and production... not money by fiat. We've lost our sovereignty.

Until we abolish the Fed and income tax, America will continue to sink and everything that Congress does will fail. We will never be free from the Power Elite, International Bankers, Globalists, or whatever it is you want to call them (they are known by many names).

EVERYBODY, including you Jim, needs to become cognizant of this data. The incredibility of this is why it is invisible to the American public.

Get off the mainstream media. Read "The Creature from Jeckyll Island" and other illuminating books on the Fed Reserve; watch The Money Masters DVD (can watch it on youtube); watch America: Freedom or Fascism DVD, etc. etc.

Get educated, get informed. It is the first step towards being able to do anything about this. The Money Masters count on the fact that you will stay ignorant and complacent.

Jim in San Marcos said...

Hi Anon 6:09

I'm not really sure of how to figure that article. Banks maintain margin requirements made by the Fed. If the Fed says 5% then 5% it is.

I'm thinking that if a depositor places 100K with the bank, it has to put 5k in Fed margin account. That allows the bank to write 95k in loans. What if the bank takes the 100k and puts the whole amount in the Fed, my reasoning suggests that the bank can now write a million dollar loan. I think that there is some bank leverage going on here that is a little on the cook the books side.

The banks could be in a real bad way (I would have never guessed). I could be drawing the wrong conclusions on this and I will be the first to admit it. There are many different ways to interpret the information. I don't think we are getting the full picture---yet.

Thank you for the link.

Jim in San Marcos said...

Hi Dan Mac

I really don't have an answer. I do think as things get worse, credit cards will be used as a last resort by people with no cash to spend.

Common sense suggests that the abuse of credit could be enormous. 40 years ago, you couldn't buy groceries with credit for good reason. It could come back to that real soon.

Time may supply the answer. It sure has me puzzled.

Thank you for your comments.

Jim in San Marcos said...

Hi Anon 12:18

The Federal Reserve I understand quite well. I am not misinformed.

What you are repeating I have read many times before, and if you do any research using google, you will find there are a few true facts, but most of what you have cited is pure hogwash. I'm not faulting you, for reporting what you read, but rather pointing out that a lot of what is written out there you have to question very closely.

The real thing that bothers me, is the fact that if enough people repeat something enough times, it matters little whether or not it is factual. It becomes real and is accepted as fact.

It kind of reminds me of the latest You Tube video of using cell phones to pop popcorn. It ain't real.

Thank you for your comments.

Anonymous said...

To: Jim
From: Anon 12:18

I'm surprised. What I wrote in my earlier post is data about the Fed Reserve that I have read in books, articles and from internet research. I've assumed that it is all factual.

Please be so kind as to point out what "facts" I wrote in my last post that were hogwash? I want to follow up on them with more research in order to determine the truth.

I'm not interested in being right. I'm interested in the truth.

Thanks.

Anonymous said...

Jim, study up on how fractional reserve banking works and forget about the FED for the time being. Fractional reserve banking is where a large amount of our money is created and it is nothing but checkbook entries and banks charge interest on it. It is an abomination. The way to see how the whole thing works is to not look at just one bank in your mind. You need to look at it as all the banks make up one big lake. When someone gets a loan 90% of it is just a computer entry. Nobody borrows money and then just keeps it in the account they write checks on it and then these checks are either deposited back in the same bank or a different bank. All the banks follow the same rules that are created by the FED. The other banks are doing the same thing. They can loan out 9$ more for each dollar they have in reserves because they know that not all of their depositors will come for their money at the same time or at least they hope they don't. As long as all banks are following the same rules and can borrow money from the FED when they become short sometimes then the whole thing works. However, no one should have the right to be able to create money by loaning money and then charge interest on it. It is an abomination.

Thomas Jefferson when he killed the first central bank said that "no one has the right to the trade of money lender except those who have money to lend". Fractional reserve banking worked then exactly how it works today except for one thing, at least then money was backed up by gold so at least they were loaning out something that was partially backed up by something of value.
But someone then still just got paper that was not backed up by the full value of the loan but only by whatever the reserve was. Now the whole system is nothing but pure fiat, through and through. Study up on fractional reserve banking and how it works; study up on Jefferson's and Jackson's battles with the central banks. This is all history its not pie in the sky.

One other thing to think on, if banks only loaned out their depositors money exactly how long do you think they would be able to operate? Sooner or later they would have most of it loaned out and then they would have to sit back and collect interest and only be able to loan out what was coming back in as payments. With fractional reserve banking money is always being created and destroyed. When a dollar is borrowed a dollar is created and when a dollar is payed back it is destroyed and it's just about that simple. However, one thing remains the same, it is an abomination to charge interest on money that is created by the stroke of the pen or the cklick of a key on a computer. If you don't look into anything else, look into fractional reserve banking.

An anonymous concerned citizen

Rob in Nova Scotia said...

To Anon about Fractional Reserve

Whether the Fed is owned by shadowy group of international bankers or not makes no difference to what Jim is trying to say in this post. He is talking about the unsustainability of the credit card industry. When you bring up your points you only deflect attention away from the argument. I have learned this the hard way when discussing this with others. Unless you want to be known as someone who wears tinfoil hat then it might be better to just stick with the facts. I want to say that I am no fan of the Federal reserve or Central Banking.

You likely heard the old saying, absolute power corrupts absolutely, well being absolute in your argument corrupts absolutely as well.

Cheers

Rob

p.s. Jim I'm sure the weather is nice there in Kalifornia but here in Kanuckistan it's snowing again.

Anonymous said...

The reason I think that the FED is always appropriate to any discussion of our financial system and its inherent instability is because fiat currency and fractional reserve banking is at the root of the instability of the whole system. If our government did not allow the creation of money out of debt (money out of thin air) then I dare say the credit card industry wouldn't even exist because no one would be able to loan that kind of money out that is totally unsecured. If people are driving trucks and cars across a bridge and the bridge is continully sinking then perhaps they need to quit looking at the bridge and start looking at what it's foundations were placed upon. Now, I'm not one to irritate people so here is my last post for a while. Before I go I would like to share with you this one last article and I do at least hope that Jim will go read it because he has been writing about the coming collapse for two years. There is nothing wrong with looking at what the foundations of the bridge are built on.

Please read this article that is written by Dr. Edwin Viera Jr.:

http://home.hiwaay.net/~becraft/VieiraMono4.htm

I hope that I have not offended or irritated anyone, especially Jim. It has not been my intention to do so.

an anonymous concerned citizen

Rob in Nova Scotia said...

I can only speak for myself but I am not offended. I like the discourse. I have read quite a bit about this including articles from author you have mentioned. I don't disagree with the crux of what you say.

I watched the Matrix again last night. It is a great analogy to the problems in our Modern society. As in the movie the vast majority of people will always be happy with their day to day existence. Anyone who tries to move them outside their comfort zone is marginalized.

It has been my experince that when trying to point out the inherent weakness in current financial system, we should focus on what is easily explained using math and commom sense. The beauty of math is the simplicity of argument. It avoids all the conspiracy accusations that can be thrown your way by easy explainations that most with a grade level education can understand.

Some will say that the world is run by 300 families. They may have wealth beyond my imagination but their control over us is wholly dependent on our labour. If we are all broke because we cannot pay our credit card bills then they have killed the goose that lays their golden eggs.

Cheers

Rob

Anonymous said...

Rob, being an engineer and a machinist, I love math and use it everyday. Building and repairing machinery also makes one practical because it is totally foolish to make a machine more complicated than it needs to be. In fact, the mark of a good engineer is the ability to design machines that do something complicated and valuable that are in fact very simple and easily repairable themselves. Elegant engineering is what they call it.

The FED is a very cleverly designed machine that operates under all of our noses and has been far more successful and lasted longer than it's designers ever initially imaged it would. If it were not for the pure unbridled greed of the last few decades it would have gone on for perhaps another hundred years. However, it will now come to an end because their greed has caused them to paint themselves into a corner and they are now at a point where they are damned if they do and damned if they don't and are not sure what to do. Unfortunately. I'm afraid the whole thing with just be redesigned and ratcheted up and operated on a global and international level instead and all of the industrialized world, whose currencies are also fiat, will accept such a system out of fear in order to avoid the disaster and life will go on with a lot less freedom for the majority of people.

anyways, God bless

an anonymous concerned citizen

Jim in San Marcos said...

Here is a quick lesson on fractional reserves with the FRB.

Bank A has 1,000,000 in deposits. If they want to loan out money, they have to deposit on reserve at the Fed a percentage of that, say 10% which is 100k.

They can now loan out the 900k. Joe sells his home for 900K to Sue. The bank loans Sue 900k and she pays it to Joe.

Joe has two choices deposit the cash in the bank and the process starts over again or he can put it in a mattress.

Notice if Joe puts it in the mattress money creation stops. This is what happened in the 1930's.

Fractional reserve banking by the Fed is a brake mechanism to slow down the creation of new money by the banks. Increase the reserves to be maintained by the bank and you slow down the velocity of funds traveling through the bank.

right now I would guess that the Fed reserve rate is negative. They are accepting some of these SUV's as collateral instead of demanding cash from the banks.

Rob in Nova Scotia said...

Anon

I work in civil engineering field as a drafter designer so I'm exposed to math every day as well. You are right in saying that they have painted themselves into a corner. The credit card bubble is just one aspect of this.....

Rob

Anonymous said...

Jim,

"Bank A has 1,000,000 in deposits. If they want to loan out money, they have to deposit on reserve at the Fed a percentage of that, say 10% which is 100k.

They can now loan out the 900k. Joe sells his home for 900K to Sue. The bank loans Sue 900k and she pays it to Joe."

I don't think that is correct. I think it goes like this:

Bank A has 1M in deposits... they put 10% on reserve with The Fed... they can now loan out that 900k ten times. They now loan out 9M!

Anonymous said...

Now, here is something from the horse's mouth, at least a horse of a different color. Here is some mighty interesting reading about how banks, through the miracle of fractional reserve banking and the FED create money. It's a 137 page pdf file. Don't worry, you can go straight to the Chapter III. How Money Is Created. If you read this chapter you will understand why you have to look at the total of all the banks together (like a lake) to see how 1 dollar of reserves can be multiplied to 10 dollars in the money supply. There are other ways money is created. It's pretty interesting reading and it's even printed by the US Government Printing Office.

The document is here:

http://www.devvy.com/pdf/2006_October/Patman_Primer_on_Money.pdf

And is entitled as follows:

"A Primer on Money

Subcommittee on Domestic Finance

Committee On Banking and Currency

House of Representatives

88th Congress 2d Session

August 5th, 1964

Printed for the use of the Committee on Banking and Currency

US Government Printing Office

Washington: 1964"

It sounds pretty official, anyways. I have been reading Chapter III and it's pretty informative.

an anonymous concerned citizen

Anonymous said...

I'll try once more

http://www.devvy.com/pdf/2006_October/
Patman_Primer_on_Money.pdf

or just Google Patmans Primer on Money

an anonymous concerned citizen

Jim in San Marcos said...

Hi Anon

Here is a link to that article you are talking about.

It's the worst explanation of our banking system I've ever seen. I couldn't figure out how something like that had such credentials. The reason is, it was written by a Congressman. When he talks about going to the Federal Reserve to look at the bank's reserves, it gets a little unbelievable.

His use of words for defining the actual banking transactions are extremely poor and confusing. His concepts about the Federal Reserve creating money out of nothing are a far description of how the process operates. I think he doesn't have the slightest idea that the Treasury which creates bonds and increases or decreases the supply of money is a different organization than the Federal reserve.

I only read chapter three, IMHO the guy sounds dumber than a sack of rocks. I'm not saying that he has no valid facts, Its a little like a blind man describing an elephant by his sense of touch. It is very mixed up.

You can check it out for yourself. Click on the link.

Thank you for your effort, it is well appreciated. That guy is no professor.

Jim in San Marcos said...

I don't mean to leave everyone high and dry.

Here is a link To Debunking the Federal Reserve

Here is another link to the Federal Reserve itself on how it operates.

These links might answer some of your questions brought up on the FRB.

Anonymous said...

Jim your first link doesn't seem to be working

AngryTaxPayer said...

Jim,

You need to drop the ".htmllink" in the last part and change it to ".html" to work correctly.

This one should work...

http://www.geocities.com/CapitolHill/Senate/3616/FedReserveFacts.html

Tom

Jim in San Marcos said...

Hi Anon 8:27

Lets call you the bank. Your friends loan you 1 million to invest. If you were a federal reserve bank you would have to put 10% in our example into reserves. You now have 900K to loan out, not 9 million

You can loan out the 900k and another depositor could deposit it back into your account as a deposit. You could take 10% of that and put it in reserves and loan out 810K.

So if we look at the banking system as a whole, starting with a million dollar deposit and going for 10 deposits following this particular money trail with different banks, with 10 loans at 90% we get 1m, 900k, 810k,729k, 656k,590k, 531k, 478k, 430k, and 387k. The 10 transactions would net 6.5 million in new money created. This is on the assumption that none of the depositors spent a dime which is highly unlikely. Then we have the Federal reserves increasing 100k, 90k, 81k,73k, 66k, 59k, 53k,48k, 43k, which comes out to 611k.

There isn't one bank that gets a million and then loans out 9 million, it is a slow methodical process of deposits and loans with many different banks.

The scary thing is when the economy is going down hill, people want to withdraw money from the banks and they are loaned out 90%. Here is where the Fed tries to cover the banks with their own reserves. Sadly 10% in this debacle ain't going to cover it. That's why we have the TARP loans.

I kept it simple, but it is more convoluted than this. Hope this "kind of" gives you a whiff of what is going on.

Jim in San Marcos said...

Hi Tom

Your right as usual

I'll try again

Link

I'm getting sloppy I didn't check the link Thank you for troubleshooting it.

Jim in San Marcos said...

I see two other mistakes I made

"right now I would guess that the Fed reserve rate is negative. They are accepting some of these SUV's as collateral instead of demanding cash from the banks"

I was in a hurry this morning (I've got a job)

It should read: Right now I would guess that the reserves deposits for banks at the FRB is close to zero.-- it can't go negative.

Second "So if we look at the banking system as a whole, starting with a million dollar deposit and going for 10 deposits following this particular money trail with different banks, with 10 loans at 90% we get 1m, 900k, 810k,729k, 656k,590k, 531k, 478k, 430k, and 387k. The 10 transactions would net 6.5 million in new money created."

I added in the original amount into the increased money supply. Instead of 6.5 million it should read 5.5 million. (I just can't add or think well on Friday the 13th)

Rob in Nova Scotia said...

Basically the Banking system and by extension the credit card industry is just a legalized cheque kiting operation. It only becomes apparent when everyone marches to bank to demand thier money.

rob

Jim in San Marcos said...

Hi Rob

I took a worst case scenario. Normally when you sell a home you also have a loan that gets paid off so in each step of the way, the next deposit in the chain might be zero. In the case with the housing bubble it was far from zero, and we can see the resulting mess. Normally this would not be a bank check kiting scheme, there would be a balance of expansion controlled by increasing or decreasing the Fed's required banking reserves.

Any banking system would collapse if everyone went to the bank for their money. It just isn't there. The Federal Reserve was created to prevent that from happening. They guarantee the deposits and in that way a bank run is prevented.

The problem right now is depositors are withdrawing money from the banks at a rate faster than it is being deposited. You spend your savings when you are unemployed. In the same manner that the money supply increased, it is now contracting at a very fast rate.

The Fed can stop the bank runs, but it cannot stop the contraction of the money supply. In this case, Congress and the Treasury are going to print dollars to stem the contraction.

Anonymous said...

Jim,
Per your explanation, this means that banks that are members of the Fed Reserve system only have 10% of the total deposits that they've been given. The 90% has been loaned out. And they continue to lend out 90% of whatever deposits they get (with all banks doing this it becomes a convoluted, complicated mess). Those 10% reserves are held by a FRB. Thus banks don't ever have much cash on hand. If 35% of their depositors came in at once and decided they wanted all of their money, the bank would probably not be able to fulfill their wishes. Do I have this right?

Who ever thought this craziness up? It creates a terrible imbalance. I can see banks maybe getting away with a 3:1 ratio but a 10:1 is insane. This extension of credit along with the printing of money are the two causes of inflation. The credit and the printed paper both have no value at all yet they still raise the cost of goods and services.

Man is a genius in so many ways yet he is a jackass in so many ways.

Jim in San Marcos said...

Hi Anon 9:41

The 10% is held by the Federal Reserve, not by the bank. If the bank submits a bad check to the system it gets deducted from their 10% reserve account. The bank has to make up the difference or borrow from the Fed for an "overnight loan." People write bad checks all the time.

The banks are like any retail business, they have to have cash on hand for daily business. Loans are being paid off and new ones are being written. Considering the present interest rates being paid by banks, I would guess they are flush with cash and no one to loan it to. That might not be true for a bank that specialized in real estate loans.

You are right when there is a run on the bank, the money isn't there. During the Great Depression 3,000 banks failed for just that reason. The Federal Reserve was created to stop that from happening. The guarantee that your money is safe pretty much eliminates a bank run from even starting.

The more fully invested a bank is, the more profitable it can be. So if you deal with a bank and need large amounts of cash, you order it days in advance from the bank.

The bank writes a loan to you for 100k at 10% and sells it to an investor at 9.5% and the bank charges the investor a half percent management fee. You can see that if they can do this successfully several times a month, that half a percent adds up to be quite a bit. This is where the bank makes it's money. It could hold the loan, for the interest being paid, but that ties up their funds and limits new loans.

Anonymous said...

Hi Jim,
As things continue to unravel (more defaults, bankruptcies, foreclosures, job losses, etc.) I guess credit ratings and histories and FICO scores won't mean very much to people anymore. Especially if they don't plan on buying a home, car or any other big ticket item that is usually financed in the next 10 years.

If I was in a squeeze and under pressure—or even considered that I could wind up in that position in the future—my first concern would be a roof and food on the table for my family. The credit cards would be the first thing I'd let go. The thinking would be something along the lines of, "It's unsecured debt and who cares about credit ratings anymore. I'm gonna conserve all the money I can to get through this economic nightmare. Looks like the big screen TV, lawn mower, last year's vacation to Hawaii, the clothes and shoes my wife bought, and the $3500 cash advance I got to pay off some other bills have all turn out to be... FREE!!"

Hey credit card companies... bend over and get ready for the big one. The tables have turned.

Jim in San Marcos said...

Rob

I don't think I answered your question completely

The Banks cannot create money. There is no check kiting going on. The bank can only loan the depositors money. The home sellers increase in wealth in our example is redeposited into the banking system. If the present (note holder) homeowner walks from the loan, the bank eats the loss and may become insolvent. The depositors lose nothing because of the FDIC insurance.

In the housing bubble, the banks had no problem selling the loans as home prices were going up. Home sellers were making money (increasing the money supply), the banks were making very bad loans, which paid very good management fees. Nothing was wrong with the party until the bubble burst.

What is really confusing probably is the fact that this thread is talking about fractional reserves, the mechanics of the Federal Reserve system and regular banking operations. They are all interrelated and when I simplify one, I do injustice to the other.

Jim in San Marcos said...

HI Anon 11:49

Unfortunately Congress in their infinite wisdom made that pretty much impossible with the new bankruptcy laws. Credit card debt is kind of like treading water while holding a cinder-block above your head. If you have a job they will hound you and your employer to death for a payment.

Of course if you are over the age of 65, I wouldn't stop charging on your credit cards on my account--start stimulating the economy. Get the kids everything they ever wanted. The credit card companies should think twice when issuing cards to us baby boomers.

I think you are quite right, Credit cards are an invisible bubble. Their time is coming.

Jeffrey said...

Jim and Dan:

As a bankruptcy attorney "on the front lines" let me explain a possible reason why the credit card problem has remained "invisible" so far.

My clients usually have a harder time giving up their credit cards than they do giving up their mortgages. This is the opposite of the Fair, Isaac historical data that assumes people default last on their mortgage. In California at least, if you default on the mortgage nothing happens for months. If you get to an attorney such as me, you can usually stay in your home for over a year without making any monthly payments at all.

If you default on a card, though, today's data sharing among card companies will eventually trigger cross-defaults on other cards. First, credit lines stop growing and you stop getting those new cc offers in the mail. Then come the credit reductions; you pay down the line one month and the lower balance now becomes your new credit limit. Then the rates go to default (30%) even on cards you pay each month (look at the fine print). Last, you start getting the credit termination notices.

As a result, many people do everything they can to make the minimum payment each month on all of their cards. Not paying the mortgage frees up a lot of cash for making cc payments, at least until the eviction comes and you need to pay rent. But the jig is up when you lose your job. That is where we are now, which is why 2009 is the year will be the year of the credit card implosion.

I have several, middle class clients with between $250k and $400k of credit card debt EACH. They have never missed a payment. They will be filing bankruptcy this year and will discharge the entire amount of debt, most of which was used to keep their businesses afloat, not to finance high consumer purchases.

Jim in San Marcos said...

Hi Jeffry

Thank you for sharing your input on this credit mess. It kind of helps fit the pieces together.

Just out of curiosity, how much credit card debt can you get rid of in a bankruptcy if you earn say 50K per year. From what I have read, there is a means test as to how much the judge will forgive.

Anonymous said...

Jim, not to pick on the older crowd, but I think the geesers have it easy this time around. The road to perdition is shorter for them. It's the younger folks and their infant babies that have to carry the boulders on their backs for years to come.

As bleak as it looks, though, I have confidence we'll invent some gadget to help with the weight. If the gadget bears a resemblance to a bubble blowing machine, it's by pure coincidence only.