Trillions in Debt, Can the Middle Class Hang On?

Last week, the FDIC and the Federal Reserve Board were forced to remind the nation's bankers to verify their customers' incomes -- adding that it might be a good idea to determine whether or not said customers could afford their mortgage payments. The new guidelines are expected to have a chilling effect on what the industry calls "home ownership." Many esteemed economists have expressed hope that the resulting declines in home values, which have been inflated by the lack of such guidelines, will not stop too many Americans from cashing out the equity in their homes to keep consumer spending up. In other words, the "new economy" is based on people slowly losing home ownership, not gaining it.

Yes, this is both absurd and dangerous. But no, go-go bankers are not entirely to blame for our national credit fiasco, of which subprime mortgages -- the ones that have been blowing up lately, wreaking havoc in markets here and abroad -- will ultimately prove but a footnote. Go back and do the math, like professor Elizabeth Warren of Harvard Law School, and you'll discover a systemic problem: Incomes aren't rising nearly as fast as big-ticket costs like healthcare, education and housing. Ergo the negative savings rate, the two-thirds of us who can't pay our credit card bills off every month, and the proliferation of "liar's loans" -- where customers fabricate an income high enough to qualify for a mortgage and banks promise not to call them out on the lie.

I have been criticized for making a film about such Americans. A banker who joined me on a radio show, for example, sniffed that it was simply too easy to find examples of Americans drowning in easy credit. I completely agree with him. It's far too easy, mainly because those people are most of us. Bankers would do well to listen to a few of the stories behind the numbers, or else they will never understand the numbers themselves.

Some will argue -- with no empirical evidence, mind you -- that the culture itself is to blame. We have become a bunch of materialistic, Paris Hilton-loving deadbeats! they trill. Such was the argument the banks used to railroad bankruptcy reform through Congress a year and a half ago. If we accepted their argument and blamed the "gamers" -- the new welfare queens -- they promised us a dividend in the neighborhood of several hundred dollars apiece in the form of lower interest rates. Last quarter, these same bankers announced record credit card profits (JPMorgan Chase, the biggest, more than doubled their profits), but alas, no check arrived in the mail for you or me.

The "personal responsibility" argument, as it is euphemistically known, appeals to our love of false nostalgia if not history itself. It assumes that Jimmy Carter wasn't imploring us to cut up our credit cards three decades ago (he was); that the Me Generation never happened (it did); that the '80s was not the decade of greed (it was); or that, going back a bit further, the Roaring Twenties never happened (it did).

So caveat emptor, they crow. But do banks really want to be bundled in the same class as used car dealers? True, they've blurred their ivory towers by jumping into the subprime business head first, but they still like to trade on their good names, don't they? The smart ones intuitively get that if they lose their moral authority, if too many of their customers learn that they can't walk into a mortgage closing or sign a contract without a decent chance of said contract blowing up in their face in a matter of months, then the grease that lubricates the economy will congeal into a gum that jams the gears and slows it to a halt.

Some argue that the subprime mortgage fiasco has been contained, yet the mindset that created it lurks everywhere. FICO, the credit-scoring product that Suze Orman likes to compare to x-rays (when she's not peddling Cadillacs or Ameritrade accounts), is riddled with errors and has nothing to do with income. Financing contracts have evolved into minefields that cannot be understood by Harvard Law School professors, MIT math whizzes and oftentimes bankers themselves. Schemes like double-cycle billing, universal default and negative amortization tend to be understood only by their devastating consequences.

I got my first credit card as an incoming freshman at the University of Pennsylvania. My college, like so many others, had sold my personal information to a bank, which sent me an application before I had a chance to enroll in a single class. I thought of this credit card the other day, with its navy blue veneer and shield encrusted with Latin, during the congressional hearings on the credit card industry. One of the bankers was arguing that a particularly nefarious practice was perfectly acceptable because there was no law forbidding it -- just as there is no law against liar's loans or hawking platinum cards to wide-eyed 18-year-olds with no money.

I remembered my first credit card because of the motto inscribed across the front, the ethics code of the university founded by the father of American thrift, Benjamin Franklin. The motto was: Leges Sine Moribus Vanae, or Laws Without Morals Are Useless. How true.