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They Got Bailed Out, We Got Sold Out: How the Banks Profit from the Lack of Jobs

Consumer borrowing hit its highest level since August 2007 this June; here's why that's not a good sign for the economy.
 
 
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Amidst a lot of indicators that say we could be heading for another round of recession—before the so-called recovery even reaches most people, let alone our millions of unemployed—June saw a jump in consumer borrowing, three times as much as expected, according to  Bloomberg News. The $15.5 billion increase in credit was the biggest since August 2007, and revolving debt, which includes credit cards, was up by $5.21 billion, the most since March 2008.

In a consumer-dependent economy, that's a good thing, isn't it? After all, borrowers must have some confidence in their ability to pay back their debt, right?

Not so fast.

During the debt ceiling drama, we heard a lot about the need for the government to “live within its means,” comparing the government's spending to a household shelling out money for unneeded things.

The analogy didn't work out too well—imagine a household spending half its income on defense, for instance—but it had another purpose. It reiterated the idea that working Americans, burdened with debt, were themselves to blame for their financial woes. Just live within your means, the argument goes, and you won't have those pesky credit card bills.

Of course, that's not even close to true. In an economy in which real wages have been stagnant or even in decline for years, credit has had to make up the difference. Banks and credit card companies have profited off the rest of the country's debt. “America is a nation whose growth in recent decades has been predicated on a model of consumption. From a nation that used to save to invest, we now borrow to consume,” wrote  Moses Kim at Naked Capitalism back in 2009.   

When credit froze up after the financial crash and working people could no longer borrow to spend, the economy took another hit. It doesn't take an economist to tell you that spending isn't back to where it was before the crisis. Catherine Rampell at the  New York Times pointed out, “With fewer jobs and fewer hours logged, there is less income for households to spend, creating a huge obstacle for a consumer-driven economy.”

So why the jump in buying on credit, if people still don't have money to spend? Carlos X. Alexandre at Seeking Alpha explained:

“...the most logical interpretation is that as other sources of cash are drying up – jobs, equity lines, etc. -- consumers are now turning to credit cards for basic expenses, and as credit lines become exhausted another round of defaults is in store. Some may say that cash sales are not reflected in the data, but the American way of life and the core economic engine has been plastic-based for as long as we can remember, and is not about to change anytime soon.”

In other words, a jump in consumer credit isn't a sign of confidence, but of desperation.

“When you look at unemployment being above 9 percent, housing prices not really coming back to a good space, that will impact the mood and the  consumer confidence ,” MasterCard Chief Financial Officer Martina Hund-Mejean told  Bloomberg. “It’s impacting it today and it will impact tomorrow.”

Hund-Mejean's company, meanwhile, is profiting handsomely, whatever the reasons for the uptick in consumer borrowing. Bloomberg notes that MasterCard, “[t]he world’s second-biggest payments network reported that its second-quarter profit rose 33 percent. Its U.S. debit- card spending surged 19 percent in the second quarter to $98 billion from a year earlier, and U.S. credit-card climbed 6.1 percent to $129 billion.”

Credit cards are far from the whole story. $10.3 billion of the rise in borrowing was in non-revolving debt, which includes student loans, car loans and mobile homes. (The report doesn't include mortgages and home equity credit.)

 
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