From the Mirage of a Middle-Class Life to the Slavery of Debt

America is very wealthy country, but one has to wonder how much of our wealth is in fact a chimera, spun of a consumerist ideal and given the appearance of solidity by a flood of easy credit? How much poverty and real economic pain is covered up by an endless succession of pay-day loans and EZ-finance rip-offs that eventually just bury people under mountains of debt from which they have little chance of digging themselves out.

Today's bankruptcy rate is ten times what it was during the Great Depression, foreclosures are at a 37-year high and the United States has a negative savings rate, yet we're told every day that the economy is going gangbusters.

George W. Bush often points out that more Americans own their own homes today than ever before. He doesn't mention that they also have less equity in those homes than ever before. Every day brings news of the potential scope of the emerging "sub-prime" loan scandal -- what Robert Kuttner called "deregulation's latest gift" -- and new indicators that the housing market that's driven so much of the economy for the past five years is a bubble that's begun to burst right before our eyes.

Compounding our personal debt problems are our representatives, equally profligate spenders who are just as happy to run up enormous budget deficits and who reflexively guarantee and subsidize trillions of dollars of new loans to already strapped American businesses and consumers.

It's a pretty good time to ask ourselves just how we got here.

Writer and film director James Scurlock does just that in the documentary, and now book, Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders. The film is a sprawling look at the seamy underside of the American credit industry -- an industry whose practices have changed dramatically since deregulation, and not for the better -- and at those who end up caught in a trap of their own creation.

The film is not perfect. Its view is broad but lacks depth; while it makes its point with some really effective storytelling, the documentary acts on an emotional level but lacks the kind of narrative power that makes Michael Moore's films, for example, such controversial cultural touchstones.

What Scurlock's camera does brilliantly is lay bare an issue that affects millions of working Americans but is usually buried under layers of shame and taboo. The film tells the individual human stories that lie behind the bankruptcy statistics, behind the foreclosure numbers. The book, released this week, follows up with much of the narrative power and depth that the film missed.

AlterNet caught up with Scurlock by phone this week to talk about his project and the country's emerging debt crisis more generally.

Joshua Holland: You really tapped into something at the right moment -- people have become aware of the issue of debt, and we're now hearing about it described as an emerging crisis.

James Scurlock : When I started the project a lot of people didn't even know what bankruptcy reform was, but most do now. A few weeks ago, nobody knew what "subprime" meant and now because of this whole mortgage fiasco I think everyone knows what that means. So here we are, two years after the start of the project and everything discussed in the film and the book has gotten worse. As we talked to people for the film, it became pretty obvious that things were just totally out of control and there was this sense that at some point the chickens are coming home to roost and that's largely what's been happening. I'm not gloating about that -- it's really tragic.

But my sense -- and I've talked to a lot of people since the project's been done -- is that the really big system hits are yet to come. There are a lot of bad mortgages out there; there are a lot of these "liar loan" mortgages out there; there are a lot of credit cards and people used to paying off their bills by refinancing their houses every year.

Holland: Debt -- or credit -- has always been an important part of the economy; it allows people to invest and it encourages entrepreneurship -- all the standard things we learn about in Econ 101. But one thing I came away with is that we're looking at a very different credit industry in the last couple of decades than what we experienced earlier. What's different between the credit industry today compared to, for example, the industry during my parents' generation?

Scurlock: The biggest change, by far, is how the financial industry sells debt -- how it sells credit cards and mortgages and all these different products. A generation ago, you'd go to the bank for a personal loan and that was a very rigorous process. You had to provide them with proof of earnings -- your tax returns -- and you gave them references and really had to work for it. The flip side of that was that if they gave you a loan, you got it at a reasonable interest rate. Now we're in a situation where we're getting 17 billion hits of direct mail encouraging us to borrow at often very high interest rates; we're getting e-mails every day encouraging us to refinance our homes; we get offers of credit for every conceivable thing from plastic surgery to automobiles -- there's a credit card now for gambling and one to pay off your taxes. Everything. Small businesses never used to use credit cards at all. They'd go to the bank and get a small business loan with a fixed payment. Now they're primarily using credit cards.

At the same time, the way the credit industry behaves has just completely transformed itself. Its underwriting standards have gone way down and that's a big part of the reason we're seeing so many problems now.

Holland: That's a good transition point. I read somewhere that you were voted the most conservative person in your class at Wharton Business School …

Scurlock: Actually, in my high school …

Holland: OK, in high school. The reason I found that interesting is that you give very short shrift to the traditional conservative narrative around these issues. You don't focus a lot on "personal responsibility" -- on the often really bad choices people make on the way to getting into problems with debt. You focus on these unbelievably predatory situations -- scenes like the mentally handicapped guy with the low-interest government loan who you show getting hoodwinked into this high-interest loan. Respond to that.

Scurlock: You know, everybody in the film and everyone in the book will readily admit that they screwed up. They made a mistake: they bought to many commemorative plates from Franklin Mint or they took out cash advances to pay their mortgage or they bought one of those Ab-tronic belts that are supposed to give you perfect abs in five minutes or they built a 10,000 square-foot McMansion which they knew they wouldn't be able to afford if interest rates were to go up -- which they did -- and on and on.

So that's all there, but what surprised me -- and what got a lot of these people into such deep trouble -- is that lenders weren't asking for their money back along with a reasonable return and maybe a fee or two. They were asking for multiples of what these people had originally borrowed. The line between a loan-shark and a reputable bank has now become so blurred with these banks all writing high-risk, high-interest loans and slapping on all these fees and coming up with all these schemes like double-cycle billing and universal default and on and on.

It's getting to the point now where people actually have a hard time figuring out just exactly what they owe. There was one woman in the film who had a gambling problem -- someone who was very irresponsible, and no one would argue otherwise. But in one year her $12,000 debt went to $50,000 and she didn't make any new charges. There was a guy who testified before Congress recently and he had borrowed $3,200 and had paid Chase back $5,000 or $6,000 and they were still demanding another $5,000 from him.

And if you look at every study done or if you look at what New Year's resolutions people make it becomes clear: people want to pay their debts off. But they're increasingly getting into situations where their $1,000 debts are becoming $4,000, or their mortgage payments are doubling and they don't understand how that happened and in many cases it's just devastating.

Now, there are two parties to these contracts -- that's absolutely true. But the banks have the ability to change the terms and conditions, at will, and these contracts have become so complex that even the Harvard Law professor in the film has a hard time making sense of them. Sometimes bankers can't make sense of the mortgages they're selling. So, caveat emptor, yes, but you should be able to walk into a major banking institution without worrying that you're going to get loan-sharked.

Holland: Maybe you can explain something that I think would be fairly counterintuitive for most people. You say in the book that the common view many people have about bankers is that they're this conservative breed who make their money by being cautious, by writing smart loans, but in fact the real money is made by lending on the margins -- by giving loans to people who are most likely to have problems paying them back.

Scurlock: That's right, it is counter-intuitive. It's because it's gone from a business based on a conservative business model where you were loaning to people who could safely pay you back and you weren't making a ton of money -- just a bit on the spread -- so you had to look at all your risks very, very carefully in order to make money. That model is now history, and the new one is that you charge a huge amount of fees, and a very high rate of interest. So the trick is actually getting people who will pay the most interest and the highest fees.

Credit card fees went from $1.7 billion dollars per year in 1996 to almost $18 billion last year -- an increase of more than a 1000%, and that's where the money is. Now you take someone who pays their bills on time, who has savings and pays their credit cards down each month, well they're not going to pay those fees. They don't have to. And you want someone who really needs the credit, who will be willing to pay a very high price for it.

One thing you've got to understand is that we have a negative savings rate in this country. Two out of three people can't pay their credit cards off each month. At the same time, last year we cashed $800 billion dollars out of home equity. Trillions of dollars in the last few years have been cashed out of people's homes and much of that went to paying off credit card bills. And the cycle continues. So it's a bit like Enron -- you've got some wishful thinkers, and then there are these bankers making enormous fees and at the end nobody's stepping in to stop the party.

Holland: To what degree do you see this as a kind of cultural manifestation -- a reflection of how much value we as Americans tend to put on material wealth, or how much we see material wealth as a proxy for self-worth?

Scurlock: I think that has a lot to do with the taboo nature of the problem -- a lot of people just don't want to about it. Until Katrina, I don't think many people had really seen images of poor Americans. There's this scene in the film where Robin leach of Lifestyles of the Rich and Famous says nobody would watch a show called "lifestyles of the poor and unknown." We just make poor people invisible in this country and there's a sense that if you can't afford something, you've failed.

And the truth is, there are a lot of people in this country who look like they're middle class but in fact if you took away their credit cards you'd see that they're actually quite poor.