Hey Bush, Stimulate My Interest Rate

All the cheery bipartisan photo-ops accompanying the Bush-Congress stimulus package won't change the economic condition of the majority of Americans. That's because it's not based on reducing living costs. As long as expenses such as health care, traveling to work, tuition and carrying debt rise faster than average income, personal financial stability remains under attack.

Pride notoriously goes before the fall. In corporate economics, so does unregulated recklessness. Six years ago, the subprime mortgage market was a third of the size it is now. But as the stock market tanked and money became cheap, borrowers jumped at targeted campaigns extending credit at exorbitant, adjustable rates. Investment banks packaged their higher-interest loans, effectively trading the homes underlying these loans for profit (the more subprime the loan, the bigger the commission). We know how that story ended.

The same cycle is happening in the credit card market. First came exuberant marketing. According to market research firm Mintel International Group, credit card mail offers surged to 5.3 billion in 2007, up 41 percent in the first half of the year versus the first half of 2006. Direct mail to subprime borrowers doubled compared with 2005.

Such solicitations produce increased borrowing, delinquencies (late payments) and defaults -- which lead to credit card companies and banks begging the Fed for rate cuts and Congress for tax rebates, calling it stimulus. They pretend that customer extortion is acceptable, even as signs of customer pain grow.

According to the rating agency Fitch, performance in the $2.5-trillion consumer credit card market will deteriorate noticeably throughout this year. The American Bankers Association noted 2007 delinquencies are nearing early 1990s levels, and delinquencies at the end of the year rose faster than in the beginning, signaling more financial erosion to come.

Meanwhile, supermarket banks started adding credit card and auto loans to their list of write-downs -- the losses that had at first been due only to subprime mortgage problems. When JPMorgan Chase took a $1.3-billion hit due to bad subprime investments in mid-January, it set aside another $2.3 billion to cover future losses from mortgages, home equity loans and credit cards. Citigroup set aside a larger chunk of change, $5.1 billion, for the same purpose.

Then there are student loan debts. Last week, Sallie Mae, the nation's largest student lender, announced a $1.6-billion fourth-quarter loss and set aside more than half a billion dollars to cover future losses. A month earlier, it stated that people attending less "traditional" schools would get fewer loans. Stony Brook, good. Nassau Community College, bad.

And in the auto industry, too, delinquency rates are approaching all-time highs, according to Global Insight, an international research firm. AmeriCredit Corp., a subprime auto lender, cut its 2008 earnings forecast by 42 percent.

But have banks, credit card, student loan and auto lenders learned anything from the subprime mortgage crisis? The answer would be yes if they reduced interest rates and fees, and offered borrowers the opportunity to repay loans at lower rates, even over longer periods. No such luck. Default interest rates have risen above 30 percent, even for those with high credit scores, and fees are skyrocketing.

Part of the reason that the subprime crisis got out of control was that banks and lenders levied interest rates at higher levels than borrowers could afford. State Attorney General Andrew Cuomo is investigating whether they also lied about that risk to the public. That same antiquated logic -- increasing charges for people least able to pay -- reduces the chances of getting any payment at all, and increases those of more future losses.