How Our Gutless Media Helped Trigger the Credit Crisis
Last year, New York's state legislature, which has historically led the nation in passing pro-consumer credit legislation, approved a pair of bills aimed at protecting residents from questionable lending practices, the kind that have come back to haunt the economy. One of them would have put the brakes on the "universal default" provision, which lenders use to jack up the rates on credit cards if a cardholder misses a payment on a card issued by another lender. This practice has caused credit-card rates for some people to soar into the 20 or even the 30 percent range, far surpassing what once was considered criminal usury and helping to pile on debt that has contributed to mortgage foreclosures. But then-Governor Eliot Spitzer vetoed the bill, arguing that it would force lenders to increase interest rates or fees for all credit-card holders, even those with good credit records. Spitzer also claimed that the law wouldn't do any good anyway because federal law would preempt state law, and federal law allows banks to bypass state usury laws by setting up shop in states with lax regulation.
Whatever the merits of Spitzer's argument, it was an important discussion for New York and the rest of the country. But his veto was like the proverbial tree falling in the empty forest. The AP's Albany bureau sent out no story, and the news editor does not recall why. A Nexis search found only one brief mention of the veto, in the Albany Times Union. Spitzer sided with the banks and the media were silent.
This would not always have been the case. What happened in Albany is just one piece of evidence of the decline of the consumer movement, the rise of consumerism to replace it, and the media's role in both trends. The consumer movement that rose in the 1960s pushed for laws and regulations to protect buyers from the excesses of the marketplace. The press aided both its creation and its demise, then helped to replace it with consumerism, which serves the individual shopper but not systemic reform that might benefit everyone.
Nowhere is that clearer than with the issue of credit, where the consumer movement scored its first victories -- and where the erosion of hard-won protections has contributed to the nation's current economic turmoil. Back in 1967, Sidney Margolius, a syndicated consumer-affairs writer and author, testified before a subcommittee of the House Banking and Currency Committee about unscrupulous debt collection tactics, deceptive selling practices to goad people into buying on credit, and misleading credit terms that resulted in exorbitant interest rates. "The damage to consumers themselves is greater than many of us may realize," Margolius told members of Congress. "To a large extent -- and this may seem a little strong to swallow at first -- consumer exploitation has replaced labor exploitation as the real problem of our times." Forty-plus years later, some of the same issues bedevil consumers. Only now they are often viewed as simply aggressive business practices for lenders, not consumer exploitation. Gretchen Morgenson, in her July 20 New York Times piece, "Given a Shovel, Americans Dig Deeper into Debt", pointed out that lenders "have found new ways to squeeze more profit from borrowers" using sophisticated marketing tactics and personal financial data to tailor their pitches, making debt sound desirable and risk-free. Finally the fallout came. As Dean Starkman, who runs The Audit on cjr.org, pointed out in this magazine in March ("Red Ink Rising"), American credit-card debt now stands at more than $900 billion, up 9,000 percent from 1968, having risen by a third between 2001 and 2006. Worse, he noted that more than three quarters of the credit industry's profits now come from people who make minimum monthly payments. As he further reported, these industry-wide changes followed a regulatory rollback and were by and large missed by the nation's press.
Call it a special time in American history -- the nation's third consumer movement, following the one sparked by writers like Ida Tarbell and Upton Sinclair around the turn of the previous century, and a second movement born from hardship during the Great Depression. This one began with the publication of Ralph Nader's Unsafe at Any Speed in 1965, in which he questioned the safety of GM's Corvair. General Motors retaliated by hiring a detective to spy on Nader, hoping to unearth enough dirt to bury him. Instead, GM's tactics turned Nader into a folk hero, and GM president James Roche apologized to a congressional committee. Nader had been called as a witness at a hearing on auto safety, and it's a federal crime to harass or intimidate a congressional witness. After that, Nader and his Raiders, a band of bright young activists and lawyers, went about the business of building support for laws that would make cars and medicines safer, shopping for credit easier, and the air cleaner. They brought to stodgy Washington a new public-interest perspective and began to disrupt the cozy relationships that businesses had developed with the agencies that regulated them.
The press was key to their success. The economic malfeasance that Nader's Raiders attacked was often invisible, and they knew they needed the mirror of the press to show how the public was being victimized. Nader framed issues as a struggle between the little guy and the big corporations, and to many good reporters of that era, protecting the little guy was what journalism was all about. So there was a certain harmony. "Ralph used to say, 'If I don't see you in the media, you guys don't exist. I want to read about you,' " says Mark Green, one of the original Raiders and later the consumer affairs commissioner for New York City. Doing his job without the press, Green told me, "would be like playing tennis without a ball."
If Nader was a genius at using the media, staff members on Capitol Hill were just as clever. And crusading politicians were sometimes allies with crusading journalists in what they saw as protecting the public. Michael Pertschuk, the former Federal Trade Commission chairman, recalls that when he was a young staffer in the mid-1960s, his boss, Senator Warren Magnuson, of Washington State, summoned him to his office one day and ordered him to tell syndicated columnist Drew Pearson what went on during a bipartisan executive session in which Republicans had been trying to gut the Fair Packaging and Labeling Act. Soon afterward, Pearson published a story revealing what Republicans were up to. Then Magnuson confronted his staff. Did any of you leak this to the press? he wanted to know. No one raised a hand, including Pertschuk. "There was an unwritten convention that as a staffer I could speak freely and leak freely and be protected by journalists," Pertschuk said.
One journalist Pertschuk spoke freely to was Washington Post reporter Morton Mintz. Mintz's reporting on corporate misdeeds and the unequal power between business and consumers in the marketplace and the governmental process was legendary, and inspired a generation of young journalists whom Mark Green later called "local Morton Mintzes." They worked for newspapers in Louisville, Detroit, Philadelphia, Cleveland, St. Petersburg, Albany, and elsewhere, writing about local consumer deceptions and questionable practices. They fingered local businesses and sometimes irritated the holy trinity of newspaper advertisers -- car dealers, supermarkets, and banks. They critiqued state regulators and pushed for new laws to stop marketplace abuse.
I was one of those reporters at the Detroit Free Press, and consumer credit was my beat. The new laws that tried to balance the scales between lender and borrower -- the Truth-in-Lending Act, the Fair Credit Reporting Act, the Fair Credit Billing Act -- offered fertile ground for stories. We put ourselves in the shoes of consumers -- shopping for credit cards, auto loans, or refrigerators bought on time, comparing disclosure statements to see if apples-to-apples comparisons were really possible and singling out lenders who didn't follow the rules. One of my investigations in the early 1970s showed that nineteen out of twenty Detroit auto dealers were not quoting annual percentage rates (aprs) for car loans. Banks weren't doing much better. The story headline, "Auto Loan Rate Quotes Remain Deceiving Despite U.S. Orders, was as hard-hitting as the story itself. Later a federal commission on consumer credit cited the piece as evidence better enforcement was needed.
Local consumer reporters didn't stop with credit shopping; they exposed other credit abuses, like the holder in due course doctrine, which effectively required consumers to pay for faulty or undelivered merchandise bought on credit. At the Free Press, editorial writers Joe Stroud and Louis Cook crusaded in support of the paper's news stories and pushed the Michigan legislature to end the practice, which it did over strong objections from the state's auto dealers. Consumer groups saw the editorial page as an ally. "They weren't in our pockets, but once we were in agreement, we could cooperate strategically," said Joe Tuchinsky, who ran the 100,000-member Michigan Citizens Lobby during the 1980s. The combination of editorials and news stories that zoomed in on the systemic causes of a problem showed how journalism could bring about social change, a notion that seems somewhat quaint today.
By 1981, however, the political weather was changing, and that was reflected in both policy and the press. For one thing, regulators began doing the unthinkable: instead of clamping down on questionable credit practices, they began to advocate and encourage them. By the time the comptroller of the currency allowed national banks to originate adjustable- rate mortgages without limits on how much the rate could rise or fall over the life of the loan, a new era had begun. Banks could also raise interest rates without increasing a borrower's monthly payments enough to cover the higher interest costs -- and instead add interest charges to the outstanding balance. So the unsuspecting borrower's payoff amount actually grew.
Ronald Reagan was sitting in the White House, and the public was beginning to buy into the doctrine of no taxes and no regulation. Nader, meanwhile, was in trouble. No longer a media novelty, he was now the object of attacks by the business community, which considered him a real threat. In 1971, before he took a seat on the Supreme Court, Justice Lewis Powell wrote a memo to the U.S. Chamber of Commerce. "Perhaps the single most effective antagonist of American business is Ralph Nader who -- thanks largely to the media -- has become a legend in his own time and an idol of millions of Americans," Powell argued. "The overriding first need is for businessmen to recognize that the ultimate issue may be survival -- survival of what we call the free enterprise system." He urged "careful long-range planning" and action by business "over an indefinite period of years" to reverse what he saw as a dangerous trend. The Business Roundtable, an organization of ceos from the nation's bluest of blue-chip companies, grew out of Powell's memo and became a lobbying force on Capitol Hill, where staffers and their bosses had grown more inclined to listen to the ceo of Citibank than a Nader acolyte who had just released a study about Citibank's credit cards. Consumer advocates failed to persuade Congress to create a Cabinet-level consumer-protection agency, a modest $15 million operation, to represent consumers at the highest levels of government. To show that the agency would not be an expensive bureaucracy, only costing roughly five cents per American, supporters asked citizens to send in nickels, and hundreds of thousands did. But public support was no match for the Roundtable, whose PR agency placed hundreds of canned opinion pieces in the nation's newspapers. The idea of a consumer agency was defeated. The consumer movement had passed its high-water mark.
The press also grew weary. When the Federal Trade Commission tried to stop businesses from advertising to children, The Washington Post editorialized against the commission, saying that the country didn't need a national nanny. Michael Pertshuck confronted Post publisher Katharine Graham about this, who lectured him on the importance of business, including newspapers, making money, so that crusaders like Morton Mintz could do the kind of reporting they did. Smaller papers, too, became less willing to tolerate hard-hitting stories that stepped on the toes of their advertisers or that challenged the new perception that the heavy hand of government was an enemy. For me, the gig was over when the Free Press city editor said that readers were not interested in what the governor and the legislature were doing in Lansing, the state capital. Whether true or not, the message was clear: find something else to write about.
Business may have killed the consumer movement, but it did not declare war on consumers; there was money to be made from them -- lots of it, especially in financial services. The word "consumerism" replaced the derogatory term "consumerist," which business had used to describe Nader and other advocates. The idea was that armed with information, the little guy could now compete with the big boys. He could invest in stocks and bonds, manage his own pension plan, buy a house with an adjustable-rate mortgage, tap his home equity to send the kids to college, profit from a "free" credit card. It had an appeal. "What touches you personally will be more interesting than what is not personal," says Irwin Landau, who edited Consumer Reports for twenty-one years, until 1994. "It's much more interesting to find out how I can get a delicious and safe tomato for myself than how all tomatoes can be made delicious and safe."
Interest in consumerism stories peaked with the arrival of 401(k) plans and the shifting burden for financial security from employers to individuals, says Amy Dunkin, former personal-finance editor at BusinessWeek. "Employers stayed far away from giving guidance, and stories in the media became very advice oriented," she says. "You could repeat the same stories year after year. They were easy and cheap." Lucrative, too. The nineties were the glory days for personal-finance journalism fueled by financial services advertising.
Personal-finance reporting begot a story genre I call "how to get the best for you." A Money story in 1996 with this headline, "Your Ultimate Guide to a Super Credit-Card Deal," rated the top twenty-five card issuers and gave tips on "how to cut through the hype and zero in on the best deal for you." It's doubtful that all this money advice -- sometimes quoting "experts" who were in reality sellers of the new financial products -- made people wiser consumers. There is no perfect credit card; even if someone takes a magazine's advice and finds the one with the best rate, the card agreement says in the fine print that lenders can change the rate at any time, and they do. "Portions of the financial press picked up the theme that you, too, can be smart and make money playing with innovative financial instruments," says Elizabeth Warren, a credit and income expert who also teaches law at Harvard. "It was a sucker's game and the financial press gave it credibility."
Media advice on credit issues certainly did not clean up the lending industry. In fact, says Warren, "the financial press worked in concert with the purveyors of dangerous credit instruments to make those instruments look reasonable. It was seen as savvy to use them." In 1991, a headline in USA Today beckoned, "Home Is Where the Money Is; Equity Loans Essential Finance Tool." The story began: "When Neal Pauline buys supplies for his home improvements, he uses his home to pay for them." It continued: "Consumers like Pauline have transformed home-equity loans into one of the fastest growing types of loans in the USA. The home-equity line has become a personal-finance tool as essential as the checking account, the credit card or the money-market mutual fund." The story did note a warning from financial advisers that if you don't repay these loans, you could lose your home, but then added that Neal Pauline "is probably smarter than most personal-finance advisers ... Almost no one loses his home because of home-equity loans." The last two years have shown otherwise, as housing values sank and many people found that they owed more than their home was worth. Even as foreclosures piled up, some media continued to promote the virtues of equity loans. Just a year ago, USA Today published a piece about the market for equity loans drying up. The lead featured one James Chou, who found a home-equity loan to be a "wise choice."
Some media outlets did and do provide meatier stories that give useful advice, such as telling consumers how to raise a defense to non-payment for shoddy merchandise bought with a credit card. And a few sounded alarms about an impending credit crisis. Stories in 2000 by Don Barlett and Jim Steele, then at Time, and The New York Times working with PBS's Frontline in 2004, outlined exactly what was happening. "Lenders are doubling or tripling interest rates with little warning or explanation," the Times reported. But Travis Plunkett, legislative director for the Consumer Federation of America, says most coverage of consumer credit is "pretty superficial." The prototypical story, he explains, "is really a personal-finance story that focuses on helping the consumer as opposed to looking at root causes, policies, and business practices."
In a sample of magazine, newspaper, and broadcast stories over the last twenty years, we found several noting recent congressional hearings about unfair and deceptive credit practices. But we didn't find stories that described the behind-the-scenes lobbying by banks and other creditors to try to make sure these hearings don't produce laws they don't want. In July, the House Financial Services Committee did pass a cardholders' bill of rights that would end unfair late fees and stop the practice of universal default. Many stories await the enterprising reporter who will follow the maneuvering by lenders to stop the bill from becoming law or water it down to the point of uselessness. These days, there's not much appetite for staying with the nitty-gritty of any legislation. Reporters are inclined to cover a proposal for new rules by the Federal Reserve Board to curb the worst of the banks' lending practices, and at the end, when the rules are adopted, but ignore the crucial in-between stage when the special interests work their magic.
Some reporters still do aggressive consumer reporting. Last year, Christopher Neiger, a freelancer writing for aol Autos, showed how lenders got away with charging exorbitant rates for car-title loans, which provide borrowers with a little quick cash secured by the title of a car that's already paid for. Neiger noted that such lenders must disclose the interest rates in terms of the annual percentage rate, but they often just disclose a monthly rate. He warned borrowers that if they see a monthly rate of 25 percent, it is equivalent to a whopping 300 percent APR. How could lenders get away with this? We need more stories like Neiger's that delve into the reasons why the truth-in-lending law has been weakened so much that APRs don't mean much any more.
Truly educating the public seems a pretty remote goal for journalism when consumerism reigns. There's no consumer movement to make news; there are no leaders to be newsmakers, and few local government agencies left dedicated solely to the consumer cause. Heads of regulatory agencies rarely are invited to appear on the Sunday morning news shows, as they once were. There are only advocacy groups, including what remains of the old Nader organization, that get quoted here and there but have little clout.
Consumerism, fostered by the press through consumer advice stories, has helped lead people to focus on "me" instead of "we" -- the notion that a lot of little guys are in the same boat. Lenders have reinforced that sensibility, when, for example, they argue before Congress that their practices are necessary so that good credit risks don't pay for bad ones. But if your neighbors default and you don't, what happens to your property values on a street of empty houses? The mindset of "me" makes it difficult to see solutions in terms of "we," or a collective frame that might benefit everyone.
Even if the old consumer movement is gone, the marketplace still has plenty of warts to expose. Many are the same ones that consumer activists of old tried to tackle, like consumer credit and product safety. But there are new ones, such as patient safety and cell-phone marketing. As it was when I began on the consumer beat, little people are fighting the big boys -- little people like Helen Haskell and John James, and the fifty thousand or so others who wrote to the Federal Reserve Board about problems with their credit cards. Haskell, a mother whose teenage son died from a medical error in a hospital, worked for four years to get a bill passed in South Carolina that requires hospitals to provide a way for patients to get prompt attention for medical concerns and requires personnel to wear badges that clearly identify them as staff, interns, residents, or students, so families know whom they're dealing with. James, who is from Texas and who also lost a son to a medical error, is pushing the Institute of Medicine to write a patients' bill of rights. The first step, he says, is to educate people, a role the consumer press once played.
James can use the Internet now to organize a letter-writing drive, but he still needs journalists to reflect on a hospital's mistakes and help people see the problem in the larger context of an unsafe system. The thousands who wrote to the fed still need good reporters to dig out the unsavory lending practices in their communities and show how they have damaged the public good. That kind of reporting may prompt government agencies to act to on behalf of everyone. Who knows? An energized media might even spark a fourth consumer movement that will once again try to address the imbalance between buyers and sellers.