Monday, March 3, 2008
The economy is undergoing a "slowdown" according to President Bush, a "recession" according to 61 percent of Americans. Regardless of the name, 83 percent of Americans rate the economy as only fair or poor, "and almost two thirds are pessimistic now and about the future." One large source of economic stress is the credit crisis, which has spread from the subprime mortgage sector to the U.S. credit card market. "If America's $14 trillion economy is a high-powered engine, credit is the motor oil that helps it run smoothly. When the lubricant is in short supply, the economy -- like an engine -- is more prone to knocks and stalling." "The squeeze is reaching beyond Wall Street to Main Street, hitting everything from the availability of student loans to credit-card interest rates to the prices of municipal bonds in retirees' portfolios." Today, the Washington Post reports that college students will see higher costs for loans -- and "some students may be denied private loans entirely" at community and for-profit schools -- because of the credit crisis. Chairman of the Federal Reserve Ben Bernanke acknowledged last month that the credit crunch is fueling the economy's downturn. "More expensive and less available credit seems likely to continue to be a source of restraint on economic growth," he said.
CREDIT CARDS -- THE NEXT FINANCIAL CRISIS:
A new report by Center for American Progress Senior Fellow Christian Weller and Research Associate Tim Westrich details how a rise in credit card defaults could produce an economic fallout on par with the mortgage crisis of last year. Lenders have tightened access to credit in the mortgage market, "forc[ing] families to look elsewhere to borrow money to pay for ever more costly necessities," including health care and college education. "[C]onsumers who once relied on home equity to make ends meet are now increasingly relying on credit cards," Weller and Westrich write. As a result, credit card debt reached a record high of $790.2 billion last November. Approximately "35 million customers can only afford to make the minimum payment every month, which means it could take years for them to pay off their debt," the report notes. That debt is increasing rapidly. Between April 2006 and December 2007 -- the same period during which the housing market was collapsing -- inflation-adjusted credit card debt increased four times faster than between March 2001 and March 2006. Weller and Westrich point out that "lenders package credit card debt into securities" in a process similar to the securitization of subprime mortgages. As such, "increased credit card debt could ultimately translate into higher loan default and thus a liquidity crisis similar to that in the mortgage market."
OPAQUE AND UNFAIR LENDING:
Despite these warning signs, credit card companies continue to aggressively target customers with less-than-perfect credit -- often the same victims of predatory subprime lending schemes. "Direct mail credit card offers to subprime customers in the United States jumped 41 percent in the first half of this year, compared with the first half in 2006," the Boston Globe reported. Travis Plunkett, legislative director of the Consumer Federation of America, said, "It's another sign that some credit card issuers are engaging in risky, irresponsible lending to vulnerable consumers." At the same time, "[c]ard issuers also are raising fees in anticipation of increased delinquencies as the economy slows. Industry-wide penalty fees rose to $18.1 billion last year from $17.1 billion a year earlier." Last month Bank of America "sent letters notifying some responsible cardholders that it would more than double their rates to as high as 28%, without giving an explanation for the increase."
POLICIES TO PROTECT BORROWERS:
Such abusive practices have led policymakers to seek greater checks on credit card companies to protect consumers. The Center for American Progress issued a 2006 paper recommending an incentive-based, credit card safety rating system modeled after the New Car Assessment Program's five-star safety rating. Sen. Ron Wyden (D-OR) introduced a similar proposal, the Credit Card Safety Star Act, in December. Such a rating system would not preclude additional legislation that would eliminate other practices considered abusive or unfair. For example, Rep. Carolyn Maloney (D-NY) has also introduced a credit cardholders' Bill of Rights, which includes provisions requiring card companies to give cardholders 45 days notice before raising interest rates and prohibiting card companies from arbitrarily changing the terms of their contract with a cardholder. Another bill sponsored by Sens. Carl Levin (D-MI) and Claire McCaskill (D-MO) would prohibit card companies from charging interest on debt that is excessive.
Sunday, March 2, 2008
During a Senate Armed Services Committee hearing on the 27th, Director of National Intelligence Michael McConnell said that "[t]he Afghan government under President Hamid Karzai controls just 30 percent of the country," "the resurgent Taliban controls 10 percent to 11 percent of the country," and that "the majority of Afghanistan's population remains under local tribal control." Defense Intelligence Agency director Lt. Gen. Michael Maples told the same committee that "Pakistani military operations in the [region] have not fundamentally damaged al-Qaeda's position" and tribal areas in Afghanistan "remain largely ungovernable and, as such, they will continue to provide vital sanctuary to al-Qaida, the Taliban and regional extremism more broadly. "The last 12 months have seen the worst violence in Afghanistan since 2001, when U.S.-led forces ousted the Taliban from power.  More on the current state of Afghanistan here.
The back-and-forth continued this week between presumptive Republican nominee John McCain and the Federal Election Commission over John McCain's desire to opt out of the public financing system for the primary election. In a Feb. 25 response to FEC Chairman David Mason, McCain's attorney (who is a former FEC chairman himself) cited precedents for releasing McCain from the presidential campaign fund and its spending limits, because while McCain had qualified for taxpayer financing, he had not yet collected any money. Mason had also asked McCain's campaign to provide additional evidence that the promise of public financing was not used to secure a $4 million line of credit (which would be against the rules). The campaign provided a letter from its bank's attorneys, one of them a -- you guessed it -- former FEC chairman, saying that the bank was very careful not to factor public financing into its evaluation of the loan. Also this week, the Democratic National Committee complained to the FEC that McCain had broken the rules in a number of ways and shouldn't be released from the limits of the public financing system, which would limit his campaign to about $5 million in spending between now and the Republican convention. (When he ran for president in 2004, DNC chairman Howard Dean also pulled out of the public system after qualifying, which McCain's campaign cited in its letter to the FEC this week, but the DNC asserts that situation was different.) Of course, the FEC can't settle this matter right now because they don't have a quorum -- and not because all the former commissioners seem to have become election attorneys in private practice. Who's holding up the nominees in the Senate? Well, on the Democratic side, one of those senators has been Barack Obama. Small world.
*Correspondence between the FEC and the McCain campaign:
*Summary of the DNC's complaint: http://www.democrats.org/a