Credit-Card-Carrying Masses Have Reason to Fear Future

Besides praying, we know that Dubya likes dogs. He was seen carrying a Scottie off his helicopter, and the dog looked like it was used to Presidential handling. We know, too, that the praying prexy is big on baseball, a private-sector activity that he has no objection to the public subsidizing; when he was a part owner of the Texas Rangers (the American League baseball club, not the law-enforcement organization), he was successful in getting the taxpayers to pay for a new stadium.

So far, so good, but here’s the rub: Many of these new stadiums bear the names of corporations, which is O.K., too-but what’s not O.K. is that some of them (without mentioning any names) may well go bankrupt in the not-too-distant future. It won’t look good for our baseball teams to be playing in buildings decorated with the logos of corporate corpses. The nation’s No. 1 baseball fan needs a plan.

And while he’s at it, he might take a look at the bigger picture, which is not quite horrifying, but it ain’t pretty. It hasn’t gotten to the point of resembling a San Francisco cable car flying down a hill, rickety-racketing, while the brakeman-that would be Gee Dubya-wrestles with the mechanism to make it stop. Things have reached the point where blame is being apportioned out. The three most-oft-cited culprits are Alan Greenspan (i.e., interest rates), the dot-coms and the high cost of energy.

The prices of all commodities, including energy in its various forms, float up and down all the time for a variety of reasons, some of which we understand and a few of which we probably don’t. Any economy that tanks because of an ordinary upward jump in the price of even such a necessary commodity as oil was probably on shaky ground to start with. Viewed from the perspective of time, however, oil prices are not unconscionably high-but for many, oil is code for “Arab” and “Muslim,” and why not blame these despised and condemned people? It’s as easy as it is irrational.

The Greenspan interest-rate hypothesis is more respectable, if not more convincing. The people who now say Mr. Greenspan was “behind the curve” in failing to drop the Fed funds rate sooner and faster overestimate the power of the Fed to run the whole economy and underestimate the number and importance of elements Mr. Greenspan has to balance off before moving the rates. Besides the stock market, which may or may not perk up when rates go down, the man has to think about inflation and the value of the dollar. The lower the interest rates, the less incentive foreign investors have to keep their money here in American securities.

The blame for the dot-com train wreck and the bidding up of other stocks to absurd numbers belongs primarily to the securities industry, which for the last four or five years lied, misrepresented, exaggerated and took advantage of the naïve cupidity of amateurs, who thought they knew but didn’t. The worst, though, was how the millions who weren’t looking to make a killing, but rather to have a nest egg for retirement, were abused by the quick-buck artists employed by firms carrying some of the most famous names in the history of American finance. This fraud was perpetrated by the name-brand outfits; and, incidentally, when Alan Greenspan raised the most timid voice of caution a few years ago-remember “irrational exuberance”?-they damn near lynched the poor bastard.

What’s done is done, so where are we now? The cable car may stop itself without crashing, or the brakeman may succeed in slowing it down, or-well, let’s not let our imaginations entertain grisly thoughts. Currently, we’re being told that things are basically O.K. and that the slowdown in business is restricted to the manufacturing sector, while everything’s just hunky-dory in the service sector. But is it?

The goings-on at Lucent-a company with a magnificent past and a miserable future, which sells equipment to the telecommunications industry, a service industry-belies that thesis. Lucent has been giving credit to its customers, which in and of itself isn’t a rash thing to do. Many companies arrange credit for their customers, but the sounder ones have a diverse customer base not concentrated in one industry. Lucent’s customers are in a part of the service sector which is in hot water. Nortel and Cisco, while in much better shape than Lucent, are facing similar troubles. Is the economic foot-and-mouth disease spreading?

Skip that. We are also told it’s the consumers who drive the economy, and their confidence is up. But their bank accounts aren’t. The overall figures for consumers aren’t bad, but they look a lot better than they may actually be. On average, the net worth of households is four or five times their disposable income, which indicates that if anything goes wrong, these households have plenty to fall back on-but it’s not that simple. Here’s where the perennial Republican indifference to the wage and income levels of the toiling masses comes back to bite them. Twenty to 40 percent have more than enough money to draw on come hard times. The rest are another matter, and most of it swings around debt.

There are said to be about 1.5 billion credit cards residing in the purses and pockets of our fellow citizens. The average household carries in the vicinity of $7,000 worth of debt on those cards, but it’s not distributed evenly. About 40 percent of the card-holding households have no debt; they use their cards as a convenience and pay them off every month. The rest carry hundreds of billions in debt. So the families with the lowest income have the highest per capita credit-card debt.

That bottom 60 percent got in the prosperity of the last decade on the cuff. They are borrowed up to the hilt at 18 percent interest, and it’s anybody’s guess as to how many of them will be able to meet their monthly installment if they lose their overtime or-God forbid!-get laid off or get sick.

The mortgage situation is just as tippy. In the waning months of the Clinton administration, the Lover President was wont to brag that never had home ownership been higher. He left out some important details. A huge fraction-40 percent-of houses sold are financed with under 10 percent down (5 percent is common). Once, buying a home was something you saved up for; now many a family that is more or less broke can buy a home. Whether the home stays bought is another question. Comes trouble and many a family may find it easier to walk away from the house than struggle to keep it.

Another 11 percent of houses sold are “subprime,” as they say in the trade, meaning they are high-interest mortgages to people with high-risk credit histories. Put that together with the low-down-payment mortgages, and it appears that something approaching half of all those houses sold during this boom are questionable business propositions.

Who is holding all this quivering debt? Much of it is “bundled,” that is, wrapped together according to the loans’ statistical characteristics, so that each bundle is calculated to pay a regular amount by use of a selection formula which takes the predictable defaults and prepayments into account. These bundles of mortgages and credit-card debt are then “securitized,” meaning they are turned into bonds or commercial paper to be sold to insurance companies, pension funds and individuals.

Up to now, the bundling and the securitizing have worked well-but in the past, credit was not doled out the way it has been in the last few years. Prior to the 1990’s, mortgages and credit cards were restricted to borrowers the lenders didn’t have to worry about. These were borrowers who didn’t live from paycheck to paycheck, borrowers who had rainy-day resources. If the country begins to experience lots of defaults, there may be hell to pay. Nobody knows. We’re sailing in uncharted waters.

In the event of widespread defaults, we can’t say if the bottom 60 percent will bring down the top 40 or not. We do know that the policy of indifference toward the income of the bottom, while at the same time encouraging-nay, baiting and seducing-the economic middle class to go deeply into debt, may have been as short-sighted as it has been selfish.

Behold the cable car careening down Powell Street, the prayin’ President from the Permian Basin wrestling with that big brake. Lord, let him get a grip on the thing before we get pitched in the bay.

Credit-Card-Carrying Masses Have Reason to Fear Future