I have spent many years dealing with money, and I am aware of many basic things that people (the general public) should know yet they don’t! I once spent two years explaining to various members of society why the bank had rejected their request for a loan. So now i would like to dedicate the following posts to helping explain the greatest tragedy of our society in the last 15 years. I am not talking about 911 or either of the Iraq wars, I am talking about credit and the ways it has been misused by corporate America. Now before you dismiss this as crazy or asinine I would like you to give me a chance to make my argument in the following paragraphs. If after that you still believe I am wrong, feel free to ignore the posts that will follow this.
I am going to start with an excerpt from a Barack Obama campaign pic. Although i dont intend to promote Barack Obama with this post, it says some things I feel about the direction our nation should be taking and i think it is an appropriate introduction.
“I believe we can give our middle class relief and provide working families with a road to oppertunity. I believe we can provide jobs to the jobless, homes to the homeless, and reclaim young people in the cities across America from violence and despair. I believe that as we stand on the crossroads of history, we can make the right choices, and meet the challenges that face us.”
Lets start with our parents and the American Dream… the people born just before the Baby Boom, up until just after the Baby Boom. When they bought houses (in the early 60’s) the banks required 20% down payment or more and the loans were for 15-30 years no exceptions. Over the years the banks started making exceptions to these rules, and as time passed the exceptions started becoming more and more prevalent. At first glance you look and see a bank that now requires only 10% down payment and see two immediate effects. The bank has made a way to increase its profit by charging interest on 10% more loaned money, and the person who is borrowing the money to buy the house can now place a down payment that is half of what they used to need.
So what’s the problem here? The problem is now the system is more flexible (and more complex) and allows for more abuse. To the average person a house doesn’t cost $200,000 to $500,000, it actually only costs $10,000 plus $2,000 a month. Well as banks saw a way to make more money they started requiring less and less down payment, and then the 15-year loan disappeared. Then in addition to 30-year loans, 45-year loans came into existence and even 60 year loans. So now the banks are making money hand over fist and why not, this is America, they deserve to make a profit.
So lets take a minute to recap what has just happened because this is about to jump to a new level. Americans (our grand parents born between 1920 and 1940) used to work 15-20 years to pay off their house, then work another 25-35 years to build enough of a savings to retire, and then they spent 10-20 years doing what they wanted before they died. Then our parents (born 1940-1960) worked 20-30 years to pay off the house, worked another 25—35 years to retire, and now had to make that retirement last another 15-25 years because they are living longer.
Then Corporate America kicked it up a notch. From the 1970’s to about 1985 (still talking about people born in 1940-1960) people are looking at 10% down and 30-40 year loans. Our grandparents who have not died have used their savings and now need money because health care is costing more. So our grandparents sell their houses and move to retirement homes so they wont be a burden on their kids. Now our health care system is starting to feel the effects of the old people who have not died.
Now it gets worse.
In the late 70’s and early 80’s people are trying to figure out what to do so they don’t end up like their parents (our grandparents). Well the banks are making money by lending for real estate, so why don’t we get our piece of the action, by selling real estate. We tell people that a house is not going to cost them $50,000 to $100,000, its only going to cost $5,000 to $10,000 and a few hundred a month. Then the real problem begins… the cost of a house jumps when the person who can afford $400-500 a month starts paying that much (after all it is only $200 more). Of course if you if you increase the monthly payment by 40% then the total cost of the house is about 40% more.
In 1989 the real estate market crashes due to many pressures (some of which were health care, a depressed fuel economy, and a natural downturn in the economy) both external and internal (the California market is especially affected). Those who saw the collapse of 1989 often didn’t realize that the many of their neighbors had two houses, one to live in, and one as an investment. Those same people didn’t realize that the neighbors who lost that second house in the blink of an eye, lost 10-15 years of their savings. As a natural reaction the nations upper class buys the majority of the real estate market at rock bottom prices.
In the 1990’s there is a rebound of the real estate market as the upper class sells this extra real estate back to the working class. Then by the mid 90’s the nations car economy takes off again, and the car market starts telling the public that a nice car is not going to cost them $15,000 to $20,000, it will only cost $4,000 and $200 a month. Then the term of the car loan goes quickly from 3 years to 4 year to 5 year by the late 1990’s. By the early 2000’s the average car loan is for 5 to 6 years. The next step is to decrease the down payment, because the banks need a larger balance to charge interest on. So now the car industry is large, General Motors has a health care obligation to it’s employees of billions. When car sales slow down GM does not cut back, it moves to almost zero profit on the sale of a car to keep the number of sales increasing every year. This also keeps their service departments and money-lending departments making money and makes sure their stock doesnt go down. The cars start flying off the proverbial shelves and the number of employees grows, as they need more workers to make more cars. There is no plan for the company to be able to deal with an economic down turn, just an assumption that the cars will always sell more and more each year. GM’s health care bill is so large that General Motors Auto cant turn a profit large enough to cover their expenses and would bankrupt if they didn’t have the money lending aspect. Also note that General Motors is a great example but the same holds true for almost every other car manufacture. In 2002 Porsche and BMW are the only manufactures to turn a true profit by selling their cars.
By 2002 the average price of a car is almost $25,000 and the price of a “nice car” is $40-50,000. The average American now has two car loans consuming one forth to one half of their monthly income. General Motors and Ford are in danger of going bankrupt, and causing unemployment in this country so large that we would go back to the 1930’s quality of life with homelessness and starvation.
The average price of a house is now in the mid hundred thousands, except in California where the median price of a house is well above $200,000. The housing banks now adopt zero down payment loans as a common practice, and the average term of a house loan is more than 30 years, with lower income families getting close to 40 year loans on average and reaching as high as 60 year loans. Also in 2002 a law is passed that a bank is no longer restricted on the interest rates it can charge for simple interest loans (the kinds of loans your house and car are bought with and the kind of loan your credit card represents). Pay Day Loan Centers open all over the nation lending money to people that could not previously borrow money from banks. The pay day loan centers start charging 200% to 600% per year interest and show normal banks that charging fees is more lucrative than charging interest. The credit card companies start sending credit card applications to people with bad credit because they can now charge enough to cover the money they lose by giving people with bad credit, new cards. The number of people who need to declare that they are bankrupt skyrockets over the edge as the people can no longer handle the house, two cars and the credit cards. Shortly after the number of bankrupt people skyrockets over the edge, the credit card companies declare that they are loosing too much money by not being able to collect from the very people they caused to go bankrupt. So a new law is passed making people unable to eliminate credit card debt by declaring bankruptcy in most situations.
In 2007 Bank of America get jealous of the payday loan centers making money off of our nations unregistered poor, and declares that they will start issuing checking accounts and credit cards to people who don’t have social security numbers. In the words of someone at www.fark.com I sarcastically state, “What could possibly go wrong?”
So today you have a working class who receives worse health care than the poor, from a dying health care system where the baby boomers will bankrupt the social security system, and that’s only regarding subject of what people need. We got into this mess because of people paying for things they want but cant afford; and don’t know they can’t afford. The reason people don’t know they can’t afford the things they want is because they are not educated about the way the current system works, and there are not enough of the right laws out there to stop the enablers (the banks, credit card companies and payday loan centers) from telling the uneducated public that the decision they are about to make will mean they cant retire and they will eventually turn into a blight upon their loved ones.
I can hear them now, the seductive words I used to whisper into the ears of hundreds of people: “It only adds a little bit to your monthly payment.” Meanwhile I would be fired for uttering, “which you will paying long past your ability to work if you buy anything else.”
Read a testimonial article
Credit card debt by state updated in real time. That plasma screen you got for Christmas with a 29% APR doesn’t look so good now.
Thanks for reading about the problem of uneducated people and credit. I will be posting details to specific parts of the problem and recommending solutions. If you have any input please speak up. When we have enough information I will post a petition for people to print and send to their congressperson. For that matter I will be proposing a curriculum to send to educators.