Zombie Debts

According to the Wall Street Journal, there is an increasing trend among collection agencies and U.S. banks, of pairing credit card offers with debt repayment agreements as a way of re-aging debts that have passed the statute of limitations. Some of these offers are becoming subject to legal scrutiny either because they do not make it clear that the subject of the offer is agreeing to enter a loan repayment program, or because they deceive the consumer into believing that the debt in question is still current.

Nevertheless, some subjects of these offers report being pleased at receiving them, and indicate that they would accept another of the same, because it provides them an opportunity to reestablish credit when most lenders would not deal with them. I’m not so sure that the warm embrace of these practices by certain consumers means that the trend is a good one. Quite the contrary, I think it says something terrible about the banks involved.

I’m not especially bothered by the allegedly deceptive practices. I know it’s a little unsympathetic of me, but I suppose that if a person is eager to sign up for a credit card in the shadow of persistent and disastrous financial difficulties, they damned well ought to be repaying defaulted loans no matter how they were finagled into the agreement. I can understand undertaking and gradually paying on debt, and I can understand letting it lapse and then living without it altogether, but failing to manage it and yet still accepting it as a part of your life just seems like harmfully inconsistent decision-making.

What bothers me about the practice, then, is something that the WSJ article points to, itself:

“[Some lenders] are leery about subprime borrowers. But the debt-driven credit cards show some banks tiptoeing back into subprime lending after suffering big losses during the financial crisis.”

I’m no economist, but trends like this make me almost convinced that financial bailouts and the like from Washington have served to avert disaster in the short term, but have actually made the underlying problems worse. Money lenders are evidently viewed as so fundamentally important to the structure of American prosperity that their failure is unconscionable, which means that from a slightly different perspective, their failure is simply impossible. The money will always be there in one form or another, so no matter how risky a lending practice is, the institution will be covered against catastrophic losses.

In this sort of situation, the only things an investment bank has to fear are public outcry and government scrutiny, not a failure of their own investments. If that’s the case, the rational thing to do is to maximize profits with little regard for long-term risk, and just be careful not to get caught. Banks can’t really be blamed for that attitude; their self-interest is best served by such practices, and it’s not their fault that there are no consequences to mitigate their desire to pursue them.

So it seems natural to me that lenders would “tiptoe back into subprime lending.” The short-term profits were so tremendous in the past and the long-term consequences so comparatively small. That is, long-term consequences were small for the lending institutions themselves, though not for the rest of the country. If those institutions continue to resurrect debts that have been shown to be worthless, as well as lending more money to the people who couldn’t support those debts, I can only assume that recent history will repeat itself with greater clarity, complete with marvelous benefits for a small minority and disastrous consequences for the rest.

Breaking points don’t come from those who reap the benefits of existing trends; they come from the people who stand to lose from the same. Political will can stop the rational reversion to perilous bookkeeping and lending practices by pushing for a situation in which both risk and reward are again shared by the same institutions. Alternatively, some of the lower class people who are the objects of subprime lending could interrupt these trends themselves by sloughing off the illusory promises of a lifestyle beyond their means, and learning to save instead of spending, and to live without anything they can’t buy in cash. For that change, I’m waiting for the breaking point whereby people start to realize that massive debt is existentially worse than subsistence.

The trouble with the former possibility is that I’m not sure that political institutions actually having any power over, or even independent of financial institutions anymore. The trouble with the latter is that the same rational imperatives of self-interest that lead banks towards subprime lending also lead individuals to accept the terms of any loan that they can ultimately survive.