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.

Cigarettes: The Most Illegal Legal Substance!

I heard a radio interview yesterday in which vivid descriptions were given of the new warning labels that will be required of all cigarette packages in the United States as of September 2012. This entire government anti-smoking campaign is beginning to look truly absurd to me. The FDA has described these images of diseased lungs, dying cancer patients, and the like as “the most significant advancement in communicating the dangers of smoking.” Is that really what this is? Is that even a reasonable goal at this point? I mean, do we really expect anyone, anywhere to pick up a pack of cigarettes, look at the graphic image declaring that “cigarettes cause stroke and heart disease,” and then exclaim, “I didn’t know that!”? Perhaps I am giving my fellow citizens too much credit, but I don’t think anyone is that ignorant.

I can’t help but think of the climax of the film “Thank You For Smoking,” in which Aaron Eckhart’s character, a tobacco lobbyist, is asked point blank by a Congressional panel whether he thinks cigarettes are dangerous and he stuns everyone by plainly answering “yes.” He proceeds to rhetorically ask whether anyone in the room isn’t sure whether cigarettes are dangerous, and makes his pro-tobacco argument on the basis of freedom of choice even when we know something is bad for us.

I think that does well to describe the situation we’re facing. The public has been thoroughly informed about the dangers of smoking. I don’t think anyone is left with doubt about the harm it can do. The question we’re left with is just whether people have the freedom to choose to smoke in spite of that. The answer very well may be no. That’s the answer when it comes to any of a multitude of illicit drugs. Thus far, though, tobacco has been a legal substance, which people are free to consume and the government is free to tax. These ongoing efforts at “public education” push the conflict into the realm of absurdity because the duty for public education has already been fulfilled, and the rest is just an attempt at discouraging certain legal behaviors.

Certainly, it can be argued that an appropriate role of government is to promote the public welfare by advocating some lifestyles and outlawing others. Public awareness campaigns like the food pyramid, now just the dinner plate, are examples of the former. Making drugs and prostitution illegal are examples of the other side of that government function. But anything that falls in between, I think, is an attempt at controlling behavior, and something unbecoming of a free society. After we’ve decided that something is damaging to the general well-being, there comes a time when the government has to make a decision about whether to make it illegal or to simply let people have their vice, health and longevity be damned. To do anything else is to make the potentially dangerous claim that there is a role to be found for the government in attempting to control private behavior even when that behavior is not illegal and its consequences are understood.

New York State and particularly New York City are way ahead with this mentality. New York City has just banned smoking in public parks, pushing cigarettes still farther towards a status of being made illegal through a series of decrees about their use without the item actually being legislatively outlawed. The city, state, and federal governments may feel very good about themselves for measures like this, but the fact is that if they feel so strongly that, for their own good, no one should be smoking, by allowing the production and consumption of cigarettes to remain a legal activity, they are not doing all they can to discourage it, and they are thus complicit in the ill effects wrought on those not reached by shocking visual warning labels.

Meanwhile, the government continues to collect taxes on cigarette sales, making their role in the tobacco conflict severely duplicitous. When your campaign against something you deem awful is comprised of a series of half-measures, that is questionable, but when you’re actually profiting off of the evil you preach against, it’s time to seriously reevaluate your morals. New York State has even gone so far as to violate Native American treaties in order to begin collecting taxes on cigarette sales on reservation lands. To my mind, that sends the message that while the use of cigarettes by private individuals is unconscionable, they are not so bad as to be restricted by the government, and in fact they are not so bad that it’s not worth violating other ethical principles for the sake of securing their revenue.

This is the moral and logical tangle that results when an establishment tries with all its might to avoid breaking points. That breaking point might sway society to either side of this issue, prompting government to reconcile to the fact that some people are just going to smoke no matter what, or else to decide that it can no longer be accepted at all, and that it is time for cigarettes to go the way of cocaine and other drugs. But to go on trying to play both sides serves no one and only encourages some dark trends in government.

Lower Outlooks

The S&P's decision to lower it's outlook on U.S. debt is being variously described as a "threat," a "wake-up call," and a "warning shot across our bows." Perhaps without intending to, all of these phrasings suggest an element of power and deliberate manipulation on the part of the S&P. And what I find fascinating, and fairly shocking, is that no such well-intentioned warning was deemed necessary for private banking institutions when, no long ago, the S&P revised their rating methodology to include the assumption that banks will always be bailed out by the government.

I think the tension between those two judgments ought to be given a great deal of attention. Isn't there something seriously wrong when private investment banks can be considered essentially immune to default, but national treasuries cannot? Placing these two pronouncements by the S&P in context with each other, can there be any doubt as to where the greater share of the power in this country resides? Who's in charge when it is explicitly assumed that the government will bail out financial institutions, while it is accepted that the government must stand or fall on its own, with no expectation of the financial sector to float it the cash to keep running?

I'm looking for one of two breaking points from this. Either we fully acknowledge the injustices of the economic imbalance of which this is a part, and move to change the structure of a system that demands that governments take a back seat to financial systems, or we sit back and watch as a decreased rating for the government undermines the bailout assumption and drags down the ratings of the banks until both institutions are fractured and depleted.

Those are just the breaking points, though. The more likely outcome, as always, is the preservation of the status quo, which in this case means that the government will agree to raise its debt ceiling again, and Congress will ram through some dubious budget compromise to capitulate to the "threat" that has been issued by the S&P, which is, apparently, powerful enough to easily push around the entire federal government.