TPM Cafe: Opinion

Oregon has just passed an anti-payday lending statute. The politics are gruesome. The legislature passed the bill to keep it off a state ballot initiative, and there’s much talk that the plan is to repeal the bill once the general election has passed. Even so, there is some very important news in the Oregon experience.

First, family economic issues work. Pollsters in Oregon said they had never seen anything like the support for interest rate caps on payday lenders. The numbers were 70-30, picking up every single demographic group they analyzed including majorities of both political parties.

Second, faith groups joined with political activists to push economic legislation to protect struggling families. The coalition between PIRG and the religious groups was very effective.

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Ronald Mann, one of the nation’s leading experts on payment systems and author of Charging Ahead!, a book due out later this month, shares his thoughts about a new report from the Federal Reserve on credit cards: The debates leading to BAPCPA gave short shrift to the idea that credit cards might have something to do with skyrocketing bankruptcy filing rates. Section 1229 of BAPCPA, however, did obligate the Federal Reserve to study the industry, in response to a sense of the Congress that some issuers might extend credit without considering the likelihood of repayment or in a way that encourages the accumulation of debt and that those practices might be a major contributing factor to consumer insolvency.

The Federal Reserve has now issued its report, without collecting any new data or giving serious consideration to any information that would support Congress intuition. Given the traditional reluctance of the Federal Reserve to move aggressively in this area, it should be no surprise that the report stops short of criticizing the industry. Unfortunately, however, the report is so facile that it will only contribute further to the lack of serious policy debate.

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The Boston Globe has just laid out a onetwothreefour-part series that both politicians and Pulitzer Prize panels should be carefully studying. The Globe team wrote about what happens when someone falls behind on a credit card. The stories are shocking: People have been sent to jail over credit card debts. People have been bullied and threatened and treated like dirt. People who needed their cars to get to work were forced to pay ransoms of thousands of dollars more than the original debt just to get their cars back after a collection agent wrongfully seized it. The stories show how hard-working people hanging on to the fragile edge of the middle class had their lives turned upside down by a credit card bill they couldn’t repay.

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The NYT ran a story that connects two dots€”: the housing bust and a slowing economy. Because housing has been a big employer, as new home construction comes a standstill, the effects will reverberate through the economy. Thus comes the answer to the question posed by readers several times on this blog: So long as I’m not strung out on some crazy mortgage, why should I care if the housing market implodes? Because it affects the whole economy.

Now let’s add a third dot to the picture the impact of an effectively unregulated home mortgage market. Over the past five years, lenders have sold billions of dollars of mortgages that are designed to go into eventual default because the borrowers cannot possibly afford to pay them. These so-called creative mortgage products have two powerful effects: They fueled the boom, pouring more money into an overheated housing market. Now they will accelerate the bust, pushing more people out of their homes through distressed sales, thereby accelerating price collapses on the way down. In other words, a housing bust doesn’t just happen. Regulators who won’t regulate have an effect as well.

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This week a Gang of Seven law professors and sociologists started a new blog, creditslips. (Upfront confessions I’m one of the Gang.) The topics are tumbling out pension reforms, medical bankruptcy, collecting from people even after they file bankruptcy and hurricane relief. Credit junkies who are regulars on Warren Reports will want to check it out.

The Center for American Progress ran a day-long conference on debt last week for SRO crowds. But the number one feature was that in four panels eighteen speakers, four moderators, two introductions and a governor to give the lunchtime address we barely scratched the surface. There was still plenty to talk about.

Take a look when the next Newsweek online appears. From the calls I’m getting, I figure there are more stories in the pipeline for major news outlets.

What’s up?

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The contempt of this government for the middle class sometimes becomes blindingly clear.

The New York Times ran a piece Sunday discussing a new Brookings Study showing how cities are becoming polarized, so that only the rich and the poor survive. Not to worry, says an economist for the Federal Reserve. Who cares if the fire fighters, police and teachers can’t afford to live in the city where they work?

Firefighters who want to live in high-priced cities can work two jobs, said W. Michael Cox, chief economist for the Federal Reserve Bank of Dallas. I think it’s great, he said. It gives you portfolio diversification in your income.

Only an economist would see working two jobs as “portfolio diversification.” The rest of us might just see it as an economic squeeze play in which the middle class has become expendable. Yeah, the rich need the services of these middle class service people, but truck them in from cheaper areas, like so many low-priced electronic gizmos from some foreign country.

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The Center for American Progress put on a conference today on debt. Terrific people, terrific presentations. Over the next couple of days, I’ll write about a couple of them. But I want to start with the most amazing part: a new survey that should turn the head of every politician in America.

The survey has a lot of gold nuggets to talk about, but I’ll cut to the chase: The data show that Americans see debt as a middle class problem as their problem. By a wide margin, they are personally more worried about debt than they are about a terrorist attack. That’s right: Debt, not terrorism, is keeping people awake at night.

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Cross-default clauses are those nasty little traps that credit card companies figured out they could use to boost profits. The idea is devilishly simple: A customer who has been making payments faithfully to Providian, for example, may get into an argument and refuse to pay her phone provider. BAM! Providian ups its 9.9% interest to 29.9%, raking in the profits and wrecking havoc with the customer’s budget. Welcome to cross-default clauses.

Now the New York legislature has passed a bill to ban the practice. It goes to Governor George Pataki’s desk for signing on August 8. Which way will the governor go—for the customers who get bitten by this practice, or for the big-time credit card companies that scoop up the profits from it?

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I love to shop at Target. I buy brightly colored baby clothes for my cutest-in-the-world granddaughters and doggie toys for my almost-as-cute golden retriever. I always figured I was their perfect customer. I’m cheap, but willing to spend money on those I love.

I was wrong. I had the business model upside down. I figured Target made their profits on high-style, low-cost goods. Businessweek just reported that Target’s latest statement shows that three-quarters of their profits didn’t come from the sale of goods they came from subprime lending. That’s three out of every four dollars of profit come from interest, late fees, over-limit charges and penalty fees. I guess the baby clothes are just the teaser; what they really want is 29% interest on the Target card. And that difference has big-time political implications.

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The NYT ran a front-page story this morning about the sharp rise in complaints against debt collection companies. The sharp tactics include freezing someone’s checking account for a debt she didn’t owe and calling someone at work enough to put her job in jeopardy.

I’m glad the Times ran the story, but this is the wheat that we’ve been sowing for years. When Congress handed the credit industry its wish-list in rewriting the bankruptcy laws last year, did anyone think this would mean debt collectors would become more gentle? Congress gave the creditors the whip hand, and they are whipping debtors harder than ever.

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Want to contribute to TPM Cafe? Email ideas for your pieces to us at talk@talkingpointsmemo.com

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