The Red Queen's Advice

As I read today’s news, I was struck by the item reporting the much higher than expected quarterly profits by J.P. Morgan Chase. The headline was JPMorgan profit jumps, but warns on credit cards. The essence of the article was that the investment banking business was doing surprisingly well, but that the consumer mortgage and credit card losses were accelerating. No surprise there. The methods used by banks to manage credit card risk have always displayed a curious brand of logic from a consumer perspective, but in the current economic environment, it’s taken on the extremes of a Lewis Carroll story. As long-time customers who, on the whole, have always paid their bills lose income and begin to struggle making payments, bank risk rises, so card interest rates and minimum payments increase for the universe of cardholders to attempt to offset the collective losses to the bank. The minimum payments can actually double for some customers. Entire new groups of cardholders who were previously able to make their monthly payments are no longer able to make the newly increased payments and begin to fall behind. Bank losses increase and interest rates and minimum payments continue to rise stressing the next tier of cardholders. So it goes, ad infinitum. As the Red Queen said, “Now, here you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

Over many years of relative stability, many people have mistakenly learned to think of credit card debt in terms of a fixed and predictable payment and developed what they thought were manageable budgets on that basis while ignoring the large amount of underlying debt they were carrying. The fallacy of that thinking has been a painful lesson for many. I sometimes wonder if a radically different response from a maverick bank could be more effective in the long run. What if they identified financially stressed cardholders with high balances that had reliably made payments for a long time and offer them an opportunity to estabish a fixed payment at a more reasonable rate that they could budget for and set it up on an automatic withdrawal. The lower rate could apply more of the payment to principal while still making payments on time giving the bank predicatble income and the consumer a pathway to decreasing their debt. It would not cover the losses from those who were absolutely unable to pay their cards, but would preserve an entire group of historically good customers from sinking further into debt and risking more defaults. Such a radical bank might even find that these customers appreciate their action and become fiercely loyal to that bank when better times return. It could amont to exchanging a smaller amount of physical capital for a greater amount of social capital and clearly differentiating that bank from its competitors...Or, perhaps I’ve just watched too many reruns of It’s a Wonderful Life for my own good.

Fireworks, Festivals and Fortitude

Between the fireworks, parades and community festivals of the Independence Day weekend, I ran across the following online article by Heather Boushey from the Center for American Progress.
http://www.americanprogress.org/issues/2009/07/recession_today.html

For me, this article served as a reminder that, despite the forecasts of impending economic recovery, millions of American families will continue to struggle to survive, cobbling together a patchwork of government assistance, and short-term or under-the-table work when they can find it. Many of those fortunate enough to have accumulated assets when times were good are depleting their resources to maintain standards of living, while confronting the uncomfortable realization that those standards will need to change significantly in the future.

Although there’s nothing dramatically new presented here, the timing is perfect and some of the facts in the article deserve a second look:

• 
  · The share of the population with a job fell to 59.5%, lowest since 1984
  · The number of mass layoffs in May reached an all-time high of 2,933 incidents, indicating more pain to come in the pipeline
  · The average hours worked fell to 33/week, a historic low
  · The unemployment exhaustion rate for the initial benefit period (26 weeks)reached 49.2% in May
  · Only 67.7% of adult men are employed, a number that had never previously fallen below 70.5%
  · The number of discouraged workers has more than doubled to 793,000 since the recession began in December 2007

These are stark reminders that this recession has transcended the cyclical shedding of jobs impacting those with marginal labor force attachment to penetrate the broad spectrum of the American population. While the massive debt resulting from efforts to stimulate the economy and shore up our safety net is painful, desperate times call for desperate measures. One thing is clear, however…the stimulus investment must be treated with a level of critical importance. These funds cannot be treated as simply “more of the same” to be used in precisely the manner to which we have become accustomed. Our traditional workforce, economic development, education and community resources are being called upon to facilitate the kind of revolutionary practice needed to make a difference in the future direction of our economy and our nation.

So, while I'm participating in this most American ritual watching tonights fireworks, I'll feel just a little more connected to those around me and further convinced that what we do, indeed, matters.