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Written by José D. Roncal
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Thursday, 16 July 2009 05:25 |
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Last fall we wroteConsumer Debt in the U.S., an extensive report on the state of credit debt in the U.S. We've also written about the credit crunch in our bookThe Big Gamble. There is valuable background information in these reports, but with so many recent changes in the news, we thought it was time to give you an update.
What has changed?
The severe economic downturn has changed the rules about those little plastic cards we carry in our wallets: credit-happy consumers have curtailed their binge spending, government regulators are tightening the standards, and credit card companies are having to re-evaluate their business models and soon will have to be more transparent about their practices.
The reasons for the decline in credit card use are all interlinked. First, credit card issuers got hit with a rising default rate—up to 8% or double the figure in 2006. That caused companies to set stricter standards making it harder for borrowers to get additional credit. At the same time consumers have become more cautious about taking on more debt because of concerns over job loss, declining home values and evaporating retirement funds.
We are all too familiar with these facts, but there's one aspect in this picture that isn't reported much: securitized credit card debt. That means packaging and selling credit card debt just like Wall Street did with mortgage-backed securities. For a little refresher on what that means, see our report entitledGet Ready for Another Crisis: The Coming Credit Card Debt Meltdown, especially on the third page under the subhead: Under the radar: Packaged credit card debt. |
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Written by José D. Roncal
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Wednesday, 01 July 2009 01:05 |
That's the question we wish we could have posed to scores of individuals before they unwittingly put their trust in Ponzi schemer, Bernie Madoff. On June 29, when the judge handed down a sentence of 150 years, Madoff's victims no doubt experienced a healthy dose of Schadenfreude—that sense of pleasure one gets from the misfortunes of somebody else, especially if that somebody else was guilty of meting out misfortune on so many others.
Madoff received a penalty six times greater than those imposed on the chief executives of WorldCom Inc. and Enron Corp. But even the extreme sentence of 150 years, coupled with a sense of justice having been served, will not compensate for the millions lost in personal savings. In what will likely be remembered as a swindle of epic proportions, the losses could potentially reach $65 billion in both real and phantom investments.
Who's to blame? The perpetrator and his cohorts alone, or should some of the responsibility for this fiasco be placed on the shoulders of those who blindly went along with greed as the underlying motivator? What ever happened to that old axiom about something being too good to be true? How did so-called investors think they could continue to reap double-digit growth year after year without ever having received a single printed monthly statement or confirmation of how their money was being spent? Who is to blame for accepting such outright questionable financial dealings sight unseen?
That brings us back to our original question, "Are You Investing or Speculating?" the tagline in the title of our book, The Big Gamble. In the current economic crisis, the word speculation is not a popular one. Speculators, hedge funds, and most of Wall Street's elite are seen as the evil-doers responsible for the demise of the financial system.
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