The Two-Income Trap - Elizabeth Warren [66]
Lenders also began to see the possibilities opened up by the new laws. No longer would credit be a prized commodity, doled out parsimoniously. By the mid-1980s, credit had become a highly profitable consumer product, like running shoes or soft drinks, and the new game was to sell as much as possible.16 How to manage the risk that some customers might default on the debt? Simple: move the lending operations to South Dakota—or Delaware, which quickly followed South Dakota’s lead—and then raise the interest rates for customers across the country. 17 Banks would “lose” money on some credit card customers, but, thanks to higher interest rates, those losses would be more than offset by the profits on the rest. Over the past decade, bad debt losses and loan write-offs have soared, but profits have risen even faster.18 In this new sky’s-the-limit world, the stern-faced banker and the long application forms have been replaced by chirpy advertisements and “preapproved” credit offers. Banks can now lend to anyone and everyone (including those in financial trouble) and still make a handsome profit.
The Debt Explosion
In the new world of unregulated lending, families are barraged with advertisements and offers for a new product: all the debt they could ever want, and more. Now, in a single year, more than five billion preapproved credit card offers—totaling over $350,000 of credit per family—pour into mailboxes all across America.19 Magazine ads, telephone calls during dinner, and flyers at the bottom of grocery store bags barrage families with even more offers of credit, while roving bands of credit card marketers haunt college campuses and shopping malls. Credit card debt has increased accordingly: from less than $10 billion in 1968 (inflation adjusted) to more than $600 billion in 2000, an increase of more than 6,000 percent.20 It would seem that once Americans got a first bite of the debt apple, they just couldn’t get enough.
But what are families spending all that money on? Did they blow it on “vacations and luxury items,” as one columnist claimed?21 This explanation might gratify the self-righteous bill-payers, but it doesn’t square with the facts. Undoubtedly, all that easy credit dangling under everyone’s noses enticed a few more Americans into buying things they could have lived without. As we showed in chapter 2, today’s families are spending more on some goods, such as computers, home electronics, and pet food, than they did a generation ago. But they are spending less on food, clothing, appliances, home furnishings, and tobacco—a lot less. There is no evidence of an increase in impulse buying or luxury acquisitions over the past thirty years—certainly nothing that could account for a 6,000 percent increase in credit card debt. Moreover, the expenditures that have shown the biggest increases—e.g., housing, health insurance, college tuition, preschool—are the purchases least likely to appear on a credit card bill.
If families aren’t buying more goods, then what are they using all that debt for? They get into debt trying to buy their way out of the Two-Income Trap. The bidding war has inflated the cost of middle-class life to the point that once they have paid the mortgage and other fixed expenses, families have little discretionary income left—and even less margin for error. What to do when something goes wrong, as it increasingly does? Since the two-income family does not have a stay-at-home mom to call on to help make ends meet when emergency strikes, the family turns to debt to make it through to the