Tuesday, November 4, 2008

Bailing out Joe the Plumber

Everyman America too needs a bailout


From The Statesman

Joe the Plumber, America’s Everyman fictionalised and popularised by both Senator John McCain and Senator Barack Obama during their fiercely contested presidential elections, cannot pay his credit card bills. After the elections, he will be forgotten but not his problems. American consumers are defaulting enormously on their credit cards and banks are bleeding red ink coast to coast.

The credit card industry and consumer advocates are asking the Federal regulators to let them write off as much as 40 per cent credit card debts for some consumers, according to Associated Press. Cash-only lifestyle in the United States has long been gone.

Barring a minuscule minority of old-fashioned people who still believe and practice what Polonius said in Hamlet, “Neither a borrower nor a lender be,” most Americans have become accustomed to living on credit. It was so wonderful when the going was good. Banks were eager to loan money to anyone who had a minimal threshold of credit-worthiness. Before the financial tsunami hit the country, the industry used to mail billions of solicitations to people offering credit cards.

There are more than 650 million credit cards in circulation in the United States for a total population of 300 million plus. American economy depends on consumer spending. Even today in spite of the credit crunch, when you enter a store a pretty girl would greet you with the solicitation: “If you open the credit card account now, you will get 10 per cent discount on all your sales today.” And then she would whisper: “You can cancel it any time.” With very little background check, instant credit would be issued to the customer and thus would begin the spending spree, for which the whole world is paying the price.

A few years ago it was thought that the American model could work for a growing economy like India; so credit cards were issued as generously and foolishly as they were done in the United States. But as they have pursued the American way of life, the rising middle-class Indians too have been sucked into the consumerism tidal wave with unforeseen consequences for the economy.

A middle class Indian would live in perpetual debt, as would Joe the Plumber for many years to come, making monthly payments for the mortgage, home equity loan, car loan, and his children’s college education. And if Joe the Plumber faces divorce, a highly probable domestic future for Everyman America, or if there is a major medical catastrophe uncovered by his health insurance, he would look for a bailout or bankruptcy. There was a time when American consumers used credit cards mostly during a holiday season. Gradually it became an all season credit addiction. When bills began to pour in and borrowers were unable to pay them, they juggled their debts from one credit card to another.

In spite of the fact that the law in the United States now makes personal bankruptcy rather more difficult, on average about a million people filed for bankruptcy every year. Now it is going to be much worse. Bankruptcy of course is no shame in the United States. From Lehman Brothers to Joe the Plumber, everyone does it. It is only a minor embarrassment. Call it a method of re-inventing oneself; or re-structuring.

Americans routinely use the card to make all kinds of payments: medical bills, gas, groceries at the supermarket, college tuition bills; and even dial-a-porn. It is so convenient. In fact consumers are rewarded for using their charge cards. Many card companies offer cash back, frequent flyer miles, or some other horny corny temptation every time the customer uses the card. Without savings, how can a family balance its budget in tough times, except through more borrowing with the credit card? According to Federal Reserve estimates, the total credit card debt carried by the US households in November 2007 was $900 billion.

As long as the good times rolled on, banks did not feel that credit card delinquencies posed a serious threat to the banking system because most card customers were good, so good that their business covered up not only the losses due to bankruptcies but also due to frauds. The cardholder liability in fraud cases is limited to $50 only. Every year thousands of people become victims of card frauds. There have been several reports from major news media whipping foreign hackers for most of the card frauds in the United States. Credit card thieves come in all shapes, colours and nationalities and they have the same working methods: hack into the data bank of a major retailer and once logged on, download customers’ social security, credit status, and addresses.

With stolen ID they can live the other person’s life for a long time and then move on to another victim. The usurer, the debtor, and the gentleman crook were all doing well in the United States, though it had been a continuous challenge: life in perpetual debt, worry about paying the next month’s bill; or jail for fraud. But in hard times like these, the credit card industry cannot survive if the losses reach a point that the credit card system collapses like a house of cards.

So what should India be doing?

Instead of pursuing the American way, India should consider the French way where most people opt for a debit card. This will allow an aspiring Miss Bollywood to spend as much on her Prada collection as she has in her bank account.

(ND Batra teaches communications and diplomacy at Norwich University. He is working on a new book: This is the American Way, Stranger!)

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