Credit

Appeared in Le Nouvel Observateur, November, 2007.

Welcome to "Debtors Anonymous"
AMERICA HOOKED ON CREDIT

More than 2 million Americans could loose their houses in the months ahead victim to risky mortgage loans, the infamous 'sub primes'. But that is only the visible part of the debt: bank cards, student loans, loans against salary make up the reverse side of the American Dream.

From our correspondent in San Francisco
Dominique Nora

There are ten of them. Six women and four men, sitting in a circle in a small meeting-room in the basement of St-James Episcopal Church, San Francisco. It is six o'clock, the tea kettle whistles, the meeting begins. Ann, in an azure blue suit, a timer in hand, oversees a strange ceremony: a prayer, a few readings... then comes the time for "sharing". Max, an anguished forty-something who until then had looked at his running shoes, goes first: Good evening, my name is Max, and I am a compulsive borrower and spender". "Good evening Max" answers the Assembly warmly. "I really needed to come here tonight. I am more than 10 000 dollars in arrears. It is awful, I can't even manage to keep cash in my pocket..." Here the talk is not of God, but of money: on the door, a sign with the initials DA for... Debtors Anonymous. Debtors Anonymous is a self-help group for people excessively in debt, founded in 1976 by x-members of Alcoholics Anonymous. For the city of San Francisco alone, the association holds seven meetings per week. Now it is Mary's turn, with a sweet look in her eye ands a ravaged face: "For months, I was abstinent. I was even able to save a bit of money to go visit my mother, ill in Chicago", she recounts. "But for the last two weeks, I have fallen back: I too have large medical expenses, and am facing an operation..." Insufficient salary, lack of medical insurance, divorce, unemployment, university fees, new house, new car: through the glimpses into the lives of these DA members one sees the difficulties of middle-class America. 19:15 hours: standing, in the center of the room, with clasped hands, the participants conclude: "We will come back...because this helps us!" What is actually at work, at bottom, is hyper marketing in an American society, where there is pressure on individuals to engage more debt, to borrow ever-more, often beyond reasonable limits. "The culture of debt is very different in the united States from that in continental Europe", explains Nicolas Marin, formerly with HEC (commercial studies) but now a mortgage agent in the San Francisco Bay area. "Here the idea is not to pay back, but rather to surf on ever-larger loans, while profiting from one's holdings. When markets turn, this form of leveraging multiplies losses, just as it works to create wealth in good times." Over-indebtedness is the reverse side of the American Dream. The hidden face of optimism and risk-taking, which are the powerful motors for the national economy.

Zelda Johnson is not acquainted with DA. For her, it is already too late. Eighteen months after having purchased the house of her dreams, in the small town of Concord, Zelma has lost her savings...and her house. She is not alone: some 2, 2 million American households, victims to the crisis in mortgage lending risk loosing their homes, according to the Center for Responsible Learning, an association working for stronger federal regulation. And this is only the beginning: "In 2007, 12,9% of American households had a house whose value is less than the amount of the loan against it. In 2008, they will be 25,4% projects the First National Bank. The entire planet worries on the possible effects of this mortgage time- bomb. Worse, this is but the tree hiding the forest of debt contracted by American households. The other culprit? A or rather many credit cards. "86% of applications for personal bankruptcy involve credit card debt", according the the professional "Nilson Report". Americans were saving on the average 11,1% of disposable earnings in 1985. For the first time since the Great Depression, this rate is negative in 2005, at-0,5%, according to the American Commerce Department. The trend reversed itself during the 1980s, with de-regulation of financial services. The growth of this credit card debt "is a reflection of the shift of economic power of industry toward the banks. It is now more lucrative to finance consumption, than to produce manufactured goods" puts forward Robert Manning, professor at the Rochester Institute of Technology, in his book "Credit Card Nation".

In effect, contrary to French practice where expenses are automatically re-embursed at the end of the month, a credit card in America, literally, creates debt. One can run up some 15 000 to 35 000 Euros in expenses, with an average exorbitant rate of 18% (the maximum rate varies from State to State) and only pay back a small portion each month. The United States are responsible for over half of all bank card transactions, as opposed to one quarter in Europe. Americans are actually shooting up on plastic. Robert Manning claims there are 1,5 billion credit cards in circulation in the U.S.: on average, 10 per person! Credit card unpaid balances account for over one third of consumer loans and are bring in a fortune to the banks. Abuses start at university. The banks do not hesitate to recruit agents on campus, and lure students with gifts. California recently passed a law forbidding offering t-shirts or pizzas! Indeed, universities themselves often unroll the red carpet. 52 000 new students at the university of Minnesota thus received a U card in September, which serves as an identity card, a library card, but also a credit card if they open an account with TCF Financial Corp. A privilege this regional bank payed 28 million Euros. The banks await the students with hard penalties. The 18-24 crowd thus pay 3 Euros in penalty for every Euro unduly spent! "This is the reason we have a pre-paid card, which refuses the transaction if there is not enough money in the account", explains Patrice Peyret, founder of Plastyc Inc., which puts out cards for adolescents and young American adults.

"No credit? Bad credit? No problem!" one merely has to land in the U.S., open a bank account, or buy a pair of running shoes on the Internet to be constantly harassed with loan propositions on the telephone, by mail, by e-mail. A predatory form of marketing whose principal victims are fragile populations: the unschooled, immigrants, the young, the old...In his documentary "Maxed Out", James Scurlock tells of indebtedness dramas: a mother who commits suicide, a young man who turns into an assassin, a soldier emprisoned for having spent wildly on a professional card. Poorer Americans are millions to frequent Pay Day Loans, walk-in shops which - against a post-dated check - will advance cash no questions asked. "Normally, one takes 15 dollars on a 100 dollar loan", tells Rebeca Flippo, a retired worker from such a shop in Virginia. " Clients think they will only come to us once...But, in general, they cannot pay back, and must once more pay 15 dollars, the following month, to keep the same loan..." An usurious rate, which, by end of year, may have cost up to 400% the borrowed amount! In total, Pay Day boutiques take in 3 billion Euros in commission every year. More surprising, even in affluent circles, Americans are often strapped for cash. "When I created my first enterprise in Silicon Valley, I was surprised to learn one had to give out pay checks every fifteen days. Once, I was five days late, and there were serious problems for certain engineers", recounts French entrepreneur Patrice Peyret. Over-spending is a way of life Big is better! It is the adage found in publicity spots, taught in commerce schools, encouraged by the White House. It is a question of status: in the United States, one is judged by how much one weighs, what one exhibits.

THE BROKEN DREAM OF ZELMA JOHNSON

In May 2006, following her dream, Zelma Johnson bought for 420 000 Euros a house with 3 bedrooms in Concord, in the eastern part of San Francisco Bay "Garage, ecnlosed garden: everything was perfect to create a daycare center", tells this 49 year old black woman, sitting on the stairs of a pastel blue house. Zelma "only" has 25 000 euros, and no salary since she just quit her job as an employee? No problem! A mortgage broker, "a friend" she believed- put together a loan over 30 years for the totality of the sum. Payments? 2 900Euros per month!
"At the time, I thought it could be done", says Zelma. "By taking care of eight childrn, I would have made 8 000 dollars (5 600) Euros per month"...

This is a high-risk mortgage, one of those infamous sub primes, as are over 20% of new loans in the United States, in 2005 and 2006. At that time, real estate was rising continually. To such an extent that lending banks - which would immediately re-sell the risk on credit markets - come to relax their criteria to an extreme extent. And Americans start using their houses as giant money machines. "The more their houses appreciated, they would contract loans on the potential plus-value involved. Confusing this debt for capital, they would spend it on consumer goods", explains the financier Nicolas Marin. Zelma Jones, for her part, meets which a string of bad luck: the work done on her house is over-budget and late, eating up all her savings. The bank refuses a crucial loan, on which she was counting. And she finds only three children to baby-sit instead of the anticipated eight. From October 2006 on, incapable of paying her debts, she is hounded by payment agencies, and a target for late penalties. In July 2007, "her" house is re-possessed by the crediting bank..for 280 000 Euros. The unfortunate entrepreneur - still in the red - lives in fear of expulsion.