Economists and politicians are still debating and recalculating the odds on whether the economy will stumble into a recession or avoid a serious downturn.
But a majority of Americans have concluded that the downturn the experts are debating has already arrived. More than 60 percent of the respondents to a recent poll said they think the housing market’s contraction, the subprime debacle and the resulting credit crunch have pushed the economy over the recessionary edge. Turbulence in the stock market, continuing reports of rising foreclosure rates and shrinking employment forecasts are re-enforcing the perception that the economy’s trajectory has turned clearly and sharply downward. Most of the consumers responding to the poll, conducted jointly by Associated Press and Ipsos, cited stock market losses and falling home prices as their major concerns. “I really dread opening my [financial] statements,” one of the respondents interviewed by AP said.
If there is any good news in increasingly glum reports like this one, it may be that the economic downturn, or the fear of one, is forcing a generation of over-extended consumers to deal with their addiction to debt. With stock portfolios hammered, home equity shrinking, and lenders tightening standards for all kinds of loans, consumers who have borrowed against their assets for years are managing their money the old-fashioned way – like their parents and grandparents before them, “they are starting to live within their means,” a New York Times article reported recently.
The change is hardly voluntary. The Federal Reserve’s most recent survey of lending trends found that more lenders tightened their credit standards in the fourth quarter of last year than at any time in the past 17 years. More than half of the banks surveyed said they had tightened standards for mortgages, 60 percent said they had tightened up on home equity credit lines, and 10 percent said they were imposing stricter standards on credit cards as well.
To some analysts, the statistical writing is on the wall, evident not just in the Fed’s survey, but also in the increasing number of consumers shopping at discount stores – and paying cash for their purchases.
“The shift under way feels to some…like a cultural inflexion point,” the Times article suggested, “one with huge implications for an economy driven overwhelmingly by consumer spending.”
While many analysts think the change in consumer attitudes toward credit will be far-reaching and long-lasting, others suspect it will be short-lived. One of the skeptics is Lendol Calder, author of “Financing the American Dream: A Cultural History of Consumer Credit,” who told the Times: “A river of red ink runs through the history of the American pocketbook.” That river has been fed partly by “desire,” partly by optimism, and “partly because lenders have been free to invent useful borrowing tools that minimized shame and bother.” As a result, Calder said, “I think it will take a great catastrophe, greater than the Great Depression, to wean Americans from their reliance on consumer credit.”
FOR WHOM THE (CRA) BELL TOLLS
Anticipating the recent Congressional hearing on the Community Reinvestment Act (CRA), credit union trade groups assured their members that the legislative review was not aimed at them. And, indeed, credit unions were not the primary focus of that hearing, called by Rep. Barney Frank (D-MA), chairman of the House Financial Services Hearing, to mark the 30th anniversary of the law. Credit unions are currently exempt from that statute, requiring banks to meet the credit needs of the communities they serve, but it was clear from the number of regulators, consumer advocates and bankers who questioned the exemption, that credit unions will be very much part of the ongoing discussion of how the CRA should be revised, modernized, and broadened to reflect changes in the financial marketplace.
Testifying for the Independent Community Bankers Association (ICBA) and repeating a long-standing banking industry argument, Cynthia Blankenship, vice chairman and chief operating officer of Bank of the West, said credit unions compete directly with community banks and should be subject to the same requirements. Studies comparing records of lending to low-income and minority borrowers have shown “consistently…that banks actually do a better of fulfilling the credit unions’ mission than the credit unions,” Blankenship contended, adding, “ICBA believes the national Credit Union Administration had the right idea when it adopted the CAP (Community Action Plan) proposal [requiring credit unions to document their service to low- and moderate-income members], and took a giant step backward when it repealed the rule the following year.”
Federal bank regulators testifying at the hearing agreed that the CRA should cover all depository institutions, although some stated that position more directly than others. The most direct statement came from a spokesman or the Office of Thrift Supervision, who said the agency thinks “all depository institutions [including credit unions], should participate in CRA to increase the provision of financial services to low- and moderate-income families and communities.” Comptroller of the Currency John Dugan said the statute should apply to non-banks as well as banks, but stopped short of stating specifically that credit unions should also comply. “That’s really an issue for Congress to debate,” he told reporters. “But given the success of CRA so far and how it’s been administered, I think it is time for a debate about whether it should extend to other types of institutions.”
Credit unions, for their part, maintain that as member-owned and member-oriented institutions, they serve their members by definition and don’t need a statutory requirement to do so. In a letter to members of the Financial Services Committee, NAFCU President Fred Becker noted that CRA was enacted specifically “to punish banks and thrifts for engaging in discriminatory practices, such as redlining and disinvestment. Credit unions were not included under CRA,” Becker argued, “because there has never been any evidence credit unions engaged in these illegal and abhorrent activities.”
FIRST IN LINE
It’s finally happened. The first member of the generation that vowed, “Never trust anyone over 30,” has filed for Social Security benefits. Kathleen Casey Kirschling, whose birthday one second past midnight on Jan. 1, 1946 makes her the nation’s first baby boomer, celebrated her 62nd birthday by submitting an on-line Social Security application, documenting her eligibility to begin receiving payments. Social Security Commissioner Michael Astrue congratulated Kirschling on reaching “a personal milestone – she has made the transition from the workforce to retirement,” Astrue said, “and I could not be more pleased that she has chosen to make this transition by filing for her benefits on line.”
Astrue may be somewhat less enthusiastic about the 80 million Americans in line behind Kirschling, who will reach retirement age, at a pace of 10,000 per day, over the next two decades.
A recent survey of boomers born in 1946 ,conducted by the MetLife Mature Market Institute, found that 31 percent plan to apply for Social Security when they turn 62 and an almost equal number (32 percent) plan to wait until they are 66 or older, so they can receive full benefits. Early filers say they are afraid there won’t be anything left in the system if they delay their enrollment. Among the survey’s other findings:
- 37 percent own stocks and 38 percent have mutual funds.
- 85 percent own their own home, with an average value of $297,000.
- 47 percent have defined benefit plans, 50 percent have 401(k) retirement plans and 50 percent have IRAs.
The survey also found that, notwithstanding their political roots in the radical ‘60s, most of the boomers have led relatively conventional lives. “They were married once, had two children and feel they’ve done a decent job of caring for their family, their community and themselves,” Sandra Timmerman, director of the MetLife institute, said. “They’re really more like Ward and June Cleaver than we may have thought.”
CHANGING THEIR IMAGE
Payday lenders are really responsible, responsive, concerned corporate citizens, who have the best interests of consumers at heart. If that description doesn’t quite match your impression of these purveyors of high —extremely high-cost loans, take a look at the television ads flooding the air waves of late – the leading edge of a multimillion-dollar public relations campaign launched by the industry’s trade group, the Community Financial Services Association (CFSA). Taking its cue from beer ads that admonish consumers not to drink in excess, the payday promotion urges consumers to use the loans only for unanticipated essential expenses, to borrow “only what you feel you can comfortably repay,” and above all, to “always use payday loans responsibly.”
Industry executives describe the campaign as a public service, designed to emphasize the appropriate use of loans that consumer advocates describe as a “financial death trap” for borrowers. But the ads clearly target criticism that has led two states (North Carolina and Georgia) to ban payday loans, produced a federal law defending military personnel against payday loan “abuses,” and threatens to bring broader federal restrictions and more state laws regulating the loans or banning them entirely.
If payday advocates are hoping the public image campaign will produce more favorable publicity for the industry, they had to be disappointed by a recent front page article in the Wall Street Journal headlined, “”High Interest Lenders Tap Elderly, Disabled.” The article described a new marketing twist in which lenders advance loans not against borrowers’ paychecks but against their benefits payments – Social Security, disability payments, and veterans’ assistance, for example.
“These people always get paid, rain or shine,” noted William Harrod, a former manager of payday stores, who was quoted in the article. The article notes that Harrod resigned last year “over concerns that the company exploited its customers and targeted vulnerable groups….”
While noting the lack of available statistics on the proportion of payday loans now backed by benefits payments, the article reports the results of a study it commissioned that found payday lending stores clustered around government subsidized housing developments for seniors and the disabled. The study’s author, Steve Groves also produced a study identifying high concentrations of payday lenders around military bases. The Journal notes that the Department of Defense cited that study in its successfully campaign for the legislation enacted last year, capping the interest rate on loans to military personnel and their dependents.
You may recall that when the Department of Defense issued the rules implementing that legislation, credit union trade groups did not join the banking industry in trying to block or significantly modify the regulations. They may be rethinking their position now, however, as the DoD has issued for comment a proposal to expand the rules to cover a broader range of loans that weren’t included in the original proposal, specifically, credit cards and overdraft protection services. If the department adds those loans to the list of products covered by the rate cap, the National Association of Federal Credit Unions has said it will seek an exemption for credit unions “in order to preserve the availability of beneficial credit for our troops and their families.” In his comment letter on the proposal, NAFCU President Fred Becker said the regulations should focus on “bad actors,” such as payday lenders, and the “largely unregulated” financial products they offer.
IMMIGRANT CRACKDOWN BAD FOR BUSINESS
As immigration reform proposals continue to languish in Congress, state laws cracking down on undocumented immigrant workers are proliferating, but so are concerns about the negative impact on U.S. businesses. A recent report by the U.S. Chamber of Commerce warns that these restrictions are boosting labor costs in many sectors, including housing, and threaten to undermine the competitive position of the United States. The report, “Assessing the Effects of State Laws Addressing Foreign Born Unauthorized Workers,” tallied about 1,562 legislative proposals aimed at undocumented immigrants introduced last year; 244 of them became law in 46 states, about three times the number enacted in 2006.
The report focuses on four states that have adopted new laws to regulate the employment of foreign-born unauthorized workers: Arizona, Colorado, Illinois, Pennsylvania and Oklahoma. The Oklahoma law prohibits employers who do not participate in E-Verify or the equivalent from receiving public contracts or subcontracts and labels as a discriminatory practice the hiring of an unauthorized worker in the place of an authorized worker in the same job category. The law classifies these breaches are felonies, along with transporting, concealing, harboring, or sheltering undocumented immigrants from detection.
The report cites anecdotal evidence from builders “a significant rise in sub-contractor charges for certain construction jobs, such as dry walling and roofing that attracted a high proportion of immigrant workers. This appears to be the result of both a decline in the supply of available workers – some contractors said that they have lost as much as 40 percent of their crews – and an attempt by some sub-contractors to take advantage of the tight labor situation,” the report says.
With undocumented immigrants accounting for one in five workers in the building industry’s workforce, it is not surprising that home builders consistently rate the availability of labor as one of their most pressing concerns. Builders, who are by and large small business people, are being forced to comply with a patchwork of state and local laws Jerry Howard, executive director of the National Association of Home Builders, complained. “It’s very, very difficult,” he said. “It literally can’t be done.”