Shop until the Tow-Truck Comes
Despite recession and unemployment, American consumers cheerfully run into debt. The experts argue: Will the buying craze save the economy or only make everything worse?
By Thomas Fischermann
[This article originally published in: DIE ZEIT 24/2003 is translated from the German on the World Wide Web, http://zeus.zeit.de/text/2003/24/Privatbankrotte.]
Sergio Costa has a stable job. The man steals cars. "I live to work at night", he says, "on account of the security. However there is so much to do now that I am active 24 hours." Costa turns off alarm systems with a few manipulations, silently opens top security castles and sometimes carts away cars with their tow-trucks. Last month he stole 402 cars, mostly BMWs and Toyotas.
Costa is not an ordinary car thief. Before he steals a car, he notifies the police. At the end, he returns the cars to their true owners. Costa is a so-called repo-man. He is operating manager with the firm Elite Collateral Recovery and Investigations in Elizabeth, New Jersey that takes back vehicles bought on credit from tardy debtors. The company receives orders from automobile firms and banks and business has been increasing for months.
When our branch booms, that is an excellent index for economic crises", laughs Harvey Altes, head of the branch association Time Finance Adjusters. Last year its member firms "stole" the record number of two million vehicles from their insolvent owners, "a really enormous number", Altes said. The number reflects a series of alarming economic trends. Many private American households have exhausted their credit limits with banks and credit card firms. Some of them cannot pay their installments any more. The average debt service of a US household has reached a record of 14 percent of disposable income. Altogether the private debt of American households rose to an historic high of $1.7 trillion and the number of personal bankruptcies climbed last year around five percent. "We have arrived at a point where the heavy debts of private households cannot be maintained:, judges Dimitri Papadimitriou, president of the Levy Institute. "This is clear to people though it has serious consequences for business activity."
Unique in History
Joy in credits is not new in the US. Americans traditionally live on credit and save less than most other industrial nations. The trend has accelerated. If US citizens at the beginning of the nineties hardly put aside nine percent of their disposable income, the savings rate at the end of the decade was slightly above two percent. The stock market boom and the supposed wealth spurred many people to exhaust their credit cards, bank loans and financing possibilities. Some economists believe this credit- and consumer wave produced the consumption wave of the late nineties more than the Internet.
However economists and psychologists are still perplexed today why this mentality hasn't changed since the bursting of the stock bubble - unlike in earlier recessions. For example, the borrowing of Americans drastically fell after the 1991 economic crisis. This time Americans cheerfully take credits, more quickly than before if one takes the share in disposable income as the standard. "This acceleration is unique in post-war history", says Jan Hatzius, economist at the Goldman Sachs investment bank in New York.
The result: the debt state of American private households breaks all records. In the meantime, the debts of an average American household are above their net annual income.
Several credit institutes already have cold feet. Financial firms of large auto companies like Ford Motor record a one-third increase in their credit failures in the past three years. Americans nowadays carry $3200 in debts on two or three credit cards - an increase of almost $1000 over last year according to a November 2002 study of the debtor advisory firm Myvesta. Credit card firms report that more and more Americans have reached the maximum of their credits and can no longer make their payments. Some of these firms have opened up the so-called sub-prime lending market in the last years. Their customers are people without a perfect credit history. The credit card firms are now more nervous than ever. Some call unreliable customers even before the settlement date to urge payment. The fees and interests for late debtors have increased drastically.
People fall in the debt trap who previously seemed hardly endangered. The association of repo-men declared that more and more people voluntarily give away their cars. "They don't want the annoyance", says the branch spokesperson Altes. "They are honest people from the middle class in an extraordinary situation. They are people like Mantell Sponder from Brooklyn for example who once earned $150,000 a year as a computer expert on Wall Street and now accustoms himself to rude telephone manners after a year of unemployment. "Credit card firms and creditors call daily", Sponder says shrugging his shoulders. "There is simply no money - and I have grown accustomed not to speak to them. The pitchforks are thrown."
Homeowners feel rich
Some economists refuse to accept a private debt crisis. The contractor of debts according to their argument could turn out the winner for a better future. Ultimately the economy profits from the strong consumption of Americans. Thus the collective borrowing could become a self-fulfilling prophecy. Who is right - the pessimists or the optimists?
The calculation is only true if the labor market grows with the demand. Last year income rose 4.5 percent - after only 1.8 percent the year before. A large part of the increased income resulted from the Washington tax cuts. The unemployment rate in the US has again surpassed the six percent mark.
The development of interests and house prices is also important. Federal Reserve chief Alan Greenspan keeps the leading interest rate at a record low and opposes its rise. Americans in the past months have gained a large part of their new credits by mortgage credits on their houses at favorable interest rates or by changing the terms of their mortgages. Homeowners living in regions of a booming real estate market, for example in Sacramento or in Hew York City, have done very well. Some house prices rose 30, 50 or even 100 percent in the past years so extra cash accumulated by changing the terms of debts. Homeowners feel richer. However some economists see the house prices at a high. Some pessimists warn of a collapse of real estate prices in several regions. The interests could hardly fall again. This practice of contracting debts may soon be over.
Very different signals are given to American consumers because no one knows the seriousness of the situation. "Live rich", counsels Citibank on billboards and television spots. Bankers try to persuade their customers that getting an austerity haircut isn't a good idea.in crisis times. Americans are born "with the right to accepted loan applications", so to speak. Conversely debt advisors like "Survive Vacations without Bankruptcy" become best-sellers. Consultation seminars for heavily indebted Americans are in demand. Shady offers ("receive a new credit identity") find more and more desperate interested parties. The American Bankruptcy Institute worries that "the increasing numbers of insolvent households could endanger the financial health of creditor institutions." The usually optimistic banking houses have an enormous lobby in Washington to reform the laws around personal bankruptcy. Whoever goes bankrupt can usually keep many things in the United States, often the house with great tax allowances for cars, jewelry and furniture. Credit institutes desire tough action from the new legislation.
Are these bad times for tardy debtors and good times for people like the repo-man? Perhaps not. "May was a very strange month", the branch spokesperson Harvey Altes laments. "The car firms in the past month have sold so many cars with zero interests and special rebates that they post losses", Altes says. "The latest trend is that the cars aren't taken back."