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Perfect Storm in Personal Finances and Economy (Wednesday, May 18, 2005)

The Tide is Changing

The recent signing of the new bankruptcy law will make an impact on borrowers and their families.

Major medical bills can be blurred by income means tests. Many people will be squeezed even harder. This will damage their credit histories and force them into borrowing at rates that were considered usurious less than a generation ago. This does not help mass-market retailers. It only fosters a society of workers in terms that Dickens described.

Rising Interest Rates and Fees

Credit card minimum payments and fees are on the rise. It is not about profitability anymore but about greed. Banks and credit card companies now treat an ordinary customer as the goose that laid the golden eggs. Here, the financial institutions are going for the “kill” to get all the eggs at once instead of one-at-a-time. The customer base is not growing at 15 percent per year because population growth is significantly lower than that. So the companies have developed new fees and penalties and raised the amounts for old ones to offset a truly saturated market. This does not bode well for discretionary spending.

Mortgage payments for outstanding adjustable rates are also being reset at higher levels. Higher financial payments ultimately reduce income available for other goods and services.

The transformation of fixed interest rates to variable rates will sap individual consumer discretionary income. For many consumers the interest rates are HIGHER than their marginal tax rates and predatory default rates are even higher. A growing number of credit card issuers are altering terms in the agreements that the new potential default rates would be higher than maximum marginal tax rates. Astounding!

Desperate homebuyers may have found temporary respite with zero down mortgages. However, they truly have no equity – only debt. Other mortgage variations are “interest only” payment features for the early years. Thereafter, principal payments start to kick-in and that will sharply boost monthly outlays. Forty-year mortgages are on the horizon. Effectively, buy when you graduate --- and pay until you retire, provided nothing goes wrong.

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