The Unbearable Burden of Debt

If you often forget to make your payments on time, and rack up penalties and processing charges, then sorry-you may end up only owing more and more, and never come out from under the debt....

It is an age that worships the market, and the financial realm is no exception. It used to be that only businesses had the need or ability to deal with banks. But in recent years financial services and loans-whether in the form of auto loans, credit loans, home improvement loans, student loans, or even loans to finance a honeymoon or the payment of taxes-have become ubiquitous parts of people's lives from cradle to grave.

Blind veneration of the market has led to one crisis after another. The most recent example is the collapse of the subprime mortgage market in America, which has caused the near collapse of financial markets around the world. And following Hong Kong in 2002 and Korea in 2003, Taiwan in 2005 experienced an explosion of credit-card debt, with about 500,000 "card slaves" accumulating about NT$40 billion in debt. It created a new financial crisis for the government to cope with.

Serves them right?

At the mention of these "card slaves," many are inclined to self-righteously denounce them for their "excessive consumerism" or say that they got "their just deserts for worshipping filthy lucre." But based on interviews with card slaves, bankers and mortgage agents, Plastic Opium shows that unemployment (57%) is the number-one reason for credit-card debt. It is followed by divorce (16.5%), helping parents or relatives pay off their debts (14.3%), and business failure (13.5%). All of these may happen concurrently with unemployment. Among the top five reasons, "excessive consumer purchases" comes in lowest, at 12%.

But the book does more than offer concrete evidence; by describing the process by which people fall into heavy credit-card debt, it also dispels the notion that these debtors are "getting what they deserve," and exposes the greed and mercilessness that characterize the entire financial system.

Author Hsia Chuan-wei shows that there's a lot more to it than: "Why would you use a card when you know you can't pay the bill?" To the contrary, the path that leads to accumulations of credit-card debt is laid carefully, one stone at a time: After designating target groups, the banks outsource the work to marketing companies and credit reference agencies. There is exploitation at every stage. The agencies are concerned only about earning commissions by bringing in qualified people. In extreme cases, they use fake data, completely ignoring the creditworthiness of the consumer. They couldn't care less about what kind of crisis the bank might have to face down the road. Their laxity is demonstrated by the fact that the number of Visa Platinum cards issued in Taiwan accounts for an astonishing 77% of the Asian total!

For their part, banks both employ advertisements that intentionally encourage people to consume ("borrowing money is splendid") and also offer extremely low minimum payments that are matched with extraordinarily high interest rates (20% yearly) on revolving credit. As a result, cardholders are at first beguiled by the convenience of paying with plastic, and only later discover that they have become trapped by debt. The interest and late payment penalties are a huge source of income for banks.

Plastic opium pushers?

Engaging in predatory lending, the banks were harming both their customers and themselves, but when the credit-card debt crisis exploded, the government and academia-concerned foremost about the stability of the financial and credit system-inadvertently absolved it of guilt. But as suggested by the book's title, if there weren't opium pushers enticing people to buy, then how would people get addicted? With restrictions placed on the age of tobacco purchasers and warning labels mandated for cigarette packaging, how is it that authorities allowed banks to freely push plastic opium on the market even though the credit-addicted card slaves lack self-control?

The next key question involves how to go about humanely resolving the credit-card debt crisis. Tragic incidents of parents committing suicide and killing their children by such methods as burning charcoal indoors raise the question: What is more important, the debtors' right to life or the banks' right to repayment? The issue has created widespread debate, but it's currently hard to be optimistic about the card slaves' prospects for emancipation.

When the crisis first erupted, the government charged the Bankers Association of the ROC with devising procedures whereby debtors could get together with the banks and negotiate repayments. But the system overwhelmingly favored the banks and treated the debtors harshly. For instance, monthly payments were sometimes set at levels higher than the debtors' incomes.

As a result of the hard negotiating stance, although 220,000 of the nation's 500,000 credit-card debtors reluctantly renegotiated payment schedules with banks, half of them (111,000) quickly found the burden too onerous and had broken their contracts within a year. At the same time, the Legislative Yuan passed the Consumer Insolvency Act, which went into effect on April 11 this year. Just how the new law will affect the wrestling match between banks and debtors remains to be seen.

Blind financial deregulation

The writer argues that our future immunity to similar debt crises will hinge upon how deeply we understand financial deregulation.

Joseph E. Stiglitz, who shared the 2001 Nobel Prize for economics, has studied the process of privatization in former Soviet republics and other previously socialist nations. He has a deep understanding of the pain this transition caused. He points out that establishing "free competition" in a "market economy" is not a panacea. Without appropriate social measures, economic liberalization becomes a runaway train, causing disasters that will have to be cleaned up.

To be fair, Plastic Opium doesn't describe all economic activities as evil. To the contrary, the author praises the Grameen Bank, founded by the economist Muhammad Yunus, which offers loans to the poor at interest rates that could hardly be described as low (16-20%). But those microloans, which are put into the borrower's business, are used for investment, not consumption. They are productive in nature and have helped many people pull themselves out of poverty. And with repayment rates as high as 97%, the loans benefit the banks, the borrowers and national development.

On the other hand, America's subprime mortgages or Taiwan's credit-card loans-although billed as "democratizing credit" by giving poor people without assets the right to borrow money-in practice fleeced the poor, who lost everything due to the high interest rates. (On top of the stated 20% revolving credit rates, various fees can bring the actual rate to over 80%!)

When the wealthy mortgage a home, they can borrow NT$10 million at an interest rate of 2%, the author notes. But those burdened with credit-card debt-most of whom are in the middle or lower income brackets (in 2006 their average household income was NT$540,000, only 60% of the national average of NT$910,000)-are forced to accept terms of 20-80% interest on average credit-card debt of NT$2 million. This has created a social injustice of "the poor subsidizing the wealthy."

Is financial justice enough?

What's more, credit-card borrowing isn't done to finance a business. Rather than being used for moneymaking investment, it encourages consumer spending. The banks encourage the debtors to borrow more and for longer periods. For instance, the design of the barcoded forms used for paying card bills in convenience stores typically provides for only two choices: either you pay it all, or you pay the minimum of 10%. This exploitative form of lending, whereby the more you borrow the poorer you become, runs counter to the ideal of providing loans so that people can shake off poverty.

Plastic has a lot of other rich content that is worth ruminating on, but let us here extend our discussion to the following point: the expansion of financing, particularly consumer financing, is closely connected to the fecklessness and loss of focus shown in national financial policy.

As the author points out, the explosion of credit-card debt is intimately connected to the "second financial reform" in 2004, when the government released public shares of banks and promoted bank mergers. On the one hand, the reform encouraged new and leading private banks to expand. On the other hand, it made the weaker private banks eager to compete for this large pie of high-interest business in order to protect themselves and avoid becoming takeover targets. The result was an M-shaped curve, with two large groups of strong and weak banks at either end. And it was the banks at the extremes of the curve that issued cards most enthusiastically and got hit hardest by mounting debt.

In the process, financial safeguards failed, and the government began to think that stimulating demand through the use of credit cards was a convenient way to pull the nation out of its economic doldrums. The mission of public banks to provide loans to medium and small businesses was transformed, to the point where many small companies had nowhere to go to borrow money, and themselves ran up card debt. All were accomplices. And these structural problems have not completely been resolved. True, banks have learned their lesson and are much more careful (the approval rate has already dropped from 70% to 40%). But once the pain is a distant memory, it is easy to imagine that there will be another wave of rampant blind lending and borrowing and that the nation will fall into the same rut.

To conclude, the author discusses El Barzon, a Mexican debtors' organization with more than 2 million members; Community Development Financial Institutions during the Clinton administration in the USA; and the debt relief for poor countries championed by the rock star Bono, as he explains how poor countries, poor areas, and poor people sink into poverty as a result of imperialist capitalism and market forces, and how overcome by debt and mired in poverty, they can do little but protest.

When the US subprime mortgage crisis has toppled several American and European banks and led to credit crises in one country after another, this would be an appropriate time for a wide-ranging debate about credit and the design of new models for lending and borrowing.