Many explanations for the current economic crisis have been bandied about, some more accurate than others. What cannot be denied is that a cataclysm of this extent cannot be fixed to one 'cause', but must be the coming together of a whole constellation of issues that together had the effect of pulling the floor out from underneath a structure of greed, risk and irresponsibility.
Among the most serious consequences, though, is the evaporation of trust. I say this because, while easily lost, trust is hard won. And the fact that trust has exited state left from our economic house poses some hard challenges ahead for us all.
Follow me as I reflect on the consequences.
Early on in the crisis, as the freeze of the credit markets assumed center stage in the national attention, both Fed Chairman Ben Bernanke and Treasury secretary Henry Paulson mentioned that credit had stopped flowing because there was a lack of trust. It was, they said, a situation in which bankers could not lend to other bankers, because they could not trust that the other bank would survive and pay off.
AIG, perhaps the epicenter of the economic quake, had bet on an endless supply of trust to over-commit itself to unimaginably huge sums in Credit Default Swaps -- insurance on others' transactions. As investors realized the extent of its exposure, investors did what they do -- they tried to cash out; and in the process they sent the stock of AIG, Lehman Brothers and many other financial powerhouses cratering.
We've heard much, since then, about rebuilding trust by unfreezing the credit markets, baling out the banks, etc.
But the erosion of trust goes farther than Wall Street, much farther, and I believe that poses a profound risk for the entire nation going forward. The erosion reaches down to main street and into homes, as local banks, businesses and families retrench, seeking to protect themselves from the disruptions roiling the world's financial, industrial and commercial centers.
Credit card companies, banks and mortgage companies are raising rates, tightening standards and acting aggressively to squeeze every cent out of every asset they can lay their hands on. In the process, contracts are being redrawn as fast and frequently as possible to tighten terms. This, of course, exacerbates the problem as borrowers --- small businesses and families alike, are pushed further toward the edge, leading to more delinquencies, more tightening and a downward cycle.
This is easier to see and understand on the micro rather than the macro economic level. For a number of years, banks have engaged in creating new profit centers by boosting fees, eliminating float and increasing the spread between what they pay depositors and what they charge borrowers. Credit card contracts are modified frequently, with new fees and charges imposed almost indiscriminately.
Not too long ago, my sister's interest rate on her credit card was boosted, from 15% up to 28%. Since she hadn't missed any payments, she inquired why; after several phone calls, she was told she had been late on a payment in 1984. She dropped that card and is no longer using the bank more than she has to.
The same bank (Huntington), for the past three years, has engaged in practices that generate overdraft charges on my account every three to six months. It's repetitiveness has been worrisome, and an analysis of these occurrences this past week revealed that they shuffle transactions regularly. When transactions are posted electronically, they don't post deposits first and debits afterward of course -- I knew that. I'd been told they post deposits first, but experience shows they posted debits before transactions. But it's worse. They don't maintain the order of "Pending" transactions as they originally post. Instead, they shuffle them to create overdraft conditions, particularly with that category of transactions known as "pending." They can generate a fee for each item that "theoretically" could overdraft the account (because of its pending status) until the transaction is no longer pending, which could be hours or days. In the final analysis, there is no such thing as a 'pending' transaction, and all transactions can be regularly moved around to create different balances.
Such gamesmanship took me two years to uncover. I also blame myself first, and figured I was taking lumps for my own sloppiness. And I'm honest, so I wouldn't automatically suspect a respectable bank gaming me so obviously. And yes, I'm lazy and didn't pursue it at first. It goes without saying that I'll leave that bank; but will the next one be any better? I have no way to know.
I had left my savings there for credit union savings long ago, because they were paying interest rates of 1%, while the last loan quoted for a car purchase was 10%. Since I don't use credit, that was no big deal, but the point is the spreads between what they pay depositors and what they charge borrowers. In earlier eras the spread averaged around 4%, but are now up to 9% or even more.
Enough about me. I've also noticed that, banks will now process transactions for any amount of money on any account and any transaction. It seems impossible to actually 'bounce' a check now. In other words, if you write a check for $150.00, and the recipient deposits it as a $1500.00 check, expect to owe the bank the difference (plus fees), and to be told you have to go after the other party yourself. What you write on the check, or sign on the credit receipt, doesn't really matter anymore. You have to trust (there's that word again) the merchant will put through the right amount.
On credit and debit card purchases, debit transactions are processed instantaneously, and credit transactions -- well, maybe in a week, or two. Meanwhile, your money languishes in the bank's coffers. A few cents here, a few dollars there -- and the bank gets a really big float to earn money on.
There was a time that banks treated account information as confidential. Once could call and ask if there was enough in the account to accept a check, and get a yes or no answer. I recently tried an experiment with a friend posing a such a merchant, and he was told my balance.
The point here is that I can no longer trust my bank to operate by the terms of my agreements with them. Can the merchants? The small businesses? If they play the same games with others, they have squandered their greatest asset, for the trust we placed in them is gone and without that, there is no longer a basis -- or any reason -- for me to do business with them.
Likewise the brokers who manage my investments. Like everyone, I've lost a lot of money, but I'm now closely examining statements for evidence of wrong doing. Does the fund show churning? Are the expenses abnormally high? Can I rely on the personnel the firm hires?
I've got to say, living this way is not good. It's unhealthy to be paranoid every time I venture into the market place. Is the gas station owner overcharging me? Did the butcher weigh the meat with his thumb on the scales? Is the grocery scanner accurate?
It could drive one bonkers. What it has done to me, and to many I know, is throttle our activity. Even necessary purchases are made more slowely, with more concern for the integrity of the merchant (will Best Buy still be here in six months?).
And that's going to have a profound effect on our economy, even after the recession ends. More caution is a good thing, but it comes at a cost. And the cost, in this case, is a severing of some of the most basic economic ties that hold our communities together and make markets function.
Word reached me this week that the eleventh bank has failed in Georgia this year. That's only a little less than one per week. I now seek out small, owner operated businesses, because I want to shake hands with someone who will give me some reason to trust what they say.
Trust is the lubricant for community life; without it, that life shrivels and dies, as each family, each individual withdraws into a private world barricaded against the depredations outside the gate.
As financial houses and other businesses become more stringent with and hostile to their customers, are they setting themselves up for a fall? Yes, but when they fall, they damage us all. That's why I believe it is of the utmost importance that the government impose the strictest of regulation and standards of fairness on these organizations. The credit card reform bill currently heading to the Senate is but a start. Bankers must be put on notice that they should not expect to engage in widespread shady dealings without consequences. Maybe we need to limit the spread again, more closely look over their shoulders as they conduct their businesses, audit their processing policies and transactions.
I'm not sure what the answers are; I just know we need to develop them and implement them quickly, so we can get back on the right track.