The collapse of the housing bubble has had a few immediate implications. The first, of course, is that foreclosures are leaving individuals and families homeless. The second is that it is more difficult to sell a house. Houses are on the market for a longer period of time. The third, as I mentioned in an earlier commentary, has been the bankruptcy of many homebuilders, thereby leaving the purchasers in the lurch, either with an investment evaporating entirely (including incomplete homes) or the loss of any warranty to cover construction.
The fourth implication has been in the form of the collapse of equity. To put it another way, the ability to refinance one's home as well as the ability to gain lines of credit to cover the purchase of other items has also been disappearing. In fact, what is now unfolding is that banks that extended lines of credit to homeowners, based on the value of the home, are now shutting off such options. The extra funds that many people were counting upon to cover extra — though not extravagant — purchases, or in some cases to just get by, are no longer there.
Now comes the plastic crisis. Credit cards that formerly seemed to fall from the air, often going to people who should never have been within a mile of a credit card, are becoming more difficult to obtain. The terms and conditions are becoming far more stringent, as well.
For years, large numbers of credit card users have had excessive monthly carry-over charges. The average household having at least one credit card has approximately $9000 in debt. Roughly half of credit card users make only the minimum monthly payments, thus racking up tremendous interest payments.
What this means is that increasing numbers of people in the United States have been attempting to sustain themselves not on their wages, but on debt. Why?
The living standard for the average U.S. working person has been declining since the mid 1970s. As wage increases stagnated, structural unemployment became more common, and work came to be defined more in terms of being part-time, temporary or contract (rather than full-time and regular). It has become more and more difficult for working people to keep up.
The housing boom and the availability of credit gave large numbers of working people an opportunity to prop up their living standards. Everything seemed fine until the housing bubble burst.
Now working people struggling to survive find themselves turning again to their credit cards. Yet, with balances of more than $9,000 and so many people relying on making minimum payments, this situation cannot last. In fact, if banks proceed to shrink the availability of credit cards as well as shrink the availability of credit, the result is a spiraling down toward a crash.
While there are steps that government needs to take, such as overturning the Republican-backed legislation that makes it more difficult for average people to declare bankruptcy, getting to the roots of the problem means digging deep. The economic policies in fashion since the early 1980s have largely led to the decline in living standards. In addition, the ability of employers to undermine efforts by workers to join or form labor unions thwarts what has been generally recognized as the major and most successful anti-poverty program the United States has experienced: unionization.
For years we have lived an illusion that through credit we could sustain a living standard for the early 21st century on wages and salaries that — once inflation is factored in — is equivalent to what we were making in the late 1960s. This illusion led many of us to believe that the reasons for our stagnating living standards never needed to be addressed. Well, the bill is coming due.
Bill Fletcher, Jr. is a Senior Scholar with the Institute for Policy Studies and the immediate past president of TransAfrica Forum.