War Bonds

WRITING - John Bloom

Wall Street has always been the Afghanistan of New York--tribal alliances that are constantly broken, blood in the street, wild enthusiasms that come to nothing--but lately it's even looked the part.

The streets are ripped up. The dust from Ground Zero blows through the narrow winding alleyways like a Herat sandstorm.

Aid agencies have tents erected. Places of worship--Trinity Church and St. Paul's--have been transformed into centers of humanitarian relief. There are military barricades along Broadway. There are posters and shrines and throngs of outsiders gawking at the bombed-out buildings.

And there are accusations of breaking the faith. The New York Stock Exchange itself broke an alliance with the city of New York in November. The city had bought three Wall Street buildings that they intended to resell to the stock exchange for its new high-rise tower and headquarters. But the exchange reneged on the deal, saying only that high-rise towers were not wise in these times. Mayor Giuliani feels betrayed, and the city is left with hundreds of millions of dollars in potential losses.

But nothing illustrates the strange cockeyed world of Wall Street better than the recent debate over war bonds. Actually "debate" is too strong a word. It was a whispered conversation, causing massive uneasiness in the back rooms of the brokerage houses. The Treasury Secretary himself said that he had more important things to do--like finding the assets of terrorism and freezing them--than to issue war bonds.

But the war bond idea wouldn't go away. Senators and Congressmen from the Midwest kept agitating in Washington, saying that their constituents wanted war bonds. They wanted to give money to the government for the war, just like they did in World War II. They introduced bills. They lobbied the Treasury. They pursued it like wildcats.

And finally the Treasury caved in and agreed to issue "Patriot Bonds" beginning in mid-December. They're not anything special. They're the Series EE bonds that pay 4.5 per cent, and anyone could have bought one at any time since September 11th. (A much better investment is the Series I bond, which is tied to inflation and currently pays 5.92 per cent, but these bonds will not be redesigned as war bonds.) Apparently the simple inclusion of a logo on the bond that says "Patriot Bond" will cause more people to buy them, partly because they want the actual physical bond in their possession.

And yet that's just exactly what Wall Street fears--that massive numbers of people will buy the war bonds. The last thing the economy needs, they say, is people switching from spending to saving. When war bonds were issued in 1941--in a similar way, by renaming an already-issued bond--there were no consumer goods to buy and extremely low unemployment. Now we've got the exact opposite: unemployment growing like a weed and consumer goods out the wahzoo. Wall Street wants shoppers, spenders, buyers. They want Americans to go out and load up that Mastercard, buying SUVs and big-screen TV's and stuffed animals for the kids.

"If Joe Six Pack is currently spending $1.02 for every dollar he makes," says my friend Andrew Stuttaford, Managing Director of Nordea Securities, "and suddenly he starts spending 98 cents for every dollar he makes, then you can see how that would quickly devastate the economy."

But the fact is, the average American doesn't see how that could devastate the economy--and apparently neither does the average Congressman. Stuttaford, who says "I'm a Scot, so I abhor debt," knows the guilty secret of the American economy--that it's based on continuing credit card debt.

In the fifties, or even the sixties and seventies, who could imagine a world in which the President would say, "We're at war, times are bad, so spend money"? In every previous crisis we were encouraged to save money. That's why the Midwestern senators and Congressman think they're doing a patriotic service, when, in fact, if they were to succeed in getting normal Americans to invest heavily in war bonds, they could bring down the whole infrastructure like a house of cards.

Over the past 25 years, we've gone from a nation that saves to a nation that goes into debt. The actual savings rate in October was 0.2 per cent--and that number is not based on total income, but on disposable income. There were times in the nineties when the real rate of American savings was below zero.

And nothing about that changed on September 11th. In October, personal income decreased 0.1 per cent. Disposable income decreased 1.7 per cent. But personal expenditures actually went up, by 2.9 per cent. When a country is spending money it doesn't have, that can mean only one thing: credit cards.

Even people who don't have credit cards are doing it. One of the most profitable areas of modern banking are those check- cashing outlets that you see in strip malls in every city of America. They're specifically for people so poor that they don't have checking accounts. The check-cashing outlets routinely charge anywhere from 500 to 950 per cent annualized interest for their personal loan services--they pioneered the two-week loan for people who sign over their paychecks in advance--and they avoid the usury laws by such innovations as "leasing" money to desperate people.

But it's credit cards that are now the main engine of our financial system--bigger than corporate loans, bigger than international loans, and certainly bigger than small-business or personal loans, which have become almost non-existent. In fact, what happened in the late seventies and early eighties is that banks moved out of lending to "high-risk" neighborhoods entirely, then gave credit cards to those same people at interest rates of 18 up to 35 per cent. By the early nineties they were aggressively marketing the cards to college freshmen who had never had a job, and senior citizens who had lower than poverty- level incomes, knowing that all it took was one life reversal-- loss of tuition support, serious illness, divorce, estrangements within families, car accidents--to cause a person to load up a credit card with so much revolving debt they would essentially become lifelong feudal peons, paying minimum balances forever. The toll in college-age suicides, bankruptcies, divorces, and aged widows forced back into the workforce is just now beginning to be understood, but it's clear that the United States has the highest level of consumer debt in the world, and is the only industrial nation whose savings rate has gone below zero.

We also know that when people get nervous--when they're afraid of losing their job, for example--they will apply for additional credit cards and try to build up the maximum amount of credit. In Robert D. Manning's recent book "Credit Card Nation," he shows how most people overwhelmed by credit card debt didn't get there by charging a bunch of vacations to Bermuda--the popular media version of the "maxed out" irresponsible spendthrift--but that they used the cards for necessities and were given higher and higher credit limits as the credit card companies positioned themselves as the person's best friend in the world, raising their credit limits, issuing additional cards, only to turn nasty once the minimum balance has reached a point that is often more than the person's monthly income. (The love/hate cycle is especially effective with the undereducated, the lonely, and those who live in impoverished areas.)

Meanwhile, the wealthy "convenience users"--who pay off their credit cards in full every month--are given interest-free loans. Like my friend Andrew of Wall Street, who says, "I put everything I buy on a credit card. If I could put my daily newspaper on a credit card, I would. And then I pay it off at the end of the month. The reason is that I like having the itemized statement, and I especially like all the frequent flyer miles."

"Do you know what the credit card companies would call you?" I ask Andrew.

"No," he says.

"A deadbeat."

And it's true--the credit-card-issuing banks are constantly trying to lessen the number of people who pay off their cards monthly, because it represents a net loss to the bank.

The question we should be asking right now is not "Why aren't people buying more consumer goods?" It's why do the banks continue to offer thousands of dollars in credit lines to people who are barely above the poverty line to begin with?

Part of the answer is that the banks don't have to worry about bankruptcies anymore. One of President Bush's first acts after taking office was to back the credit-card industry's demands for a reform of the bankruptcy system. The credit card companies, especially MBNA, were the largest contributors to his campaign, and are now collecting in the form of a new law that will make it impossible for some people to get rid of their debt through bankruptcy. After all, the shop foreman laid off through "downsizing" after 30 years of service, given only three months' severance pay and a service pin, should have planned on that, right? Citibank didn't force him to borrow all that money at 22 per cent interest. They just gave him a credit card. They didn't know what he would buy with it. They just knew it would eventually be something huge.

This is the reason that war bonds are so scary. Collecting interest instead of paying it? God forbid the American consumer would become the American saver. Then the terrorists will have won.