Debtors Revolt in the Offing - Check Local Listings

A debtors revolt is coming and, ironically, the dozen or so Too Big Too Fail (TBTF), systemically important financial institutions which control the bulk of about a trillion dollars of unsecured credit card lending, and which so generously received and in many cases still show on their balance sheets copious amounts of taxpayer capital borrowed from China, are now enacting the very policies which will be the cause of said revolt.

JPM Chase is leading the way, sending letters to cardholders who have locked in low "teaser/promotional" interest rates of 3.99% or 4.99%, mostly through balance transfers from other higher-rate credit cards which promise these low rates for the life of the loan unless you default (the technical term for doing something really bad) by making a late payment, going overlimit, missing a payment, paying less than the required minimum payment, forgetting to call your Mom on Mother's Day, and so on. Chase, and other debt-pushers, now the beneficiaries of the lowest interest rate environment since ever (they can borrow from Uncle Ben at the Fed for about a half percent, p.a.), aren't squeezing enough profits from these promo-rate cardholders, but now they've found a way.

Chase recently notified tens of thousands of cardholders it is raising the minimum monthly payment to 5 percent from the old industry-standard we'll-make-you-a-debt-slave-for-life-and-since-we-rewrote-the-bankruptcy-rules-good-luck-with-that minimum monthly payment of only 2 percent. Starting August 1, Chase cardholders who received these letters (see this link at Consumer Affairs and this link at Daily Kos for some real-life examples of the impact of this change), now will need to pony up 150 percent more each month to keep the low, low teaser/promotional rate. So if you just did a balance transfer for $20,000.00 (!) and were starting to feel pretty good about consolidating your debts into a manageable $400.00 minimum montly payment, surprise!, your convenient new minimum monthly payment jumps to$1,000.00.

Chase, of course, which recently did repay its $25-large Uncle Sugar equity infusion (and therefor never should be eligible to receive another bailout, TBTF or not), says it's merely following recommended federal (Office of the Comptroller of the Currency) guidelines in hiking the minimum monthly payments to 5 percent, but it (and probably all other card issuers who will follow) is rushing to change any and all credit card terms while it can before new regulations prohibiting such changes go into effect next year. The Clearly Intended Effect, of course, is, by making the new minimum monthly payments two-and-a-half times higher in one fell swoop, carholders unable to comply with the new $1,000.00 payment will default, which then gives Chase the ability to jack a cardholder's interest rate into the stratosphere, or at least 25 percent to, yes, incredibly, 39.99 percent, from the low, low, life of the loan 3.99 percent the cardholder was deceived into accepting. (And, insult-to-injury-wise, the cardholder probably paid a 5 percent balance transfer "fee" to boot - another grand for a $20,000.00 transfer.)



Marshall Auerback raises the same issue of a debtors revolt in his new deal 2.0 piece "Risk of Major Social Upheaval Likely if Bank Bonanza Continues," albeit triggered by different circumstances, and as the only remaining form of protest available to citizens of a new and dangerously armed police state (forget marching, as in Iran), but the effect will be the same.

When most of the home owning voters cannot pay their major debt or have no
incentive to pay their mortgage debt, there will either be a debtors revolt that
society will sanction or there will be a bailout of such a magnitude that mega
moral hazard will affect private lending forever. Once these things happen, you
will no longer have the social rules for private risk based lending. In other
words, financial markets will be unlike anything ever seen before in private
economies. Is this really what Wall Street wants, let alone American society as
a whole? (emphasis mine.)

When U.S. debt-slaves decide they have nothing left to lose, when neither marching in the streets nor bankruptcy is an option, the former due to personal status/safety issues and the latter because that game is already rigged in favor of the lenders, when minimum monthly payments are more than doubled specifically to create an opportunity-by-default to spew interest rates into the 30 percent range, the time will be at hand. Maybe not this year, but soon. Naturally no one in the finance-captured main-stream-media has picked up on this story, much less the widespread implications in a consumer-driven economy (Update One, 06/30/2009 Via Bloomberg: JPMorgan Raises Minimum Monthly Payments on Credit Cards to 5%).

In the meantime, Chase's action (and likely all other cardholders which will follow suit) will KILL what remains of the withering, green-shootless retail economy, no question, as cardholders are forced to shut down any and all discretionary spending to divert funds to credit card payments. Either way, kiddies, it'll be a lean Christmas (or Hanukkah or Kwanza or whatever) this year, so don't expect much under the tree (or menorah or whatever).

Your tax dollars at work. (Well, not Chase, but for BofA and Citi and Wells Fargo and...)