Wednesday, October 08, 2008

Credit Cards and the Credit Crisis

The current financial crisis had its origins in the sub-prime mortgage crisis of 2007, and has seen both a major melt-down or devalorisation of huge amounts of fictitious capital born of speculation, and a loss of liquidity as financial institutions lose confidence in the extension of credit to customers who might be industrial capitalists, merchants, other banks and financial institutions, and the working class.

In respect of the latter, some pundits are predicting that the financial crisis will soon move onto forms of personal credit other than residential mortgages and in particular, onto the world of credit cards.

Credit is an arrangement whereby the purchase time of a commodity is separated from the payment time.

Credit a distinctive creature of capitalism

Although this reached a particularly vicious stage for working and middle class people in the 1920s with the refinement of the system of hire purchase, the separation of sale and payment arose within the system of commodity circulation at the beginning of the capitalist era.

Money, as a commodity whose function was to exist as the universal equivalent of all other commodities, was both a means of circulation of commodities and a means of payment for commodities.

“With the development of circulation,” noted Marx in Capital, “conditions arose under which the alienation of commodities becomes separated, by an interval of time, from the realisation of their prices…The vendor becomes a creditor, the purchaser becomes a debtor”.

After a time, the requirements of the capitalist mode of production for extensions to its scale of operations led to the centralisation of individual capitals in special institutions – banks, joint-stock companies etc – whose purpose is to grant credit to individual capitalists on a large scale, where before, credit was simply a means of deferring payment for commodities on a small scale.

The emergence of credit removed the need for individual capitalists to hoard savings, during which time capital is dead and incapable of reproducing its own value, and by assisting in the circulation of capital, albeit as interest-bearing capital, also promoted further accumulation. However, it came at the cost, or inherent weakness, of a separation of credit from its monetary basis and of its likely expansion, therefore, as fictitious capital.

This process becomes more acute with the development of imperialism and the merging of bank capital and industrial capital to produce finance-capital, and with it a massive extension of the system of credit within all spheres of the economic activity of society and amongst all classes of the people.

Credit nevertheless retains its two-fold function of (a) extending production and (b) facilitating exchange. In its first function, credit is an important factor in the cycle of overproduction, enabling the advance purchase of new or replacement machinery as well as raw materials relative to their capacity to pay for themselves through their combination with the labour power of the worker; in its second function, it can aggravate what it has already helped cause – over-production – by having its own price (interest and fees) increased to the point where it is no longer an option for the ordinary consumer. Reductions in the ability of credit to facilitate exchange lead to reductions in the ability of society to consume what has already been over-produced.

Disciplining the markets and the masses

The sensitivity of capitalism to fluctuations of monetary and fiscal policies has grown throughout the course of the current crisis. We see interest rates used to try and discipline the financial markets. We will see a further aggravation of primitive accumulation in the non-industrialised world as peasants are forcibly separated from their traditional means of production and turned into wage workers whose surplus value as profits are removed from their countries of origin and repatriated to the imperialist countries. In the industrial countries, wages policies will emerge to discipline the working class and assist in the production of surplus value, not to bring fictitious capital back into line with the real value of commodities in circulation (at a loss to finance capitalists) but to use realisable surplus value as a means to valorise the speculatively created “values” of fictitious capital (to preserve the “gains” of the finance capitalists).

However, wages policy is a double-edged sword for the capitalist class. On the one hand, individual capitalists seek to reduce the wages of their own employees to the absolute minimum required to guarantee the daily reappearance at the workplace of each employee. On the other hand, the capitalists as a whole benefit from an expanding domestic market and this must largely come through other capitalists’ waged and salaried employees.

The extreme enthusiasm of the individual capitalist to part with more than the absolute minimum of capital in the form of wages is matched only by the extreme enthusiasm of every other capitalist, of the capitalists as a whole, to get their hands on those wages through sales of commodities and services in the market place.

Not only do they want their hands on wages already paid; their avarice extends to wages yet to be paid, to future wages. Hence the all-round promotion of “buy now, pay later” schemes in almost every area of retailing or trade.

Twenty years ago, what was left of a worker’s wage after rent or housing mortgage payments and loans for major purchase items such as a car, and for hire purchase arrangements for items like white goods or electrical goods, was spent as cash on commodities for daily use such as food and petrol. The emergence of the personal credit card has brought even daily consumables into the world of credit purchases. The technology that allowed one single machine (ATM for cash withdrawal or EFTPOS for purchases and/or cash withdrawal) to process transactions regardless of which card is used spurred the use of credit cards for minor purchases. In 1987 “cashless shopping” met with some consumer resistance with 80% of shoppers favouring cash payments whereas today it is rare to see cash used at the supermarket; indeed, supermarkets are increasingly moving towards customers swiping their purchases’ bar codes and swiping their cards for payment, thus eliminating the “checkout chick” altogether.

A credit card implosion?

But it is not just that small scale personal consumer credit use mirrors the large scale financial credit used to lubricate the circulation of capital.

Both are linked. Credit card debt is difficult to analyse because many people use it for rewards programs and retain the capacity to pay it off each month. For example, there was roughly $US970 billion owed on credit cards in the US at the end of July 2008. $US26.6 billion was charged-off during 2007, and it is estimated that $US41.5 billion will be charged-off by the end of 2008 and as much as $US96 billion by the end of 2009. (A charge-off occurs when the creditor writes off the debt owing as a “bad debt”, usually 6 months after it should have been paid. They no longer list it as an asset, although you still owe it and they’ll still chase you for it.)

That’s a fair amount of credit card delinquency in the system, and it links to big finance because banks and financial institutions buy and sell securities backed by credit card debt in the same way that they buy and sell securities backed by residential mortgages. Packages of credit card debt may constitute a smaller card in the financial house of cards than those made up of sub-prime mortgages but they are none-the-less structural beams and pillars, and their collapse will add to the current crisis.

Credit cards link to the bigger picture in other ways too. Banks are in the grip of financial constipation. Banks and other lenders that might, up until a few days ago, have still been flooding your letter box with offers of new credit cards (as David Jones has just done with its store card now a use-anywhere American Express card), will now be cutting back on new card issues and cutting credit off from consumers unable to meet repayment obligations. Consumers for their part, will reduce the use of credit cards as they tighten belts.

We are already seeing this in Australia where collectively we owe a record $A44 billion on credit cards, or an average of more than $A3200 per card. Note that that is “per card”, not “per person”. There are an estimated 112.9 million credit cards in Australia which has a population of approximately 20.5 million. There are more than 100 million purchases on credit cards each month.

Despite (or perhaps because of) the popularity of credit cards, the household gross debt – the difference between income and debt – has exploded from 50% in the early 1990s to 160% in 2008. Credit card fees (annual fees, over-limit fees, late payment fees etc) have risen 170% in the past five years and data suggests that consumers are being hit with penalty fees more and more often. Consumers are also hit with retailer surcharges for credit card use after the Reserve Bank got rid of the “no surcharge” rule in 2003.

So, look for credit card debt to feature in a new wave of financial crisis as the measures taken to “stabilise the financial system” solve or defer one set of problems but move the pressure of fictitious capital on its monetary base to other weak points in the system.

It ain’t over yet folks.
Brendan M Cooney's excellent series of videos on capitalist economics contains this gem on Credit. It comes in two parts:

1 comment:

Mike said...

For un update from the RGE Monitor, dated March 18, 2009:

U.S. credit card defaults rise to 20-year high. Analysts estimate credit card charge-offs could climb to between 9 and 10% in 2009 from 6 to 7% at the end of 2008. In that scenario, such losses could total $70bn to $75bn in 2009. The $5 trillion in outstanding credit card lines (of which $800bn is currently drawn upon) are being trimmed even for credit worthy borrowers with Meredith Whitney estimating that over $2 trillion of credit-card lines will be cut in 2009 and $2.7 trillion by the end of 2010