As this economic maelstrom continues to spin out of control and the federal government rushes to bail out every single industry that has fallen upon hard times, there is one industry or group that seems to be repeatedly overlooked. The end consumer. We have heard many times about industries needed TARP or bailout money because they are too big to fail, that the economy needs them to stay in business or the recession will become worse yet these same industries, especially those deal with consumer financing such as banks And credit card industries, continue to heap abuses on the very consumers that they need to stay in business.
Right now consumers need credit, not for purchasing big screen or home entertainment systems but to purchase food and help make ends meet. Businesses need credit to help make payroll and assist with short term cash flow. Yet the industries that make the decision regarding who can access credit, (the banks and credit card companies) are tightening access due to the greater risk. Yet these same industries have accepted billions of dollars of bailout money from the government taxpayers to stay in business yet have not taken one step to help out the very same taxpayers who are strapped and trying to make ends meet.
In fact, rather than help consumers, these industries, the banks and credit card companies are doing everything they can to take more money from their clients. From being raising such fees as monthly, overdraft and insufficient funds, late payment, annual and over the limit fees to tightening access to credit, these financial institutions are preventing their clients from being able to access the short term cash flow that is required to have Businesses operate and for people make ends meet. Even worse, if a consumer, we will call him John, is late paying credit card A, and by late I mean 24 hours late, then not only can credit card A raise the John's credit card rate but credit cards B, C and D Can raise rates as well. On top of this, John's insurance company can also raise his rates because he has now been classified as a risk borrower. How is this legal? And the government is doing nothing to help John out.
These industries, flush with the inoxication of greed, are hurting the very people that provided them with billions of dollars in the first place. Yet the government, both parties, is doing nothing to change this. The government has been so concerned with industries that are "too big to fail" yet are failing to realize that one group is far bigger and in even greater danger of failing. The end consumer.
Economies are fueled by consumption. If consumers do not buy new things then companies do not have new things to sell. Cars, TV's, kitchen appliances, furniture, homes. With the financial and credit industries tightening up the access to credit then consumers will not be able to purchase as much and when the consumption slows, the economy slows even more. Going even deeper, without the access to money, people can not renovate their homes, which means the contractor and supply companies experience hard times. The entire process because an ever growing circle of destruction.
Politically I am a libertarian, economically I believe in a free market system that is void of a lot of government regulations and interference although in some cases, the government does become the group with ultimate responsibility and its first duty is to protect the people of the Country and in this case the government needs to step in and change the way business is done. The credit and financial industries are not exactly working in collusion but at the same time are taking advantage of the current economic situation, which let's not forget they had a big hand in creating, to squeeze more money out of consumers that are already hard pressed to Pay bills.
The government needs to step in, there needs to be a complete review of the entire credit scoring process known as FICO. FICO is the formula that money lending companies use to determine the likelihood that they will be paid back the money that they lend. The information makeup of the FICO is as follows: 35% payment history, 30% credit utilization, 15% length of credit history, 10% types of credit used, 10% recent credit application activity.
What people do not realize is that the FICO formula is not a government formula to determine credit worthiness, FICO is the product of the Fair Isaac Company based out of Minneapolis, Minnesota. It is a private company that yields incredible power over many aspects of financial life in America. This in itself is not a bad thing but the system is outdated and does not take into account the crisis that is going on now.
There were 1.4 million bankruptcy filings in 2009, up 32% from 2008. 25.5% or 43.3 million Americans are reporting credit scores of below 600 up from an average of 15.5% or 25.5 million Americans. What this means is that the traditional method of grading credit does not take into account the crisis. What is more, as the country begins to climb out of the recession the need to increase consumerism will become an important factor in moving the economy forward, however, given the current stringent formula used to score personal and business credit, a great number of people That have the need to use credit will not be able to obtain it though slowing down the recovery.
The government needs to step in and encourage both Fair Isaac and the 3 credit agencies to accept an improved scoring model that takes into account all that has happened since the beginning of this crisis during the summer of 2007.
The failure to act to change the scoring model will be one of the leading factors in slowing down any recovery. If consumers can not receive credit: no new cars, no new homes, no new appliances or electrical goods and if because of bad credit consumers are forced to pay higher interest rates, that will also discourage them from large ticket purchases. And on the business side, if small businesses can not access credit through LOC's then they will not be able to meet payment obligations or pay their obligations.
The government allowed the credit and financial industries to conduct business irresponsibly, the government irresponsibly rushed to give billions of tax dollars to these two industries in violation (at least symbolically) of the constitution. Yet the government is doing nothing to protect the consumers from abuses such as what these industries are inflating. The government needs to step in and encourage these changes in the scoring formula, if the government fails to act, the ramifications to the economy will be great.