Financial Crisis Forcing Americans to Examine Spending Habits
KPBS & Envision San Diego Special: Maxed Out
Thursday, December 18, 2008
SAN DIEGO If the housing bubble was the best of times -- Americans feeling rich with equity and flush with credit -- this may now be the worst of times. The real estate market has crashed, foreclosures are commonplace, and credit card debt is catching up with the country.
We are being forced to examine how we spend money – especially money we don’t have. Consumer spending is down – the sharpest drop in almost 30 years. We may finally be exhausted from trying to keep up with the Joneses. In this KPBS and Envision San Diego special, reporter Joanne Faryon introduces us to people who couldn’t stop spending and experts who say we’re addicted to shopping.
But first, meet the Reyes family. Hard working and down to earth. Drowning in credit card debt.
It’s a little after 5 p.m. this Wednesday. Denise and Andreis Reyes and their six children are making dinner, and cleaning up. There’s barely room for all of them to work, and play in their three bedroom house on a busy street corner in National City.
By this time, Denise and Andreis have been up for more than 13 hours. They start their day before 4 am. Andreis leaves home at 4:30 a.m. Everyone else in the family is usually gone by 6 a.m.
Andreis works for a medical waste disposal company. Denise works for the local school board – you’d know her as the lunch lady.
There are few signs of waste or indulgence in their home – just this TV, and a couple of iPods.
But they have been spending more than they earn for several years. And this spring, when Andreis' hours were cut back at work, it caught up to them.
Denise: “See they’re 800 numbers that means they’re the credit card companies, we won’t answer it, unknown callers, we won’t answer it, credit no, city corps, it's all credit people calling.
Denise Reyes: Five years ago we refinanced the house and we paid everything and then it just started all over again. Because I thought everything was OK. I was making the full payment. I was making the $150 payment fine, on a couple of them. “Fine, everything’s OK. Let’s go get something else. Let’s do this. Let’s do that.” That’s what happens. It was easy. It was easy. ‘Cause it’s easy. We had another credit card…our credit was…we had really good credit. Really good, good credit. Wherever we went at, charge. Just charge it. It’s OK. It’s OK. We can’t do it anymore. It’s just…it’s… we can’t. No way.
The Reyes charged new tires for the cars, this TV, clothes for the kids, trips to Knots Berry Farm and Disneyland, and dinners out at restaurants.
Denise Reyes: We would go out to a real nice restaurant in Miramar and I used to give the guy a $25 tip. And they love us. We haven’t been in there at all. We haven’t been there in a while, huh? How long? Like a year, huh?
In the past five years, the Reyes amassed 20 credit cards and $42,000 in debt.
Denise Reyes: It’s easy. It’s just…it’s easy. Even Wal-Mart. I go into Wal-Mart and it’s tempting. They have somebody there standing at the front. “Do you want to apply for a Wal-Mart credit? We’ll give you this for free, this for free…so…
The Reyes are like 60 percent of consumers in this country who carry credit card debt. A country that, until recently, has been giddy with easy credit.
Everything seemed all right for so long. After all, spending makes the American economy go round. More than two-thirds of our gross domestic product is consumer spending. That means all the shoes you buy, the clothes, the dinners out – add up to a healthy growing economy.
California’s economy is the largest in the country – accounting for nearly 8 percent of the nation’s total GDP. In this state, consumers spend more on goods and services than the entire Gross domestic product of countries like Canada and Spain. And so, what’s the problem?
Manny Navarro: My name is Manny Navarro and I’m a counselor and a bankruptcy counselor.
These days, Manny Navarro is busier than usual. And that’s the problem. He counsels people who are maxed out - underwater – in debt up to their eyeballs…he’s heard it all.
Navarro: We’re seeing a lot of people who are having problems with credit cards because they use credit cards to supplement their income because their income wasn’t enough to maintain their home. So it’s usually couples. A lot of them are younger couples. A lot of people who are self-employed or were self-employed. People who were laid off or their hours are being cut back. So we’re getting pretty much a well-rounded age group.
Sub-prime mortgages and living beyond our means has caught up with us. When Navarro got into the credit counseling business more than a decade ago, most of the people he saw were in credit trouble because they bought too many luxury items. Today, they’re using credit cards for necessities.
Navarro: All of a sudden they had a $2,000 mortgage and now it’s $3,000. But their income didn’t go up. Their expenses went up but their income hasn’t gone up.
So the only other place to go to is your credit cards. So what they do is what they used to spend cash on—groceries, gas, utilities—they’re using their credit cards for and they don’t have the money to pay down the credit card or pay off the credit card at the end of the month, so they’re starting to build larger balances.
Americans have a total of about $970 billion in unsecured revolving debt – in other words, credit card debt. According to industry statistics, 60 percent of Americans carry credit card balances. The average amount owed varies depending on who’s doing the calculations. Some agencies estimate the number to be as high as $9,000. All agree those balances have grown over the decades.
Song: You load 16 tons and what do you get, another day older and deeper in debt, St. Peter don’t you call me cause I can’t go, I owe my soul to the company store.
When that song was written 60 years ago, credit cards did not exist in America. The song is about coal mines and the owners who paid workers in vouchers and forced them to buy goods from the company store at higher prices. Men had to keep working in the mine just to pay their debt.
It doesn’t feel much different today.
Vintage video: “Now, let’s see how shopping can be fun, real fun at this modern and convenient shopping center.”
The first general purpose credit card was introduced en masse to California in 1958. Bank of America sent 60,000 of them to people living in Fresno. The experiment did not go well. There was fraud and massive defaults.
Scene from the movie, Wall Street: Greed is good, greed is right, greed works….”
Between 1980 and 1990, the number of credit cards doubled and the average credit card balance went from $500 to $2700. Americans shopped and bank profits grew.
Bob Gavin: I think in the eighties people started to spend more than they earned.”
Bob Gavin is in the advertising business. It’s his job to get consumers into the store.
Gavin: Well, I think cynics would say that advertising sells people things that they don’t need, don’t want, can’t afford, but consumers feel good when they buy. It brightens their spirits, it identifies them at individuals, so spending is a feel good device, good times and bad.
Gavin: There is a piece of your psyche that we are trying to tap into. Whether you have a blackberry or and I phone or Verizon or a sprint or an LG. In that whole world, everybody is looking for that one tool to express themselves. So what we’re attempting to do is give them the feeling that they have solved a consumer, they have solved an individual problem. Communication, through the phone, or through the internet, and so we are attempting to do is to reach into various, I like to refer to them as touch points or foundation points, that allows consumers to sort of jump over to the other side, and say “I’m free now, I don’t have to think about that anymore. I have made my purchase, and I made a smart purchase. I got good value.
But when did we begin confusing need with want? Do we even know the difference?
A federal government study looked at how spending habits have changed in the last century. In 1901, Americans spent most of their incomes on the necessities of life - nearly 40 percent of their budget on food. The rest on housing and utilities.
Today, almost half our income is discretionary. Only 13 percent of our budget goes to food, and almost half of that is spent in restaurants and fast food chains.
But as our standard of living goes up, so does our debt. It seems we have an insatiable appetite for spending.
John: And nobody’s going to tell me I can’t have what I want. I’m going to go ahead and buy it.
John and Sophie are members of Debtors Anonymous. It’s a self help group based on the same 12 step program as alcoholics anonymous. We aren’t identifying them because the group promises anonymity to its members.
John joined the group almost three years ago after accumulating $30,000 in credit card debt.
Joanne: What were you buying? What added up to $30,000?
John: Oh geese, a lot of things: household appliances, CDs, stereo. I got this giant stereo at home that I don’t need, I would be satisfied with a little walkman. Big screen TV, then when it got to the point when I was running out of money I would take a credit card, take a cash advance out and pay the rent money or pay whatever I needed to pay for on credit. So I crossed that line so many times, it wasn’t a big deal for me anymore.
Sophie has a 50,000 home equity loan and a $5,000 credit card debt.
Sophie: If I needed it, I would have no tolerance for waiting or saving, and I had this sense that if I didn’t get it now, I wouldn’t ever have a chance again. So it was really from a place of, this kind of fear, all the time. So the way I swashed my fear is to prove to myself that I could go an get things. I mean, it was the craziness of it. If I didn’t have something and I got anxious about money, I would go out and buy something so I could kind of go “ha, I can get what I want, see?” And then I would be so anxious, you know, when I would go home I would stay in this kind of cloud of vagueness all the time.
These people have a lot to do with our addiction to spending.
The Joneses. The fictitious neighbors introduced in a comic strip nearly 100 years ago..They were never seen, but everyone wanted what they had.
Song: Keeping up with the Joneses only makes your life a mess…bill collectors.
Gavin: I think that people are always, in our culture, envious of what somebody else has because maybe that somebody has solved a consumer problem in a way that they would like to buy haven’t yet. So just living in communities we do, here in southern California, yeah, the home of conspicuous consumption, where the BMW and Mercedes Benz sales are the highest in America, where the highest number of per capita pools in America are located, highest incomes, highest housing values. People are always tallying and keeping score. Whether you’ve got a menial job or whether you’re a CEO, and however you’re able to play that consumer game, odds are, you're going to play that. There are very few monks out there these days.
John: I think apart of it is keeping up with the Joneses. For myself, I’ve always looked at it as ‘the grass is greener on the other side,’ so someone has something that I want, I wish I had that, and I maybe could not afford it by pulling the money out of my pocket or what was in my bank account, but I did have credit cards with thousands of dollars of limits on them. So I was able to keep up with the Joneses to some degree.
Manny: I know people who will tell me that every two years I buy a car. Every year, I get a new model car. Trade this one in, get a new model car, trade this one in get a new model car. Why? Don’t you ever want to not have a car payment? Don’t you want to know what it feels like to have an extra $500-$800 a month in your bank? No, I’d rather have a new car. It’s just the way people think, the way they react to these things.
Joanne: Are we trying to fill some other void? Why is it we want things?
Sophie: Our western world, is spiritually bankrupt. And the financial situation is just an…
John: An example.
Sophie: An example or mirror of what’s going on with each of us. We don’t have community, we don’t know how to sit down with people, we can’t tolerate time without the television on. We don’t know how to be in our own skins, we don’t have a relationship and we’re thirsty and we’re hungry. We’re told over and over and over again, that this, this will be the thing.
Denise: I’m going to tell you the difference of when we had money and now that we don’t—It’s not that we don’t have money, but I’m just saying when we used to have money and not worry about spending on credit cards. I used to go shopping after Thanksgiving. I would be gone. 4:30 or 5 a.m.. The kids would stay with a babysitter. I was gone. “See ya!” And I would come back with bags and bags and bags and put ‘em away. And now? Ask me. I didn’t even look at the specials after Thanksgiving. I didn’t look at any of it. Why? Why would I look at them?
Creditors started closing the Reyes’ accounts, increasing their interest rates, on some cards as high as 29 percent.
And for the first time in her life, Denise was declined credit at a local hardware store.
She was buying sand for her daughter’s sandbox at day care.
Denise: That’s when I wanted to crawl under the sand and hide. I was so embarrassed. He was like, “Well, ma’am, we’re going to have to take all the sand back and put it back.” I said, “Please don’t do this. Please, can we just wait? He’ll be here. He’ll be here.” I think my son wanted to crawl under the biggest rock and hide. It was embarrassing because there was a line of people and everyone was looking at us. Even the three, four sales clerks were like, “Come on, lady.”
The Reyes are not alone. According to the Federal Reserve’s monthly report, credit card debt declined by .2 percent in October– a sign banks are giving consumers less credit.
And like the Reyes, Americans have been forced or perhaps chosen to spend less.
According to the latest government statistics, consumer spending is down almost 4 percent -- that’s the sharpest decrease in nearly 30 years.
Manny: I think we are finally forced to take a look at our spending and start to make some realizations there. I think it forced us to realize that we didn’t have to have all of those things.
Denise “No, I think I’ve learned. I don’t want to do this again. No. No more. No more. Even when we’re ok again, which I know we will be, but I’m not going to use credit cards anymore. I won’t do it. Nope. No more.
After months of stress, Denise Reyes went to see a credit counselor, she talked to Manny Naverro. He helped negotiate with her creditors, reducing her interest and monthly payments.
The Reyes will now be out of debt in less than five years,instead of 34 years had they continued making only minimum payments. They will also save more than $65,000 in interest.
Credit counseling is free – most credit card companies will give you a referral if you call and ask.
Manny Navarro’s phone has been ringing non-stop. But he’s glad to help. You see, he thinks this job is really his calling. He’s been there. He lost everything in the early 90’s after losing his job and was forced to live in his car with his infant son.
Navarro: I know how devastating it is, I know how embarrassing it is, and I know how easy it can come by. I know how quickly it can happen; it can just sneak up on you.
The financial indicators tell us spending has slowed down, our country is officially in recession -- major chains are going out of business. Stores are even bringing back layaway– a plan that doesn’t allow you to take your item home, until you’ve paid for it with cash.
But human behavior is a complex thing. A 34-year-old security guard was trampled to death by a mob of shoppers looking for a bargain at this New York Wal-Mart on Black Friday – just weeks ago. A sign that it may take more than a few bad months for a country addicted to shopping to kick the habit.
Bob Gavin: Have they reached a point in time where they are going to fall of the edge because they are too top heavy, too much credit in their bank account? Perhaps, but it will be a short lived amount of time. Because just as much as the business of America is about business, the business of consumers is about spending. This is America, American’s spend.