Economic Growth in the Post-Covid World
In times of social unrest and economic uncertainty, it is crucial to question what the people who have the most power and influence on the economy are doing. Whatever their tactics are, one can be sure of one thing – the end game is to secure their seat at the table. Sadly, that often comes at the expense of other people who are still in the early stages of their financial journey. The facts are clear and the future looks grim for economic growth.
Credit card debt is rising faster than hotly debated student loans. The amount of people who are 90 days plus overdue on their credit cards is on the rise, and that number is expected to hit the 2010 peak level this year. Should we ask why the majority of the people in debt are young adults? Perhaps doing so would turn on a light bulb in regards to human behavior. “Why is this so?” asks a curious voice, “Are all young people reckless?” Perhaps some are, but not all.
Maybe the answer can be found by examining the internal systems of the banks who are lending the money. Big banks are raising the amount of cash their customers have access to. They are using data to find customers who are likely to fall into extended debt by using that cash. While this may seem like a fun gimmick for the customer with the “you only live once” mentality, the more responsible mind may see the potential danger with this issue on a personal and global scale.
These policies which allow banks to dangle dollars in front of the borrower’s face are known as proactive credit line increases (PCLIs). They were banned after the 2008 financial crisis, but are now back with banks effectively cutting corners around consumer protection laws. Banks defend their actions by claiming that they have their customers’ best interest at heart, they only offer the extra cash to customers with good credit and the amount of money offered increases with higher credit scores. However this has not proven to be true. Data shows subprime customers getting PCLs at rates higher than most people. That means prime targets are those who are likely to bite off more than they can eat.
A good example of these questionable policies in big banks can be seen at Capital One. When their stock dropped in 2017, they assembled a team of human behavior analysts and statisticians. They used the acquired data to come to a decision that people have a very hard time saying no to extra money, even if it may damage their credit and keep them in debt. They raised the offered credit line to meet their targets. Actually, they learned that people are likely to use the same amount of credit they used before the new line came in when the new offer is presented. That’s a great guarantee in revenue for the banks.
While the American lifestyle is a fantasy to many people around the world, our financial policies are clearly behind those of other countries. The UK and Canada have regulations making it difficult to give PCLIs to customers in debt. Australia champions this model, as they have done away with uninvited raises altogether.
We all want to see flourishing businesses contributing to consistent economic growth. However, increasing loans to at risk populations is not the way to do it. Financial analysts are critical of these tactics. In this majority consumer based economy, any move on a bank’s part to increase available money can turn bad for both bank and customer. Ultimately these lending policies are not only dangerous for the individuals that keep digging themselves into debt, but also for the health of our economy at large. Despite that harsh truth, the card companies are running with this business model. In fact interest and credit card fees have made big banks hundreds of billions of dollars just last year. The amount of credit card debt is on the rise in America. With weak regulation, greedy banks and a population of young people who quell their anxiety by going click happy on amazon, we are not in a good position to build the ideal economy.