The CPI news is just in: core inflation (without food and energy) is up for the third straight month, and it is now clear that the Feds will raise interest rates. The big question for the money gurus is whether the next hike will be another quarter-point or a half-point. Debtors are caught in a vice: Their incomes are stuck at ground level, but their payments float like balloons. The last increase in interest rates translated into higher credit card bills in a matter of days. Every hike in interest rates translates into bigger house payments down the line for anyone with an adjustable rate mortgage. And the college students taking out new loans can expect their costs to go up too.
Rapid inflation coupled with slowly-rising wages put the squeeze on every worker. But Americans owe more money than ever before in history an average of 108% of their annual incomes. The rising cost of servicing that debt acts like a multiplier, increasing financial pressures even if family spending stays steady.
The debt squeeze didn’t just happen on its own. When Congress and the Supreme Court combined to get rid of interest rate caps on credit cards in the early 1980s, the stage was set for credit card interest rates to float completely out of sight. When mortgage companies, cheered on by Alan Greenspan, marketed variable rate mortgages to millions of families, the good times of low interest were bound to be followed by the tough times of high interest.
Interest rate fluctuations may be a fact of a modern economy. But whether those rate fluctuations will be borne collectively by the institutions that issue consumer debt or one-at-a-time by the families who face rising costs and flat incomes is a matter of deliberate public policy. Current policy says individual families bears those risks. These families lack both the information advantages of big institutions and the ability to spread their risks over millions of other customers and longer time horizons, but folks like Alan Greenspan urged them to take on interest rate risks. Now we’re beginning to feel the effects of some of those policy choices.
A few months ago, housing experts estimated that millions of homeowners would face 30-40% increases in their mortgage payments as adjustable rates readjusted. We seemed on target for about 1.2 million mortgage foreclosures. Time to get out the calculators and push up the estimate.
