Collateral Damaged | Review

The following is a review from Matt Bell who happens to be an author of two books himself: “Money, Purpose, Joy” and “Money Strategies for Tough Times.” He also leads workshops at churches, conferences, universities, businesses, and other venues throughout the country. To find out more visit MattAboutMoney.com.

In order to get out of a bad situation, it’s important to know how you got into the situation in the first place. Otherwise, you’re just treating symptoms and you’re likely to get right back into trouble again at some point.

In his book, “Collateral Damaged: The Marketing of Consumer Debt to America,” Charles Geisst traces our country’s economic woes back to their roots and proposes policy-level solutions for preventing such problems in the future. He shows how the financial instruments we’re accustomed to and the marketing of debt has changed over time.

Betting the House

If you wanted to finance a house in the mid 1920s, the standard mortgage had to be repaid in 3 years; the longest available mortgage stretched just 12 years. The 30-year mortgage didn’t come about until the 1950s.

In the 1950s and 1960s, banks and other corporations grew much more comfortable with leverage and much more aggressive in marketing debt. More complicated—and risky—forms of home financing were made possible by “securitization,” a process whereby banks bundle residential mortgages and other loans and use them for collateral for bond borrowing. Taking previously created loans off their balance sheets enabled banks to create adjustable rate mortgages, negative amortization loans, reverse mortgages, and other non-traditional loans that have gotten so many borrowers into trouble.

In fact, Geisst blames securitization for fueling the rise of sub-prime lending, which laid the groundwork for today’s economic woes.

How “Debt” Became “Credit”

The modern credit card can be traced back to Brooklyn banker John Biggins, who introduced a plan in 1946 called Charg-It. Customers of his bank could use it at local merchants. Diners Club issued the first national credit card in 1950. At the end of that decade, when Bank of America introduced BankAmericard in 1958 (renamed Visa in 1976) it allowed customers to pay their balance over time while being charged interest on the unpaid balance.

But it wasn’t just the changes in how credit cards work that led to the popularity of plastic over cash. As with mortgages, it was changes in how debt was marketed, especially after World War II. According to Geisst, “What previously had been known as the more onerous term ‘debt’ now took on a positive note. Those in debt were referred to as having ‘received’ credit.”

“Credit,” Geisst notes, has a friendlier sound to it than “debt.” “If credit cards were called debt cards, the point would be more striking.”

Similarly, the popularity of home equity loans came about not just because the Tax Reform Act of 1986 abolished the deduction for consumer interest except for that paid on mortgages, but also because home equity loans began being positioned as helping homeowners “unlock the equity” in their homes. Geisst describes such loans as the straw that finally broke the fragile back of the buy-now-pay-later society. “Consumers were not only eating out more frequently than in hard times, they were also eating the family residence in the process,” he writes.

Solutions

Geisst lays most of the blame for the financial pain many people have experienced through the recession at the feet of financial services firms and those who are supposed to be providing oversight for such firms. Not surprisingly then, his solutions focus on new regulations. He’d like to put new limits on the practice of securitization, place tighter controls on how much credit may be offered to individuals, “declare a new War on Predatory Lending,” and even bring back usury laws, which would prohibit financial institutions from charging exorbitant interest rates. “At the beginning of the twenty-first century,” he writes, “it is difficult to argue that several millennia of usury prohibitions are simply outdated and should be considered relics of the past.”

Summary

“Collateral Damaged” is not exactly a page-turner. In fact, some of it is nothing less than a tough, uphill slog through the arcane alphabet soup world of high finance, with its “ABSs,” “GSEs,” and “MBSs.”

That’s why the book will appeal mostly to those who teach economics or personal finance, financial history buffs, or those who are politically engaged enough to lobby their governmental representatives about financial regulatory issues.

However, for anyone with enough energy for the climb, “Collateral Damaged” provides some helpful historical context for the financial world we live in today, with the reminder that what’s good for Wall Street is not always good for Main Street.