Students: Cut up your cards

Harvey Golub, former CEO of American Express, warned students not to use credit cards.

Golub spoke on April 7 at the first of two “Economic Problems, Credit Solutions” lectures. He began the talk by breaking down how much credit card debt actually costs a person.

A person with an outstanding credit card balance has taken out a loan with the credit card company, he explained. Like with a bank loan, a person has to pay back the initial amount borrowed plus interest.

The average interest rate is 13.5 percent. This rate means that it would cost close to $1,500 to pay off a debt of $1,000. This is assuming the minimum balance is paid on time every month.  If one payment is missed, the interest rate is automatically set at 22 percent, the average default rate, according to Golub (see chart).
“My suggestion is [that] nobody ever get a credit card — I ran a credit card company,” said Golub, who served as president and CEO of American Express from 1993 until his retirement in 2001.

Golub then began an open discussion about our country’s current financial crisis. He believes that President Obama’s stimulus package falls short of turning the crisis around.
“It’s arrogant to think we passed a stimulus package,” he said. “The stimulus is a nice gift, but it won’t fix the current problems facing Americans.”

Golub gave the example of stimulus funds being used for renewable energy and green technology as one way it would have a depressive effect on the economy. He supported this theory by pointing out that the amount of spending needed is substantial in comparison to the relatively cheap cost of fossil fuels like coal.

He also stated that the most economically logical energy producer is atomic energy. But this kind of energy is opposed by environmental groups, and the uranium byproduct of nuclear energy is difficult to store.

As for wind power, he stated it would never work. This new technology is expensive; creating new power grids for energy from wind is difficult; and “windmills kill birds — and the Sierra Club doesn’t want any birds killed,” said Golub.

Without a stimulus plan that will effectively address our economic crisis, “the next bust will be in commercial real estate,” he said. Golub prescribed instead a cut in corporate taxes because “our corporate tax rate is the second highest in the world,” and he argued that companies do not want to operate in a country where it costs more to run their businesses.
“The tax system forces people to make decisions they would prefer not to make, and it had a negative effect on the economy. My tax burden is 90 percent. I have zero incentive to work,” he explained.

America is a consumer-driven economy. If people feel they don’t have money because of debt and inflation, they won’t spend. So, Golub concluded, the cycle will continue until something changes in how the stimulus is implemented, the government lowers taxes instead of spending more, and consumers stop carrying credit card debt.

The second “Economic Problems, Credit Solutions” lecture will be on Wednesday, April 15, at 5:30 p.m. at the Office Depot Center for Executive Education on the Boca campus.
J.C. Perrin, vice president and senior private banker at JPMorgan, and Brian L. Burke, vice president and senior investment manager at JP Morgan, will address students. Attendees must register prior to the event.