Yesterday Obama met with the credit card companies to admonish them for charging too much in interest rates, and generally being not so nice to debtors. Have we forgotten how banks make money? I am serious. Banks are not supposed to be funded by the government, they are supposed to be funded by people, people’s savings accounts, the interest on their mortgages, car loans, and yes credit cards. We are heading down a seriously scary path when we as a society think access to credit comes right after freedom of speech in the constitution.
If America is hooked on credit then it should cost as much as the market demands. If enough people are willing to pay 20% APR on a loan so they can impress their neighbors by having an empty 62″ plasma TV box out on the curb, then why should the credit card companies charge any less?
I once took an online poll designed to gauge financial acuity; I didn’t get 100%. One of the questions asked if I knew what the interest rates were on all my credit cards – I knew what they were getting at, but I said no. I said no because I have no idea what the interest rates on my credit cards are; there is a good reason for this. I am 25 years old, own my own apartment, graduated from business school, work and live in Manhattan, and I have had several credit cards since I was 18. Not once have I ever carried a balance over from one month to the next. See the question did not apply to me, and what is even more disturbing is that a multiple choice quiz, supposedly designed to give an accurate representation of the taker’s financial responsibility, had no answer (e) I have never carried a balance. That was the only question I got wrong, and I guess my situation is so rare that the authors of the quiz did not even take into consideration that perhaps there were people who have never and will never have credit card debt. According to the authors of the quiz a person with 20k in credit card debt but knows how much interest they are paying has a better grasp of financial responsibility then me, who has no idea what my rates are but has never carried a balance.
We have become a society so dependent on credit and the parlaying of debt that we have generations of Americans who believe the only way to afford something is to finance it on a credit card. Forget hard work, forget living within your means, as long as you can afford the low low $99.99 monthly charge, it would be foolish not own it.
You know what got Enron, Worldcom, Fannie Mae, and the rest of them in trouble? The accounting of debt. Basically, passing off debt indefinitely into the future and only realizing gains to make it appear as if they were profitable. This is the same thing we as a society are doing. If we make 50k a year we consume as if we make three times that, and then pass the debt off for our future selves to pay. This works if your time horizon is infinity, unfortunately it is not. The debt catches up to you, and that is what is happening to us as a society. The debt has caught up to us.
This massive debt has caused inflated values, inflated inventory, and inflated demand for our major manufactured goods. Now, the only real way to reset the economy is to let it bleed. Businesses that only exist based off of artificial demand must fail, inventory must be diminished, prices must drop. Restoring credit should not be our goal, teaching America to live without it should be, once that happens the responsible management of debt will follow, and the credit markets will ease.
The government should make sure the student loan and housing markets remain liquid, after that there is no social imperative to ensure the availability of credit for buying overpriced status symbols.
The current economic policy coming out of the White House is designed to do only one thing, create the next bubble by keeping us spending. Americans (read: voters) are too impatient to wait out a correction, no, we need it to be “fixed” right now so we can continue to buy our Snuggies and iPhones. We have discounted the future so much that another bubble sounds pretty good right now, we can worry about what happens when it pops at a later date.
Shame on you credit card companies, shame on you for charging so much for your credit. You should be making it less expensive for Americans to get into debt. You should not expect our consumption rate to be rationally inverse to the cost of debt. No, you know that our demand for debt has become inelastic and that you can charge an addict anything you want, shame on you, not us, you!