Posts Tagged ‘credit’

No cred!

2010/03/18

Imagine a world without credit.  If you want something, you have to pay cash for it, whether it be a dress, a television, a car, or a house.  As you might imagine, the pace of home sales would slow down somewhat.  Auto sales might take a hit, too.

Well, this is where we are headed.  The force of Greed has managed to screw up the credit system so badly that credit is about to disappear.  You see, you can make money by lending people money, and Greed has pushed that to the point where we borrow money to do everything.  Everything! States borrow money to make payroll until taxes come in.  Companies borrow money instead of selling stock.  Business people borrow money so that they can stock their shelves without having to pay for all the merchandise themselves.

This system was created by greedy people who wanted the everyday person to buy more stuff, from refrigerators to houses,  because they would be able to profit from the sales.  Credit became easier and easier to get, until a mere signature would secure a loan.  Greed got so intent on making money that it lost it all, because it kept lending the same dollars out over and over again, until somebody couldn’t pay them back.  All of a sudden, the people who had deposited their money in to some kind of investment, because the investments paid more than the interest on bank accounts would, those people watched their money disappear.

And money is still disappearing, as loans come due that cannot be paid.  The government is borrowing huge sums of money, to try to get people wealthy enough to spend again, but the people are too far in debt to be able to spend any money that is given them without defaulting.  Just before the economy fell in the toilet, a large number of companies decided that the cheap money swirling around everywhere was just too good of a thing to pass up on, so they borrowed a whole bunch of money.  Those loans are coming due in a couple of years, and the companies are not likely to be able to pay them back.

All of which means that you might as well pay off your credit card, cut it up, and learn to live without, so that the shock won’t be so bad when things really collapse.  Learn how to make things that you need, like clothing, furniture, food.  Put money into some kind of saving account, even though it doesn’t pay very much interest.  If the Federal Deposit Insurance Company cannot insure that your money is safe, than things are already in free fall.

Everyone seems to have forgotten that credit used to be very hard to get, generally only given when some kind of solid collateral could be held, such as a house.  Borrow money to buy a car?  Forget it, you might wreck the car the first week you own it.  Borrow money to go on vacation?  No way, you might not come back.  That was the way the world was, until Greed got in the act.

Because of Greed, we are going to go back to that kind of world again, it looks like.

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The view from debtor’s prison.

2010/01/18

Debt.  Credit.  Lenders and losers.  Somehow, the world economy has morphed from saving to buy to borrowing to buy.  Lending has been so lucrative that banks have made credit a normal way of doing business.  It wasn’t that long ago that state and local governments only borrowed money by selling bonds, companies sold stock to raise money, and individuals only borrowed from friends.  The one exception was the mortgage used to buy a home.

Partly as a result of banks desire to be able to loan out their money faster, we have seen the world economy severely damaged by excess credit.  Banks which wrote mortgages used to hold those loans themselves, having to wait until they were paid off before the money could be loaned out again.  Then, someone had the brilliant idea of having the banks sell the mortgages to another investor, so that the bank could then turn around and lend the money out again.

Back in the 1960’s, many consumers had used up their savings, and they began to stop spending on unnecessary things.  In order to keep consumption up, a new financial instrument was created:  the credit card.  At first only available to those with the ability to pay off the balance each month, credit cards gradually found their way into the wallets of nearly every American.  Paying off the balance each month was no longer necessary, and often discouraged, as the lenders made more money on revolving balances.

Corporations climbed on board the credit train when they found selling stock inadequate to provide short term liquidity, such as making payroll.  They even began lending money to each other for short periods of time, creating what is known as commercial paper.  State governments saw this, and decided that borrowing to cover expenses while waiting for tax receipts to come in was a sound practice.

In less than 50 years, borrowing had changed from a dirty word to the accepted way of life.  Credit was widely available, to almost anyone, for a fee.  Saving became old fashioned, and consumption was getting higher all the time.  Bankers even encouraged people to borrow against the equity that they had built up in their home, so that the bankers could make even more money.  Its citizens too broke to lend it money, the federal government turned to other nations to borrow the money used to pay for weapons, wars, and welfare.

Now, we are waiting for consumer spending to resume to dig the economy out of the hole we are in.  The government is borrowing nearly as much money as the country makes each year, trying to keep the wheels turning.  Home owners are walking away from mortgages which are for much more than the homes are worth.  Bankruptcies and bank failures are happening faster and faster.  But everyone wants to believe that things will get back to the way that they were.

No where do you hear respected economists and academics calling for the tightening of credit, or for learning to live without it.  Credit has become so fundamental to our economy that people can’t imagine a world without it.  We had better start, because credit is not going to be easy to get for a long time.  How can a bank loan out money when it doesn’t know how much it has?  Many banks are carrying packages of mortgages which, if put on the market today, are worth about 25 cents on the dollar.  Writing off the value of those collateralized debt obligations, as they are known, would wipe out the bank, so they are holding on to them.  In the mean time, the solvency of the bank is questionable.

As the tidal wave of foreclosures engulfs us, those packages of mortgages are going to lose even more value, making credit even tighter.  The federal government has to borrow money to pay the holders of Treasury bills and notes when those instruments come due, which means that it is insolvent, surviving on the good will of China.  Many of the states are facing running out of money, and not being able to borrow more.

Welcome to Debtor’s Prison.