Recently, there’s been a lot of talk about the American credit system. Personally, I think Americans rely far too heavily on credit, and that is going to come back to haunt us VERY soon if we don’t make some drastic changes.
Back during the debate over the first bailout bill of this year, Senate Minority Leader Mitch McConnell (R-KY) made the following comments:
And it’s that type of thinking that leads to the credit crisis that we’re in now. The credit system is like our circulatory system? NO! We should not be relying that heavily on our credit system. Credit is NOT intended to be the same thing as money. Equating credit with available spending money is one of the major factors that led to the Great Depression. People were buying things on credit and laying out installment payment plans. That enabled them to buy more stuff, and this created an artificially high demand for items (such as radios or cars, both of which were often being bought on credit). But once they began having to pay multiple payments back, people could no longer to afford to continue buying stuff (thus why I called the demand “artificially high”) – the demand for those items was not necessarily high, people were just buying things immediately that they normally would have saved up for. And when they didn’t keep track of how much that would cost in the long run, the credit bubble burst.
The other day, I posted a comment on a friend’s blog (Right Wing Reform), and that’s what got me thinking about all of this. The following is my comment (with a little more added in – I wrote the original comment to be quick and short):
The credit system is intended to be used as a crutch. You still do the walking, but you can’t quite walk all by yourself at the beginning of an injury (purchasing a large item). Over time, you begin to pay off the debt (heal), and use less and less of the crutch, until eventually you don’t need it (the item is paid off). The problem with the current way many Americans are using credit is that they’re using it more like a wheelchair than a crutch. And it’s used too often, even to take one little step in a room (buying a meal at McDonald’s or a small purchase at the grocery store). The problem with using it for small items is that over time, you begin to lose track of how much you’re spending (unless you have a GREAT memory), and a lot of people find themselves not being able to pay off the entire credit card bill at the end of the month. And do you know what that means? That’s right, they have to pay interest on that. And that means less money in their pocket, meaning that they are MORE likely to use credit as cash. And the person (or family) gets deeper and deeper into debt.
When you overburden the credit system and you never try to walk on your own, the crutch breaks.
Honestly, we’re never going to be able to get rid of credit. And there’s no reason to. When used responsibly, it’s a great tool. But a strong financial system would be able to withstand a loss of a credit system (at least small item credit [the biggest example of a small item credit system would be credit cards; another example would be installment payments for stuff like furniture] – I would argue that it should be able to withstand the loss of large item credit, but this would mean that buying a house would be something that takes a lot of work and time, and you’d go back to the days of people building their own houses and living with other people rather than a single person owning a home by the age of 23).
Right now, America would not withstand the loss of even the small item credit system, and THAT is a problem for us financially.
If Americans want to get through this financial crisis, keeping the credit cards at home more often would be one way to help.
Tags: Bailout, Car, Cars, Cash, Credit, Credit Bubble, Credit Bubble Burst, Credit Card, Credit System, Crisis, Depression, Economic Crisis, Economics, economy, Financial Bailout, Great Depression, Kentucky, Minority Leader, Mitch McConnell, Money, Politics, radio, Republican, Senate, Senator