A Look at the Causes of the Credit Crisis

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:

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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.

Done Ranting,

Ranting Republican

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7 Responses to “A Look at the Causes of the Credit Crisis”

  1. RightWingReform Says:

    However, credit is an enormous factor of production. With $2,000 of loanable funds, the banking system creates $20,000! That does wonders to spur economic progress. We should be focusing on encouraging lenders to make loans to qualified individuals.

  2. RightWingReform Says:

    However, credit is an enormous factor of production. With $2,000 of loanable funds, the banking system creates $20,000! That does wonders to spur economic progress. We should be focusing on encouraging lenders to make loans to qualified individuals.
    Oops…forgot to say great post! Looking forward to your next one.

  3. Sean Says:

    My friend and I were talking about this just last night… Luxury items people feel somehow entitled to, so they just throw it on the card (new TV, cable internet when you can’t pay the electric bill, so on…) We both agreed that there are all kinds of things out there that we’d like to have… And we could just throw it on “the card”. But that’s just making a larger problem for later, not worth it.

    Credit is a wonderful tool, but it’s abused, and abused badly, to the point where having 10,000+ dollars of credit card debt is “the norm”… And when payment comes due, it’s magically someone else’s fault, and people feel that they get to be bailed out. It blows me away, you’ve basically got the entire economy revolving around money that doesn’t exist, loans guaranteed by borrowed, borrowed money. It’s a house of cards on a tissue paper foundation.

  4. Political Blog Weekly: 20 March 2009 | U.S. Common Sense Says:

    […] "A Look at the Cause of the Credit Crisis" Originally published:  17 March 2009 Submitted by:  U.S. Common Sense Summary:  Looking at the role the credit system plays in the United States, and how that role needs to be changed. […]

  5. Simonn Says:

    I found your site on Google and read a few of your other entires. Nice Stuff. I’m looking forward to reading more from you.

  6. Analysis of President Obama’s Plans for GM and Chrysler « Republican Ranting Says:

    […] credit should only be going to those who deserve it.  As I’ve said before, credit, when used irresponsibly is a VERY dangerous […]

  7. FinancialLasVegasBrokerNV Says:

    Learn something new everyday\Well thought out post\Thought I would drop in for a quick comment. Been lurking around on your blog for some time now…
    Just thought I would throw a reply on one of your posts to let you know I exist🙂

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