Posts Tagged ‘Credit Card’

A Look at the Causes of the Credit Crisis

March 17, 2009

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:

more about “A Look at the American Credit System …“, posted with vodpod

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

Why the Economic Stimulus Package Was a Terrible Idea

March 21, 2008

Alright, so I was looking around Senator Chuck Hagel’s (R-NE) website to see about his new book, and I stumbled across this press release:

Hagel Statement on Vote Against Senate Economic Stimulus Package
 
February 7th, 2008 – U.S. Senator Chuck Hagel issued the following statement today after voting against the passed United States Senate economic stimulus package:“In the last few years we have overbuilt, overmortgaged, overleveraged and abused credit. The market is now self-correcting.

“This economic stimulus package is wrongheaded, short-sighted and will only drive our country deeper into debt and continue to perpetuate this irresponsible mantra of spend, spend, spend. We are borrowing money that our children are going to have to pay back. Flying over America dropping rebate checks that we can’t cover doesn’t solve anything. This isn’t free money.”  

###

I’ve gotta say – I will always love that man and his politics – I disagree with him on a couple of things things, but he is by far my favorite politician (other than Reagan) – it still saddens me that he’s retiring, but I hope he gets back into it.  I told him on my last visit to D.C. (I should post a picture of that) that if he ever runs for anything, he has my full support.

OK, back to economics:

Here’s the bill that he was referring to: House Resolution 5140: H.R. 5140 Economic Stimulus Act of 2008 – here’s the summary, at least where I have a problem – the tax rebate stuff is fine, but Title II is dangerous:

Title II: Housing GSE and FHA Loan Limits – (Sec. 201) Raises the statutory ceiling on the maximum original principal obligation of a mortgage originated between July 1, 2007, and December 31, 2008, that may be purchased by either the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Disregards mortgages purchased with the increased ceiling amount for purposes of meeting certain housing goals established under the Housing and Community Development Act of 1992.

Expresses the sense of Congress that Fannie Mae and Freddie Mac should securitize mortgages acquired pursuant to the increased conforming loan limits of this Act if the manner of securitization does not: (1) impose additional costs for mortgages originated, purchased, or securitized under existing limits; or (2) interfere with the goal of adding liquidity to the market.

(Sec. 202) Establishes a temporary loan limit increase for FHA-insured mortgages in specified high-cost areas for which a borrower received credit approval by December 31, 2008.

Grants the Secretary of Housing and Urban Development (HUD) discretionary authority to increase loan limits in 2008 based upon the size and location of residences in particular areas.

Directs the Secretary to publish the median house prices and mortgage principal obligation limits as revised by this Act not later than 30 days after its enactment.

And here’s why it’s dangerous: As Senator Hagel said, “we have … overmortgaged … and abused credit.  And what does this act do?  Raises limits on mortgages dealing with approved credit.  But here’s the problem (as I addressed in this post: https://inkslwc.wordpress.com/2008/03/19/monopoly-electronic-banking-credit-cards-terrible-for-kids/):

  1. People bought overpriced houses.
  2. They couldn’t afford these houses.
  3. Mortgages were given to people who NEVER should’ve been given mortgages, especially for as much as was loaned.
  4. People got adjustable rate mortgages (ARMs), which are normally used for people with bad credit, because it puts more of the risk on the person taking out the mortgage.
    1. The problem was that SO many people took out ARMs and then couldn’t pay.
    2. The banks don’t want to foreclose, because they can’t resell the property because the market is now in a state where most of the houses are overpriced, and too many people are already in financial trouble from previous mortgages.
  5. Another problem is credit – we have people all over using credit cards for whatever they want.  Rule #1 of a credit card: NEVER buy something that you couldn’t pay with cash.  Credit cards are meant for convenience so that you don’t have to carry around a wad of cash or keep all your money in a checking account where you aren’t earning interest, NOT as a secondary source for spending money.  Rule #2: Pay off the balance monthly so you don’t get nailed with interest.
  6. Yet another problem: All this $0 downpayment stuff – sure, it looks good, but that just means that you’re going to have to pay that $500 later PLUS interest!

Americans really need to go and take a simple budget or economics class, because these quick fixes are only going to hurt us.

Why is it the government’s job to fix problems that we created?  If I go out and buy a house I can’t afford and then can’t make payments, why is it the government’s job to right my stupidity?  It’s not, but ever since FDR did it in the depression, we’ve become dependent.  Herbert Hoover was right in not helping the people who just kept investing all their money in the stock market – their stupidity cost them.  Now, I understand that banks shouldn’t have been investing money that they didn’t actually have, but I’m not talking about that – I’m talking about the individuals.

If Americans aren’t careful, the economy will be slaughtered and the government won’t be able to bail people out time after time.  LEARN from your mistakes and don’t make them again, PLEASE for the sake of all of us!

Done Ranting,

Ranting Republican
add to del.icio.us :: Add to Blinkslist :: add to furl :: add to ma.gnolia :: Stumble It! ::

Monopoly Electronic Banking & Credit Cards: Terrible for Kids

March 19, 2008

OK, so over the weekend, me and some friends got bored and wanted to play Monopoly, but nobody had the game up here at college, so we decided to go out and try the new Monopoly Electronic Banking Edition.

It’s pretty cool – you put the credit card in, and the calculator senses a bump on the card (each card’s bump is different & some have 2), and it keeps track of how much money you have.  It makes the game go a whole lot faster.

But, we had been discussing (before we bought it) how terrible this is for kids.  The game is marketed for ages 8 & up.  After we bought it, this fact became apparent – this game is terrible for kids, and pretty much everybody who stopped by to see what we’re playing made a comment along those lines.

Now, let me explain why:

  • Monopoly used to teach kids counting and stuff – not with a calculator.
  • The even bigger problem: we’re teaching kids to use credit cards at age 8 (of course you can’t spend more money than you have in Monopoly).  And here’s why that’s a bad idea: most adults don’t know how to use a credit card properly.  Rule #1 of a credit card: never use it to buy something that you couldn’t buy with cash.  If you don’t have the money to pay for it in cash, don’t pay for it with a credit card.  Rule #2: ALWAYS pay the credit card balance off every month – then you don’t get charged interest.

It’s the fact that adults can’t use their money wisely that’s put us into this economic mess.

  • People are going around buying houses that they NEVER should have bought for way more than they’re worth.  Just because you can afford the down payment doesn’t mean that you will be able to make the monthly payments.
  • The banks are giving mortgages to people that they never should have, and now they too are losing money.  Banks are actually not wanting to foreclose on homes because they know that they won’t be able to resell them and make a profit.
  • How many people actually have budgets?  If you don’t have even a basic budget, unless you’re loaded, you’re going to find yourself in a financial mess that you 1) weren’t planning to get into and 2) have no clue how to get out of. 
  • Adjustable rate mortgages (ARMs) are terrible ideas – that’s what’s getting people into these messes.  Mortgage companies advertise these things, and then people who normally wouldn’t qualify for a fixed rate mortgage (FRT) are qualifying for an ARM and just getting slaughtered financially.
  • Cars – people are buying cars with dollar down payments or even no down payments, but that only means that they’ll have to pay MORE in interest later – people just see original costs and don’t factor any of this in.

If adults can’t even manage their finances correctly (the Stock Market Crash of 1929 – Hoover was absolutely right in not bailing them out – the government isn’t here to help people who make stupid financial decisions, it’s not the government’s job.  If you screw up your checkbook, the government is not here to balance it), then we shouldn’t be teaching 8 year-olds to use credit cards.

I really am scared of what’s going to happen when my generation is going around buying houses and in charge of financial institutions – with some of the spending and loaning principles that are going on now, I am terrified of the worse things that could come in the future.

Done Ranting,

Ranting Republican
add to del.icio.us :: Add to Blinkslist :: add to furl :: add to ma.gnolia :: Stumble It! ::


Follow

Get every new post delivered to your Inbox.

Join 287 other followers

%d bloggers like this: