I keep seeing people posting to this forum begging Obama to “force banks to give credit.” Things like “I can’t get a 30 year loan to buy a house.” Or “My credit card company keeps reducing my credit.” When I hear these complaints I am reminded of a crack addict’s pleas that they use the drug “responsibly”. They all feel that if they could just get a little more they would be fine.
The reality is that use of a credit card has a much more profound and expansive impact on those around you then using crack does. Use crack, live 10 blocks over, and I will probably never know or feel the result. However, if you use credit to buy your groceries that you otherwise wouldn’t have been able to afford, you have increased the market value of groceries.
Basic economics most people have at least heard of tells us that “a market price is set by the highest value at which people are ‘willing AND able’ to buy the product. Credit cards have allowed people who normally wouldn’t have the resources to compete in the market against me to have access to those resources.
Let us say you are browsing the fine objects available for sale at an auction. You spy a great cigar store Indian in the middle of all the other stuff that you feel you must have. When the auctioneer get around to tapping his cane on the Indian you feel that little jilt of excitement that you are about to become the owner of that which you desire. Much to your delight he starts the bidding off at just $10. You raise your hand high. But just like that you notice another bidder raise the hand. Back and forth you go. 15 becomes 20. 20 50, at about $75 you wish the other party would run out of money. Now on it goes until you bid $150. You are starting to feel the excitement of the win when you hear the other bidder’s friend say “OK” to the request to loan out $50. You are not to be outdone, so eventually you win the bid at $210. You think to yourself, “I wish that yutz hadn’t offered her that extra 50 bucks or I would have only paid $150 for this treasure.” Well that is how I feel when I walk into a grocery store or an electronics store to buy a product with cash. I wish credit card companies hadn’t offered so many yahoos credit to buy these products. They would be priced more realistically. That is the way I feel when I look at the going rate for college when trying to save up for my children’s future. I think, “I wish somebody would make it illegal to offer loans for college educations. Schools would have to charge a more realistic price if they actually wanted students to show up. Now you might think, “but they have to charge enough to pay for their teachers”. But can you imagine how much less a teacher would have to ask for as a salary if they could get a big screen TV band new for $200. It is a classic “chicken or the egg” scenario. Do people need paid more because credit has allowed market prices to be bid up or is it the fact that market prices are so high, that people need credit to pay for them and thus need paid more. For some reason bread only used to be 10 cents.
What happened in the housing market is that banks started offering longer and longer terms in order to get more people the ability to afford to “buy” them. A win/ win/ win for financing organizations. They get more buyer, buying at hire sale prices (which they are getting a percentage of), and earning more in interest over the long term. Interest that they charge you up front. The same thing happens with everyday stuff as banks offer credit cards into the market. Credit companies get paid form the vendors and the consumers. (The funniest thing I have ever seen was an annual fee. I have to pay you money for the honor of paying you money? This is worse economics then a strip club.)
So it is the people who are going through “credit withdraws” and are trying to convince the world that “then need it to survive” that are threatening to unravel any chance we have at a wholesome economic recover. So stop it. Your credit card reduced your limit? Good, you will thank them when you loose your job. A mortgage company won’t let you finance a 30 year loan on a $150,000 house that ends up costing you $350,000 with interest? Write them a thank you letter for not letting you make a mistake that will not only damage you but the entire economy for the rest of us who were also promised our government would give us the opportunity to be alive, free, and happy. None of these thing can you be if you are in debt and working 60 hours a week just to make the minimums. And I can’t be if I have to compete in a market were you are capable of doing that.
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