Financial Frontlines®

I have been out of the office with pneumonia this week and I have had time to listen, read, and watch plenty of news on this credit crisis issue.  As I put together the pieces of the puzzle, I’m struck by how worthless credit has become in society and how misguided, no spoiled, we as citizens have become when it comes to credit.

We all knew it.  We talked about it around the kitchen table with our friends and family.  You talked about how easy it was to get credit and some company was throwing credit at you.  You might as well use it to buy that new furniture or electronics gear or that extra house.  How many people tried to become little Donald Trumps?  So we kept using credit to purchase what we wanted.  The problem is that we were living in a box of free credit and we lost relativity and reality of things outside the box like the real financial world.

In today’s situation credit in and of itself is worthless.  It has no value.  It’s an empty promise without proof of assets backing it up.  Someone finally noticed and called us on the fact the emperor has no clothes.

Now that credit is getting tight we are offended that we can’t get credit.  There are countless stories of people and businesses in the papers crying because they can’t get the credit they have become accustomed to keep their lives and businesses going.  Truth is that you can still get credit.  It’s just that the credit rules are going back to what they used to be; something of value.

What we are seeing now is called reverting to the norm.  Happy days are over and it is time to get back to reality.  Credit has to have assets backing it up to be worth something.  Credit is not owed to us as if it is some kind of right.  It’s not a right, it’s a privilege and nothing is owed to us so it’s time to buck up.

When I was a teenager, it was a big deal to start your credit record and that meant you applied for a Sears or Montgomery Wards or gas company credit card.  These companies weren’t giving credit away back then.  It was not a sure thing.  You had to supply proof that you were good for the credit—a good credit risk so to speak.  It was a big deal to find out you were approved and then you were careful not to abuse the power.  With power comes responsibility.  Then credit was backed up by proven assets and the ability to pay.  Credit had substance, value.

Now what do we have?  We have credit card companies pushing credit cards to kids with no assets.  I know.  My girls received credit card apps in the mail when they were in high school and college when they had no assets.  Shame on those companies.  You deserve your default rates.  And for you people who accepted the offers, hope things worked out and if not, oh well.  People have to be smart enough to know their financial situations and whether they can afford the responsibility to have a card—or credit in general.

You would think we should know better since we’ve been down this road before.  A big reason for the Great Depression was people buying stocks on margin (credit) with no assets (collateral) backing up the margin.  Back then you could purchase a substantial amount of stocks with no assets backing up your credit line.  The values of stocks were based on worthless credit.  The bubble had to burst when people figured out the stock market value was based on nothing.  Now we have rules for minimizing the amount of margin and the required collateral a person must have before buying investments.  But here we are again only this time it is houses instead of stocks.

The housing market and financial world realized mortgages are based on nothing—worthless credit.  The housing market was ballooning as more and more people bought houses with no collateral.  Now why would a company risk their own financial security and future by making mortgage loans to people who can’t afford to pay the loan?  That type of business transaction makes no sense and in fact would be financial suicide.  Well to do that type of business you would have to know someone else would take the risk off you.  Take a look at a New York Times article of 30 Sep 1999 by Steven A. Holmes.  Just pull up the New York Times and search under September 30, 1999.  The article will pop up in the search.  It seems our government decided responsible tax payers would be willing to bare the load for people who couldn’t afford homes to buy a home.  I guess someone decided home ownership should be a right.  Wonder what the motivation for something like this decision would be?

Right now, I’m not feeling much sympathy for companies or people.  Maybe it’s my illness talking.  Bailout?  I think not.  Let the market get the worthless credit out of its system and get back to the norm.  In the 1930s it was a stock market based on worthless credit.  In the 2000s it’s the houses based on worthless credit.  How long will it be before the credit card companies follow suit?  If financial companies called in all your debts right now, how much of your credit is based on thin air?  I have to think there are loads of senior citizens out there with a little smile on their faces thinking “I told you so.”

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