Saturday, November 22, 2008

Credit In The Simplest Terms Possible. I Think

Hello all. A couple of times this week I have been asked to explain why a bank is different then an automaker when it comes to government regulation and intervention. I have said time and again that I believe that credit is equivalent to legalized counterfeit money. But even that seems to not be clear enough. “So what is wrong with counterfeit money.”

Let me ask a few questions. You can think to yourself or shout the answers out loud. Do you have a credit card debt? Do you know anybody who doesn’t have a credit card debt? You know, you are out at the bar or to eat with them do they always pay in cash? Do you know anybody over 20 that has none of the following. Home loan, car loan, school loan, or credit debt? Do you know people who work hard, make a decent wage, do the right things financially, but are still struggling? Do you have a years worth of savings accumulated in case joblessness or illness occurs? So how can it be that so many of us are working our butts off, making an alright living, not living lavish lives, and still could not make it a year with out income. Now, under that guise let us talk about the affect of credit on the US economy.

Let us say that there are two consumers. Consumer A (conA) and consumer B (conB). A little background. Both work blue collar jobs making about the same amount of money. Both are looking to marry their current sweethearts (a mistake that we will deal with on a different day) buy a nice moderate home near where they work, have a couple of children and live out the American Dream. For ease we are going to suspend some disbelief for a time and removed elements of time, market size, and realistic values. These two have happened upon an article that says, “Home for sale. Am selling Sunday to best offer, by 5 PM, no matter what.”

Come Sunday our two consumers show up at 3 PM. They bring the full amount that they have amassed to make a home purchase to date. ConA has $4500 in hand. ConB has $5000. They both really like the house, and it is everything they are looking for. Neither of them have debt, credit, or other obligations currently. They have other money, but this is what they have saved up to buy their dream home with. Since basic economics (and auction sales) tells us that a product is worth the highest amount consumers are “willing and able” to pay for it. In this case, ConB has set the market price with his ability to offer 5 grand. However, the bankers circling like vultures across the street see what is going on. So they swoop in and make an offer to ConA. The banker says, “If you give me $1200 in two months I will give you $1000 right now.” Now ConA doesn’t have the extra $1000 let alone $1200. It will take him the whole 2 months just to save up the extra cash. ConA really wanted the house though. Not to mention his wife to be is there making eyes at him and nagging him to “just do it.” So he does. The house has just artificially been increased to $5500, well ConA would actually have to get $5700 out of it in order to get his “investment” back.

ConB likes the house equally. But, he is able to resist the pressure from his fiancé. He decides to do the right thing and not go into debt. But guess what. Everybody in the neighborhood found out that the house went for $5500. They all feel their houses are worth more than the dive that ConB bought. So they all immediately ask for at least $5500 out of their house. Also, As a matter of fact, it seems that these financial loan sharks have been busy and stationed all about the place offering people the ability to outbid other potential buyers for the homes they want now.  Each banker trying to walk that line that will keep the home buyer in the  house long enough to make their investment back.  What ConA learns is that the only way he will ever get a decent house is to take the loan, buy into the madness. Well he could wait another 15 years saving up while at the same time housing prices balloon. By then his sweetheart will have whooed ConB into dumping that bitch that talked him into going in debt and letting her move into the house of her dreams. The problem is that over the 15 years he was saving, the market is now asking a quarter million dollars for homes that cost $5000 only 20 years ago.

With the advent of a credit card, this phenomenon has occurred in every product consumed in the US. Whether it be cars, homes, education, clothing, food, or sex wax (the stuff they put on surf boards), the price they can get for it is artificially propped up by the availability of credit. The fact that everybody else can afford to by everything with money they haven’t earned yet, allows the price of everything to rise to unreasonable prices.

Look, there is no reason a reasonable house should take you 30 years to pay off. There is no reason you should leave college with a 30 year that you have to pay off. A car should not be something you are paying on long after you are getting repair bills for it. Your wife should not be at the store spending money you are at work making at the very moment you are making it. (That reminds me. I got to call my wife.)

The government has a responsibility to controlling the amount of buying power in the system. Money was designed as a tool.  It was supposed to represent hours of labor and supliment and add function to the barter system.  Instead it has iteslf become something people feel they have a right to possess. They (the government) go through great strain to control the amount of money and wealth in circulation but neglect the giant leaking hole in their theory by the way of credit. Morons one and all they are.

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