Economics 101
Credit is also Debt

Credit has been way too easy to obtain is this country. Who does not get dozens of credit card applications in the mail each year? Mortgagees have mortgages they cannot pay. Mortgagors have granted loans they have no business giving. Consumers have credit card debt so huge they can’t pay the interest! Lenders have been leveraged 20-30-40 to 1. Credit has been abused.

Now credit has dried up. Banks will not even lend to other banks because no one understands the extent of the risk involved. Credit has a significant place in our economy. Companies borrow money daily to make payments banking on the receipts they will be obtaining. Now, no one wants to take the risk that their borrower can pay. Grandpa Kriner always said do not buy something you cannot pay for in cash. Darn good advice for the consumer because it keeps you out of debt.

For some reason, many believed there would never be a deflationary impulse in housing in spite of the overbuilding that was evident all over the country. But, now houses in many places are worth less that they were last year…even last week. But, the big mortgages taken against those houses still have to be paid. Another thing Grandpa said: “When you have a mortgage the bank owns your house.” The situation with the current crisis: lots of debt; decreasing equity; no place to turn to refinance or pay the debt.

We have been witnesses to the circus in Washington trying to solve the credit problem encouraged by the same clowns who made this possible. That is not excusing greedy lenders who tried to come up with fancy new ways to make mortgages that were of questionable value into securities. Yet, without the attempt to make home ownership an entitlement, the sub-prime mortgage mess would never have occurred. But, the real question is what this all means to you?

Get out of debt when you can…as soon as you can. If the government does enter the banking market as appears to be the case, expect more mucking about. Why? What free enterprise action does the government do better than the market? You get the idea. Your share of the bailouts of Bear Sterns, Freddy & Fanny, AIG and whatever is next will be sufficient debt for you. Remember whatever all these governmental actions are called, it is now attempting to unfreeze the credit markets. Credit must flow for the economy to work. But, also remember, credit is also debt. You will be saddled with more of it by your government; so avoid it on your own.