Credit and Economics

Full disclosure: I am not an economist.

I do dabble in economic theory, but I am not trained as an economist. Despite this lack of training (or perhaps because of it), I have noticed something about our current economic crisis that no one seems to be discussing.

We've got too much debt.

Both as a nation and as families, we carry far too much debt. Over the last half-century, our access to and use of debt has accounted for far more growth in our Gross Domestic Product than actual wealth.* Put bluntly and simply, Americans have collectively been buying everything on credit cards for decades, while our actual wealth has barely kept up with inflation.

Nowhere was this more evident than in the housing market. Housing costs soared throughout the last twenty years, as finance gurus found more and more ways to expand the public's access to credit. While I am an advocate for people owning their own homes, things eventually got to a point known clinically as "silly."

When people with practically no income and no savings can buy a $200,000 home at 0% down, things are not going to go well. The traditional down payment of 20% did two incredibly important things:

1. It ensured that people buying homes had a significant stake in making the mortgage payment. If they failed to do so, after all, they would lose the thousands of dollars they had invested in their homes.

2. It kept housing prices grounded. Simple math: if a house costs $200,000, you need $40,000 to get started with it. If you don't have $40,000, you don't buy the house. If no one has $40,000, the price of the house falls until someone can afford the down payment.

Our current method of buying not only houses but practically everything on easy credit makes our economy into little more than a speculative crap shoot. Nothing is actually worth the price asked. No one is sure what actual values are, because easy credit has bent the whole system out of whack.

This is why I fundamentally disagree with the "bailout." I understand that trillions of dollars are tied up in the financial markets, and that losses will be devastating; but it will be worse if we prolong this correction. The markets are broken. The government should let them fail, and work to pick up the pieces.

Let the markets become grounded in actual wealth again.

I promise, it will work out far better in the long run than propping up a broken system.

More to come, as I pull more hard figures about debt and consumption.


*By actual wealth, I mean real income from employment or profit from business.