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February 13, 2009
Credit or Debit?
When senior US bankers had to answer to public concerns about their multi-million-dollar salaries and bonuses, their corporate jets and the bonuses paid to staff just before the taxpayer had to bail them out, Congresswoman Maxine Waters asked a few loaded questions: Did you increase your credit card interest rate?, and also Did any of you reduce the amount of credit that was available to credit card holders because they shopped at certain stores?
The idea here is that the Bush administration rescued those banks in order to boost not just their liquidity, but to i>unfreeze credit. It appears they didn't put strong enough stipulations in place to ensure that banks would actually lend out that money.
What's wrong with this picture?
Isn't the idea of unfreezing credit a euphemism for increasing consumer debt?
The credit obtained via credit cards is unsecured. Typically, purchases made with them decrease one's equity, and they're usually not an investment that promises returns. People use them to pay for things they can't really afford, given that they can't pay cash for them: a new TV, a family holiday, groceries. None of these enables them to profit.
Credit card debt is a huge problem for consumers, especially in times of rising unemplyment. The right consequence of the crash must be to make such credit harder to obtain. There is hardly a need for credit card purchases: if you can't pay for it right away, don't buy it. Credit cards make sense where a deposit needs to guaranteed, e.g., when renting a car. But that's about it.
Very similarly, it was the unsecured portion of debt that is typically secured against property that caused the price decline in the housing market: Lenders were giving out 105% mortgages, with cash-back deals and very little checks. (Casey Serin was a notorious case of someone who misunderstood the system, got scammed by get-rich schemes and is now in debt.)
Investment is the key. Obama's stimulus package tried to do it: education, science, health, infrastructure. This aspect got cut out by Senate republicans, in favor of short-term solutions and tax breaks that typically benefit those who have jobs: the rich get richer.
Posted by dr at 4:44 PM | Comments (0)