Stranger than Fiction; America Must Continue its Debt-Fueled Ways to Survive

When I read all of the literature about how to solve the financial system, I realize that any rational solution cannot work. We have too many extenuating circumstances to return to a normalcy of spending because we have simply gone too far with our debt fueled existence to dial it back; without increased government spending, our economy as we know it will sink like a stone.

Right now we have a convergence of consequences from the various forks of the economic road requiring the largest outlay of deficit spending in the history of the country. We have corporate welfare with the bailout of the banks, insurance and auto companies. We have an escalating national debt, initially inflated by George Bush and his policies but now alarmingly exacerbated by President Obama's stimulus efforts. Finally, we have entitlement costs - social security and health care - and military spending that will bust the national budget in a few short years not to mention the interest payments on the national debt.

We are a nation depending on the kindness of China and Japan, the largest purchasers of our treasury bonds, to finance our debt. We are a nation completely unprepared to spend within our means. When times were good, our previous President, Mr. Bush, racked up annual deficits and doubled the national debt in his 8 year tenure. Now that times are bad and there is little real money flowing in our economy, our current President, Mr. Obama, needs to spend big and it is scaring the bejesus out of us because the debt that he inherited was already incomprehensible.
Unfortunately, we were all happily flush with cheap credit to worry about the debt when it mattered.

Now we have the Republicans, flagrantly disregarding the trillions Bush added while America's fortunes seemed rock solid and who lack a cohesive party agenda, blindly caught up in the throes of a full-fledged deflection of this stark reality and blaming President Obama for his profligate spending though it has apparently saved their bank accounts. Huh? I urge any Americans sucked into this rabid plot to reconsider and understand that the mechanisms for the problems we are facing were set in motion long before Obama.

Anyhow, efforts to balance the budget may well be the final nail in the coffin for the economy. This is an economy based on spending, 70% of it generated by consumer spending alone. The consumer is under siege due to the crash in the housing market, crash in their investment and retirement accounts, crash in credit financing and associated crash in employment. The government has to replace this spending in the interim to save the economy and it has to get us the credit we need so that we can start spending again.

As a result, the Federal Reserve and the Treasury are pumping all the money they possibly can into loosening those credit markets which, much to our distress, places the banks in the enviable position of ruling our economic roost. We cannot do anything about it because we all need the credit to move forward, including the government. It is counter-intuitive to think this way. After all, rational spending should be the basis of a sound economy and the solution of continuing our credit-fueled existence should sound stranger than fiction because it led us to this crash in the first place. But, it truly is our only hope at least until the economy can generate "real" money again. How, what and when will that be?

Sadly and ironically, the banks are cutting their consumer credit lines to shore up their balance sheets thus refusing to realize that by doing so will unleash a deadly negative impact to our consumer economy. They may be happy that they are racking up deposits because the consumer has learned the very hard lesson of not saving for a rainy day and are currently stashing cash but without credit cards and other consumer loans, we will buy nothing and that is much worse for America. So, we have to continue our debt-fueled ways because every other solution is an economic buzz kill. Yikes!

Collateral Damage: Credit Cards and Loaded Guns

Finally, Congress has passed a credit card reform bill that has some teeth. Most of the heinous credit card company practices have been curtailed in the bill. Some may argue that some of the reforms do not go far enough but as far as I can tell the overall bill is satisfactory. All of the usual suspects have been addressed, the hiking of fees on existing balances, payment cutoff times that are set at odd hours and don't take into account holidays or weekends, ample notification for interest rate or other fee changes to your card account, and many others that you can think of. Unfortunately, none of these reforms kick in until July 2010. So, those of us who already have been dinged have another year of suffering.

Though the credit card companies have threatened that the most stellar card users will bear the brunt of making up the revenue shortfalls that will be incurred through compliance to the bill, they are already charging these users more to make up for the losses of those who are already defaulting left and right. As a responsible credit card user who always pays on time, my response is to pay off the balances and not use the cards again. If others respond in this way then the credit card companies will have to capitulate if they wish to keep us as customers. They want us to keep using their cards so they can keep making money, don't they?

Anyhow, pardon the wordy way of getting here but, the truly heinous piece of this legislation has nothing to do with the credit card reform portion at all. Egregiously slipped into this bill is a provision allowing registered gun owners to carry loaded guns into national parks and wildlife refuges. What? What the heck is wrong with our Congresspeople? Why is it necessary to slip in this type of lightening rod, not to mention dangerous, provision into this type of reform bill? In this age? In this time? Sadly, the machinations of government hasnot changed and the back-washing continues.

So, some time in the future when you pay off your credit card debt and you decide to celebrate by taking that long delayed car trip to experience our national parks and you get there and you are surveying the natural beauty of the country and as you go to take that perfect picture at sunset you drop the camera and the flash goes off as it falls over the ledge shocking some poor sod who grabs his gun in fright and just then the camera hits his hand causing him to pull the trigger and the bullet ricochets in the canyon and maims you or someone you love and then and only then will the populace realize that the right to bear arms should not blatantly undermine public safety. Collateral damage at its finest. Anyhow, since guns scare the shit out of me, I guess I won't be going to Yellowstone anytime soon.

Credit Card Companies Officially Sanctioned Loan Sharks

I am so blooming mad, I am thoroughly disgusted. After nearly 2 harrowing years of aggressively paying down business debt, unfortunately funded by credit cards, on time and always well above the minimum due, we had reached the stage when the light at the end of the tunnel was in reach. But now, all hopes have been dashed as one by one our creditors have reduced our limits and doubled our interest rate for doing the right thing. Are we being punished because we were only paying down and not charging any more? Are we being punished for actually trying to eradicate our credit card debt? Or are we being punished for simply having credit card debt in the first place?

I understand that many people are defaulting on their debt but I show no signs of doing so, the amount of my payments have been consistent for the last 2 years. I have not made a late payment this decade and I've never abused my balance. Yet, I am a liability as far the credit card companies are concerned. Well, since most of them are banks, they have a captive audience that they can raise rates on at any time and are doing so by necessity since the rest of their loan businesses are tanking. It is an odd feeling to have borrowed at a low rate but now be paying it back at an obscenely high rate when you didn't do anything wrong.

I think it is time to revisit the Fair, Isaac credit score (FICO) monopoly. Anytime a credit line is reduced, it increases our debt utilization or debt ratio, the total amount charged in relation to the credit available. This accounts for 30% of your FICO score. If you have a $2,500 balance on a card with a $10,000 limit, you have a debt ratio of 25% but if the credit card company reduces your limit to $5000 then your debt ratio is now a whopping 50%. Debt ratios of 30% reduce credit scores significantly. This sucks. Yet, most of us have little recourse.

We can disagree with a rate change by agreeing to close the account thereby reverting back to the old rate for the remainder of the repayment. I would gladly take this road but, as we have learned by now, closing down credit cards affects our debt ratios. Then again, how much worse can our debt ratios get since closing cards at this juncture may not make any more difference to our scores since the reduction in credit lines has increased many of our ratios above 50%. Yet, this score affects our cost of credit and is now used as a reference factor of employment. A good score means you are a reputable person? That is definitely debatable. Nevertheless, credit scores across the country are being smashed due to the housing and employment crisis. Maybe there is not much to worry about after all. Let the score fall and to hell with it? Maybe.

At the end of the day, no one can really shut all of their credit cards because we still need a credit card for so many transactions that I have a hard time imagining how people get by without them for everything from reservations to large purchases; even if you don't want to use one, it is tough to get around not using one. If consumers now have to pay double the interest for all the purchases they made last year or before, then they really won't have any extra money to spend. Also, their costs to borrow will be too high to take advantage of the low interest rates that are supposedly abounding. Is anyone really qualifying for them? Investors can cheer the banks for making a profit but at what expense.

The Bailing Out of the Reckless Has Gone Global

The euphoria on Wall Street with its recent rallies and the reactions to the G-20 summit, which essentially calls for nations to commit more money towards economic stimulus efforts worldwide including $1,000,000,000 for the IMF to help to prop up developing countries, once again puts the celebration squarely on bailouts as the only way to combat the collateral damage of the near-collapse of world financial markets; the bailing out of the reckless has gone global.

In the meantime, the only people who do not seem to be benefiting from any of this financial benevolence are those who "did the right thing." Those who were responsible for their financial actions are getting a rude blow; while their irresponsible compatriots are defaulting on their mortgages, credit card payments and other loans, the dutiful credit borrowers who paid on time, never missed a payment and did not carry large balances are having their credit lines slashed in droves at a time when the credit cushion safety net is most needed. Wasn't this the reason why you paid on time and kept your balances low, so that you could have the credit line available for a financial emergency?

Instead of reward, banks are reducing the credit lines of the diligent folk in order to reduce the amount of reserves required to cover the balances of those who default on their payments. While Wall Street may think their world is getting better now that they are infused with taxpayer cash to meet their debt obligations, the taxpayers are wondering how they are going to meet their debt obligations.

You know the consumer credit crisis is coming; it has already been forecast since the beginning of last year and finally the news is beginning to trickle out. A couple weeks ago it was reported that credit card defaults had reached a 20 year high. It is surer than sure that this whole consumer credit market is seriously about to blow. Nearly 2,000,000 people have lost their jobs this year alone. Compare this to 2008 where the total job loss for the year was 2,600,000. The current clip puts the US on track to lose at least 5,000,000 jobs this year. That is a heck of a lot of people who will stop paying on their cards or will be charging up what's left of their credit lines to survive now that they are jobless; soon they will run out of credit and stop paying on that too. Bankruptcy filings have risen 55% on Long Island this year.

Lenders are tightening their standards, raising interest rates and reducing or canceling consumer credit lines as fast as they can. Unfortunately, credit has fueled our consumer-based economy; consumer spending is responsible for nearly 70% of the US Gross Domestic Product (GDP). 2008 GDP was approximately $14,000,000,000,000. To put it in perspective, the government and the Federal Reserve have lent, promised or guaranteed approximately $12,000,000,000,000 to stem the financial meltdown. The consumer borrow and spend mentality that has fueled this decade's growth will have to be replaced with something else in order to maintain the current GDP. What will that be?

All of this bailout and "not being held accountable for one's actions" does make it very tempting to quit paying those credit card bills and suffer the consequences along with the rest of the folk. Those with business debts and other debts may just abandon paying because they see no reward in doing so. After all, should any of us really be concerned with the negative marks on our credit reports. If your score is below 720, what do you have to lose? No one is going to give you any new credit anyway. I think sometimes of abandoning paying back the credit cards that were used to start our unsuccessful business venture. I have been laid off from the job that I specifically went out and procured to pay this business debt. We are struggling to pay them since I still have not received any unemployment compensation.

However, I am chicken. I want to be able to refinance my mortgage should interest rates continue to fall. I want to be able to get a job in the future without being disqualified because of a bad credit score. My car was originally leased as a business vehicle and the lease is up in a year; I will need good credit to get a replacement vehicle. The relief for the prudent is non-existent, only the assurance that without all of this economic and financial intervention for the greedy and irresponsible, we would all fail. So much for keeping up with the Joneses.