November 14, 2008

• News:  Credit-Card Meltdown; Economic Anemia?

  How fragile is our economy and what are the greatest detriments? Will a $5,000 tax credit get a minimum wage family with no health benefits through the year? Will a good-paying job with health benefits, but no tax credits get them through the year? How important are credit cards to most Americans today? Associate law professor at Georgetown University, Adam Levitin, says: "Credit cards are in line to fall. The question is whether they will beat out the auto industry — they're racing for the honors." The credit card industry is in trouble, no doubt. But how will this effect our economy?

  Ordinarily, the credit-card industry would be resilient during economic downtimes. As people started to become late on payments, the credit card companies could simply compensate with late fees and higher interest rates to boost earnings. But these are not ordinary times. As defaults are climbing, American consumers are tapped out. Charge-offs are rising so fast, the industry is scrambling to keep up. The old and tested methods can no longer keep pace.

  The problem: For the last 10 years, American consumers have been racking up debt. Things looked good and were manageable through the last two years of ‘Clintonomics', ending with the Bush election. When the economy plunged, Americans began to rely more and more on the ability to still buy on credit, even without the cash to back it up. Mis-management was largely disregarded due to Mr. Greenspan's decision to keep dropping the Fed Rate until it reached zero percent. So credit cards became prolific with their ease of use and no-interest offers. Little management was needed.

  Politicians must cease with the lie that ‘perception is reality'. A two-by-four between the eyes is reality but not perception. In fact, it is the opposite of perception. This is what so many credit card debtors have suddenly come to realize. After the perception of Bush's ‘tumble-down economics' policy whacked us with the two-by-four between the eyes, we also began to realize that credit card bliss is perception, also. Not reality. Over the eight years of Bushenomics, the economy was going anemic. Consumer cash-flow was drying up, replaced with a cheap synthetic substitute called credit.

  Economies require two supporting beams: Supplier Confidence and Consumer Confidence. Reality dictates that Consumer Confidence should go away when cash goes away. But perception allows that credit is the same as cash. So Christmas after Christmas, all the malls were filled with shoppers. We finally even succumbed to living off credit for food and essentials. Every one had credit cards; no problem – except for the credit card industry. Now what do we do?
  
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