Give credit the credit it's due
It's hard not to have a credit card or rely on loans these days, and some critics don't like our reliance on them. But commentator Will Wilkinson says saving and borrowing is part of transferring from one stage of life to another.
Commentator Will Wilkinson (The Cato Institute)
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Scott Jagow: One reason stocks fell yesterday was this warning from Goldman Sachs: The credit crisis is far from over. Losses from mortgage and lending problems won't peak until next year. And banks will need another $65 billion to cover losses. Ouch. But here's a less painful take on the credit market from commentator Will Wilkinson.
Will Wilkinson: It used to be a lot harder to borrow money. You'd have to grovel to your rich uncle or talk with some guy named Rocco, whose debt collection techniques emphasized mangled fingers.
These days it's hard not to have a credit card. Home loans are within easier reach, and there's even such a thing as a "reverse mortgage." And if you find yourself in a tight spot at the end of month, there's always a payday loan.
Last week in his New York Times column, David Brooks complained that our increased reliance on personal debt is a sign of "rampant decadence." But I say we need to give credit credit where credit is due. Saving and borrowing are both transfers from one stage of life to another.
We begin at the bottom in our 20's, and slowly work our way up until income peaks in our early 60's. Then, we retire and live off savings and pension checks.
When we're young, we typically need a lot more than we make. When we're a bit older, in our peak earning years, we typically make a lot more than we need. That's why it's rational for younger adults -- who might need to pay for an education, a car, or a house -- to borrow money from their future, flush selves. The difference between borrowing and saving is paying to use money now versus being paid for waiting and letting others use it.
Credit markets allow us to distribute consumption more evenly, and more optimally, over our lives. That leaves us better off than we would have been without them.
Of course, managing debt can be complicated, and it's important to be responsible. But it also looks like we're doing fairly well. According to a new Gallup poll, 60 percent of Americans say they usually pay the full balance on their credit cards each month, and the percentage of people who carry balances is going down.
And how about this virtue of thrift stuff? Does credit make us self-indulgent and lazy? Well, my student loan debt isn't paying itself off.
Jagow: Will Wilkinson is with the Cato Institute.
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From Richmond, CA, 06/18/2008
I was electrically stunned to hear Mr. Wilkinson say this: "-- to borrow money from their future, flush selves." I see alot of "flush selves" where I work. They collect Social Security to survive.
From Ventura, CA, 06/18/2008
Mr. Wilkinson's comments miss the point, again. Issuing credit to people who are worthy of it was always a matter of good regulatory practice and sound business practice. The current credit crunch has resulted from the government's abandoning of its role as the regulator of irresponsible banks, and from the banks' irresponsible lending of money to people who are known credit catastrophes.
Hence, the issue is not whether credit is good or bad. Rather, the critical matter is whether large banks and our government are going to behave in a responsible manner such that people who are huge credit risks do not make doing business difficult for those of us who are credit worthy!
Mr. Wilkinson is apparently defending a status quo that has made it very difficult for businesses to do business. Hence, as usual, Mr. Wilkinson's commentary misses the point.
Will Wilkinson's fluff pieces are always out of place on Marketplace. I'm remiss as to where they might fit, in fact.
Payam
06/18/2008
That is the theory that we have operated on for years. I am old enough to remember about 45 years ago when credit was being sold to us as the wave of the future. Anyone who spoke against it was out of step with sensible financial planning. I remember these arguments well because they mirror the ferocious arguments I had with my then-husband about our limited cash flow vs. this incredibly freeing opportunity to defer payment for all kinds of (at that time) comsumer goods.
The theory sounds viable. It doesn't allow for real life, however. My thne-husband left me with liens on the house for loans he had made without my assent, three children (two in college, one only six years old), car payments and insurances for the car he took with him that was in my name because he didn't have enough credit to take out a car loan -- the list goes on. Eventually, among other things, there was $38,000 of child support that he didn't pay, as well. He did not pay one nickel for the older children's education.
In the meantime, I had a fairly secure position in State government and could keep most things going, although it was often tight. I remember one winter when my son and I used to go into the woods every day to pick up enough wood scrap to feed the coal stove (my husband had insisted that we buy this stove rather than properly insulating the house; I was so exhausted from 3 children and two jobs that often I just gave in; he didn't work for very long periods of time). Anyway, I was at least making it, the last child was growing up, and I thought that I would have a few years prior to retirement to finally square myself financially. An accident, several medical misdiagnoses resulting in lengthy unpaid absences from work and a fair number of medical expenses, a job layoff and the necessity to take a much lower-paying job, finally the necessity to retire early from my full-time job for medical reasons and later from a part-time job for the same reasons: here am I, at the age of 68, still in debt from all of the above, still with major medical problems, unable to even think through how I will get through the coming winter and heating oil prices (I used 1100 gallons of oil last winter, which translates to about $4500 dollars at current heating oil prices right now where I live).
Be careful of what you theorize. Credit/debt is a lot more manageable before life hits.
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