The Washington Times - August 9, 2008, 06:47AM


Credit is killing us



The mortgage crisis shows how clueless millions of buyers really are, having bought into variable rate, interest-only loans they had no business purchasing. Granted, greedy mortgage brokers and finance institutions grabbed billions in commissions for writing high-risk mortgages, but consumers should have known they didn’t qualify for the loans in the first place.

Then gas prices jumped and everyone now blames the fuel pumps for all our economic woes, but I think the primary blame goes to individuals. I know we don’t want to hear this, but it’s time the majority of Americans realize that our lack of personal fiscal responsibility has come back to bite us in the derriere. People are truly stupid when it comes to their wallets.

How stupid are we? Well, look at auto loans. The average automobile loan today is for 63 months and some go as high as 80 months. Compare this with average loan duration of less than 48 months five years ago and about 24 months in the 1950s. Yeah, I know that the 50s was a long time ago but it still matters because people back then tended to live within their means. Today, most people seem to have a sense of entitlement that drives them to needing to have everything now - no thought of what it will cost in the future.

Things get worse when you look at the amount of money financed in vehicle loans. Only 10 years ago banks financed an average of 89% of a new vehicle’s price. Last year, it was 101%! How can this be? Well, nowadays consumers borrow more money to cover the amount they were upside down on their trade-in. Over 40% of all trade-in transactions involve an owner who is upside-down (he owes more on the car than it’s worth) on the existing loans, so we just go along and roll the still-owed money into the financing for the new vehicle. There are millions of people out there who owe over $40,000 on a $30,000 car! No wonder mathematics is so unpopular in school.

It even gets more hopeless when you realize that over 50 million households carry credit card debt balances over $12,000 and half of all households only make minimum monthly payments on their bills. Of the remaining households, 40% pay less than half the monthly balance owed when the bills come due, which means that two-thirds (72%, actually) of all American households are engaged in what is basically financial suicide.

Where did we go so wrong? I really don’t know, but if we don’t wake up we’re going to consume ourselves into extinction, at least economically. Higher salaries won’t help. Keeping jobs here in the U.S. won’t help, nor will retaining the Dollar as the world standard. Even if we owned all the world’s oil reserves it wouldn’t help because as a society we are spending far beyond what we take in. That’s an impossible situation to maintain. Debt is a like a cancer: it doesn’t hurt until it grows so much that it kills you.