Saturday, September 06, 2008
Is credit indentured servitude? A look at modern American peonage
I was reading a blog today about the economy and one of the commenters mentioned that americans were over extended with credit. In fact, I found out that they average credit card debt for a household is around $8600. The average mortgage debt is $192,000. That's probably between $800-900 billion in credit card debt and somewhere around $17 trillion in mortgage debt in this country. These numbers may be conservative as there are over 116 million households in the US. Can you say over extended?
Even with an annual foreclosure rate of 1%, that would mean around $178 billion disappears from the economy, mostly from mortgage debt. That's not small. But the real reason for this post is to illustrate how are economy is propped up by personal debt. I don't believe this is an accident. Credit cards were non-existent 25-30 years ago. Most people I knew did not have one. If you wanted to buy something, you'd pay cash for the most part, excluding cars, and homes. Mortgages tended to be 15-20 years, and car loans were 2-3 years. Today, we have mortgages out to 40 years and car loans beyond 6 years. The average car loan debt is now between $12-13,000.
Sometime after the last inflationary bubble at the end of the Carter administration, some economists must have figured that if banks loan more money out to people, and extend the terms of the loans, they could pump money into the economy causing it to grow. A different kind of trickle down economics. On the income side, salaries would be kept at a pace such that an equilibrium is kept between consumers ability to pay and the money lent out. There have been a couple instances where there were hiccups, and then the resultant bailouts, but it has enabled corporations to flourish at the expense of the debt incurred by the average household. Look at the growth of the stock market since 1980. Even with the ups and downs, you'd have to agree that is has grown tremendously, but now we are at another hiccup.
The problem is that we are having difficulty maintaining an equilibrium between this debt, income and economic growth. In the last several years, banks have really gone too far in extending credit, particularly with mortgages. This in turn pushed housing prices higher and people borrowed even more. It's not enough that people buy what they want, but also be able to buy things beyond their dreams. Call it greed. Now that the housing market is collapsing, people that over extended themselves are looking for relief as are some of the lending institutions. Personally, I say let them rot, it's the only way they will learn.
At this point I'd like to consider the political economy if you will of this situation. Jefferson was afraid of situations like this, particularly with the government borrowing money. He feared corruption through financiers and industrialists. In many ways Jefferson may have been clairvoyant. Much of the shell game economics we see started with Alexander Hamilton, who believed in assuming debt and pushing out the time in which to pay it, where as Jefferson was more agrarian in his approach, pay as you go. On one hand, Jefferson wanted America to be unique in that we did not have a society divided by political, social or economic classes. In Hamilton's approach, I believe he sought to find a solution to problems of paying debt after the Revolutionary War without causing a depression or succession of states. I also think his risk tolerance was quite a bit higher than Jefferson's. My point here is that there is a historical philosophical approach in our democracy regarding economics and this argument is nothing new. What is different in the present is that the common man is given access to capital so easily without earning it as he receives it. Capital obtained in such fashion presents itself for abuse.
The end result here is that we have a society that in effect is in indentured servitude except that there is no debtors prison for those that refuse to pay. There are social and economic penalties for individuals, but insofar as lending institutions, they seem to get off scott free. This still leaves the vast majority of people that pay their debts on time in a condition of peonage, as they will be paying off their credit card and mortgage debt for many years to come, and in some cases, after they are gone. Unfortunately, this fiscal philosophy has found it's way to the government, which is even in worse shape. I guess you can sum it up as the free lunch mentality. The problem is that there is an end to this as the system has limits. The only way out of this, at least I think that some believe this, is to add more debtors to the system. The only way to increase this is through immigration, legal, or illegal.
The problem with this is that illegal immigration has brought new problems that exacerbate the situation. The social costs of having people her illegally is staggering. Healthcare, schools, and crime take their toll. The answer to this part of the this new problem created is amnesty, in an effort to get them on board tax-wise. Banks have not lost step as they already offer credit to illegal aliens. The problem is, if they skip, how do you catch them? It's a total loss. The side effect of all of this is that there is now a political demographic that is more open to socialism and it is changing the expectations of our society. Of course politicians will give them what they want and are already anticipating the political clout of this newly created demographic. So much for the traditional melting pot.
Again, this leaves us at a turning point at the 2008 presidential election. Where are we going from here? Do we adhere to Jeffersonian principles, do we continue on the same path we currently are on or do we pursue a different, yet equally dangerous approach with socialism? Our current path is to take on more and more illegal immigrants. Insofar as credit is concerned, I see no changes in approach with continuing down the same path. Today, the government announced it is going to bailout Fannie Mae and Freddie Mac. Detroit car makers are already squealing that they want preferential loans to bail them out. I see this path as a steady decline fiscally, morally, and socially. With Obama's approach, government will be used to curtail wealth through taxation, with the additional burden of government mandated and managed entitlements. In our zero sum game, it's really redistribution of wealth. With the added taxation and continuation of debt among the average citizen, in essence, we will be in a peonage system, or indentured servitude that we will never get out of. Both the government and financial institutions with cooperation from industrial businesses will basically have the population by the balls. Over time, we will loose our self-sufficiency and perspective on responsibility; we will have traded our freedom for that which neither enriches us nor makes us any safer or better off individually.
A classical liberal or Jeffersonian approach would entail fiscal responsibility. You shouldn't spend more that you earn, and you should not receive what you have not earned. What are considered entitlements should never be rights. Part of the solution would be to curtail outrageous interest rates. The government could do this. What the government should not do is bail banks out, or other corporate entities. They will never learn their lesson in greed and/or poor judgement if they are bailed out time and time again. Corporate and industrial subsidies should end. Yes, lower the tax rate for corporations to 10%, but no more subsidies. Both individuals and corporations will be responsible if it is demanded of them. The federal government should have fewer responsibilities than it currently has. I wont get into it, as you can read it in my Bona Fides, but it is not impossible to cut back the federal government 25-33% and as I have said, I would settle for the abolition of the IRS.
Between the government and financial institutions, we have fastened a chain around our neck that has a 300 Lb steel ball at the end of the chain. We cannot blame this situation on anyone else than ourselves. We elect the corrupt individuals that indenture us to the government and we take it upon ourselves to live fiscally irresponsible. The only way out of this is through individual responsibility, self-sufficiency and a philosophy of personal liberty. Fortunately, or unfortunately, depending on your point of view, these things can not be legislated, but are learned through education and experience, and are fomented through political, social and spiritual leadership. This is where America falls short. No matter what happens this November, even if the Obamessiah wins, people like myself will have our time again. It's the nature of revolution to come back again.
Thank you for reading this blog.