Archive for March 10th, 2009

Credit Card Culture

When I was a boy my mom showed me something new she had gotten — a Bank Americard.  It would look familar to people today, with the colors of our modern “Visa” card.  That’s because this new concept of a ‘credit card’ would quickly outgrow Bank of America who would give up control of the cards, ultimately to the service known as Visa.  I still recall the commercials “Bank Americard is now Visa.”

When I was in college the idea of a college student having a credit card was virtually unknown.   These were not easy to get, and you had to pay them off relatively quickly — minimum payments were rather high back then.   I waited until I was 25 before I had my first credit card, and I wasn’t sure I really needed it.   Credit cards weren’t accepted everywhere (and definitely not at fast food places or grocery stores, where it was only cash or checks), and if you had to make a major purchase you saved up for it.   My mom routinely put things on “lay away.”  You make a down payment for a dress or Christmas gift, and then pay off the balance over time, receiving the item once you finished paying.  That way you lock in both price and access to the item before you actually conclude the purchase.

Layaway still exists, and is even making a comeback due to the problems in the economy, but it’s been relegated to the social class of people who aren’t qualified for credit cards or have bad credit.  It used to be common across the economic spectrum.   Back then carrying a credit card debt was foolish — for large amounts you should take the money from savings, and not pay high interest rates.

Early on, people used credit cards responsibly.  But soon habits changed.  Credit cards came to be marketed to a younger crowd; almost all college students now have one, even if they lack a steady income.   People were given much higher credit limits, and monthly payments were reduced dramatically.  This helped feed a culture of consumption, which not only meant higher credit card debt, but a slow erosion of savings until the US shockingly reached a savings rate of 0%.   Large numbers of people counted on their credit cards as the source for emergency funding, and any desired purchase — a flat screen TV, new furniture, a vacation or clothing — was bought without regard to the status of ones’ bank account.   Like gaining weight, people started by carrying small balances, then larger ones, and ever larger ones.  Just as the 32 inch waist suddenly becomes 38″, the credit card debt of $400 a month grows to the thousands.

Interest rates were low from the 90s on, and this meant credit cards offered people cheap on the spot credit.   During the bubble some people even took out cash advances to buy stocks, believing the stock market could not go down (at that time the Dow hit 11,000 and Nasdaq 5000 — today the Dow is at 6550 and Nasdaq at 1270).    Moreover, as people saw their “illusionary wealth” skyrocket thanks to the stock bubble or later the property bubble, they weren’t concerned about carrying credit card debt or having no savings.   They could always sell their stocks or take out a home equity loan!   No need to save, our assets are growing.  It’s not like stocks are going to suddenly fall off a cliff or property values plummet — the pundits made sure people felt secure (and ridiculed those who wanted to warn about a potential disaster — see the previous post).

This process was reinforced by the cheap money available after 9-11, as interest rates dropped dramatically and we were told it was our patriotic duty to go out and spend money.   By 2007 we had achieved full culture shift.  Credit was our way of life, consumption was an American right, and patience was for losers.

This extended throughout the economy.    Everything on credit, and everything on demand.   Want a new car?   You drive it off the lot today.   Want to eat at McDonalds — swipe your visa card, it’s quicker and easier.  Even Las Vegas put card swipes at their slot machines — rather than a bucket of quarters the slot junkies could just charge it.

Don’t get me wrong, I like credit cards.  I don’t use cash very often.  I like getting a statement every month on where and how I spent my money, and I like having the option, especially when 0% interest rate offers and the like were everywhere, to purchase something and pay it back at a later date.   I am part of the credit card generation.    Credit cards are convenient and useful.   Yet like all human tools, they can be used wisely or abused.  And in this case the ‘credit card culture’ spawned by cheap, easy, credit has led us into an economic abyss.

In short, we got used to having everything when we want it, but without thinking about whether or not we can afford it.   The 80s Michelob ad “you can have it all” became the mantra of a generation.  You didn’t have to work hard, you just had to be a clever investor.  What can go wrong?

Last month the savings rate in the US hit 5% for the first time since the early nineties.  Consumption has dropped.  This means recession, higher unemployment, and an economic crisis.   Yet the fact that Americans are starting to save is a good thing.   The real way out of this disaster is not to expect things to be like they were back before September, but rather to break out of the credit card culture and start living within our means.    It appears we are starting to do so.

Still, massive government bailout and stimulus spending, along with danger that the credit card industry itself could undergo the same kind of crises as the rest of the financial sector, suggests that all this will take some time to play itself out.  I made my peace with the economic recovery act (aka, stimulus) because it isn’t just an attempt to promote consumerism, but focuses on restructuring.  It’s a gamble, but it might work.   The bailouts, on the other hand, are looking more and more like they were done far too quickly.   The danger that we still have another round of severity — stagflation, a credit card crisis, etc. — is real.  Things will likely get worse before they get better.

Nietzsche noted that what doesn’t kill us only makes us stronger.   Provided that the country continues to function and we pull together to weather this storm, the US could pull out of this with a more realistic and sustainable culture and society than what we had the last quarter century.   For the 15 years we’ve been doing the economic equivalent of partying and drinking heavily every night until the wee hours of the morning.  It may be fun, but sooner or later the body can’t sustain it.   Sooner or later one has to live a healthy sustainable life style.   Our society has to aspire to be like the reformed partier — change our ways, and we’ll find that we not only do not miss the noise and action, but that living a real life is far more satisfying than getting lost in the party.