PLASTIC AND MORE PLASTIC

I know it will be hard for some of you younger readers to believe, but back in my misspent yut, (that’s “youth” for those of you not fluent in Brooklynese), there was no such things as credit cards. It was cash on the barrelhead for all commercial transactions. This was, of course, before the electronics age. My father worked for a large company and was paid every Friday in cash. He would be given a small brown envelop that contained something like $76.23 in bills and coins. This was after deductions for social security and withholding. The first widespread use of a plastic credit card did not come into existence until around 1950, a mere 65 years ago. It was the Dinners Club card which has since largely gone out of existence. But it allowed people to experience something never before experienced in mankind’s history. And that was the instant psychological gratification that comes from from acquiring a product or service at a point in time that a person didn’t have the cash to pay for such items. It became a heady intoxication and it revolutionized the world as it existed back then.

A case in point was a girl I was dating when back in college. She was one of the first persons I knew that latched onto a Diners Club card and she rarely hesitated to use it. Especially on expensive stuff, like mostly clothing. When I pointed out that her family could ill-afford the items she was buying, via her credit card, she cooly replied that: “Well, that’s why God created plastic, isn’t it?”  I didn’t acquire my first credit card until the early 1960s when I was working overseas. It was an American Express card and for many years I seldom used it, fearing that if I started charging purchases, I would fall helplessly into a debt that I could not climb out off.

How quaint were such notions when viewed from today’s perspective. Today, the cumulative private debt racked up by all Americans stands at a shade under $12 trillion. That’s a 12 followed by 12 zeros. The entire commercial world is fueled by debt. In some financial circles it’s not even referred to as debt anymore. Instead it’s called leveraging, as if a debtor’s liability has suddenly become an asset. So where has all these easy money policies and the triumph of the instant gratification mentality led us to? Well, we don’t have to go very far back to achieve a clearer understanding; only back 6 or 7 years to around the year 2007.

It probably all started around the latter part of 2006 when real-estate prices were booming and credit was being issued with little collateral to back it up. When my wife and I bought our first house in the mid-1960s, a 20% down-payment on the purchase price of the house was required in order to qualify for an approved mortgage. I was able to make the down-payment with money I had saved up while working in Europe, and I was only able to to acquire those savings because the Government, at the time, gave its employees generous housing allowances when working overseas. The amount of my mortgage also had to be no more than the amount that was considered affordable based on my salary at the time. By the early 2000s, of course, all those fiscal restraints had melted away.

After the turn of the 21st century, credit became loose and easy, especially in the housing market. People were allowed to purchase homes with little or no money down, and were approved for mortgage limits that were well over their heads, financially speaking. It was the time for the fast-buck artists to make a killing. Housing prices began exploding, and real-estate speculators were riding the gravy train for all it was worth. Prospective real-estate buyers were told not to deny themselves the instant gratification that came with acquiring that big, beautiful house they dreamed of, but could clearly not afford. After all, realty prices could only one way, and that was up, they were told. When their property value increased in a year or two, they could always renegotiate their unaffordable mortgage into something more palatable. And so it went, as the easy money and instant gratification syndrome spread like a plague throughout the country.

Reality prices continued to rise beyond everyone’s wildest dreams, until one day they just didn’t. Suddenly, the air of overinflation began to seep out of the real-estate balloon, until one day the balloon just burst. Housing prices began hurtling downward in a death spiral, until new terminology had to be introduced into the U.S. vocabulary, such as mortgages that went “underwater.” Suddenly a large chunk of the U.S. population found themselves with mortgages that were considerably larger than the shrunken value of their homes. They were underwater. To add to their fiscal woes, as a result of the deep recession that was unfolding due to the plunge of realty values, many people lost their jobs as well. Thus, people suddenly unemployed found themselves with mortgages larger than their home’s value, and with no income being received to make the monthly mortgage payments. Many in this category had no choice but to simply walk away from their house, leaving the banks or mortgage companies holding the bag.

Next up in this on-going fiscal fiasco was the bankruptcy in 2008 of Lehman Brothers, a huge Wall Street financial institution. It seems that Lehman was holding billions of dollars of financial real estate derivatives. When the housing market collapsed, these derivatives became more worthless than the paper they were written, and Lehman was forced to go out of business. Many Americans didn’t realize that the U.S. economy came within a whisker of going belly up after the Lehman bankruptcy. People would have inserted their ATM cards at their bank, with a sizable amount of funds in their accounts, but nothing would have come out. Banks would have begun shuttering their doors. Credit cards would have become useless.  The whole enchilada, financially speaking, would have been gone.

Actually, it President George W. Bush’s Secretary of the Treasury that came to the rescue. He quickly instituted the Troubled Asset Relief Program, (TARP), which said that the Government was willing to pour seven hundred billion dollars in to the economy in order to avoid economic disaster. With that action the country slowly edged away from the financial precipice it was clinging to. In the six years since then, the American economy has achieved a remarkable recovery, although it’s still short of where it should be.

In the meantime, the mindset of instant gratification through use of credit cards, unaffordable mortgages, or other fiscal instruments continues to grow. Why put off for tomorrow, that which will bring us great pleasure today. So what if I can’t afford the new and very costly Apple Watch, which I don’t really need in the first place. That’s not going to stop me from purchasing one today. On credit, of course.

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Categories: Economics | Tags: , , | Leave a comment

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