Friday, April 24, 2009

Where Would We Be Without Credit Cards?


A few years back when I was a young municipal bond salesman, I was speaking with a bank president in Ashland, Kentucky. What I learned from him that day was that the farmers that banked with his bank, did not deposit their proceeds when they sold their crops in the bank, but rather took cash money, dollar bills, and went back to each place or store they had borrowed and paid what they owed. This is the way their fathers and grandfathers had done it and this is the way they continued that tradition.

The banker also shared with me the fact that had all these farmers deposited their proceeds from the sale of their crops in the bank, that there would have been more money in the community banks to lend, and thus that would have aided the growth of the local economy.

When a deposit is made in a bank, the bank creates additional money by making loans, and those loans create additional demand deposits which explains how banks facilitate the expansion of credit, which is another form of money.

Now fast forward to the present situation with many of the credit card companies closing out individual’s credit cards, and even paying them to tear up their credit card. If everyone in the United States took scissors and cut up all their credit cards and started to pay for everything with a check or cash, the domestic economy of the United States would have what would amount to as a financial heart attack. In other words, if you did not have the cash in your pocket or in your checking account to write a check, you would defer the purchase until you had the money. Can you see how such a drastic change in the reduction of the use of credit would nearly collapse the domestic economy of the United States?

There is an old story coaches give their teams before a big game where their opponent is likely the stronger team. It goes like this, “these boys put their pants on one leg at a time, just like you.” Well, these bankers put their pants on one leg at a time, just like the rest of us. But it is going to take a clever President Obama and some tough politicians to move these bankers to do what is best for the country, when they are wired to do what is best for themselves. They come to public service AFTER they have made their killing, not BEFORE.

Stay tuned.

6 comments:

Unknown said...

That's if they ever come to public service, at all. Bankers, it seems, are cold and calculating - their 'Patriotism' stops and the vault door. If it's good for their bank, they're all for it. But to look to the Greater Good - to the country, for example? I don't know ...

I'm willing to bet good money it was a banker who first said "Charity begins at home."

moneythoughts said...

Henry Paulson, the former Secretary of the Treasury, and Robert Rubin, also a former Secretary of the Treasury are both former Goldman Sachs CEOs! Washington is filled with these guys and their lobbyists, that is why things are in such a f**king mess!

winslow said...

We're seeing the snobish elite gain too much power in this country. With their ivy league degrees and multi-million dollar salaries and benefits, they have the pre-World War II German mentality. I think it is our right as Americans to take this away from them.

WetPaint said...

Credit is such a personal decision. I have 2 credit cards, and only use them for efficacy, and pay them off each month.

As I have done this for some time, and not just recently, my singular consistent actions do not sway the economy on way or another.

Here's a radical idea...WEAN the economy off of credit as a form of money. Short term credit for small things, or fixed rate loans for houses and schooling-fine. Revolving debt- no. What's wrong with only buying what you have already earned? As a country, we have an unsustainable standard of living.

All credit is a form of gambling. Which philosopher was it that said, paraphrased, that cause and effect is merely an assumption of redundancy under like circumstance? The assumption of increasing or steady salary and jobs has fallen off a cliff, and so should the credit system that relied on it.

Why are we obsessed with expansion and growth?

PS- hi, missed you. back now.

moneythoughts said...

Winslow, if we would get the proper regulations, oversight and transparency, the things you are asking for would come about. I am not going to blame all Ivy League graduates, nor all the people that work in banking, but I blame the few who knew what would happen under a financial free for all.

moneythoughts said...

Hi Wetpaint,

Missed you too.

I disagree with you about credit cards, but let me explain. A family that needs a car for work and driving their kids to functions, church etc. should not have to put the family car in the garage because the family doesn't have the money for 4 new tires or a major auto repair. Credit, used properly, can help a family with capital improvements that are necessary to the car or the house. Buying a 50 inch HDTV on a credit card and then paying it off every month is not a capital improvement and should not be purchased until the family has saved the money for it. Also, that same family has put away enough cash in a savings account to keep the family going for six months should someone lose a job. May be in this economy a year's worth of income should be on hand before a new big HDTV is purchased. Credit cards used to maintain a car, a truck or a house ( a new furnace) is the right way to use credit.