I am going to try and not get too technical here — I am not a finance expert, by any means — but I have to tell you that I’ve been thinking a LOT (too much) about the current economic crisis and who is responsible for it.
On the one hand, it’s now become pretty apparent that the main players in our credit system failed: Banks and credit card companies extended credit to millions of consumers who had no business borrowing that much money to buy cars, houses, or to get high credit limits on their credit cards. One of the most fascinating and scary things I’ve read on this subject is an email from a banker who witnessed the ridiculous degree to which banks and credit companies got lax with doling out credit. His email was recently reprinted in the New York Times and it’s worth a read if you’re interested in this topic. I had no idea, for example, that when you apply for a credit card the credit card company does not verify the household income number you put on your application. Wow.
This paragraph from the banker’s email really drove home the fact that banks and credit card companies, by being so lax with giving out credit, have a lot to do with the current collapse:
I recently had a client apply for a credit card. She is a homemaker, with no personal income. The house she lives in is in her husband’s name. She would have asked for a $3,000 credit line, just to pay miscellaneous expenses and to establish some credit on her own. So the computer is told that her household income is $150,000; her mortgage/rent payment is zero. The fact is that her husband’s mortgage payment is $7,000 a month (which he got with a no income verification loan). She had a good credit score, but limited credit since she has only lived in this country for the last three years. The system gave her an approval for a $26,000 line of credit!
But here’s the flip side: What about the millions of consumers who went out and bought houses they could not afford and spent lines of credit they could not pay back? My credit card has a $25,000 credit line (no doubt based on the household income we used to have before I became an entrepreneur). But I wouldn’t dare spend anywhere near that because we can’t afford it. When we applied for a loan for our current house we were offered more than we asked for. Sure, those gorgeous bigger homes we could have afforded with that higher loan amount look great, but we can’t afford the monthly payments. In other words, we’ve taken responsibility for our finances and our credit, even though the credit card companies and banks have clearly been too generous with it.
I understand, of course, that both my husband and I are well-educated people, with a solid understanding of credit, various loan structures, monthly budgets, etc. Many of the consumers who took out those no down-payment, no interest adjustable loans were not financially savvy and trusted their bank. I think it is absurd that we don’t require some type of financial literacy courses in our schools and even colleges, because it’s a core life skill, right up there with reading, writing, and communication. But I think this is too easy of an excuse, I think many of the people who overspent beyond their means are plenty smart and educated to have known they were doing something that would eventually get them in financial trouble.
So I’m stuck trying to figure who is to blame for this mess. The answer is probably quite complicated — the banks with lax credit rules, consumers borrowing and spending beyond their means, the government without proper credit markets oversight, our education system without proper financial fundamentals for students. But I am curious what your take is on this topic so sound off in the comments!