The Convenience of Credit

Lately I have heard several call-in radio shows where most of the callers complained about their problems getting credit. Many are incensed that they can't borrow money. They are indignant and want to string up all the bankers. It's as if they think credit is a civil right. Credit is not a right, it's a convenience. If you do not want to take the time to save money to buy an item, you can pay a bank for the convenience of getting the money in advance.

Banks are businesses. They exist to serve a need or desire in the marketplace and to profit from meeting those needs and desires. Banks make money primarily by collecting interest on the money they lend. Therefore, banks have to lend in order to make money. If they don't lend, they go out of business. They can also go out of business if they lend to people who don't pay the money back.

Banks have been damaged lately by the collapse of the housing market. Value has disappeared practically overnight. People have been defaulting on their loans and the capital that banks usually have available to lend has dried up. They are gun-shy. They got caught with their pants down and are extremely reticent to take risks. This is why they aren't lending like they used to. Once they get a handle on things, credit should loosen a bit. But it's not all the fault of the banks.

Just because a lender is willing to lend you money doesn't mean that you have to take the loan. If you have any doubts about your ability to pay it back, then you shouldn't take it. You don't have to borrow money at all. Really! It is quite possible to exist without borrowing money. This whole easy-credit thing is a relatively new development that got of control over the last 30 years. It used to be the norm that credit was hard to get.

During this anomalous rise of easy credit, savings rates in the U.S. have dropped to near zero while personal debt has risen to record levels. Instead of using savings in case of an emergency, people use credit cards. This is a crazy way to manage personal finance. It's expensive, too. If you saved up money for a rainy day, you could earn interest on it until you needed it. Instead, by using credit cards, you end up paying interest (at a much higher rate). In addition, using credit cards means that you need to continue to earn more money and have fewer emergencies in the future. There are no guarantees of either of those things happening.

We are way out on the limb of credit and the further out we go, the more likely the limb will break and we will fall hard. The slightest little glitch in the economy can crash the whole thing. That's what's happening now. The limb we are hanging on is cracking. The government and practically everyone are trying their best to get credit freed up so we can keep borrowing and consuming. This is not the solution. It's dangerous. We are trying to patch the crack in the limb so we can go further out on it. The fall will be even harder if we pursue this course.

What i am trying to say here is that the major problem with the economy is not the bankers, the government, the housing market, or other economic challenges we face. It's credit. The best thing that we can do is to live within our means, stop borrowing and start saving. Just ask your grandmother.

Tax Problems are Everywhere

So far, at least three nominees for President Obama’s cabinet have gotten negative attention due to tax problems. Why is this? Maybe it’s extra hard to find any American who doesn’t mess up on his/her taxes, either on purpose or by accident.

The IRS Tax Code is so long and convoluted that I can’t even find agreement online on how many pages it is. The official count is somewhere over 13,600 pages! With that kind of extreme complexity, it’s no wonder people screw up when doing their taxes. It would also not be a surprise to find that millions of people cheat on taxes either by not understanding the laws, or by purposefully misunderstanding parts of the law to their own financial advantage. I suspect that even the IRS agents don’t understand all of their own code, especially since parts of it change every month.

I’m about to do my annual tax return. My tax situation is a little complicated but nowhere near as complicated as Tom Daschle’s is. I would have never thought that having a friend provide limo service for free, would result in a $130,000 tax. This is why millions of dollars are spent each year to hire tax accountants to figure out our taxes for us. Interpreting the tax laws is a huge industry. I think it’s ridiculous. We need a much simpler tax code. It should be easy for any person to do their own taxes.

Unless the U.S. Senate, who approves cabinet nominees, can prove that candidates purposefully cheated, I don’t see why it should be a big issue if the candidate messed up by accident.