My Main Issue with President Bush’s Financial Crisis Speech Last Night: Consumer Debt as Usual
September 25, 2008 by Miranda Marquit
Filed under Finance
Last night, President Bush gave the second speech on the financial crisis in one week. The merits of the $700 billion bailout plan (for and against) are being debated all over the place. My main concern, though, is that President Bush’s speech merely served to highlight the fact that going forward things are going to be pretty much business as usual: More credit and more debt for everyone.
Emphasis on consumer spending enabled by debt
President Bush seemed to put a lot of emphasis on the fact that American people were having trouble borrowing money. He mentioned car loans and student loans — and even mortgages — but he didn’t mention the real driver of our economic engine: credit card debt. Perhaps we don’t want to draw attention to the fact that there is close to $1 trillion in revolving consumer debt out there.
So my question is this: Is it such a bad thing that Americans are having a hard time getting credit? Shouldn’t that be a good thing? Shouldn’t the current difficulty with regard to getting into more debt give us reason to pause and wonder what we have all this debt for?
Everything that has been done, from economic stimulus checks to Wall Street bailouts, has been done in the name of keeping the credit flowing. Our economy is based on debt. Consumer spending driven by debt is what keeps our economic engine humming. And that — obviously — is a recipe for financial and economic instability. I mean, the big investment banks are failing because they were investing in debt through credit derivatives.
Perhaps instead of trying to figure out how to keep the credit flowing (maybe the government’s creditors need to up the lending standards), we should be focusing on changes that everyone can make in their lives. Maybe we can get back to a more stable economy that values things like hard work, a strong dollar, saving and being content with modest material possessions.
My other issue: “The markets aren’t working properly.” Huh? By free market thinking, the fact that all this over-valuing and over-leveraging is coming crashing down is, in fact, a sign that the market is working properly.
What do you think?
I agree, Miranda. I’ve been saying for a while that the whole credit derivative thing is a “house of cards,” ready to fall in a brisk wind. Well, there’s a tornado going on and the whole thing is collapsing.
And everyone is blaming everyone else.
You are right that our love of credit is causing the problem.
Thanks, Jean! While it is fun to play the blame game, there is plenty of it to go around. So it would be much more productive to work for actual solutions, and move forward.
What do I think? I think our economy is built on nothing more substantial than debt and the creation of more debt. We are a society based on consumption and if we don’t start creating something of more substantial value than paper money, we are going to be in trouble.
I agree completely. Endless consumption sustained by increasing debt is an unsustainable economic model. Because we will always need more. Plus, this sort of setup just leads to greater inflation on top of everything, since the “money supply” can be increased at any time simply by borrowing. Of course it’s all information and paper and not backed by anything…
I agree. I think the market is working perfectly, and those who irresponsibly profited for the last few years should pay for their greed.
Hmm… I do not think it is so simple due to the dual nature of the credit markets. Yes, they contain debt instruments, but they also contain transaction instruments. Particularly in B2B. The SMEs I know who want to operate on a cash-like basis accept corporate credit cards. They do not require their customers to show up at their door with dollars or gold bullion. Pay by check? Forget about getting your mission-critical parts in time. Extend trade credit? Not to non-.govs during a financial meltdown. Anyway, I agree with your sentiment on the debt side. Just do not neglect the economic friction on the transaction side.
Miranda: I agree. The Fed, administration and Congress have based our fiscal and monetary policies on the “spenders” in our economy, not the “savers.” The spenders have no more money to spend and they are also out of credit. This causes concern and results in “rescue” packages to free up more credit. It won’t work in the long run. The economy needs to be “dialed back” to meet the needs of the savers and to rein in the spenders.
Thanks Pinyo and ToughMoneyLove for your thoughts. I think that consumer spending — and the continual encouragement the government gives to it — is a source of major problems.
Sean, thank you for your insights. You are right that credit is important, and that transactions are important. However, my main issue is this continued emphasis on increasing consumer spending funded by consumer debt.
I also think that the government could ease that particular credit situation by offering loans, similar to that offered to AIG. Although I am glad that the agreed-upon plan does require that the government receive equity in the companies bailed out. Hopefully as the stock market recovers the government will recover some of what is spent.
Right now consumer credit standards have tightened considerably which is a good thing. If as a result of government action this week those standards are relaxed again, we are likely to find ourselves back in this position before too long.
I agree Miranda.
This bailout is giving the “OK” stamp on more debt. It’s putting a plaster to hide a much bigger wound…
You are right that consumer standards should remain tight, ToughMoneyLove. That is important. Everyone should be more cautious about consumer borrowing. And Francois, I agree that this is little more than a band-aid. It doesn’t address the fundamental problems with what our economy has become.
I love and agree with your points on americans and access to FURTHER loans… Thank you for a really good artichle!
Please can I ask you all to read another good artichle adressing similar things:
http://peekablog.net/2008/10/what-caused-the-financial-crisis/
Thanks, Peter. And for sharing a link to your own thoughts.