Can our economy survive without credit?

[kentuck]

If the banks have money, why do they not offer credit? Surely our economy will not collapse if we do not spend more on credit cards? However, if we stop buying cars, new homes, and other big ticket items, then the economy will surely slow. But will it collapse? Car salesmen, carpenters, construction workers, roofers, etc will suffer the costs if these industries shut down, there is no doubt.

But if we give the banks the money and they still refuse to offer credit to homebuilders, new car buyers, etc, then why give them the money?? Why not just let these folks borrow the money from the government? Why depend on these banks that are too paranoid and fearful to loan to anybody?

Personally, I do not need any credit at this time. I pay my bills on what I have already bought but I have no desire to purchase anything else. If the economy depended on me, it would probably stagnate. And there are probably millions of others just like myself?

But, if we do not continue to build and grow, then we will have nothing but a customer service economy. If we only buy necessities, the economy will not create enough jobs to go around. That may be the best argument for credit?

However, we should ask if this "credit problem" applies to all banks or just the investment banks that got in over their heads with VaR and credit default swaps? And if these investment banks went under, would it really collapse our economy? I believe we need to delve just a little deeper into the consequences of the credit problem?

[Veritas_et_Aequitas]

1. There's a theory that the credit crunch doesn't really exist, or has been exaggerated.

I'm not really familiar with it, though.

As for the investment banks going under, I doubt it would collapse the economy. Healthier banks would buy up the failed ones piecemeal, like what happened with Lehman Brothers.

[bstender]

21. credit reality

there is a definite excess of debt in the world economy. to the tune of 100's of trillions in derivatives, swaps and securities that are worth some pennies on the dollar. that is not a small problem as all banks are heavily affected by this revaluation. individual consumers are also heavily indebted and revaluing their personal net worth and are wisely cutting back.

[Greyhound]

2. Not in it's current form. Our economy is based entirely on debt and the permanent

creation of ever increasing amounts of new debt.

It is a good thing that it's collapse is inevitable as any sane economy must be built on creation.

[NNN0LHI]

3. You have no desire to purchase anything else? Say what?

You getting ready to check into a monastery or something kentuck?

I thought everyone wanted something?

I know I do.

Don

[kentuck]

10. If I can't pay cash, I don't need it...

that's about where I'm at..

[NNN0LHI]

15. I am already there too but I still want stuff

Been there for a few years now.

Don

[kentuck]

16. Are you willing to go into debt at this time?

Most folks are little wary of buying anything on credit at this time, in my opinion.

[NNN0LHI]

25. Probably not

I currently have two vehicles one a 2000 with 84,000 miles on it and the other a 2004 with 47,000 miles. With a good economy I would either be ready to or already have traded one or both of them off by now. I have taken great care of both of them and plan on driving them both for at least a few more years. They are not nickel and dimeing me to death yet either.

Don

[JVS]

4. Without credit, central economic planning becomes necessary

[doodadem]

5. Replicators!

I've been saying for years, if you want to cure the problems of the world, let's get going with inventing replicators. If everybody can make whatever they need themselves, money--and everything it can buy--becomes superfluous.

[Cessna Invesco Palin]

14. There's a small problem with that argument, though.

Because naturally the replicator companies would be the first to go out of business. Hell, if I bought a replicator, the first thing I'd use it for would be to build MORE replicators!

[Coyote_Bandit]

6. We don't produce much of anything

other than services and consumer spending represents over two thirds of GDP.

That means our economy is dependent upon consumer spending. That spending can be financed through either credit or wages.

[Cessna Invesco Palin]

12. Here's an interesting exercise:

Name an industrialized first-world country that does derive more than 30% of its economic output from manufacturing. I'll start you off with Germany, probably the most manufacturing-centric economy in Europe, at about 27-29% depending on how you compute it.

[Coyote_Bandit]

17. And that proves

nothing other than the fact that the economies of first world countries are dependent upon consumer spending rather than production.

The ultimate end of a global economy is a single worldwide standard of living. That means that more prosperous nations will become poorer and that poorer countries will prosper.

Pretty easy to lower the standard of living in those first world countries when they are lacking in production. And relatively quick to accomplish. Limit credit availability, increase prices, stagnate wages and reduce their purchasing power.

[Vinca]

7. I'm beginning to think there is some exaggeration about the credit crunch.

My husband's profession depends on mortgage lending and all of a sudden he's as busy as we've seen it in a couple of years. It could be the banks are pickier about who they lend to and how much, but that's a good thing at this point.

[Cessna Invesco Palin]

13. The credit crunch can't be a long-term phenomenon, almost by definition.

Banks don't make money if they don't lend. Mortgage companies don't make money if they don't issue new mortgages. Sitting on your pile of money and waiting for things to get better only works in the short term. In the long term, your pile of money will keep getting smaller and smaller unless you lend, write mortgages, etc.

[bstender]

19. it's called ZIRP

just a bubble, not a long term policy solution. but the folks at the top of the feed trough are happy and that's what is important to the policy makers. keeps the contributions coming in.

[terisan]

8. I think you have a point about the investment banks. I thought the bail out was

connected to the international banking community since other countries are taking similar measures,

On the credit I think the borrowing for businesses to help them grow is often more a scheme to help the banking system prosper and allows companies to lose great amount of money during downturns and thus more beholden to the banks.

I think credit is useful when a business or individual personally knows the bankers and the bankers know their customers, and there is accountability. I believe our country can do ok if we keep Wall Street out of most of our transactions. They seem to have become an enormous expense to almost like extra overhead.

Keep posting your ideas please. I think we the people are going to have to the thinking on rebuilding our economy into something that works for us. I wonder if there is a country where people live well and are not too tied into the investment bank model.

[donco]

9. It is the job of the United States too

consume, consume, and consume. See what happens to the worlds economy when we slack off?

[Cessna Invesco Palin]

11. Here's an example of a business that would have trouble surviving without credit:

The father of a friend of mine owns a small business which designs and builds custom plastic and styrofoam molding machines. The market for them is small, but relatively stable, and his machines are highly valued by those who need them. He's considered something of an artisan in his trade, and people come from all over the world asking him to design machines that fit their needs. He's not particularly wealthy, nor does he come from a wealthy family, and he more or less built his business from scratch. He employs two or three guys to do a lot of the machining of parts, assembly, and testing while he handles the design, financial, and operational aspects. Like I said, it's a small company, only four or five people maximum at any given time.

In a typical year he might design and build three or four machines. I don't know how much they cost to those who buy them, but I'd make a guesstimate that we're talking about something on the order of $250,000 per machine, if not more. So his cash flow is quite lumpy - lumpier than most small businesses, but it serves as a good example. He gets large cash infusions - regularly, but infrequently.

Now, a hypothetical situation based on the above:

It's january, and he's just received his first contract of the year to build a machine. He gets part of the money up front - say $50,000 (again, a somewhat arbitrary guesstimate) which will be enough to cover the costs of the initial design and layout for some of the materials. The rest is payable upon delivery. So here we have a situation where he's promised $200,000 upon delivery, but has very little money right now - certainly not enough to pay his employees and feed his family. So he obtains a line of credit, based on the contract and the assumption that $200,000 is in the pipeline. This covers his operational costs during the development of the machine, including salary for his employees, and upon delivery of the machine he's able to pay off the credit that was extended to him.

Take away his line of credit, and it suddenly becomes very difficult for him to do business. He has several options: He can increase the cost of his machines, or he can demand more money up front to cover his production expenses. Both reduce his customer base, because both increase the risk and cost to his customers. Further suppose that his customers are having the same problems getting credit. This increases their risk further. Not having the resources to fund the business himself during the entire production cycle, he's left with few options but to lay off workers or cease production entirely.

This is an extreme example, but it illustrates an important point. Many small businesses are dependent upon the availability of reasonably priced credit to smooth out bumps in their cash flow. We are not speaking here of businesses taking credit irresponsibly or spending unwisely, but simply businesses that require the ability to borrow in the short term against future earnings, in order to cover costs. So in this sense, yes, credit is required for the economy to function - especially for small business which lack large cash reserves. Such businesses are a big part of the economy, and when they start failing simply due to credit availability, we have a very serious problem.

[NightWatcher]

18. which is worse, a lack of credit or a lack of faith in the economy?

When interest rates are around 0, I think that more people and countries will be scared of buying dollars because they fear not getting paid back or having the dollars be worthless should they ever get paid back.

[bstender]

20. credit

contrary to official obfuscation, the 'credit crunch' is a necessary reckoning of the overextension of credit. it's no different than when anyone gets too far into debt, they have to stop, retrench, cutback and save for a while. the official obfuscation would have us believe that borrowing a few trillion from our kids to wipe out the largest debts of the most important players will magically make this problem go away, but math doesnt work that way. we are being screwed over again, sorry to say. (but who is surprised, really) sadly, Obama is a major cheerleader for this policy. AND he knows better too, don't kid yourselves. do you really think a reformer would be allowed to take the oath of office? (don't kid yourself, this is BIG money at stake)

we have only ourselves to take care of OUR interests, as always.

[Cessna Invesco Palin]

22. Hmm...

do you really think a reformer would be allowed to take the oath of office?

So who or what organization or group of people installed Obama, do you think?

[bstender]

24. "allowed" Obama

no group 'installs' a president. we have a system whereby two corporate controlled parties present a candidate who has been vetted well in advance as being in line with the corporate agenda. that is not to say that there is a monolithic agenda, but there are certain litmus tests along the way that if failed, will sink a candidate due to the opposition one or the other special interest can bring to bear.

let's say some candidate, like Obama for instance, wished to promote something glaringly obviously in the best interest of the USA, like single-payer health care for instance, or say, a balanced approach to Middle East policy. that candidate would not advance to the nomination due to an immediate black-balling by the corporate media and the loss of all-important funding. if for some reason an opposition candidate's popular message nevertheless persisted in gaining traction and they were to gain success in the primaries and they eventually held some vague chance of winning as an independent candidate, they would simply be assassinated by any number of special interests that stand to be destroyed by a change in policy. obvious mega-interests that would not go quietly include health care, military-industrial, prison-industrial, energy, Israel...and of course, the capitalist/imperialist program in general centered on Wall St. have shown their importance as Obama and McCain fell over themselves to support their bailout. the people be damned.

to be sure, Obama is much easier on the eyes and ears, but he has fallen in line with the status quo 100% in action, and mostly in words as well.

[killbotfactory]

23. It might after a long, painful adjustment

Our way of life is ridiculously unsustainable as it is, we can either start scaling back and adjusting how our economy works or keep propping it up until it all comes crashing down when we hit the limits of the Earth's natural resources.