CREDIT, CONFIDENCE AND CONSENSUS
By Avi Davis

As a young boy, it didn’t take me long to learn the value of currency. A devoted collector of toy soldiers, I knew that 5 cents could buy a cowboy and 10 cents, a Revolutionary War soldier. For weeks I would hoard my 20 cent (AUS) allowance – a gratuity from my father offered for various acts of servitude performed in our home garden over the weekend. That 20 cent piece felt and looked like real money - weighty, shiny and always making a euphonic clink whenever it was plunked down among all the other coins at the bottom of the piggy bank. But it also represented something very real - a tangible token that could be exchanged in the pleasurable process of acquiring ownership.

You can imagine my shock then, at the age of eight, when introduced for the first time to a dollar bill. This dollar bill, in my boyish experience, had very little to recommend it. Flat, green and oblong, it could not compare with my 20 cent coins. And when my father explained that this odd looking piece of paper actually represented five times the worth of my treasured 20 cent coins, I was dumbfounded. How, I asked, could a mere piece of paper, almost weightless, with no shine nor engraving, be worth more than those precious discs. I was deeply skeptical.

At a very young age we learn that monetary value is not dependent on size, weight or luster. As we pass through our teens, we discover that not only do dollars carry monetary value, but that other odd devices - checks and rectangular pieces of plastic which don’t have any inherent value in themselves - offer access to that value. Adulthood introduces us to a dizzying array of monetary vehicles – from stocks (whose certificates we rarely ever see) to futures to commercial paper, none of whom make that same clink at the bottom of the piggy bank. They all represent purported value relying for their existence and their credibility on the notion, not of absolute value, but of a promise by someone to pay someone else at some point in the future.

That promise to pay, otherwise known as credit, is in fact the sea on which the world’s monetary system floats. For not only do banks lend to their individual customers but continuous liquidity demands that small banks loan from large banks and large banks loan from even larger financial institutions. Nearly 75% of all consumer purchases in the United States are conducted by some system of credit and nearly 100% of consumer loans are conducted in the same way. This had led to the development of an international monetary system which has grown increasingly removed from the tactile world of coins and dollars and today exists as a fabricated system of promises and expectations dependent on goodwill and good conscience.

Yet more than goodwill and good conscience there remains one element that buoys this system and keeps it from spinning into collapse. Confidence. Confidence that consumers, when using their credit cards, will eventually repay the credit card companies and banking institutions for the privilege of not having to use copious amounts of dollars and coins; Confidence that homeowners, who borrow money to purchase a property will eventually repay their lenders both principal and interest; Confidence that investments will grow and multiply; Confidence that even when there is a default on those investments, large insurers will make ready substantial funds to cover the shortfall.

It is the erosion of this vital element in our system, more than any other factor, which has shaken the world’s financial markets in the past two weeks. Simply put , there were too many lenders providing loans to too many people who had either no intention or no ability to repay them. Lax government regulation and the determination of successive administrations to ensure home ownership to all working Americans, had created a climate where credit became so accessible that millions of Americans found themselves owning homes they could not afford. The level of default on sub-prime mortgages has been so staggering that it is being referred to as the greatest housing collapse in American history. Confidence is the system has been deeply affected.

It is almost de riguer these days to blame Wall Street greed and lax government regulation for the series of financial crises which have overcome the American economy in the past several months. But there is another culprit who has not received much attention nor anything near the same level of opprobrium – the American consumer himself. This individual, riding the crest of a more than twenty year economic boom has become so accustomed to easy credit, that he has almost come to see large amounts of it as one of his constitutional rights. Such a view was reinforced by the government’s funding of government service enterprises such as Fannie Mae and Freddie Mac, two companies which were specifically designed to make it possible for large groups of Americans to own their own homes. With so many people whispering in his ear to take the money and run, the American consumer simply jettisoned common sense and gave in to his own greedy inclinations.

The idea that we all deserve easy access to credit is a piece with the general collapse of individual responsibility which hampers the vigorous growth of our own democracy. Since the 1970s, the sense that our entitlements outweigh our duties and responsibilities has been a feature of not only of American democracy, but of democracies around the world. The American citizen, much like his counterpart in the Europe, no longer places much emphasis on his duties, role or responsibilities as a citizen, but instead demands that the State protect and advance his individual rights and assure his social and economic wellbeing. But the focus on the individual at the expense of the greater public good has allowed greed to overcome good sense and selfishness to compromise social cohesion. This remains one of the gravest challenges and threats to continuity of Western democracy.

Years ago I scissored all my credit cards and began relying solely on a debit card - where money would be withdrawn directly from my banking account and I would thereby not owe anyone anything. For I, too, had been seduced by access to easy credit, thinking that the true pay day for my extravagant lifestyle could be shunted off to a distant future. I was wrong and was made to pay for it. My debt was modest but it is easy to imagine that millions of others gave in to the siren song of the banking and credit industries – with disastrous results, not only for themselves, but the country as well.

As of this writing economic catastrophe may well have been averted by the approval of the government’s bail out proposal of $700 billion. A consensus in Congress has ultimately been reached on the idea that where private enterprise fails so atrociously as to threaten the economic well being of the entire nation, then government has no option but to step in and lend a hand. The legislation, of course, flies in the face of conservative resistance to overt government interference in the economy and liberal fears of an all powerful executive dictating economic policy. But there it is- the payback for years of self involvement and abdication of social responsibility.

The real disaster will occur if none of the lessons of the past twenty years have been learned and the American consumer reverts to his careless, spendthrift ways. A severely tightened credit market may offer a brake on this possibility. But as for me, I can still hear the clink and the jangle of those 20 cent pieces in my childhood piggy bank and have to wonder whether real value and real money will soon begin to re-assert its role in our lives.

The Western Word - An International Weekly Digest   10-3-2008