Wednesday, December 19, 2007

Debt At All Levels

From Roxie of Independence Lost

Household finances are in a similar, sad shape. From this editorial by Mortimer Zuckerman, editor-in-chief of U.S. News & World Report:
Yes, there are weapons of mass destruction. They are "financial weapons of mass destruction," to quote the famous investor Warren Buffett as he surveyed the morning-after wreckage of the subprime mortgage lending crisis. The continuing destruction can now be called a credit crisis—a significant escalation because credit has been the high-octane fuel powering the American economy for the past half dozen years.


People and companies are trying to cope with the debt accumulated during several years of profligate lending and spending. The real danger from a credit crunch is that everyone, from banks to corporations to households, may retrench simultaneously.
Read the entire article,"The Credit Crisis Grows," in which Mr. Zuckerman explains the vicious cyle in which our nation is enmeshed.

What remedies can be applied? Mr. Zuckerman opines as follows:
What should our economic policy be? The Federal Reserve must get ahead of the curve. Its priority must be to maintain the viability of the credit system and the flow of credit; our postmodern economy is dependent on an ongoing flow of credit.
A start—and it is no more than that—is the proposed federal effort to help the mortgage industry deal with subprime mortgages....
I have a problem with the idea of bailing out in-trouble home buyers who should have read the fine print on the mortage documents they signed and had the financial wisdom to curtail their spending. Who's going to pick up the tab of this bailout? The banks? Such a move penalized savers by proxy. The government? The government has no money except for what the government takes from the taxpayers' pockets? Yes, I feel sorry for all those whose homes are on the line. But what about those of us who have been following sound economic policies in our financial lives? Does our frugality count for nothing?

A nation cannot continue to run in the red. Neither can a household. Nevertheless, Americans today seem to think that the most basic rules of finance don't apply and turn to the government to solve their problems for them. Mistake — huge mistake.

The time comes for insolvency. Living beyond one's means cannot continue forever. Furthermore, government intervention at the personal level of financial management will only serve to increase taxes and to promote nanny state.

At the end of his editorial, Mr. Zuckerman concludes with the following:
The collapse of values and the risks of the credit squeeze are the worst since the Great Depression. We are going to put the economy's resilience to a severe test.
As I see it, America may fail the test, thus no longer being a world leader in economic power. Then what?

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posted by Always On Watch @ 12/19/2007 07:23:00 AM