In the 1940s, 50s, and 60s, before credit cards became omnipresent in the U.S., Americans purchased only what they could afford. Consequently, if someone paid cash when dining out or even for their first home, others weren’t surprised.
But, with the advent of credit—credit cards, car loans, mortgages, and other funds extended by banks and other institutions—Americans started purchasing whatever they could. So, if a bank qualified an individual whose had a modest salary for a $500,000 home, that person would probably buy a home that cost that much, even if that was more than his family needed. Or, if a recent college graduate had a credit card whose limit was several thousand dollars, he would make purchases up to that amount.
Beyond tax cuts for the wealthy, the Bush administration’s principal economic policy involved encouraging Americans—whether they could afford to do so or not—to buy homes in order to get their piece of the “American Dream.” At the same time, banks and other creditors loosened their lending requirements, and as a result, billions of dollars of mortgages were written that never should have been put on the books. In turn, investment banks bought these risky “subprime” mortgages, packaged them into exotic financial instruments, and sold them to investors around the world.
While home prices continued to rise, many Americans used their homes as “piggy banks,” continually refinancing, taking equity from their homes, obtaining new lines of credit, or sometimes, all of these actions. In a nonstop spending spree, millions of Americans bought cars, boats, and other items, much of which was unnecessary or excessive.
Like many things that are too good to be true, the housing and credit markets eventually collapsed. During 2009, many people have lost their homes through foreclosure or will do so in the near future. Unfortunately, some who bought homes during this period have subsequently lost their jobs and, therefore, cannot qualify for conventional fixed rate mortgages.
In addition to their mortgage debt, many have crushing levels of credit card debt. Suze Orman, a popular financial expert, regularly advises Americans to eliminate their credit card debt, curb their spending, and save for both a “rainy day” and retirement. Many callers to her show have hundreds of thousands of combined mortgage, credit card, and student loan debt. Even so, a still popular feature of her TV program involves callers asking Suze whether they can afford to buy an item, including a young couple wanting to buy a $10,000 swing set for their children, a recent graduate seeking to spend $3000 on a trip to France to watch a sports event, or a middle-aged man desiring to purchase an expensive sports car. It’s amazing that individuals who already have so much debt want to take on even more.
There are several possible reasons why Americans routinely bought more than they could afford and, as a result, ended up using credit to make such purchases. Evidently, lax credit standards, a tendency to use credit cards when paying in cash would be better, and keeping up with one’s neighbors all contributed to the current housing collapse and, for some, personal financial disaster. But, many Americans—whether in their 20s, 30s, 40s, or 50s—became accustomed to buying virtually whatever they wanted whenever they wanted to do so. A habit like that is hard to break.
Perhaps the one bright spot of the current economic recession is that at least some Americans will recognize that buying more than you can really afford, especially by using credit, isn’t a prudent approach and can result in your losing your home and possessions, damaging your credit rating, and even making it difficult to get a new job if you lose the one you have. And as they cut back, Americans may also learn that money and things don’t buy happiness. As Suze Orman repeatedly tells viewers, “I want you to remember one thing…it’s people first, then money, then things….”