Financial Distress and How to Deal with it

I awoke this morning thinking about the challenging times we're living through. My mind was brought back to a finance professor I had at Baylor while getting my masters degrees. He promoted an approach to financial matters which still amazes me. He fully planned on maxing out every line of credit available to he and his wife. His explanation was that by using credit, it caused the economy to grow. He planned on leaving his maxed out credit cards, double or triple mortgaged house, and other lines of credit to his children.

It is true, there are financial theories which suggest borrowing money actually creates money in an economy. However, I think it is taking this type of thinking to the extreme which has placed the country in the tough spot we now find ourselves in. The big assumption is that you know what the loan is worth and that it will be repaid. So lending money to some parts of the economy is not always wise. For instance the part of the economy which cannot repay their loans or should not be in houses they cannot afford!

From a different angle, Shawnie keeps pointing out that the cause of the crisis is tied to the idea of buy now, pay later. I agree. We've gone to the extreme of buying everything now and paying for everything later. The local furniture ads epitomize this...buy today, no interest or payments until 2010! Why is this a good idea? (Oh yeah, fine print. They get you either way.)

So why would you buy a computer, couch, appliances, clothes, dinner/groceries, or other small to moderate purchases on credit? OK, maybe my professor was right, you add money to the economy. YOU pay double for the items. The price of the item plus the added interest YOU pay for borrowing the money.

So, how else could we fix this crisis? Washington and Wall Street cannot fix it on their own. I suggest we start by paying the interest to ourselves. If you are going to spend the interest anyway, why not pay the interest and the price of the item to yourself first. Sit down with a friend or family member and 'buy' the item. Figure out your payments and set a delivery date to when the payments are paid in full. Then you can put the interest you save to pay for the next item you want to purchase OR shorten the payment schedule and buy the new item in full sooner than you could by going into debt!

So is this crisis as bad as the Depression. It could be. It all depends on how it is handled by us individually, the big-wigs in positions of power, and the world. The one bright note is the fact that when the US banks begin to fail and stock values drop, people move their money to the safest bonds available, US Treasuries. Generally these bond measures are used by the US government to build roads and pay for other federally funded initiatives. In the case of the latest crisis, the government is using the money to act like a big bank and bail out the financial institutions. The fundamentals are sound, the business cycle will swing the other direction at some point what is between here and there is the million dollar question.