When talking about money or personal finance today, it is difficult to avoid the topic of credit. Everyone has it in some form: credit cards, student loans, car loans, and others. Credit has changed society from one that saves to purchase large items, to one that goes into debt to be instantly gratified. However, this is not a problem that is unique to this generation, but a problem that comes and goes with the flow of the market. Post-Industrial Revolution, multiple economic crashes have occurred in America, and many of them can be attributed to consumers’ instant gratification catching up with them. The ebbs and flows of credit seeking have contributed to moral problems in society as well. A large consumer base wanting cheap ways to fulfill their desires instantly gives many people with the ability to supply credit an avenue where they can get rich manipulating other people’s naivety and ignorance. Thus industrialized nations need a proper education in personal finance and an understanding that financial crises not only harm an individual’s property, but the right to property of many individuals in the economy.
Credit is a concept based on a person’s history and how they are perceived by the people surrounding them. As one goes through life, they do things that boost or reduce their reputation. Their ability to meet deadlines, stay organized, and use the money they received to build value were and still are major factors in how society determines whether one person is creditable or not. However, there is a large difference between historical credit and what we have currently. Pre-industrialization, credit was a loan given to people making large purchases to improve land or capital. Farmers were largely the ones who used and received credit. Credit was never used for everyday purchases because that would be wasting the additional money someone else granted them to improve what he had. The shift to credit cards has obviously changed this. Many people use credit for all of their purchases, and pay them off slowly as they can afford it. This switch from financial responsibility and using credit for capital improvements to everyday purchases to “improve my credit score” has negatively affected morality and responsibility in society.
There is a great danger with this shift in how people view credit. People are being irresponsible with their money, and it is negatively impacting the rights of people around them. The most recent example of widespread financial irresponsibility was the financial crisis of 2008. For years, financial firms had been selling the idea created by Salomon Brothers where certain bond investments are loaded with a few good mortgages, but mostly sub-prime mortgages that were expected to fail. Financial firms were giving them great ratings, even though they were largely terrible investments. People bought into this lie, along with the theory that the housing market would never go down. They invested into a housing market by buying multiple mortgages, because they believed that they would have to do nothing to improve the property, and they could sell it for a higher price. This created a housing market that was doomed to fail, since many people had no feasible way of paying off more than one mortgage, let alone five. However, some people bought these properties when they could afford it, and lost their jobs due to the market crash. They lost their houses while being financially responsible because others chose to inflate the market so much that the only possible outcome was a crash.
The movie The Big Short presents a perfect example of people’s rights being negatively impacted due to others’ irresponsibility. In the movie, two friends bought up tons of land in Miami on credit assuming the price would keep growing and they could sell the properties later to pay off the debt and then some. They would rent out the houses they bought to lower income people to make a quick dollar, and use that money to buy more mortgages. One family in particular is shown as just moving in with their recently born child to one of these rental properties. Then, the market crashed, and the brothers had to declare bankruptcy, giving all the properties they bought back to the banks. The families renting out those homes lost their houses, most of which did nothing wrong; in particular, the family with the newborn child was shown at the end of the movie living out of their van. This family suffered greatly due to other people’s financial negligence, and theirs was not the only case. Across the nation, countless people lost their jobs and homes because of other people’s lack of social and financial responsibility. Without a proper understanding of what they were investing in, people bought mortgages and investments from brokers and banks creating a situation where the market was so inflated it could only burst.
Therein lies the problem. Banks were so willing to hand out loans and people were so willing to buy them because they were never taught how to manage their finances correctly. American schools are not teaching the basic fundamentals of finance today, and it is causing this massive influx of credit-seeking with little understanding of the repercussions. Schools teach supply and demand, but disregard the basics of stocks, bonds, IRAs, 401(k)s, and countless other ways to save money in an intelligent way. Without this basic education in finance, America will be doomed to the rapid acceleration and massive crash cycle, regardless of what the Federal Reserve does to control it. Our country needs an education in finance, how to use credit, and what smart investments are, or we will be sheep who follow the poor investment strategy of men who bought their suits on credit just to impress others and “invest their money.” And even though they have been burned before, they will not learn, because the housing market could never go down again. Right?