If there is one thing the ongoing financial crisis demonstrates, it is the need for fiscal discipline. The causes of the crisis call attention to the more problematic characteristics of debt. At the same time, the prospect of bank failures and the curtailing of lending highlight the degree to which debt has a legitimate and important financial role to play. In short, debt incurred to finance investment is often justifiable; debt used to finance consumption is unsustainable.
Perhaps a healthy cultural outcome of the crisis would be the re-stigmatization of debt as a means of accelerating consumption. By all means, it is important for people to be able to access financing in order to fund education and other forms of investment. What is worrisome is the tendency towards low or even negative net savings, as well as taking on debt of an especially pernicious sort: on credit cards. Taking responsibility and making informed choices remains necessary, even if governments choose to regulate financial markets more closely.
People with a clean credit history who are paying credit card interest really ought to look into alternative financing options. Credit card interest rates are often around 20% per year, and minimum monthly payment amounts are just 2% of the outstanding total. That means your debt is growing by 1.67% per month, and you are paying it down by just 2%. The amount of principal being paid off each month is tiny.
Someone who put $1000 on a card with 20% interest, then proceeded to make minimum payments only, would have the debt down to $500 after 210 months (17.5 years), having paid $3043. Sticking to minimum payments, there is still $40 left after 1000 months (83 years), by which time the person would have paid $5838. The credit card company would be delighted for them to keep paying forever. Just by paying off 10% of the balance each month, instead of 2%, the time taken to reduce the debt to $50 becomes 36 months (3 years), at a total cost of $1148.
Both borrowing and lending are activities that need to be undertaken with wisdom and restraint. Hopefully, that will be the message that governments and individuals draw from the world’s present economic woes.