Joan McCullough on the credit bubble

If it were not for an unrealistically stretched-out car payment schedule (unrealistic in terms of balance outstanding vs. depreciation of the underlying asset) would a $50k per annum couple even be thinking about a $16k car? Not on your life. Come to think of it, if enough $50k per annum families said "no way, Jose" to a $16k used car, what do you think would happen to the price, eh? Right. If that zero-down, option payment, 80/20 mortgage were not available, do you think Joe Schmo would have signed on the dotted line for 6x his gross income for 4 walls and a roof? Right. But given the terms, Joe was a glorified renter and had nothin' to lose. So he took a shot. Unfortunately, Joe crapped out early in the game. Sayonara, Joe.

The point here is that the credit gimmicks that entrapped so many Americans simultaneously supported prices bubbles. And the insidiousness of this credit-gimmick tack is underscored by the fact that nobody complained about the price of a new car being equal to or a multiple of one's yearly income. Or that home, even a starter home, had run up to a frightening multiple of same. As long as the monthly nut was kept palatable and the credit spigot in the permanent "on" position, all was well on Main St., USA.

How do we stop the madness then? The answer is to break the back of the bubble once and for all by taking away the props and letting the market price the assets accordingly. Given the tightening of loan standards and the actions being taken by the credit card issuers, the process has already begun. What's troublesome, though, is that the government is interfering. Why are they hell-bent on throwing good money (ours) after bad?

Because they are serial MANIPULATORS. While the price of homes, for example, has been escalating out of control, they turned a blind eye to the credit abuses that were rampant on their watch with a view towards allowing the game to continue.

~ Joan McCullough, East Shore Partners, Morning Comment, February 19, 2008