Credit culture

The crisis that has pushed the American financial system to the brink of disaster is spawning its own moral economy.  The new object of fixation is blame-worthiness, rather than credit-worthiness.

The high-flying executives on Wall Street who invented those ingenious financial instruments known as “derivatives” are being singled out for special flogging.  Not too long ago, they were the celebrated and highly compensated geniuses of the US economy. Today, there is not a corner in hell that seems punitive enough for them, no penalty that can conceivably equal the magnitude of their greed and recklessness.

But this blame game is ultimately a futile exercise.  It’s like blaming culture for the way people are.  It may be morally gratifying, and perhaps even politically unavoidable. But it brings Americans no closer to understanding the complexity of their highly-leveraged economy. Credit is not just the lifeblood of the US economy; it is its heart and soul.  It is the only way Americans do business.  In such an economy, one’s credit record is all that is needed to open doors.  It is the center of gravity of one’s identity in the larger society.

A foreigner visiting the US for the first time will not fail to note the centrality of credit in everyday transactions.  Hardly anyone pays with cash, except for the smallest purchases.  If someone forks out a hundred dollar bill to pay for a cup of coffee, as Filipino tourists are sometimes wont to do, the cashier will likely take a second look at him and at his money.  In this economy, the use of a credit card or even a check to pay for a meal at MacDonald’s is the most normal thing in the world.

In hierarchical Philippine society, we measure a person’s worth by his family background, his educational attainment, his profession, his connections, and visible wealth.  In less hierarchical America, a person’s worth is roughly equivalent to what he can borrow from a bank, or how much he can buy on credit.  It is one’s credit standing that matters; it is the measure of almost everything else that is regarded as valuable.  It attests to a person’s capacity to pay back, which is all that is important.  If one habitually pays with cash, there is no way he can build a credit history, the most important basis of economic identity, and one’s principal claim to citizenship in the market.

Credit cards and housing loans are the two most important indices of the average American’s economic standing.  It is fairly easy to get a credit card, but also quite easy to lose it if you do not meet the minimum monthly payments. But housing loans used to be different – a steady and adequate income was required to access them.  It wasn’t until the early 1990s that the dream of owning a house became possible for almost every American family, notably for those whose incomes did not normally qualify them for such loans.  Thus were subprime mortgages born. They were hailed as democratic, rather than devious; equitable rather than exploitative.

It was the time of the economic bubble.  Banks and other financial institutions were awash with money that needed to make more money.  And so they started giving out loans with little regard for the risks of not being paid back.  They were focused on interest payments.   Borrowers who were enticed with initially low interest payments found themselves trapped in schemes that carried adjustable interest rates and high penalties for pre-payment.  But the spiraling housing demand drove prices through the roof and gave homeowners the assurance that what they were paying out was more than offset by the rising market value of their homes.

It is an aspect of the inventiveness of finance capitalism that when the subprime housing mortgages began to turn sour, the investment houses, instead of being alarmed, bundled these mortgages with credit card debts and sold them as mortgaged-back securities.  There was a time when responsible borrowers, still the majority, were seduced with offers to re-finance their mortgages.  This meant borrowing more money against the equity they already paid, money they could use to upgrade to a bigger home, or to buy a new car or go on an expensive holiday.  These were offers that were too good to ignore, and they were perfectly consistent with the entire logic of the American way of life.

I remember how my US-based sisters and their husbands carefully calculated the benefits of having money to invest in the Philippines against the risks of refinancing under new adjustable repayment terms.  They were not alone.  Many Filipinos took the money and bought properties in the Philippines, instead of moving into a bigger home or buying an additional car.  But many others were not as conservative.  The more access they had to borrowed money, the freer their spending habits became.  Surely, they must accept some blame, and they are paying for it.  But it’s not entirely their fault.  They are after all only a small part of a system that has created a reality so complex that it spins one contingent state after another, rendering its self-stabilizing operations totally useless.  It is an amazing time.

One good thing that I see in all this for us in the Philippines is that it will finally put a stop, hopefully permanently, to local banks’ annoying practice of issuing unsolicited credit cards in order to spur credit spending.  A consumerist culture driven by credit is the last thing we need in these times.

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