Americans have a long, sordid history with borrowed money. In Collateral Damaged: The Marketing of Consumer Debt to America, Charles Geisst, a professor of finance at Manhattan College, takes us through the centuries to explain how we wound up at our most recent””and spectacular””credit bubble. TIME’s Barbara Kiviat spoke with him.
You write that one of the major myths about American society is that we used to be prudent with our money and only recently did we go astray. What’s the real history?
Americans are speculative people. During and after the Civil War, for instance, there was a lot of stock market and commodities speculation””people trying to make a quick buck. But it was only when financial institutions picked up on that and provided the methods whereby you could buy now and pay later””that very simple concept””that things started to change structurally. Now Americans are more highly leveraged than they were in the past.
Which makes our most recent downturn worse?
Yes, absolutely. We’re out of proportion with our amount of personal debt. A good number of people are in debt to the point where they may not ever be able to pay their way out.
[i]I think everyone should have access to credit in a very strict proportion to their income—not a future projection of their income, which is what we’ve been doing. It’s been, “I’m now making $50,000 but in a few years I’ll be making $150,000, so no big deal, let’s go buy an expensive house now.” This whole business of giving more credit than a person can service is not only foolish, [b]but if you tried to do that 200 or 300 years ago, it would have been considered immoral as well.[/b] We don’t think that way anymore, but essentially it is, because that person is going to be in debt forever.[/i]
Now there’s an interesting thought!
I wonder, incidentally, what this would mean for education loans? Would most Humanities subjects cease to be funded this way beyond the BA?
[blockquote]”I think everyone should have access to credit in a very strict proportion to their income—not a future projection of their income, which is what we’ve been doing.”[/blockquote]
[blockquote]I wonder, incidentally, what this would mean for education loans?[/blockquote]
It would mean no education loans for anyone, at least not for full-time students who don’t have a job/income on the basis of which to get credit. The vast majority of undergrads, regardless of field, don’t have the CURRENT income to justify credit sufficient to cover tuition. The same is true for graduates in medical, business, and law schools: the entire justification for education lending is the projected future income.
If all lending were based on current income rahter than future income, there would be no education loans to speak of.