Hacker News Reader

Comment by hohlecow | Hacker News Reader

At the risk of being a hypocrite (mortgage, student loans), why not eliminate credit? Can't afford a $200,000 house or $20,000 car without credit? Guess what, no one else can either. Prices of those goods would fall back to reasonable levels. Can't afford cable, data plan, or fancy clothes? Guess what, you don't need those things, so learn to live without them.

What good has credit brought the individual? Inflated prices, slavery to debt. What good has that done for corporations, banks and governments? Trillions worth of good. (Not saying that corporations, banks, and governments are bad, just pointing out that they are the winner with regards to credit.)

I realize prohibiting credit instantly would be a huge jolt to the system, but wouldn't it prevent similar problems in the future?

View on HN

I think this ia a bit naive. Some kind of credit's required to get through the ups and downs of the normal business cycle. Otherwise, "gee, can't make payroll in the last week of a quarter, whack the staff and rehire them in 3 weeks..." Many historians argue that an organized financial market (England, Holland) enabled rapid economic growth and resulting political growth.

Yeah, credit used badly is a problem, but used correctly or well it's grease for the system.

> Some kind of credit's required to get through the ups and downs of the normal business cycle

Isn't that what cash reserves are for?

If there is no credit, is there any loans? If there are no loans, there's no income from "cash reserves" - how can you pay anything if you're unable to make money from the deposits people have given you?

I think you'll have a different argument and a different result if you wish credit CARDS to go away, rather than credit. If you had to go into somebody's office and sign forms, etc, then you'd think twice about charging the next latte...

As I recall, credit cards came from the revolving credit various stores started at some point in the past. They've grown a bit in use and scope since then :-).

If there are no loans how to do you start the business to make the cash reserves? If there are no loans how do people get an education when they can't afford one? If there are no loans how do people get to work before they have a car to save up enough cash to buy a car?

All these things were done before massive consumer debt, and people with enough self discipline are continuing to do them now.

> how to do you start the business to make the cash reserves?

Not all businesses have this luxury, but fortunately for most of us software has an extremely low startup cost. Start with what you can afford and expand as you can afford it.

> how do people get an education when they can't afford one? My wife payed $0 for her undergrad degree by getting good grades. Her second Masters was essentially covered by her employer. I payed $4,000 for a Masters in CS by working my tail off while I went to school.

> how do people get to work before they have a car to save up enough cash to buy a car?

Take the bus, slug (if its available in your community), ride a bike, or put some walking shoes on. I work with several engineers who are humble enough to ride their bikes to work. I have a neighbor who walks to work every day. Put away your money and before you know it you can buy a car. The concept of savings is really not that absurd.

I suppose it would prevent similar problems, much like having one's mouth sewn shut would prevent food poisoning.

Credit applied properly is beneficial. An individual earns enough over several years to purchase a house; without credit, they would have to wait those years before buying it, whereas with credit they can use the house while they pay for it (at a modest premium).

The economy is more efficient if people are able to adjust the timing of when they consume an item versus when they pay for it; saving allows them to use it later, credit allows them to use it earlier.

If we didn't have credit, we'd simply develop less-efficient replacements. For instance, children would simply borrow from their parents instead of from a bank to get a house. This concentrates risk and doesn't allow for economies of scale.

But when a child borrows from their parents, the burden is confined to that family and the object is already paid for. No outside burden is placed on the family.

It appears apparent to me that the typical American cannot handle credit properly. When they are given unlimited borrowing potential, they will not stop themselves when appropriate, especially when the lenders suggest they have the capacity to borrow more.

> The economy is more efficient if people are able to adjust the timing of when they consume an item versus when they pay for it...

Do you have a reference for this?

And if your parents don't have enough money you are what? Fucked?

The majority of people can't handle credit? Where do you come up with that? Certaintly a good percentage can't handle credit, but some percentage of the people in college go on to be alcoholics and the rest don't binge drink that way.

The real solution is to just make it harder for irresponsible people to get a loan. You should have to put 20% down on a house, not 0. You should have to prove income, you should have to have a good credit score. You shouldn't punish me by saying no loans just because my parents couldn't pay for college when today I have my loans paid off and I'm almost to a 20% down payment and I have no credit card debt anymore, but all of that debt enabled me to get where I am today.

Maybe you're missing the bigger picture: no one would have enough money at today's prices. College costs would have to come down because very few people can afford to pay for school. House prices would have to come down because no one could afford them.

In the 1940s people didn't take out home loans like they do today, and home prices were significantly lower. In 2000, people were paying 4 times the adjusted price of a home was according to census.gov (http://www.census.gov/hhes/www/housing/census/historic/value...).

> The majority of people can't handle credit.

I stand by that. The average debt of credit card holders is over $16,000 dollars (excluding mortgage) (http://www.creditcards.com/credit-card-news/credit-card-indu...). 55% of Americans with credit cards don't pay off their balance monthly. That's the majority of credit card holders who can't handle credit, and I doubt they have $16,000 around the pay off their balance. According to NYT (http://www.nytimes.com/interactive/2008/07/20/business/20deb...) the American's will save, on average, $392 this year. How are you supposed to repay $16,000 in debt when you can only save $392 per year? It would take 40 years assuming interest wasn't collected on the principal amount.

Your idea is horrifyingly out of touch with economic realities that it is laughable to say I'm out of touch with the big picture. I understand that people have credit card debt but to say no debt allowed in the country at all is just plain stupid.

You are basically arguing that massive across the board deflation of every good in the country and literaly putting every single person underwater on their mortgage is a GOOD thing. If house prices have to fall to the levels you want, everyone who owns a home now would lose so much money that the great depression would look like a cakewalk. Nearly every person with a mortgage would be bankrupt.

So this grand idea is to prevent a repeat of this temporary 50% reduction in our investments due to 5% of the people in the country defaulting on their mortgage? What?

Not to mention anyone that has a pile of cash today (i.e. those that are old enough to have paid off a mortgage and had the advantage of credit in their youth) would be able to outspend everyone else. So we would become a society where inheriting your parents wealth would out weight anything else you can do. Sounds very American.

Your idea is horrifyingly out of touch with economic realities that it is laughable to say I'm out of touch with the big picture.

Usually it worries me when users say such harsh things to one another, but in this case krschultz is right. This whole thread is surreal. Economies need debt to function.

There are good arguments for strong property rights in Latin America for the primary purpose of allowing millions to leverage ownership with debt to finance new ventures. http://bit.ly/DeSoto

I'm not quite so extreme as Hohle, but I'd really like to see some reduction in the use of consumer credit.

The way my econ classes normally explained credit went like this: You have a businessman or entrepreneur who spots an opportunity where, if he just had a little money now, he could make more money in the future. So he takes out a loan, makes the investment, reaps the profit, and then pays the interest on the loan (and the principal, eventually) out of those profits. It only makes economic sense to take out that loan if you can expect to make more in additional profits than the cost of capital.

Consumer credit throws a giant whoopee cushion into that system, because here people are taking out loans with no expectation of making a profit from them. They just see "free money!" and don't realize that they end up paying far more in the long run. The result is a sort of neo-feudalism, where the credit card companies "own" their customers because of their spendthrift ways, and then extract "rents" (interest) on the money owed them. The additional cash in the system drives up prices, even for people who don't max out their credit cards, and so they either suffer reduced living standards or have to take out debt of their own to compete.

And many consumers don't even intend to pay back the principal. They just keep maxing out their cards as long as the credit card companies will let them. The companies figure a certain portion of customers will default, and build that into the interest rate they charge. But that makes the system highly unstable, because if default rates edge up, they're not just out the interest, they're out the accumulated principal as well.

I think the debt-based economic system today is sick. It's basically a big Ponzi scheme, and it's bound to collapse eventually. I don't think credit itself is bad, but when people take out loans with no intention of paying back the principal, it's not credit anymore. It's just economic mayhem.

This is like my personal rule. I try to avoid credit and loan, unless 1) I really need it(emergency etc) 2) it makes me money(eg. a business opportunity 3) its saves me money(eg. house loan(which isn't always the case)).

But most people seem to take credit and loan just because they _want_ something, and just raise their standard of living on money they don't really have, and hurting their future wealth.

Do you have a reference for this?

No I don't, but it seemed logical enough to me. If inter-family credit is the only credit allowed, then for a family to survive financially it cannot merely earn enough money to eventually pay off all expenses -- it must earn and save enough money to pay any expense immediately. (Triplets? They'll be going to college one-at-a-time.)

If each family needs to stockpile more resources to survive, those resources can't be used productively by the rest of the economy.

If credit were eliminated, you'd end up with a situation where the rich own significantly more of the world than they already do. It'd be like going back to medieval times. The rich would be even richer and the poor would end up having to rent from the rich.

What good has credit brought the individual? Inflated prices, slavery to debt.

I don't consider my mortgage to be "slavery." I'd consider having to live in rented accommodation with the crazy restrictions landlords have to be far worse.

Other people consider their auto payment not to be slavery compared to driving a battered old car. I'm not in that camp, but people have the right to feel that way.

Credit has only done good for me. I used it to work through a cashflow slump - if credit were outlawed, I'd have needed to file for bankruptcy as soon as my current account dipped below $0!

I think a distinction needs to be made between credit for consumer expenditures and credit for capital expenditures.

I think that somehow eliminating or reducing the former would be beneficial to society, though I wouldn't advocate force to accomplish it, but the latter is a powerful engine for growth.

Because if we eliminated credit, how would the banks be able to charge ridiculous interest and enrich top ranking exectutives, who would then line the pockets of top ranking government officials, who used to be top ranking executives. The entire ponzi scheme err social order breaks down.

And how you'd handle money creation? And what about UST and bonds? They're loans as well. How you'd finance the govs debt? With taxes?

You have the point, though, that less money would make the assets cheaper. But this is monetary 101.

Credit is just the continuous version of slavery. There's little difference between a literal slave and someone deep in debt with creditors forcibly confiscating their income. Unfortunately the market rewards those who use credit, which encourages a society based on debt rather than one based on widespread assets.

However, this does not mean that credit should or can be prohibited via edict. What will happen is that over time communications technology/market efficiency will progress to the point that anonymous transactions will (once again) make economic sense.

When it once again becomes feasible to transact your life using money (instead of the current identity based "point" system), it will make sense for people to liquidate all sources of credit and laugh as the creditors are unable to collect. When this catches on, the credit system will crumble.

edit: cool - mass downmods for an idea that doesn't mesh with the groupthink du jour. didn't know one had to pay karma to hopefully start a discussion.

Let me guess, you just watched Zeitgeist Movie? Great flick.

Never watched the first one, but I saw the 'Addendum' a while ago and thought it was mild at best. They point out a lot of problems and the history, but their proposed "resource-based economy" solution is just more monolithic authoritarian gobbleygook.

Its good to see someone else who understands the pitfalls of credit. I didn't realize it was such a controversial idea. I figured people smart enough to be on Hacker News were also smart enough to think paying >19% APR is unreasonable. I know where not to look for a CFO in the future ;)

edit i meant to say _un_reasonable

Reply on news.ycombinator.com