Credit Card Regulation, Free Markets, and Paying Cash

The Coyote Chronicles challenges Free Marketers to defend deregulation of the credit card industry: 

You can make the argument that people who can’t pay their balances in full every month should not take out a credit card, but thats more than a little disingenuous since we would see a staggering drop in consumer spending if people only spent when they could pay cash. The restaurant and travel industries would suffer immediately. I doubt there would be a Black Friday at all. Don’t even get me started about the car business.

I’ll take a shot at this one.  First of all, Black Friday, car financing, and credit cards themselves are all fairly new concepts.  Somehow, civilization survived before they existed, and suspect it will survive long after they are gone.  The assertion that our economy is propped up by the insane amount of consumer credit that exists currently tells me that we are, as a country, living above our means.  The fact that the savings rate keeps declining while consumer debt continues to rise tells me that we are in denial of this fact.  Government regulation that enables this foolish behavior only delays the inevitable crash that must occur to correct the market and insures with each passing year that the crash will be harder.

What would happen to the economy if people stopped using credit cards and started paying cash?  One thing is for sure.  Every debt free individual would have greatly increased buying power because a higher percentage of his income would be available to purchase goods and services instead of paying interest on the Big Mac Value Meal he bought 4 months ago.

Hat tip to MCB.

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Comments

Back in the old days, there used to be a popular concept called “layaway.” The idea was that you could get a store to put an item aside for you and then make payments until you paid it off. Then, you received the item. There were also “Christmas clubs” where you could save a bit of money from each paycheck so that you’d have a cache of cash to buy Christmas presents. When you used those ideas, you really had a good idea of how much things cost and how much you valued it.

I’m as bad as anyone about using plastic. I always refer to it as getting things for free, since my wife does the checkbook. The only thing that we’re smart about is that we never, ever run a balance on our credit cards.

I remember layaway. I always associate it with a really long line at K-Mart.

I also remember the phrase, “we can’t afford it” being spoken relatively often growing up. That meant that if my parents didn’t have the money (cash) to buy it, it didn’t get bought. We were far from rich, but I never missed a meal or wondered where I was going to sleep at night either. We had it better than lots of other people, partly because not wasting money on things we wanted meant we always had the things we needed

I think there’s a lot of power in that phrase, “we can’t afford it”, even though many of my contemporaries seem to have trouble saying it. Now that I’m all grown up, legally anyway, my own family isn’t what I would consider rich, but we’re a long way from poor.

Our ability to use the phrase “we can’t afford it” helps us make sure we don’t end up poor.

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