Our economy relies on people spending beyond their means. If Americans as a whole suddenly discovered Dave Ramsey and began reducing our spending on non-essentials and paying down our debts, entire sectors of the economy would be wiped out, sending the country into a paralyzing recession. Perversely, individual prudence would lead to general calamity.
On the other hand, persistent overspending only works when interest rates remain low and the economy grows faster than our debts. As we see today, persistent overspending makes the economy more brittle; hidden stresses accumulate until they can no longer be papered over with the credit cards, and then things go very bad very quickly.
How can we alleviate the problem? There are many answers, each of which attacks one part of the problem; but one part of the whole has to be replacing high-cost debt with lower-cost debt—in other words, finding ways to make debt less risky to the lender, and then deploying these strategies in the marketplace wholesale.
A tall order indeed, in this era of inflation. But inflation, by itself, does not explain payday loans that charge annualized fees of a thousand percent per year to the poorest and most vulnerable borrowers. It does not even explain credit cards charging 30% or 35% per year. To me, such numbers represent a big fat bullseye on the backs of incumbent lenders. Savvy entrepreneurs can find opportunities to provide credit at lower cost to more people, if they attack the problem creatively.
Finance should help people. It should not immiserate them. And when it does, we have the chance to make things better.
Oren Litwin LLC 