Secure Marketspace with Mike D'Agostino

Credit Crisis as a Segue to a New Financial Model

When I applied for a mortgage a few years ago, I was offered something outrageous. I've always worked, and I think financially I am a stand-up citizen. However, if I were to use the full extent of the mortgage I was offered, I don't think I would have been able to pay it off under normal, reasonable terms. Even with the stronger market at the time.

And so when I think about what credit is -- in a general sense, an estimate of what I should be able to pay back in a certain amount of time -- it is essentially giving me money that I don't really have. There is no guarantee that I will pay it back. Credit is very important, and there is no reason why people in America shouldn't be given the opportunity to prove they are reliable and thus have access to items they will eventually pay for. However, it seems at the root of the issue is that people received credit too liberally. Ultimately, they did not deserve it, nor was there reason to believe they could pay it back.

The concept of physical cash, an immediate exchange of total perceived value, is going away. 

Let's all accept it: Most of us have access to money that we don't really have. Imagine if everyone with a credit card took out the maximum cash advance possible. Would credit card companies handle it? Where would that physical cash come from?

What's going on here is that credit is starting to phase out physical cash, often to a degree that it only matters what your incremental payments become toward the overall (what seems to be sometimes fictional) total. I think here is the stage where physical cash starts to become obsolete. Not physical assets, rather the face value of actual physical bills and coins, and ultimately what someone's total worth amounts to.

The potential exists for a completely different view of what "net worth" means. Instead of a physical asset having a total cost associated with it, perhaps it has a cost that is attached to your incremental payments. Your net worth doesn't indicate how much total money all your assets are worth, but rather your ability to make monthly (or whatever the duration) payments. In effect, isn't that what credit measures? If more and more people are living off of credit and their ability to make monthly payments, why is cash important?

To be blunt, I see this actually as a movement to complete electronic currency and a fundamental shift in what currency means. I heard it described the other day that the American public should not be worried about where the physical money is coming from that the Treasury is injecting into AIG and other entities in the news right now. They create money, they will not run out. The face value of the money they create may decrease, however they can always create money. At what point does the amount of physical money being created really matter?

I don't think any business selling any product is looking at the actual grand total. They are only interested in ensuring there is some kind of cash flow going on, that payments and efforts are being made toward the goal. The concept of physical cash, an immediate exchange of total perceived value, is going away. All that matters is your ability to make a monthly payment.

It may be far-fetched to believe that our current financial state in the United States, and the world for that matter, will lead to a total electronic currency in the near future (could you imagine the authentication system needed to administer that?!). However it is clear that everyone is relying more and more on credit to purchase items they cannot pay for, in cash, all at once at that exact moment in time. A better system to measure one's ability to contribute the maximum payment over a certain duration is severely needed.

I don't see a system based on actual physical assets coexisting with a system based on credit and somewhat fictitious net worth. Looking back, it seems like the moment our physical cash lost its actual value was the moment we started transitioning to a completely credit-based and eventual electronic currency.

Question: What can banks and credit unions do to help ease the current credit crisis in America?



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