Don't Worry, Your Credit Isn't Going Anywhere, Unfortunately

Today, I offered a rather controversial idea as The Atlantic's "Idea of the Day": Criminalize Credit. Since it has already provoked so much interest and anger emotion, I wanted to follow up on a few points. First, it's not as outlandish as it sounds. Second, it could actually make for a healthier economy. Third, don't worry, it will never happen.

Not So Outlandish

One of the chief complaints from commenters so far is that economic growth would come to a grinding halt. That's true, at first. But once the financial system completely deleverages, it would resume to a normal, sustainable level. Borrowing wouldn't be allowed, but investment could still occur. Equity would be perfectly legal -- and is far more preferable.

Start-ups would instead have to rely solely on equity investment rather than debt. Imagine if, instead of an interest expense, all companies just had a dividend payment to worry about. Remember: there would be no tax benefit to debt anymore, so why wouldn't equity be preferable to debt?

The credit markets wouldn't be entirely eliminated -- even without debt. Rents and leases would grow. They would take the place of some mortgages and loans. When people actually save their money over time, they can pay in full for homes, cars, and other items if they choose. No one's way of life would change that drastically, except that they wouldn't be tens or hundreds of thousands of dollars in debt: they would have to actually save money before they buy something.

A Healthier Economy

What about homeownership? What about college? How would all of this ever be paid for? Some of part of all of these big credit-driven purchases would shrink. But that's not necessarily a bad thing.

Homeownership obviously got way out of hand, as more people purchased homes than could remotely afford them. And as mentioned, these people won't be on the streets -- they'll just rent instead. Besides, buying a home is highly overrated.

For education, the same could be said of college. It could easily be argued that too many people go to college today. Is a Bachelor's degree in Anthropology from a little private university no one has ever heard of that costs $35,000 per year really economically preferable to an Associate's degree in nursing from a community college that cost a tiny fraction of the price? You would also see parents starting to care more about saving for their children's college, because student loans are no longer an option. I think the prospect of young adults questioning whether college is worth it and starting their lives debt free sounds pretty good.

But in general, what you'll also see is asset prices relative to wages decline. If fewer people could afford education and houses, then their prices would have to drop as demand declines -- and they should. Frankly, economic equality will probably increase. Profits at the high end of the spectrum will have to be lower in order to sell products, but salaries for the masses won't come down as much. Too much consumer credit actually leads to greater inequality, since the lower- and middle-income consumers feel they have more purchasing power than their actual income dictates. Credit keeps the masses ignorant and blissful.

Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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