More reasons why an economy based purely on credit is a bad idea

The crash unfolding on Wall Street is not just the fall of once-mighty banks and corporations that took on too much debt, but the collapse of an American economy and lifestyle that for decades has been purchased with credit cards.

The nation's creditors - many of them foreign countries such as China and Brazil with ample economic needs of their own - reached a point this summer at which they were no longer willing to extend new loans in light of burgeoning default rates.

One of every 10 American homeowners has stopped making mortgage payments, and high-flying investment banks such as Lehman Brothers and Bear Stearns that peddled American debt around the world found themselves in bankruptcy and default.

The boycott by foreign lenders is forcing U.S. businesses and consumers to live more within their means, while political leaders frantically try to find ways to keep the financial sector alive without the free flow of an estimated $3 billion a day from abroad, analysts say. The spigot of foreign money in the heyday of the credit boom earlier this decade enabled everyone from Wall Street's best and brightest to college students with no income to easily obtain cheap loans.

The party is over," said Peter Schiff, president of Euro Pacific Capital. "The current financial storm represents the death throes of the old global economic order, and perhaps the birth pains of a new one. The sun is setting on the borrow-and-spend culture that has all but defined us for a generation. ... The sooner we come to grips with this, the better."
"We can no longer entice foreigners into lending us their available savings," said Mr. Schiff. "Given that we are already too loaded up on existing debt that we cannot realistically repay, who can blame them for not wanting to lend us more?"

Political and financial leaders always knew that the inevitable end of the great debt binge would be painful, forcing Americans to dramatically cut back spending and bringing on a long, deep recession that Mr. Stanley and other economists are predicting.

"We have warned for years to be careful what you wish for on this count," he said.
"The mortgage problem is, in fact, a symptom of a deeper crisis of deteriorated consumer financial health," she said.

Now, big banks like Bank of America, Citibank, JPMorgan Chase, Capital One and American Express - themselves hard-pressed to get loans in bank-funding markets - are reducing consumers' credit-card limits and home-equity lines and limiting credit-card-balance transfers, putting already pinched consumers into serious binds, she said.

"When they reduce credit availability, consumers won't have the ability to roll their debt over, and the issuers will essentially force customers into default," she said.

Consumers sank deeper into debt during the housing boom, when easy initial mortgage terms allowed them to buy bigger, more expensive homes and rapid appreciation opened the door to cash-out refinancings and home-equity loans that financed other spending.

"Millions of households have been operating just like hedge funds for a long time," said Brent Wilson, analyst with Reochronicle.com, a Web site tracking foreclosed homes, describing how ever-increasing debt financed the doubling or tripling of house prices in many areas that have now deflated.

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