America's Credit Problems: Macroeconomics and Your Personal Finances

As an individual consumer, you are affected daily by the larger credit problems of the U.S. macro economy. It is easy to fall into thinking the larger markets do not affect you if you are not heavily invested. However, the actions of each consumer and business affect the market as a whole. Likewise, the market affects each consumer's ability to purchase and enjoy financial health.

The Credit Market and Jobs

Nearly everyone knows someone who lost his or her job in the 2007-2009 recession. Unemployment reached its highest rate since the 1980's. In some states, such as California, unemployment topped 10%. The unemployment rate is a direct response to the national credit market collapse of late 2007.

Businesses operate on a cycle of debt. For example, a business purchases raw supplies and materials needed for expansion based on loans or credit. Once the business receives revenue off of those supplies, creditors are the first to be paid. Businesses which are highly sales oriented may be in heavy debt for a significant portion of the year. Retail clothing sales operates on a lengthy debt cycle. When banks no longer extend credit to businesses, those businesses cannot afford the salaries to keep people employed. The result was record layoffs in the 2007-2009 recession. 

The Credit Market and Loans

Just as businesses operate on a cycle of debt, homes typically operate in a similar fashion. Most large purchases, including houses and cars, are made with loans. Bad lending practices prior to 2007 created a host of "toxic debt," a term created for loans that could not be paid back. Most of these loans were sub-prime mortgage loans. Sub-prime mortgage loans are given to individuals who are not typically credit-worthy. They have a low introductory interest rate, and then they adjust to a very high rate at a point in the future. The toxic debt carried by a number of large banks in 2007 and 2008 caused the closing of long-standing institutions. Washington Mutual, Fanny Mae and Freddy Mac were all at risk of bankruptcy. Some organizations were infused with money from the government. Others were closed or absorbed by other private institutions. The result was reluctance on the part of the surviving banks to make loans. Every day households stopped being able to get loans for needs such as new cars and home improvement

The Credit Market and Interest Rates

While new loans were hard to come by, existing loans also became more expensive. The interest rates on credit cards began creeping up, prompting national legislation. President Obama implemented legislation preventing rates on existing debt from going up. However, rates on new debt did continue to rise. Even as the Federal Reserve reduced the interest rate it charged banks to borrow, banks continually charged higher interest rates for individuals. Those people with bad credit were in particularly bad shape. Bad credit usually means you will be charged a higher interest rate; these high rates in addition to a global credit market crisis means loans are practically unaffordable for low-class individuals or those with poor credit. 

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