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ECONOMIC ANALYSIS:

THINKING CREDIT

by Fred Cederholm
We as a nation have been seduced by a deluge of pre-approved credit cards, a flood of ever-so-tempting home equity loans, and a marketing onslaught of buy-now and pay-later sales promotions.
I’ve been thinking about credit. Actually I’ve been thinking about accountability, Luca Pacioli, compliments/ insults, Orwell’s opposites, sub-prime borrowers, and foreclosures. “We’ve trouble, folks, right here in River City - with a capital P (payments) that rhymes with C (and THAT stands for Credit).”

You see, for months there have been rumblings in the distance that there are financial problems brewing on the horizon for many American households. It is only recently that the mainstream print and broadcast media have begun to herald any forthcoming problems. This should come as NO surprise since virtually every month for the past decade outstanding debt has broached new record levels. We as a nation have been seduced by a deluge of pre-approved credit cards, a flood of ever-so-tempting home equity loans, and a marketing onslaught of buy-now and pay-later sales promotions. Given how interest rates were cheap and (in many cases) the annual percentage rates (APR’s) on Credits were below “acknowledged” rates of inflation, this was like “free money.” Rollovers ruled, and any thoughts of eventual accountability were “back-burnered” into obscurity, or oblivion.

As a CPA, CFE, and forensic accountant, I marvel at how the most basic concepts of accounting and accountability are not understood by the bulk of the populace one bit. Numbers and math are so often considered the boring focus of geeks - far from it. If you put a dollar sign in front of the numbers, you might pick up some more attention, but still probably not a whole lot. However, when those dollar- denominated numbers appear on a past due notice, a garnishment, or the notice of foreclosure (or repossession) because of delinquency arrears; they finally receive their just attention. It is only when the modern wonders of the compounding of interest, fines, and penalties come home to roost; that the full ramifications of them are finally understood on the individual or household level - then... it’s too late.

There is an underlying simplicity (and beauty) to accounting for anything. At the heart of it all is that “debits must equal credits, debits increase assets - while credits reduce them, and credits increase liabilities - while debits reduce them.” We can thank the Franciscan friar/ cleric Luca Pacioli for creating this miraculous system of account balancing around 1494, a couple years after Chris Columbus had set sail. The world was never the same, but how many people really appreciate and acknowledge this revolution in accountability. If anything, they have gotten it completely backwards!

How many times have you said to somebody that you were giving them “credit” for something – and meant it to be a compliment? Now... TH*NK about that in terms of the original and ongoing “Pacioli usage” where you are really insulting them. I mean... you are effectively wishing their assets be diminished, and their liabilities be increased. Some friend you are, right? This is perhaps the original example of a doublespeak of opposites with which we are most familiar from George Orwell’s 1984: where the Ministry of Love was really the Ministry of Hate, the Ministry of Peace was really the Ministry of War, and the Ministry of Truth was ... you get the picture. Give me “debit” for that, ok?

When we receive those bulk mailings, when we receive those telemarketing calls, and/or when we see those commercials hawking pre-approved credit cards, mortgage debt refinancing, and/or debt consolidations; they may be giving us Credit, but they are not giving us “credit” in any positive sense of the term. I find it absolutely incredible to TH*NK how when you find yourself stuck in hole, there are far more out there who are willing to provide you with a shovel, than a rope.

In recent years, the terms sub-prime borrower/ sub-prime lender have entered our vocabularies. Talk about yet another example of a doublespeak opposite. In banking/finance “prime” is a term of art meaning highest quality. In the extreme, it means “we are more than happy to lend to you, because you really don’t need the money.” “Sub-prime” doesn’t mean not-quite-prime by any means. The epidemic of “sub-prime” defaults has brought down how many mega-lenders since the first of this year alone?

Escalating foreclosure stats are now a daily topic of news and commentary from virtually every section of the nation. This trend can only continue well into the years ahead as these misguided policies of the past unravel and unwind. I believe in giving full Credit to where “credit” is due – and I don’t mean that as a compliment.

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.


Copyright 2007 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.


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This story was published on April 2, 2007.