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A Buy-In, Not a Bail-Out

The opinions expressed by columnists are their own and do not necessarily represent the views of

By the time you read this, the House might have already voted to pass the bill House Speaker Nancy Pelosi described as "not a bail-out, but a buy-in." The President will probably already have spoken and a good number of House Republicans will defied their leadership and voted against it.


I know a lot of MULLINGS readers are against this bill as well, and as you know I am not its biggest fan, but I think it is a must-do. To over-state the metaphor: If your boat is taking on water, and you are opposed, in ideological grounds, to bailing it out, it will sink and you will drown.

Let's forget about Merrill Lynch and Washington Mutual and Lehman Brothers. Let's look in, as the ad goes, YOUR wallet. What do you have in there; three credit cards? Four? Six? Come on. Come clean.

I will. I have two Amex cards - one for business use one for personal - a Visa ATM card and a MasterCard. Four. Which, according to an article in the San Jose Mercury News is the number the average American has in his or her wallet.

In fact, there are just short of a BILLION Visa, MasterCard and American Express cards in circulation in the US representing a total debt a little shy of a TRILLION dollars.

Ok. Enough of the data. Now to the point of all this.

Credit cards have been the fuel behind the extraordinary growth in the US economy which has been largely based upon consumer spending. Hold that thought.

Let's say the total debt of all of your credit cards is about $10,000 - which would put you just about at the average. Credit card companies generally require a minimum payment of about 4% of your balance on each card each month. $10,000 x .04 = $400. Each month.


With me so far?

Banks and other issuers have to have the funds to pay the merchant (less a fee) when you charge something. In order to do that, THEY have to borrow money. And they use your credit card debt is their collateral.

If the credit market remains frozen, then the banks can't borrow money to cover the $4 you put on your credit card at McDonalds this morning. They have no choice but to get you to pay your debt back faster.

Let's say that issuers raise the minimum payment from about 4% per month to 6% per month. Just two percentage points. But on your $10,000 debt your monthly payment just went from $400 per month to $600 per month.

I know you have $200 lying around at the end of each month you haven't known what to do with, but a lot of us don't.

In order to find that extra $200, you have to do two things: First you have to spend $200 less each month in cash at the grocery store, the gas station, or Starbucks. Second you have to stop charging to your credit cards because every $100 you charge now adds $6 to what you have to pay - every month.

If 100 million families have credit cards, and each of them spends $200 less per month in cash because of the higher minimums, that is $20 billion being kept out of the economy. Every month. Plus whatever people aren't charging any more.


Twenty billion dollars not being spent means businesses can't keep as many people doing whatever they were doing before. That means layoffs. More layoffs means more people unable to pay their debts - credit cards or mortgages. More defaults and foreclosures means an even slower economy leading to a spiral which could result in a 1930's style depression.

I'm not suggesting that will be the result of the Congress not passing the Bail-out/Buy-in Bill, but I wanted to point out that the situation is not limited to keeping Wachovia in business.

It comes down to you and me and our ability to get through the month.

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