All in the Name of Greed

Written by Parvinder Gill

It appears that engaging in a discussion on an inherent characteristic of human nature - greed, could not be more appropriate or apt, given the current turmoil in the global financial markets, that some believe have undoubtedly already initiated an economic recession in the United States of America. The phrase "sub-prime mortgage" has been tossed around frequently in the press, since the onset of the 2nd half of 2007. For those who are not aware of how the sub-prime crisis came about, there is only one word that you need to know - greed.         In brief, home buyers with poor credit histories in the United States of America capitulated to their greed by convincing themselves that they could afford to take out large amounts of mortgages on homes that in reality, they could ill-afford.         They were abetted by even greedier mortgage lenders, who irresponsibly and recklessly created mortgages for these borrowers that were categorized as sub-prime, primarily because of their poor credit histories stemming from their low income levels.         The mortgage lenders did not feel compelled to ensure that the mortgage borrowers were good quality borrowers who would be the least likely to default on their mortgage payments. This was because the mortgage lenders were able to transfer the default risk of the sub-prime borrowers to other financial institutions, such as investment banks, which in turn, were greedy enough to purchase huge amounts of financial instruments comprising these sub-prime mortgages, even though they barely understood what they were purchasing.         Greed ended up being the downfall of many great institutions such as UBS, Merrill Lynch and CitiBank.         Unless you are an investor in the financial markets, it is highly probable that the narration above would seem inconsequential to you, since the current turmoil in the financial markets has thus far, no discernable spillover into Singapore's economic growth. However, an important parallel can be drawn from the sub-prime mortgage crisis onto something that is of seemingly greater relevance to many of us - credit cards.         The use of credit cards as a preferred mode of payment is becoming increasingly prevalent in Singapore. Many of us would most likely at one point in time or another, have derided the elders in our family for their outdated perceptions of credit cards as morally objectionable tools that can bring no good.         It is unsurprising that the older generation is naturally averse to debt accumulation, given their financially tenuous past and the commonplace Asian tradition that preaches spending well within your means, with enough money leftover for savings.         The widespread acceptance of credit cards among the youth is also unsurprising, given the perks and convenience that comes with the use of credit cards, as well as the synonymy of credit cards with a modern, urbane lifestyle. Most importantly, credit cards enable our consumption to be partially unencumbered by our income stream.         In general, using credit is a good idea if you can promptly pay off the full amount of your account balance before the due date. By paying off your credit within the grace period, you are exempted from any interest charges and therefore, are able to capitalize on the free loan that you are getting from your credit card issuer.         However, when you take a leaf out of the book of the sub-prime mortgage borrowers, and greedily charge a higher amount on your credit cards that you cannot afford, given your current income stream and/or allowance from your parents, brace yourself for the exorbitantly high interest rates on your overdue outstanding account balances.         Make no mistake - the credit card companies are dead-set on getting their money back and if that means bankrupting you in the process while you renege on your interest payments, then that is exactly what they would do.         This is similar to the current situation in the US real estate market where the sub-prime mortgage borrowers are facing foreclosures (forced sales by the mortgage lenders) on their too-expensive homes, since they are defaulting on their mortgage payments.         It would pay to give weight to your elders' advice and manage your debt well. Do not be a sub-prime credit borrower yourself. After all, as most of us are on the brink of entering into a new stage in our financial life cycle in which we will get our first taste of financial independence with our entry into the workforce, it is prudent for us to ensure that we maintain a good credit record.         The ease of obtaining loans on favorable credit terms on big-item purchases, such as cars and homes that most of us are likely to make within the subsequent decades of our lives, hinge on our credit history that we can build up favorably from now. Note that building up a favorable credit history from now means that it can be beneficial for you to start using your credit cards for your consumption needs, as long as you are adhering to the age-old adage of spending well within your means.         The key is to remember that while it is human to be greedy and even the smartest among us are not exempted from that basic human characteristic as exemplified by the now-beleaguered investment bankers, greed by itself is an inadequate excuse for irresponsible and irrational behavior.         People have generally been unforgiving about explicit displays of greed by others, conveniently forgetting about their human frailties during such instances. Hooked Images courtesy of Google Images Comments Write Comment Name: Guest Title: Comment:

 

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