The word, "credit," comes from the Latin, "credere," which means, "belief / trust." To extend someone credit - or to lend money is to trust someone to pay it back. Our financial system is based on a belief that people will honor their commitments and fulfill their debts. America's "credit crisis" is therefore a crisis of trust and belief in our ability to make good on our financial obligations. Banks don't trust enough to lend to one another or to consumers, and consumers don't trust banks to safeguard their deposits. It is a meltdown of good faith across the system.
The background mechanics of our financial system have become very complex and are beyond the scope of this blog to untangle. However, I think we can wrestle with the foundational principles that are being exposed by the current credit crunch. Quite simply, personal responsibility and professional ethics have vanished in the face of greed. Lenders have extended too much easy credit on homes and unsecured debts because the rates of return look unbelievably rich. Getting 10% on a sub-prime mortgage or 15% on credit card debt looks like a great business to be in! Consumers have decided that failure to pay their debts back is no big deal because after all, the banks are gouging them anyway. So what if I don't pay my credit card?
Even though this doesn't characterize our whole system or even most of it - small problems have big implications because our financial system is so interdependent and over-leveraged. Our big toe is a small part of our body, but if the infection spreads to our leg, amputation and / or death may result. Time to stop with the creams and go to a major course of antibiotics. Kill the infection and make sure the patient takes care of his feet from now on.
I believe the bailouts of recent days were probably necessary and that a certain level of regulation is absolutely in order. No argument here. However, no regulation can fix the root issues of personal responsibility, professional ethics, and greed. Those are problems government CAN'T and WON'T solve. Our free-market system is utterly dependent on the "good faith" and trust of its participants. If our culture continues to drift towards Godless secularism, this will only continue to happen on a larger scale. The American capitalist experiment is ultimately dependent on the morality of its culture. As with so many issues, it is an issue of "credere." It is our collective crisis of faith.