The Bail-Out…….Why We Need It

I subscribe to a daily email from Rich Mullings, who generally writes about the Washington scene. This morning’s communique had this pearl of wisdom, that explains the crisis just about as well as anything your scribe has seen/heard/read thus far.

As a further note, a link to the draft legislation is here. Enjoy:

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.

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.

I get it.