Color of Money: You can't afford to forget the lessons of the Great Recession
In "The Life of Reason," the late 20th-century philosopher George Santayana wrote this: "Those who cannot remember the past are condemned to repeat it."
You've seen variations of this quote, but let's look at it in the full context.
"Progress, far from consisting in change, depends on retentiveness," Santayana wrote. "When experience is not retained, as among savages, infancy is perpetual."
Let's stop here. Notwithstanding the comparison to "savages," Santayana made a keen observation about the importance of learning from experience to grow.
There's so much we can glean from our failures.
"One fact we observe is that both the Great Recession and Great Depression were preceded by a large run-up in household debt," wrote economists Atif Mian and Amir Sufi in "House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent it From Happening Again."
The researchers argued that consumer spending dropped because people were so heavily burdened by housing debt. "As it turns out, we think debt is dangerous. If this is correct, and large increases in household debt really do generate severe recessions, we must fundamentally rethink the financial system. A financial system that thrives on the massive use of debt by households does exactly what we don't want it to do -- it concentrates risk squarely on the debtor."
People are going to borrow. Despite my hatred of debt, I understand the role it plays in our economy. It drives auto sales, and so many people rely on their vehicles to get to work. Without mortgages, most Americans, including myself, would not be able to purchase a home. Debt also allows people to get a college degree.
But an excessive reliance on debt is bad for both the economy and households.
So how do you know if you're taking on too much credit card debt?
Follow this one rule and you'll stay within a reasonable amount: Don't charge anything you can't pay off by the next due date. If you can't pay off the balance, you can't afford whatever product or service you're paying for with that card.
I also caution people against promotional deals where you are given extended time to pay off credit card charges interest-free. Far too often I see people who get to the end of the time allotted and can't pay off the card.
There were a number of factors that led to the recent financial crisis. Credit wasn't the only culprit. But those who suffered the most were people living the American dream on credit. We cannot afford to forget the lessons of the Great Recession.
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