Today’s Financial Paradigm Shift

A Paradigm shift is a radical change in personal beliefs, complex systems or organizations, replacing the former way of thinking. The chaos we are dealing with today’s credit market is a Paradigm Shift of unprecedented magnitude.

The use of credit has evolved drastically over the last several decades. Individuals as well as businesses of all sizes including all levels of government have redefined the proper use of credit. Up until recent times, borrowing money was something that wasn’t done without careful consideration.

Consumers borrowed money only as a last resort to tie then over a rough patch. An illness prevented then to earn a salary; a lay off required them to find new employment or an emergency repair was needed. It was only conditions such as these that Americans borrowed money in previous generations. Then a new need surfaced. That was a desire to buy goods that were expensive and had a long useful life. Through a combination of savings and borrowing money we were able to buy the cars and the homes we wanted.

Our grandparents hated the idea of owing money to anyone. They reluctantly borrowed money when needed and looked forward to the day the loan was paid off. Families checked off the major events in their lives; getting married, having children, raising a family and retiring their mortgages. The mortgage burning party was a more major event than a birthday.

Their pride kept them from taking on too much debt. In the event something happen in their lives that forced them to fall behind they were ashamed. They wouldn’t talk about it and would do whatever possible to hide the fact. The goal was to pay back what was owed before any friends or family heard about it. Bankruptcy was considered the ultimate failure. A man failed his family and his community if he was forced into bankruptcy. The people of this generation didn’t go into bankruptcy; they were forced into it.

These people saved for things they wanted to own. As children we were all taught to save our money for what we wanted. We learned by example, we made compromises. Our families couldn’t buy us everything we wanted, we needed to prioritize. We could only expect the toy we really wanted, anything else would have to wait.

As time passed we became more self-centered. Borrowing evolved from being something to be embarrassed of to an acceptable way of life. We no longer used Christmas Clubs as a saving plan to pay for holiday gifts, we just charged the gifts and planned on paying back what was borrowed at a later date. However, paying back the money would limit what we could spend on other things. This wasn’t acceptable; any form of sacrifice just wasn’t in our nature. We just kept borrowing more. Paying back what we borrowed was always something that could be put off until tomorrow.

As we continued running our personal lives this way some of us had jobs that gave us the responsibilities of handling the financial obligations of companies and government agencies. The spend now; pay later attitude that became the norm at home naturally became the norm at work. Companies and the government began doing the same thing. From a business standpoint having cash-on-hand was not the most efficient use of capital. Invest whatever capital is on hand and borrow funds as needed to pay bills while you are waiting to collect on your receivables.

Once the stigma of borrowing money was no longer a concern, it wasn’t long before “living up to your word” became an outdated concept. Utilizing any method available to avoid paying a bill quickly became the expected way of conducting business. Bankruptcy was no longer the ultimate embarrassment but became a valuable tool to be used by individuals and businesses as needed.

In 50 years we have financially evolved as a country from “neither a borrower nor a lender be” mindset to a “let’s live for today” way of life. 2008 became the year of reckoning. We live in a society that needs credit to survive yet we’ve entered an age where no person, company or bank trusts anyone. Banks are afraid to lend to companies. Companies are afraid to extent credit to consumers. Banks are afraid to lend to each other. We are now force into a Financial Paradigm Shift.

Every person and company needs to immediately change their standard operating procedure and begin to conduct themselves in a similar manner that our grandparents did. The problem we are facing is much like that of a dieter. After many years of small incremental increases of weight year to year the dieter is now trying to reverse the trend in weeks. The only difference is that the dieter acknowledges that a change in needed and knows it’s not going to be easy.

As Americans we are in a financial state of denial. We’ve yet to recognize how each and every one of us contributed to the crisis. We spend our days trying to figure out who is to blame for our troubles and refuse to consider our personal contribution.

We can’t blame the lender for giving us the financing we asked for to buy the house we couldn’t afford. We can’t blame the lender for giving us the second mortgage we needed to pay off our credit card debt and buy that big screen television we desperately wanted. We can’t blame the car company that built the SUV that we couldn’t live without and then arrange for the financing that enabled us to buy the vehicle.

Why are we surprised that the creditor that lend us the money to buy the car actually wants to get paid what he’s owed? Why are we surprised that he’s willing to take the car away from us because he hasn’t gotten paid when the car is worth less than what is owed? Why are we surprised that the utility company turned off the electric when they know for a fact we just don’t have the money to pay the bill? Why are we surprised that we can no longer borrower money to support the lifestyle we’ve grown accustomed to?

Every decision made by a company, bank or government was made by a person or persons. The decision may prove to be right or wrong. The decision may have been made with the best of intentions or motivated by pure greed or stupidity. The only thing we have direct control on is the individual decisions we make. Just as the dieter looks at himself, realizes a change needs to be made and addresses his lifestyle to suit we need to objectively analyze our personal financial shape and consciously made the required changes.

Until we make a Financial Paradigm Shift in our personal lives our country will not be able to weather this storm. It’s a massive undertaking that requires all of us to do our part. We need to stop feeling sorry for ourselves and begin to move forward with change.