The surprise villain behind nation's financial meltdown

Fingers are pointing in all directions as we search for the villains behind the mortgage and financial market crises.

Many of us focus on traditional whipping boys -- the Wall Street fat cats blamed for every financial fainting spell. Democrats point at Republicans, and Republicans accuse Democrats.

But none of this is where the rubber really meets the road. The real source of our economic chaos, like so many modern troubles, is that most cherished and maligned possession -- the automobile.

In 1909, Henry Ford created the Model T, offering mobility, convenience and liberation beyond Americans' wildest dreams. Everybody wanted one. But even after production improvements brought the price down, the Model T cost $345 -- a budget-breaker for most Americans.

Ford had manufactured, for the first time, "a mass-produced consumer's item that cost between 10 and 20 percent of a family's annual income," writes historian Daniel Boorstin in "The Americans: The Democratic Experience."

Ford was a staunch advocate of frugality and prudence. He maintained that folks should scrimp and save until they had enough cash to buy a car. But other business operators had bolder, if not better, ideas. They quickly concocted the consumer "installment plan" -- a form of financing previously used only to purchase real estate.

In 1923, U.S. manufacturers sold more than 3.5 million passenger cars, according to Boorstin. About 80 percent were purchased on some kind of time-payment plan.

"It is hardly an exaggeration to say that the American standard of living was bought on the installment plan," writes Boorstin. In the process, he adds, Americans developed "a habit of enjoying things before they were paid for."

The credit card -- a new invention -- made this financial revolution possible. It too was tied to the automobile. As more Americans acquired cars, gasoline companies began to issue cards that customers could use at thousands of gas stations across the country. Soon these cards morphed into all-purpose credit instruments.

The first was Diner's Club, in 1950, and then Carte Blanche and American Express. As profits grew, banks started to issue their own cards.

This vast expansion of credit had many positive effects. Credit cards "democratized the world of business," in Boorstin's words, and helped to usher in unprecedented affluence.

Yet as affluence grew, Americans found it increasingly difficult to delay gratification. Credit terms became looser, and a culture of debt arose.

The report documents where living beyond our means has led us. One in seven families now reports that at some point they have experienced a debt burden "serious enough to have caused them to file for bankruptcy or to use a credit consolidator." In 2004, the average family devoted more than 18 percent of its income to debt payments. Fifty-six percent of college seniors carry four or more credit cards.

Government has also contributed to financial irresponsibility. For years, the federal government has sought to expand home ownership, pushing mortgage giants Fannie Mae and Freddie Mac to fund mortgages -- including subprime and adjustable rate loans -- for large numbers of people who, in retrospect, couldn't afford them. The Community Reinvestment Act, first passed in 1977, prompted traditional banks to do the same.

State government has also encouraged our spendthrift ways. Lotteries -- once outlawed in every state -- now fuel a "get rich quick" mentality among those who can least afford it.

Today, 20 percent of Americans are frequent lottery players, according to the report. "Players with lower incomes tend to spend more on the lottery than those with higher incomes," it notes. In 2006, households making under $12,400 a year spent, on average, $645 on lottery tickets -- 5 percent of their income. If such a household invested the same amount in stocks for 40 years, it could expect to have $87,000 in 2006 dollars, according to the Tax Foundation.

There's plenty of blame to go around for the current credit crisis. But some of it belongs to the average guy or gal who has listened to the siren call of easy money, and thrown frugality and prudence out the window. That guy or gal may be staring back at us in the mirror.