06
Oct
08

The Bubble Popped. Now What?

I’ve held my tongue for days as I’ve watched the supposed leaders of this country try to explain how they’re going to “solve” the current economic mess. Part of me enjoys the perfect timing of everything blowing up right before an election. The other part, well, it wonders why everyone is so shocked that the bubble popped. The United States and its citizens were testing the theory that they could live on credit indefinitely.  Amazingly enough, running at a deficit has a cost that we’re all becoming intimately acquainted with.

I’ve waited with great patience for one, just one, person to accept responsibility, even if it’s only partial, for any part of the chaos. Surprise, surprise all I hear is both political parties blaming each other and talking heads on CNBC predicting a long-term recession. I hear everyone talking about Main Street bailing out Wall Street. I hear politicians assure me that they must intervene. Why?

Who Takes Responsibility

I’m not an economist, so my argument does not even attempt to address the financial side of things, but rather what I consider to be the moral and the ethical aspect of the situation. Accountability has been missing from society for a while now. Occasionally, you’ll hear about an investigation into corruption at City Hall or something similar. The prosecuting attorney gets some air time that will play well during the election and everyone gets to feel good that someone is getting the bad guys. Unfortunately, I don’t believe our current situation fits this mold.

Here’s the reality: I believe that each one of use is guilty to some extent for the situation we find ourselves facing. If you don’t own a credit card, you’re mostly excused, unless you took out a mortgage for more than you knew you could afford to pay. I believe this mess started when we started listening to the media, our friends, our family, telling us that we deserved to have what we wanted NOW, not later, but RIGHT NOW.

So we got sucked into the credit card offers that screamed, “One Year Without Interest” or payment plans that promised, “Only $88 A Month.” We bought the big screen, the boat, and all the others toys, believing that a “little” debt was ok, because our homes were worth double, triple, etc. what they were when we bought them.

But wait, why not sell my home and buy a bigger one, because my investment will increase even more in a bigger house that’s worth more. Oh, I can get in that bigger house for less with an adjustable rate mortgage that increases my payment by $1000 a month in three years? No problem. I’ll have enough equity by then that I can swing it or sell the house for twice what I paid for it.

The Gray Area

Before you jump on me for ignoring the plight of people who were taken advantage of by ruthless mortgage brokers whose only concern was earning a commission, I know that hundreds of thousands of people were misled. Everything from last minute rate changes to outright threats played a role in bad mortgage lending. However, even if you say these individuals make up 50% of the bad mortgages that still leaves another 50% who should know better.

Consider the words of consumer behaviorist Larry Compeau of Clarkson University from a Newsweek column in March 2008.

“People in their 30s haven’t really experienced a significant or long recessionary period…I am concerned that they won’t be able to respond quickly enough to mitigate what may be the damage ahead.”

The column’s author Eve Conant continues, “Not only do people under 40 save less, but they have less to save.” Indeed, savings as a percentage of disposable income have plummeted in the United States, from between 7 and 10 percent in the 1960s and ’70s to just 0.4 percent in 2007.” (link) Note that it’s savings measured against disposable income. Doesn’t that make us complicit?

I can also hear the argument that the cost of living has increased as wages have flattened, making regular use of credit a necessity. Health care, the cost of food, the cost of energy. You name it, most everything costs more. But let’s be honest, how many people are surviving on credit cards alone as a sole source of funds? Isn’t it more likely that the credit cards are paying for the vacations, the clothes, the iPods, and the toys of life?

I’m the first to acknowledge that the credit market is screwed up and not aimed at protecting consumer interests. (I strongly encourage Maxed Out, both the book and the documentary, for a look at the credit industry.) However, we keep going back for more. I find it telling that because I pay my balance in full each month, credit card companies refer to me as a deadbeat. Their number one customers are the ones caught in the revolving door of minimum payments, never touching the principal and only paying the interest. Doesn’t this outlook tell us something important about credit card companies?

Make Something Happen

Don’t we owe it to ourselves to protect our individual interests? For those who believe more government regulation is the answer, good luck. The $700 billion bailout started as a three page document in the White House and after the House and Senate got through with it, the number had increased, going from 110 to 451 pages. The Senate, because it’s constitutional barred from initiating finance bills, slapped multiple bills together to create a package that skirted that pesky rule. Any regulation will come with strings that may or may not benefit individuals, regardless of which party controls Congress and the White House.

So I say start small. Go to OptOutPrescreen.com and get your name removed from the list that the credit agencies provide to businesses extending credit offers or insurance. You can opt out for LIFE if you want. Start a savings account even if it’s pennies in a jar (example of government stupidity, it costs roughly 2.5 cents to make each penny, a loss of 1.5 cents per coin).

Finally, the thing I believe will save us, as it has in the past, is our ingenuity and willingness to innovate. Some have suggested, for example, that if the U.S. could create a green energy revolution through technology innovations, swinging things back to the positive side. At the foundation of whatever proves the solution will be people who made something, who didn’t just consume. We talk about the scales of justice being balanced. Doesn’t the same rule apply to what we do with our lives? If we take, doesn’t it make sense to give back?

UPDATE: If you’re curious, I wrote a post a little over a year ago about the history of credit cards and their role in the economy.

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7 Responses to “The Bubble Popped. Now What?”


  1. October 7, 2008 at 5:47 am

    Can’t say I agree with Larry Compreau’s words – doesn’t he recall the Black Monday and subsequent fall-out of October 19 1987?

    I agree wholeheartedly that we should all take responsibilities for our actions, and this goes for our personal and business lives. The problem I have with the bail-out is that it sets a precedent that says – “Hey, if we screw up we can always pay an extra dollar in tax and we’ll be fine”.

    THAT worries me more than the bail-out…

  2. October 7, 2008 at 5:48 am

    Bravo @Britter… The folks in Washington think we are idiots, are trying to blame the CEOs for all of these problems while dodging their own “contribution” to the screw-up. These guys are pandering to the people of this country, patting them on the tops of their heads, telling them it will be alright when they were the ones who made decisions (or didnt make decisions) that caused this. Its easier for them to point fingers than take responsibility.

    Evidently this kind of mortgage crisis has happened 6 times since the Civil War (NYU Stern professor said this on TV earlier this week). Unfortunately none of these Wall Street geniuses who went to grad school were sleeping when this came up. Or they were paying attention and didnt care.

    We live in a world where “deserve” has replaced “earned”. A couple years ago the NY Daily News had an article about 20-somethings, who were earning less than $35k per year were buying big screen TVs, Gucci sunglasses and designer handbags – the real ones, not knockoffs. The article asked a subjects of the article if it was a good idea to buy a $1k pair of sunglasses when you only make $20k per year as a bank security guard. Answer: “I did this for me”.

    I feel bad for the folks who did the right thing, who saved, who paid their mortgage on time, didnt live above their means and did everything right. They are the ones who are watching their house values fall, idiot neighbors who got foreclosed on reducing the value of homes in their neighborhood, having a hard time getting business credit because the big boys (who shoulda known better) screw the pooch again. They did the right thing, saved their pennies and arent getting a bailout. We are supposed to live in a country where fair play is part of our National DNA.

    Personal responsibility and taking control is the new black. Awesome post.

  3. 3 Shelly
    October 7, 2008 at 5:53 am

    OMG – THANK YOU for that link. I’ve been opting out by phone and snail-mail for I don’t know how long – but it only lasts for 6 months. After the 6 months is up, you start getting them again. The thing about that that disgusts me the most is how much paper it wastes. I end up with 2 paper grocery bags of shredded credit card offers *every month* that go to the curb for recycling. Now if I could just get my bank to stop sending me those stupid checks in the mail…so thank you for that “for life” link. I’m so tired of doing this over and over again.

    A question though – what about those of use who have a mortgage within our means and a couple of credit cards, but no balance on them? Where do we fall on the “accountability” scale? My husband and I *could* have gone for the “$300,000 house when we can only afford $100,000”, but we didn’t. (I used to work for a lending company – *I* read the fine print. I know what they put in there.) We also made sure we got a fixed rate for the interest. We had to pay a little more up front to get it, and our monthly payments are higher than they would have been had we not done it, but by God we’re glad we did that now. We also pay off our credit cards *every month*. We do not keep a balance on them. I learned the hard way when I was 18 (they really get you then!) – and I swore that would never happen to me again. We also pay $5, $10, and in some cases up to double the payments on any other bills we owe. I just paid off my school loans – all three of them, 10 years early! – just by doing that. Right now, car payment bills come to us with “$0 due” because we’re all caught up (we’ve owned one car for 1 year, the other for 3). We still owe, but now all our payments go directly to principal – just by paying an extra $20 a month on them. Credit companies *hate* us. LOL – we actually pay.

    I agree that people are too concerned with “right now” and not what the consequences are of this attitude. I’m not going to get into the politics of all of this, either, but I can easily say I’m not happy with how people are doing their jobs. (and I swear, it *wouldn’t* surprise me if those rumors I’ve been hearing are true, that GWB is planning to enact martial law to get his way. How he ended up being our President makes me want to take a flamethrower to half the US population.) I think we should do what any other company does when their employees start skimming the drawer – fire their asses and hire someone competent.

    Eh, but what do I know.

    Again – thanks for that link – I’m off to do that *right now*.

  4. 4 Britt
    October 7, 2008 at 7:50 am

    @pressreleasepr: People in there 30s would have been teenagers at best during the ’87 mess. Perhaps you were more aware than others, but I don’t actively remember any consequences of Black Monday. Subsequently, we’ve lived with a relatively non-volatile market compared to historical performance. I don’t believe people in their 30s and younger are equipped as a whole to manage the economic upheaval that could result in the coming weeks and months. For me, the more telling number is the insanely low rate of savings.

    I agree with you completely about the setting of a precedent. If the risk takers believe that the government will step in because they are “too big to fail,” what’s to hold them back in the future? Imagine what the current chaos would look like if they had known that the government would step in to try and fix the mess.

  5. 5 Britt
    October 7, 2008 at 8:01 am

    @Sean Bohan: Funny you should mention the historical precedent of prior mortgage crises. Besides ignoring personal responsibility, we’ve neglected to be students of history. We are the generation who has taken as a standard the notion that “this time is different,” and now we’re paying the price.

    A few years back, The Economist had a cover story on the American housing bubble (I’m kicking myself for not keeping it). They pointed out several possible outcomes, none of them good. I guess what baffles me most is that we willfully ignored the signs.

    I’m always shocked by how dismissive some (I didn’t say all) people in our generation can be about the role of history. We know, for instance, that the market has crashed and recovered, and yet from the commentary, you’d think this time was the first time. History has proven that market downs are temporary while ups are long term. You only lose money if you sell while the market is down. At some point, it will go back up.

    I also share your frustration for the people who did the right thing. These people played by the rules and now they’re suffering like everyone else. When I hear the politicians talking about how they need to keep people in their homes, refinancing mortgages, etc., I wonder how the people who were smart with their money must feel. The response to economic turmoil rarely includes the people who did what was smart. It’s usually targeted at helping people who were less than smart. Seems backwards to me.

  6. October 7, 2008 at 9:08 am

    Great commentary. I found this quote at another blog I follow; and rings true for this crisis, oh that circular history…

    “Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.” -Andrew Jackson, 7th US President

    In 1836, Andrew Jackson forced the closing of the Second Bank of the U.S. by revoking its charter.

  7. 7 Britt
    October 7, 2008 at 10:02 am

    @torbjornrive: Speculate is the key word. We need to acknowledge there’s a significant difference between speculation and investment. One aims for quick, short-term wealth while the other focuses on long-term gains. At issue is that risk is greater with speculation than it is with investment. We started pretending that risk wasn’t an issue any more.


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