Ever since I read Affluenza and The Total Money Makeover (see my Book List Tab for reviews) I have come to see debt in a completely different light than I ever did, and not just on a personal level. An example is a story I heard on the radio yesterday. Governments in the US, Canada, Sweden, and England have decided to extend 28-day loans to banks and other lending institutions in the US who are now very reluctant to lend money due to their housing crunch and falling economy.
The message I got from this story was as follows: The banks and other lenders are suffering (translation: not reaping huge profits) because, in their greed, they gave out bad loans to people who never should have qualified in the first place. Now they are reluctant to hand out money and so it’s more difficult to get a mortgage. This means that housing prices are falling (oh, would that some of that bad Ju-Ju would work its way over here….just long enough for me to buy my dream farm!), the real estate market is stalling, and the economy is going to hell in a handbasket. The answer, apparently, is for the Federal banks (I interpret “federal” to mean “the taxpayers’ money”) to lend money to these other lenders so they can in turn lend it to individuals and companies. (I’ll leave the companies out of this discussion, since loans to help people start small businesses, for example, seem a whole different kettle o’ fish to me then lending someone money so they can buy a house they can’t afford).
This all struck me as absurd. The US economy (to which so many other economies are tied) is collapsing because people lent out money to those who should never have qualified. The solution, then, is to use taxpayers’ money to provide loans to lenders, whose collateral is those very same bad loans, so that the lenders can hand out more loans to people who the lenders themselves now consider too risky to fund with their own money…?
Am I the only one who thinks this is insane? Or am I just woefully ignorant?
Until I saw Maxed Out on Debt I had no idea how much our economy depends on lending money (and mostly to people who can’t afford to ever pay it back). We’ve all heard lines like this one: “…investors will find out if consumers’ worries…are affecting their spending — and, in turn, posing a further threat to the economy.” Yup, apparently to boost our economy we all have to go out and do our patriotic duty at the Mall. When the twin towers fell, the President of the United States urged his people to “keep on spending” as a way to rise up in victory from this attack. Three thousands lives lost – let’s go shopping! Currently, American families are enjoying a banner tax year with the “economic stimulus package”, a cash bonus sent out to everybody who pays taxes. Supposedly this boost of consumer spending will prevent the economy from reaching bottom (or, more realistically, will give a boost in numbers to coincide with the current President’s end-of-term farewell speech). And we wonder why consumer debt is rising to levels never seen before. It all makes articles like this one seem hopelessly naive.
The bottom line is that none of this seems sustainable. Consumer debt cannot continue to rise indefinitely. But what’s the average consumer to do? Be smart; be money-wise. Save for what you want, get rid of your consumer debt. In a nod to my government we’re trying to encourage that here in Canada, though as you will read it also has its naysayers (apparently poor people can’t save money – and yet we’re happy to extend them credit – well, tell that to these ladies).
The indices used to measure economic health are constructed by us, and can be changed by us. Let’s not make it all about consumption. And personally, I would like to see some laws put into place to limit the profits made by extending credit, both in terms of interest and amortization periods (40 year mortgages – sound economic policy or a profit-mongering exercise that will only result in making houses even more unaffordable?). And don’t accuse me of being anti-capitalist: it is illegal to profit from selling drugs and those are some tempting margins that could be heavily taxed. We do apply morals to making money, why not extend them a bit further and plan for a healthy future?