Thursday, June 03, 2010


Over the past few years, I've warned of two things: the mortgage crisis and the consumer debt crisis. I felt the consumer debt crisis would be the far worse of the two, and would likely drive the economy into depression.
One I predicted would come to pass shortly after the other. One has come to pass. So the clock is ticking.

WASHINGTON – The economy trudges ahead yet debt dogs many Americans, stressing them out even as they firm up their own financial foundations. [...]

So why aren't the stressed — and the not-so-stressed — feeling better?

For starters, it just doesn't feel much like a recovery to many people.

Unemployment is stubbornly high — 9.9 percent. The jobless face fierce competition for work. Those with a job are watching their paychecks shrink.

A growing number of people are at risk of falling into foreclosure, and only those with the most stellar credit probably can get a new loan. AP-GfK polls show that only 20 percent say the economy is good, compared with 15 percent last year.

Going into 2008, the total amount of consumer debt-- mortgages, car and student loans, and revolving credit-- was roughly equal to the national debt. The bailouts changed that.

I felt the mortgage crisis would trigger a consumer debt crisis for a couple of reasons:

1) A mortgage crisis shakes the very foundation of the American Dream-- to own a home and to maintain and grow equity in that home as a long term investment that will fund your retirement.

2) A mortgage crisis would automatically force banks to tighten their lending to consumers. Since Americans had been outspending their incomes by sizeable amounts and borrowing against their homes to do so, forcing them to rely on savings they were using to pay down debt would tank the economy. There would be panicked borrowing, refinancings, and even full-on foreclosures as people just gave up. Mitigated, of course, by the awful bankruptcy reform of the Bush years. Consumers are now looking at decades of debt piled up ahead of them and no easy solution to shift the burden away from higher priced debt to lower priced HELOCs and mortgages.

3) In addition to tightening credit to consumers, banks would pressure consumer debt by imposing more fees, higher interest rates and tightening rules, all designed to make debt less convenient. And more profitable, of course. But given that the banks had to scrape knees to get past the mortgage crisis (which by all accounts could have been much worse), its understandable they wouldn't want the other shoe to drop, and so would discourage consumer borrowing.

The reflex response would be that consumers had this coming, that instead of buying $150 Nike sneakers and $200 iPods, they should have been working to firm up their own houses.

That's partly true, but is a far more marginal factor than many would admit. Elizabeth Warren, Harvard professor and currently the Congressional watchdog on the bank bailout, has studied consumer debt and finds there are three major contributing factors to why people load up: divorce, job loss, and long term health care costs.

Often, two of those three hit the same family at the same time, and in a number of cases, all three swamp a family. That's not to say that there isn't an awful lot of ridiculous spending going on. An entire marketing sector of the American economy thrives on selling us shit we don't need but must have.

But as with fast food and obesity, there comes a point where even the most ascetic among us finds themselves grasping that iPad off the shelf. It's easy, its a quick fix, and most of all, it gives us the illusion of satisfaction. It is disingenous on the part of those who would blame the broke not to fess up to the fact that the entire consumer economy revolves around being made to look foolish if you have the wrong car or wrong hair color or wrong shoes. 

And there is the malevolence of America, and now of the west (seeing as we've infected the planet with our Buymore virus): two sides of the same corporatocracy vying to see which can bankrupt us faster, only we can't file bankruptcy, so we'll be indentured slaves for the rest of our lives. 

The fear they should have, the fear I do have, is what happens when the shit hits the fan?