Is the poor state of the American economy Obama’s fault? Is it George Bush’s fault? Maybe Bill Clinton or Bush 41? Perhaps one, or a combination of the last six congresses? A little of all these? The liberals, the conservatives? The Democrats, the Republicans?
Let me put forward another way to look at it. I’ll bet many of us here remember mortgage parties, celebrations of the last house payment being made. At last, the first major goal to a safer retirement. I’d also wager many remember when 36 month financing on a car was pretty much the standard. In fact I remember when cars, furniture, appliances, TV’s were sold because of quality and price. Today their sold by the payment per month. Some folks, with really bad credit, can even “rent to own” computers, appliances and furniture. With absolutely no credit checks.
This way of making purchases, as I recall, was not the way of the generation before us or the one before them, but that’s as far back as I can remember. They “saved” for new things; credit cards at our house were taboo. At my friends houses they were for “emergency only.” I suspect some how along the way in our desire to make life “better” for our kids and give them all the things we didn’t have, we failed to see that most of those emotions were nothing more than validation of our own success to one degree or another. Signs that we could provide, and few could make light of the way our kids dressed or the toys and gadgets they had.
If we wanted a car we really couldn’t afford we leased it, we didn’t buy it. “How much a month” over a number of decades became a way of life. The economic fabric of the American family became a much looser (no pun intended) weave. In order to “keep up” we needed more family income. Hell, women working during WW II was an acceptable part of society, and necessary. In the 60’s and 70’s our household demands were getting higher still. Two income families became the norm, but the birth rate didn’t slow much. With both mom and dad working a portion of child rearing went to our school systems, and they gladly accepted. We did acquire larger homes with more bedrooms and baths, more TV and the VCR’s to go with them. At the very least we had our homes updated to the styles and features we “needed.” But that was no problem in the 70’s, we could get home equity loans. And the interest was even deductible from our income tax! For decades the savings rate in our country declined steadily. At the start of the new millennium it reach a –5% (the minus sign means minus). But that was OK everyone was doing it. It even got easier to buy housing, we could pay a little less now and more later, or refinance. We witnessed huge developments sprout up as though they were seeds in the ground. We didn’t wonder who’s buying all these homes? Large tracts of homes built on the come (specs) and they were a good way to make money. Just buy them before the development gets rolling and sell it when it’s finished. Stocks were a good buy at 20 to 50 times earnings. Do you think the liquor store down the street that earned $1000 a month would be worth $600,000.00? There were $100 to $300 stocks that had no assets, no net worth. It all became us, and the way we lived and thought.
As we went to work each day we brought our economic habits with us. We had a heavy influence on marketing decisions. We arranged ARM’s as an easy way to buy a house. We arranged 48 then 60 then 72 month financing for our cars simply by demand. We asked, they provided. They better if they wanted to survive. The living on credit not only became our way of life, it became a way of life for our businesses and even large corporations. As we look back does a business seem viable, let alone vibrant, if it depends on lines of credit for anything other than expansion? Yet many went so far as to finance payrolls with short term lines of credit. That should have been as bright a warning sign as a –5% savings rate in our personal lives. It didn’t stop there either. If we believed we were doing the right thing doesn’t it seem logical government believed they could do the same. What possible reason would we have to doubt that? Then our government thought why shouldn’t everybody have this way of life, let’s guarantee it. In fact let’s start by guarantee housing for all. We’ll tell our friends Freddy and Fannie loan more money to as many as you can. It doesn’t matter whether the buyer can afford it…do it. That leaves the two in somewhat of a lurch. They’re going to have some bad loans and then loose their jobs, nice ones too. How do they dig out of this? Package them with good loans and sell them, great idea. But to whom? Wall Street! Yeah, that’s the ticket, and they’ll make a ton doing it. Wall Street thinks it’s not a bad deal but who do WE sell them to? There some risk so let’s make up an insurance policy for the bad debt and the buyer will feel safer. “Wait, we can’t do that without being regulated.” Easy answer, “let’s not call it insurance.”
And that’s just housing. We created, by our demand, a credit based society over the last 40+ years that simply cannot survive without credit flow. And it’s dried up.
There is a bright side. American savings rates are now 5%, a 200% change in a mere 6 months. There a good chance business will be purged of a credit based day-to-day frame of mind. The weak will die, the new and strong will adapt and competition will, as always, lead America out of this recession.
It’s our fault.