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September 29, 2010

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It's a shame that such a great and interesting point (one highlighting that habits, at least as much as conscious decisions, shape our financial condition) is buried within vague and populist socio-political complaints. I find that the latter dilute the former.

I don't read the bible often, but isn't there a verse in the Bible where Jesus asked a handicapped man if he REALLY wanted to be healed. He has lived so long this way that he may not want to be healed, because he would then have to pick up his palate, go home, and become a productive person.

Sounds like some people with problems don't really want it fixed because then they will have to change their ways.

Why do the right thing?
-------------------------------
If you want to lead a very enjoyable and long life from the day you leave home until the day you die, free from as much stress as possible, then personal finances really matter.

I just turned 76, have always been a saver and have been married for 54 years to my childhood sweetheart that was also a saver. We always believed in saving for the future and paying ourselves first when we sat down to take care of our bills during our working years. Consequently we were able to retire 18 years ago with no debt and sufficient assets to allow us to enjoy a great retirement, a very enviable lifestyle and nice vacations like the one we have just returned from, cruising down the Rhine and Mosel rivers in Europe.

Contrast that with the worst case scenario of a story yesterday in our local newspaper.
It recounted the case of a 36 year old realtor that had been earning $225,000/year for the last couple of years until his debts and the drop in housing prices finally caught up with him. He said that he has now lost his home, his job, 4 condos, 6 cars, and his wife - Draw your own conclusions.

I remember, way back in the Jimmy Carter years, having a conversation with the general partner of a limited real estate partnership in which I had become a partner. In those days limited partnerships were a very good way to obtain very nice tax writeoffs (300% of your investment), earn interest on your money, and get your principal back after about 5 years.
The advice I received and have never forgotten was this - It is very easy to get rich slowly but it is highly risky trying to get rich quickly. That advice has worked well throughout my life for me and for thousands like me.

I would like the government to do the right thing, but they've shown they prefer to do what is politically easy: by pandering to people who want endless tax cuts and promising to balance the budget without touching the biggest budget areas (military, social security, medicare).

@Brian S.
I agree with you that I also would like the government to do the right thing but we are now locked in a stalemate between two political parties with totally different ideologies about their vision for America's future.

It was interesting for me to recently compare the differences between Europe and the USA.
It boils down to the single question of "Do you want the government to tax you very heavily in order to provide free or very cheap healthcare, education K-University, subsidized housing etc. or do you want very low taxes and pay for all of the services that you need yourself?

Currently the country seems to want all the Goodies that socialized governments provide their citizens but are against the very high taxes that would be required.
Maybe if we hadn't assumed the role of being policeman to the world it might be possible but with such a high defense budget and social programs like the ones that you mentioned that have huge unfunded liabilities way into the future it seems impossible.

Lets say this woman makes $80K a year. Then if she spent $133.7K a year (adding $53,700 to her debt every year), then she would be on a pace to match our federal government's spending addiction. I base that on the FY09 data ... $2.105 trillion in taxes collected, $3.518 trillion spent. Wow, even most of the reckless average American consumers aren't that bad!

It's really sad to see such people in situations like that - even if it was entirely of their own making. What's bad is bad.

That said, folks that go through this process should face some consquences and rehabilitiation if they want to get a clean slate. You can't get something for nothing. If someone wants to be thin, they can't just get Lipo and then declare themselves healthy. They need to lose the weight AND develop better habits. Otherwise, the problems will persist.

It is a mistake to assume that fostering financial responsibility is the primary goal of having any type of government.

We actually require a government for another, more critical reason--to prevent chaos and social instability, civil war, breakdown of the rule of law, anarchy etc.

The recent bailouts were required to keep the economy from sliding into a giant cesspool and causing the entire world's banking system to collapse. If that had happened (& it very nearly did), you'd now probably be worried about trying to collect guns and ammo and food to survive with your family in your survivalist shelter. It would be something like Somalia or another place where there is no central government control, socialist, communist or dictatorship, of anything.

Think about it--you actually have the luxury to just be worrying about moral hazard why such irresponsible people aren't punished and so on.

Similarly, personal bankruptcy laws exist so that we don't have financially irresponsible people starving on the streets like dogs. Which, yes, probably they "deserve" as you describe in your post.

But our own western humanistic societal ethics system (& even the "Christianity" supposedly beloved by the Tea-Partyers) demands that we provide charity of some sort for all needy people, even those who are financially irresponsible. And thus we have government-derived laws that prevent the consequences from falling on these people too hard.

Personally, I like our society, the rule of law, democracy, and our society's general ethical agreement that there should be some sort of a safety net even for the most willfully idiotic.

I'm not sure what MasterPo is proposing to put in it's place that would be an improvement over our current system? Do you really think this woman should starve to death or be thrown into a debtor's prison where she'd have no chance of recovering her life? At least now, she has a chance, even if you think she's not going to take advantage of it.

I read this and I walk away with:

Some lady is a deadbeat because the government is mean to banks.

Is that actually the thesis here or am I confused?

One of the criticisms frequently voiced these days is the fact that the Rich are getting Richer and the Poor are getting Poorer. In 2007 a household income of $250K or more put you in the top 1.7% of the population and in 2010 it is doubtless an even smaller percentage.
Unfortunatly there are many people that are driven to live way above their means, hence the current problems with credit card debt and foreclosures. In the USA particularly, people are rewarded for having high intelligence and high skills and the jobs that require less of each are the ones that have been exported overseas to countries with lower labor rates - a pair of hands in China costs a lot less than a pair of hands in the USA, especially when all of the union benefits are included.

There is no easy solution to the current problems. The damage has already been done and it seems irreversible. We all know how hard it is these days to find products stamped, "Made in the USA".

The following recent article that appeared on MarketWatch Ticker Tape says it all.
==============================================================
U.S. Economy "Close to a Destructive Tipping Point," Glenn Hubbard Says
Posted Sep 28, 2010 07:30am EDT by Aaron Task in Newsmakers, Recession
Related: ^GPSC, ^DJI, SPY, UUP, UDN, TBT, TLT
"America is very close to a destructive tipping point," co-authors Glenn Hubbard and Peter Navarro warn in their new book Seeds of Destruction. "We must change how we conduct our politics and economics...or we will inevitably go the way of all once-great nations and suffer an irreversible decline."
Hubbard, dean of Columbia Business School, joined Dan Gross and I to discuss the "major structural imbalances" facing America, chief among them being the government's profligate spending.

Hubbard, you may recall, was chairman of the President's Council of Economic Advisers during George W. Bush's first term. As you might expect, he is a strong advocate of smaller government and lower taxes. But Hubbard and Navarro, a business professor at UC Irvine, are also harshly critical of Bush's "gross mismanagement" of the fiscal stimulus bequeathed to his administration by President Clinton. Specifically, Hubbard chastises his former boss for the creation of a new unfunded federal mandate, Medicare Part D.

But if Bush was a big spender, President Obama is "taking it to a whole other level," Hubbard says, citing the familiar critiques of ObamaCare and Financial Reform and "excess government spending" in general.

In short, Hubbard believes Obama inherited a mess but has made it worse with nearly every one of his major policy initiatives and general governing philosophy.

"We as a nation cannot resolve what have become deep and systemic structural imbalances in our economy simply by throwing more money and more and more regulations and more and more taxes at the problem," Hubbard and Navarro write.

I was looking for a point in this article but found that any productive point was lost amongst the rambling.

All that appears to be left at the end is the general sense that we can't expect people to be very responsible with their debts because the consequences are not immediate nor very dire.

Wow, inspiring and helpful.

Do people even pay back debt anymore? The latest Federal Reserve household survey confirmed what anecdotal evidence had been suggesting: the relatively small decrease in aggregate household debt since the financial crisis began was overwhelmingly due to consumers defaulting on their obligations.

In our society, it has almost become a badge of honor to walk away from a house, declare bankruptcy, or default on loans. And the government has encouraged this behavior since they are not prosecuting those who deliberately default and have the means to pay (which is actually quite a substantial number). Instead, you have people living in houses they lied to get, put none of their own money down on, and defaulted on the mortgage over two years prior--still living in the house! It pays to be a deadbeat anymore.

Wow. As always MasterPo is glad to see an article has inspired so much thought.

As usual, it's impossible to respond to each point specifically so this general post will have to do.

It seems many have misunderstood the purpose of the article. It's not about bailouts or punishment or bringing back debtors prisons. It's about people willfully acting irresponsibly knowing there really isn't much consequence society places on them. From the individual level to the government level spending without even a glimmer of thought of reasonable repayment is the norm today. If our [so called] leaders say to spend more to get out of a deep hole then how can we hold individuals to a different standard? Both are unsustainable but hypocritical to say the rules are different for the government vs. the people.

The article clearly acknowledged things can happen beyond control that put a person into debt. Yet even with a total debt forgiveness no lesson was learned! The person would not have changed anything in her life to avoid being in that same hole again in the future.

If you don't like the implication of "punishment" for running up unpayable debts how about "shame"? Like it or not punishment/shame is how a society enforces the code of expected behaviours. The punishment - in this case treating a chronic debtor as a person of poor decision capability - is meant to put the individual on notice they have strayed from the norms of society. It also serves as a deterance to others in society not to follow the same actions. But remove the punishment, even just the shame, and it's hypocritical to say running up unpayble debt is wrong when society is so quick to forgive and forget.

The article wasn't suppose to "inspire" anyone. If you need inspiration to know not to run up excessive unpayable debt you won't find it on the internet. You don't need "inspiration" to know you shouldn't do it, nor to know the cures if you have like drastically cutting spending and paying back your debt as soon as possible. No magic, just hard and focused actions.

Finally, it has been implied there is a lack of charity here. As the saying goes, charity begins at home. The woman in question was offered a hypothetical charity of making her debt go away in return for a plan not to ever need such help again. She refused to help herself. "Charity" is not cleaning up after someone else's indiscretions or just plan softness of character. Especially not over and over and over.

Many happy returns to all.

@jim, that was what I got out of it too.

MasterPo, you asked "Why do the right thing?"

I wish more people would understand that you do the right thing because it is the right thing! Leaching off of lenders and society is wrong. There shouldn't have to be debtor's prisons for people to have some honor!

Before anyone yells at me, no, I do not think everyone who is debt has no honor. I think that pure users have no honor.

This issue of 'leaching off lenders' is what I'd like to take issue with-

MasterPo accurately points out that you can always find someone to lend you money. That's because the worst credit risks are the best business. Credit card companies make their biggest profits off of those who pay the minimum for a long time, and the fact that some of these people default is just the cost of doing business. Payday loans have an enormous default rate, but when interest rates are over 100%, you can have a lot of defaults and still make money.

When the banks grossly underestimated the risk of default across the economy, the economy nearly ground to a halt, and the government stepped in to save the banks (a very good thing to do, from a macroeconomic perspective), not to forgive the mortgage loans of millions of Americans.

I agree this woman is making poor decisions, but this situation is repeated across the economy and when all is said and done, the bankers end up with billions of dollars, and the people in debt never get out of debt, even if they declare bankruptcy. Now tell me, who is leaching off of whom? Sure, people are idiots, but the banks are not victims.

Oh, and Old Limey, I really like the way you set up the challenge we face-the Republicans want to cut taxes but won't cut spending, the Democrats want to keep spend but won't raise taxes, and we keep electing people who say we can do both (and until the world stops buying our debt, I suspect we'll get away with it).

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