This is a really cool little article in the latest New Yorker.
It's comparing our financial crisis and our current moment to the time when a child bumps her head right before she bursts out her scream, she's just pausing long enough to figure out what to do. The world has stopped spending for the same reason that a child cries. We've been hurt and we want everyone to pay attention.
A really great quote:
"Far from adjusting our expenditures to the needs of the moment, it seems, we tend to wildly overswing, according to our mood. The difference between the provident ant, who cautiously saves up for winter, and the carefree grasshopper, dancing and hopping, is a matter of what Keynes called “animal spirits.” It is better for the common lot if each of us is a hopper (and a shopper) rather than a hoarder. Being a nation of grasshoppers is allied to being a nation of hope."
And:
"The seasonal classics demonstrate the same truth. In “It’s a Wonderful Life,” George Bailey’s Building & Loan is, let us recall, the reckless banker of Bedford Falls, giving what would now be called subprime mortgages to people like Mr. Martini, who would be better off renting. And it is mean, miserable old Mr. Potter who berates Bailey for the practice. “And what does that get us?” Potter asks. “A discontented, lazy rabble instead of a thrifty working class.” But George’s answer speaks to the larger emotional notion of what makes economies work and what economies are for: 'Doesn’t it make them better citizens? Doesn’t it make them better customers? . . . Just remember this, Mr. Potter, that this rabble you’re talking about . . . they do most of the working and paying and living and dying in this community. Well, is it too much to have them work and pay and live and die in a couple of decent rooms and a bath?'"
But in reality, Potter was right. Or to quote a recent home schooling lecture I recently listened to where the speaker encouraged her listeners not to take out loans for a college education because "debt is bondage". Can you imagine if we took the "debt is evil" to an absurd extreme? If we went back to (as we are now) to 20% down payments on home loans? Where people waited until they can buy a car with cash. We would all be poorer. Far fewer of us would be home owners, we would be driving miserable cars with high maintenance costs until much later in our lives.
Going into debt is an act of faith, both in ourselves and in the larger community. It's a "hope rooted in a common purpose". I'm not saying that we should go back to a nation where we don't save at all. We should scale back, but we're scaling back way too much.
"What makes Bedford Falls thrive is people feeling good about its future. George Bailey is a Capraesque Keynesian through and through, encouraging consumption rather than thrift, and hope rooted in the common purpose rather than fear rooted in the impoverishment of capital. "
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10 comments:
I thought there were only 3 things to go into debt for:
1. Home
2. Business
3. Education
I don't know who reads your blog but I think you need to be careful that you are not encouraging people to spend money they don't have. I know that is not your intention, but some people might read this wrong. Just sayin'.
H,
Debt, I feel is a personal decision. I don't think there are any rules about what we should or shouldn't go into debt for. I know there are opinions, like the one you just gave, but I don't necessarily agree with yours.
But how much debt we are willing to take on in proportion to how much we are willing to save has a lot to do with how much trust we have in ourselves and in our community.
If we save too much and are unwilling to go into debt at all, it shows a serious lack of trust, which is what is happening right now.
Before the current crisis, the balance was swinging too far the other direction, we were too leveraged with debt, we had too little savings. So, when things changed, we collectively were spooked, and individually, some of us were burned badly.
There needs to be a balance in the middle somewhere.
Just for the record I would add the following to your list of generally acceptable reasons for debt:
4. Medical bills.
5. Vehicles
6. In times of economic hardships, food, clothing, and shelter.
7. Automotive/home repairs as needed.
8. Other.
Prudence should be the key, though.
One example to contrast:
My parents refused to go into debt to fix their air conditioning. As a result, we lived in Yuma, AZ without an air conditioning for years, in fact I don't really remember a summer with air conditioning. In contrast, our air conditioning broke down two summers ago. Yep, I charged a new air conditioning on my credit card without guilt.
I would have liked to be in a position where I can pay cash the next time - but that's a tough position to be in, considering that I have other things I'm saving for.
Quite simply, I have trust in myself that I would be employed long enough to pay it off (which we did).
And because of that trust, we had the comfort of living in an air conditioned house through the brutal Phoenix summer.
Scott,
Those were not my personal thoughts on what we go into debt for, and we personally have plenty more debt than that. That's what I'm worried about. I totally agree about the AC thing and probably run down cars that you have to put more money into to repair than they are worth. I just think we need to be careful about what we go into debt for based on what our needs are. Your iPod, for example, is probably a good purchase for you and Sara. You will use it, probably paid cash for it, and will benefit from it. For someone else to charge it on a credit card to buy as a gift for someone that wants to listen to music though, that isn't such a great idea, in my opinion. Even great deals aren't so great when you have to pay all the interest. I really probably shouldn't use the iPod as an example, I don't know anything about them. It was just the first thing I thought of since you had recently blogged about it being one of your big purchases this year. No intent here to offend..
H, I think we're on the same page.
No way would I be blogging this way two years ago. I should have been blogging (if I was more prescient) about how we should be avoiding debt.
I agree we shouldn't be charging for Christmas presents or anything but non-necessities. But we shouldn't be hoarding our cash either afraid that our A/C is going to break at any time and I want to make sure I don't go into debt for that purchase.
I pay (or try my hardest now) to pay for cash for things like skiing, ipods, computers, vacations knowing that I have a bit of cash in the bank and a credit card I can fall back on in case I need to make a car or house repair.
H,
I do want to say, I'm speaking in general terms by the way. These are all individual decisions and feelings.
If a person feels like, for whatever reason, they need to hoard a little for a while for more peace of mind, than I'm all for it.
The problem is that if too many people do this, we all suffer, and that's whats happening currently. Your (collectively I mean) hoarding could and would cost me my job.
I'm glad we cleared that up :) I was worried there for a moment and couldn't let you tell us to charge our future in the name of saving the economy! Thanks for the discussion. (I had an intersting chat with Bill's dad about the housing market. I'll have to share it sometime if I can remember it all)
H,
I agree. There's no doubt there needs to be a correction. Like I said, we weren't saving enough here in the US, so a recession was inevitable. I'm worried that this recession could turn into a depression, though, or a very long recession because we over-correct.
5% downpayments I think are enough, and in some instances even less for home purchases. We should not go back to 20% down payment requirements.
One of the hard things about debt is that it can become a slippery slope. Example: When my wife and I bought a house, we found one that was only a few thousand above what we were willing to pay. It was in better shape, better HOA, and new utilities. We agonized over it for days, but decided against it because it was above what we had set as our self-imposed limit.
I can easily see how a limit becomes an approximate price range. You can see that happen with cars (as they add on extras), houses, and any other thing. (Which our washer and dryer did go slightly over our self-imposed limit.) I've even seen it happen with violas and bicycles.
It seems to me that there are 2 ways that people get subconsciously pushed into buying things. The first is finding the limit, and then redefining it as a target price. The second is increasing the valuation of something. Make something a gotta-have or making it superior to another similar product. Even if it is much better, making its’ valuation more important than the price. An example is education, something which I value highly. I have some students who elect to go to a college where they will have to take out tens of thousands in loans almost every year, when they were awarded a full ride to in-state colleges. The other school might be better, but the stress of paying those loans off has me concerned.
Jeff, I appreciate your comments, and obviously whether or not to take on debt or to make more or less of a purchase is tricky, and there's a lot of emotion behind it, and obviously there's no right answer.
But I just want to say that sometimes its smart to spend more than you originally think you need to.
Sometimes its smart to be frugal. Ultimately, we're trying to reach for something in this life, and if to get there, we need to take on some debt, I think we need to do it.
School loans is a very good example. For example, if I have the choice between two schools, one an expensive private school, another a cheap public one.
It may make sense for me to take on the debt to go to the expensive school, if its a route that will help me achieve my goals. If its just a way for me to show off, than probably not.
I guess my point is that debt isn't bad, in fact its vital.
We can't grow our economy without debt. But obviously, we need to be smart about it and to do it from a position of strength.
It’s a tricky balance. In regards to colleges, I’ve had a couple of students go to college, where they were going to take out $15,000 in loans per year for only tuition, (after scholarships and without housing costs) when they had a full ride for an in state school with extra grants to cover dorm costs. One went to Johns Hopkins for medicine – probably good choice. Another went out of state for a music degree. True, she is getting a better education and more attention there, but I worry about what job she will get coming out of college to repay those loans. I agree with everything you said, but I am concerned with how debt is marketed to kids entering college. (I acquired my first credit card with a $10,000 limit while in college.) I agree with everything you said, but I don’t think people were learning the appropriate risks of debt, and thanks to the way the corporate establishment has been in this country, it has become inevitable in some circumstances due to the weakening of the middle class, as well as long-term corporate marketing goals.
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