So, I could only go through the first page of this article till I had to stop reading it. Without directly approaching a key issue (at least in the first page) this article gets at what I see to be the key to our current financial crisis. The complete and utter inability of Americans to live within our means. The woman highlighted in this article had an good paying job, bought a house well within her price range, and seemed to have everything going for her. Then she decided to refinance her home with a higher interest rate to help consolidate her debt (why people give such private information to newspapers is beyond me but that is a topic for another post).
Why does someone with such a well paying job and low mortgage payment (her initial mortgage payment was probably in the range of $1200-$1300 depending on the down payment) end up in such bad shape. Especially considering she should have plenty leftover for expenses, savings, retirement, child care costs, etc.
Well, the problem is that our back-ass consumerist culture drove her into this position. She probably had good credit going into this situation therefore she received roughly 20 credit card offers each week...of course she couldn't resist setting up at least one of them since the interest rates seemed so low and spending limit so high. Next thing you know after a couple of shopping sprees at Best Buy, Nordstrom, and BB&B she is $15-20k (maybe more) in the hole to MBNA with interest payments over 20%. Awesome.
Obviously the best way out of the situation is to cash in on a little of equity on her house (whose value has skyrocketed due to an artificially low interest rate and mortgage lenders on crack) to pay off the bills and get back on track. So what if the rate is a little higher and there is a little more risk. No big deal the good times are here to stay!
WELCOME TO 2008! The economy is now in the shits, your mortgage rate is going through the roof, even if you wanted to unload the house the market is tanking and you will end up taking a loss. Time for foreclosure and the end of the American Dream.
This, my friends, is why I am against the stimulus package that Congress recently passed. It is doing nothing to help solve the problem of people overspending on shit they don't need (yes Stan, I know you will be right behind me to give the money back to Uncle Sam). There is something to be said for personal responsibility. Obviously we need to do more to help the poor and John Edwards' is spot on when he talks about the two Americas (as hypocritical as that may be), but do people making $90k a year really need a bail out?
5 comments:
i know more about what it is like to be black in america than i do economics, but this sounds about right to me. the DC contingent of dude weekend can tell you why i am against the stimulus-package-for-you...then again, that check is looking mighty inviting to me right now.
Good rant, Cleve. Personal responsibility is important, but so are rules to prevent everything going to shit. Also I love me some behavioral economics/soft paternalism every now and again, just to nudge the populous in the right direction. EJ's column this morning looks good too.
this idiot's decision to go on shopping sprees and pile up debt on her credit card caused her problem. Noone forced her to buy that new flat screen or the pair of jeans her budget couldnt handle. To my economically illiterate mind, the problem is that noone in this damn country feels like they should have to bear the costs of bad financial decisions. It starts from the top- the government borrows from the Chinese to make up for budget shortfalls. The banks and brokers get fed bailouts for fucking up on risky mortgages instead of going under, like they should. And now Sharon from Dumfries now gets a artificially deflated interest rate (held down by the govt. and, by extension me, who didnt take out a risky loan) instead of having to suffer from her poor money management. Of course, insulating people from the costs of their poor decisions will only make them more likely to undertake these risky adventures in the future. Problem not solved. America is like a drunk at a bar trying to drink himself sober. Oh, and you bet your sweet ass im spending my stimulus package on shoes. or maybe an ipod.
I agree with a lot of what Stan says. People should be responsible for themselves, Congress should pass a Balanced Budget Amdt to the Constitution. We all end up paying for "the mass idiocy."
Some good David Brooks this morning though:
"Nonetheless, individual responsibility is not absolute. As behavioral economists demonstrate every day, human beings are powerfully and unconsciously influenced by the ideas and assumptions that float around in the social ether. If the financial elites misprice risk and offer delicious loans to consumers, then many of those consumers will end up grabbing the loans, the just and the unjust alike. We should at least see if there’s a way we can ease the pain those people are bound to suffer."
I want to get back to my major point with this post. The woman highlighted at the beginning of the WaPo article made all the right decisions from the start (house she could afford, fixed interest-rate mortgage, etc), however something caused her to spend beyond her means therefore leading her to refinance her house so she could consolidate debt. This has nothing to do with Wall Street and everything to do with Madison Avenue. Our culture is so fucking material driven that it is beyond someone to put away that extra money every month instead of buying a $500 phone you don't need. We should start sending some of these people to Cuba for a little while and see what it is like to have absolutely nothing.
I wonder what the Great Depression would have been like if credit cards existed.
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