Borrowing into Oblivion

One of the best columns that I recently read was penned by Jay Jefferson Cooke.  His screed appeared on the front page of the Courier News.  It discusses the decades-long love affair of Americans with instant gratification, and of how it plunged us into the deep waters of unsustainable debt.  Cooke discusses ways to avoid that.

If you read his column, you will get a sense for the vigor and passion – not to mention the accuracy – with which he gets his points across about overspending and its consequences. 

 

I can relate to his essay very well:  When I grew up in post-WWII Lowell, Massachusetts, textile and shoe manufacturing industries were its economic backbone – at least 50 million square feet of productive capacity.

The war effort kept everything booming, but post-war peace brought a sharp decline in demand, and mills shifted south in chase of cheaper labor and proximity to its raw material, cotton.  Later, everything would move to Asia.

For the thousands of unemployed workers and other affected businesses, federal and state support programs were not even close to the level that they are today.  Yet, somehow, people made do.

Growing up within such an environment can impress a searing economic lesson upon the psyche – one that is unavailable from mere book learning at the university level.  It’s called experience – the school of hard knocks.

Years later, when Pris and I married, we were determined to avoid the type of spending habits which inevitably lead a person into trouble when an economy sours. 

 

The specifics of Cooke’s article reminded me of the many things we did to remain afloat financially.

Our overall plan, though, was plain and simple and a good strategy to follow:  Live below your income!  That’s right:  below your income:  Not at your income, not over your income, but below your income.  I can already hear teeth grinding at the thought of it!

Keep that practice for as long as is necessary.  Never allow yourself to get mired in the mud hole of credit card addiction.

Did you see the movie classic, The Graduate?  At one point, young Benjamin is strongly advised to “get into plastics!”

 

But script writers weren’t referring to the colorful plastic that makes it so easy to accumulate debt at usurious interest rates – a greasing of the skids preceding a slide into oblivion.

Centuries ago in Medieval Christianity, usury was considered sin, because, among other things, it preyed upon the poor.  Even now, Islam in many parts of the world considers charging interest for loans sinful.

Today, the band plays on as the credit industry’s siren song of easy borrowing at punitive rates continues to slake the public’s insatiable thirst for instant gratification.  As the French say, Le plus que ça change, le plus que c’est la même chose. 

 

The second Great Depression that began in 2008 (it was not a recession) was a wholly avoidable economic blunder:

Among its many causal factors was exorbitantly easy consumer credit issued for home loans, a practice eagerly supported by politically aggressive interference in the housing market from within The Beltway. 

 

Banks caught on rapidly and joined the party:  They processed easy home loans and kicked them down the road to semi-governmental agencies, such as Fannie Mae and Freddie Mac.

 

Not to miss the festivities, brilliantly perspicacious Wall Street mavens saw the mountain of mortgage debt piling up:  They devised a scheme to sweep up those obligations by the billions, convert them into marketable securities of varying credit worthiness and peddled them to unwary buyers.  Underwriting fees made it a lucrative business. 

      

As a hedge against homeowner default, a small UK-based subsidiary of AIG began selling insurance to cover those bonds.

 

However, when the underlying mortgages supporting those obligations began to fail in overwhelming numbers, AIG found itself without reserves to cover the avalanche of useless paper.  Financial systems in the U.S. were smothered.  Humpty Dumpty had fallen off his perch and could not be put back together again. 

 

In one of his books, while commenting on the causes of the Great Depression of 1929, astute Harvard economist John Kenneth Galbraith predicted that such a calamity could happen again as it did then.  He was 79 years off in his prediction, but right on the mark as to its coming.

Thanks for checking in, and remember:  Don’t overwork those cards in your wallet.