Debt

[cliaz]

http://www.alternet.org/workplace/49676/

 

good read

 

 

 

America, Maxed Out

 

By James Scurlock, Scribner. Posted March 24, 2007.

 

The federal government -- and the majority of Americans -- can no longer get by a single day without taking on additional debt. And as more borrowing goes to simply pay off old debt, or to make interest payments, the new debt does little more than increase banking profits.

 

Eventually the higher levels of debt will lead to higher interest rates, which will lead to more debt, creating a cycle as vicious as it is inevitable. Over the past generation, banks and credit card companies have made trillions of dollars of high-interest, unsecured debt available, and Americans have scooped it up. Our incomes have risen an average of 1 percent in real terms, while our household debt has increased over 1,000 percent. As a result, we no longer save. We have no choice but to keep spending until our credit is exhausted and we own nothing.

 

As Marriner Eccles, the legendary Fed chairman during the Great Depression, noted, "The economy is like a poker game where only a few people control the chips and the other fellows must borrow to stay in the game. But the moment the borrowing stops, the game is over."

 

How did we allow this to happen? How could we be so shortsighted? How could banks keep lending to people who can't afford to pay them back? Doesn't that fly in the face of tradition, if not common sense? Don't bank executives realize that they are sowing the seeds of their own destruction? After all, when most Americans can no longer stay afloat, the banks will sink alongside them as they did back in Marriner Eccles' day.

 

The simple answer is that while the banking industry has gone through its most profound change since the Venetians invented modern finance hundreds of years ago, Americans have clung to old assumptions. In particular, we've continued to believe that banks wouldn't extend us credit unless we could handle it, and that banks want us to save. Yet, the big banks realized more than a generation ago that they make far more money teaching us to spend than to save. They've also learned that making money upfront, mostly in the form of fees, is a lot more fun than waiting for a revenue stream to trickle in. The reason is simple: Fees can be booked as profits immediately; revenue streams take years. This is why most mortgages, car loans, and even credit card receivables are bundled together and sold off, sometimes instantly, to Wall Street.

 

Take Enron as an example. Enron executives didn't want to wait for their brilliant ideas to bear fruit. So, with the help of an accounting firm called Arthur Andersen, and the blessing of the S.E.C., they applied a short-term accounting rule called "mark-to-market" to long-term contracts, so that executives could decide how much a new business idea was worth, book it as immediate profit, and then collect a bonus on that profit -- all in the same quarter. When these new businesses instead generated huge losses, executives turned to the world's largest banks to hide those losses -- for a fee. Enron would "sell" the losses to a large bank before reporting its financial results, then buy them back afterward at a greater loss. The bank collected a fee without taking a risk, the bankers got a bonus based on generating that fee, and, most important, the Enron execs rewarded themselves with huge bonuses based on phony -- but consistently growing -- profits. Of course, mark-to-market guaranteed Enron's eventual failure. But consider that the top ten CEOs in America now earn more than $100 million per year, and you realize how quickly short-term gimmicks can create vast fortunes.

 

The same gimmicks are now being applied to consumer debt. Most mortgages, car loans, and credit card debt are packaged and sold off to investors at a profit within a short period of time, sometimes seconds. Banks create an estimate of how much the credit card debt is worth and sell it to investors, pocketing a profit. Ironically, mark-to-market was developed to prevent companies from hiding losses by compelling them to adjust their portfolios to market prices on a daily basis.

 

But there is an even greater misconception at work -- a misconception that debt is not what it used to be. That there is "good" debt, for example, and "bad" debt. Tune in to Suze Orman, for example, and she will tell you that a single number, your credit score, is the key to your financial future. But while a good credit score gets you better rates on your mortgage and credit cards, it also opens up the floodgates for more "good" -- i.e., cheap -- credit to pour into your life, and this credit does not usually remain good or cheap for too long. The idea that one should stay out of debt, period, is now considered unrealistic. After all, who lives without debt? The Unabomber, maybe?

 

Even more frightening is the notion that debt is our friend -- a magical tool that allows us, in the words of Napster's new ads, to "own nothing, have everything." No less a fiscal conservative than President Bush has dismissed the federal debt as "numbers on paper." His vice president has flatly stated, "Deficits don't matter." But the apathy prize goes to two-term Florida Sen. Connie Mack, who was hired to give Bush ideas on reforming the tax code in 2005. Here's a recent exchange between the senator and the New York Times:

 

Interviewer: Where do you suggest we get the money from? Sen. Mack: What money?

 

Interviewer: The money to run this country. Sen. Mack: We'll borrow it.

 

Interviewer: I never understand where this money comes from. When the president says we need another $200 billion for Katrina repairs, does he just go and borrow it from the Saudis? Sen. Mack: In a sense, we do. Maybe the Chinese.

 

Twenty years ago, when the federal debt passed the trillion dollar mark, politicians, including Ronald Reagan, as well as economists, including Alan Greenspan, warned of dire consequences. Seven trillion dollars later, borrowing more has become the solution to every conceivable problem. Take Social Security as the largest, and perhaps most insidious, example: In order to reduce deficits, the past four presidents have borrowed $1.5 trillion from Social Security and the "trust fund" now holds nothing more than a very big IOU. In effect, we've been surfing, borrowing from Social Security to pay off the interest on the federal debt every year. In the 2000 and 2004 elections, George W. Bush promoted an idea called "private accounts." In theory, every American would own their Social Security account. The account would contain real money so it could buy real investments, i.e., not IOUs. In theory one could also borrow against it, of course. The trouble is that since the Social Security Trust Fund has no cash, no one can say where the money would come from to fund these accounts. The Chinese again? Probably. But Bush hasn't told us yet. He has, however, loudly warned working Americans not to count on Social Security.

 

The media never really took the president to task on the math of private accounts. It was the AARP that killed the idea, and, ironically enough, they hated it because private accounts would have reduced the amount of guaranteed benefits to their members, not because it would have indebted their future members. Pete Peterson, one of the smartest financiers among us, has correctly pointed out that "benefits" like personal accounts are simply deferred taxes if they're not paid for. Yet neither the anti-tax president nor his adversaries once questioned whether borrowing the trillions of dollars needed to fund private accounts was a good idea, much less possible. After all, Americans have accepted the surfing lifestyle in all of its absurdities. We have watched advertisements that say, "Pay off your high credit card debts!" and we have called the 800 numbers and attached our homes to new loans in order to pay off our credit cards, then bragged to our friends that we are "debt free." We are encouraged to rent things we used to own -- including music and, paradoxically, the down payments on our homes. We have accepted this new bargain that we will never be out of debt as inevitable, preordained by the God of our choosing. We have forgotten the feeling of solid ground as we have taken on larger and more treacherous waves. We have ignored the greatest investor among us, Warren Buffett, who has derided our "sharecroppers society." He sounds old, cranky, and un-hip.

 

Until we wipe out. Until we lose our jobs, until we get divorced, until we discover that our health insurance doesn't cover thousands of dollars of "extras," until we lose our job or until our home doesn't appreciate at the anticipated rate. Until we can no longer surf. And then the "debt hell," as a consumer advocate I interviewed calls it, kicks in. The fees pile up. The interest rates increase. The bargain we accepted ceases to be a bargain. It becomes prohibitively expensive. We learn that we are not middle class at all. We are poor. We own nothing. And then, just maybe, we finally ask, "Well, how did we get here?"

 

Excerpted from Maxed Out by James D. Scurlock. Copyright © 2007 by James D. Scurlock. Reprinted by permission from Free Press, a Division of Simon & Schuster, Inc.

[Ursa Majoris]

A disaster in the making. I have a couple stories about this but they'll wait. Some things you find out about people you thought you knew are surprising....

[alexgaddis]

A disaster in the making. I have a couple stories about this but they'll wait. Some things you find out about people you thought you knew are surprising....

 

do tell...

[Beaumont]

There are a lot of people out there living the high life and living paycheck to paycheck ...

 

Pure stupidity ...

[alexgaddis]

There are a lot of people out there living the high life and living paycheck to paycheck ...

 

Pure stupidity ...

 

The funny thing is I used to see people driving these nice new cars and would always wonder what they did for a living as they must be rich...now I just wonder how much debt they have to dive that car...

[detlef]

The funny thing is I used to see people driving these nice new cars and would always wonder what they did for a living as they must be rich...now I just wonder how much debt they have to dive that car...

 

I figured out that one some time ago when employees of mine would roll up in nicer rides than mine. I mean, I just totally "pimped out" last year when I bought a 6 year old Volvo wagon. I'm sort of utilitarian about that sort of thing.

 

But it always alarmed me how people feel about taking on payments. Certainly my wife and I pick our spots and spend way more money on things like wine and art than most do. Of course, our mortgage is also less than 10% of our pre-tax income and we have no kids.

 

We managed to pay off nearly $50,000 in personal debt that we took on to open our restaurant in barely over a year.

[alexgaddis]

I figured out that one some time ago when employees of mine would roll up in nicer rides than mine. I mean, I just totally "pimped out" last year when I bought a 6 year old Volvo wagon. I'm sort of utilitarian about that sort of thing.

 

But it always alarmed me how people feel about taking on payments. Certainly my wife and I pick our spots and spend way more money on things like wine and art than most do. Of course, our mortgage is also less than 10% of our pre-tax income and we have no kids.

 

We managed to pay off nearly $50,000 in personal debt that we took on to open our restaurant in barely over a year.

 

Well being in the mortgage industry I have seen many renters looking to buy their first home who couldn't qualify for a mortgage because they had a car payment of $600 a month...

[Ursa Majoris]

Well being in the mortgage industry I have seen many renters looking to buy their first home who couldn't qualify for a mortgage because they had a car payment of $600 a month...

 

See, that would drive me insane. I leased my current one for $371 a month and hated making those payments. I bought it at the end of the lease for way less than book and now I have no car payment, a situation which will not change for at least five years.

 

Never have understood that whole "must have a new car" thing.

[AtomicCEO]

I drove a nicer car in my mid-20s than I do now. Funny how life teaches you the value of money.

 

I refuse to make payments on anything ever again.... except my house.

[cliaz]

I can’t even begin to tell you how mad I am at the people that live around me defaulting on their mortgages because they bought homes with ARM loans. We have a new development that went up 5 years ago next to our neighborhood and these homes go between $500k and $900k. I see cop cars parked outside those homes thinking “How in the hell does a cop afford a home like that?” Well we know how.

 

Our home prices are being driven down in our neighborhoods because all of these people moved from across the tracks from the older sections of PG county and bought these huge homes for around the same monthly payment that their old broken down homes were and now find out that they can’t afford them and claiming either bankrupt or selling their homes for pennies on the dollar.

 

All you see now are signs in their front yards from companies that buy homes for cash. I almost feel bad for these people.

 

It breaks my heart that younger kids today do not know the value of $1.

 

That’s why I posted that thread for the younger huddlers http://forums.thehuddle.com/index.php?showtopic=199076 for my 8,000/9,000 post. People just are not educated on how to take care of their money and debt.

Edited March 26, 2007 by cliaz

[wiegie]

And you guys mock me for styling around town in my 1994 Toyota Tercel.

 

[Bill Swerski]

See, that would drive me insane. I leased my current one for $371 a month and hated making those payments. I bought it at the end of the lease for way less than book and now I have no car payment, a situation which will not change for at least five years.

 

Never have understood that whole "must have a new car" thing.

 

 

Me neither. Instead of getting a new car when my wife's job supplied her with a free company car, I'm gladly running our 11-year-old Oldsmobile into the ground.

[Ursa Majoris]

Me neither. Instead of getting a new car when my wife's job supplied her with a free company car, I'm gladly running our 11-year-old Oldsmobile into the ground.

 

I opted for a car allowance in cash and continued to drive my current one when I qualified for a company car. Mind you, the limited choices were so god-awful, it was a no-brainer.

[TimC]

I own both Da Vettes free and clear before any of you bozos get any ideas....and no credit card debt.

 

Oh, and GB da bonus 3/15.

[DemonKnight]

I, as I now realize luckily, screwed my credit score up so bad between 18-20 that I can barely get a checking account. Thus I own a decent car free and clear and dont owe the Govt, Hospitals or any Credit companies a penny. Credit is evil. And, might I add, all the fault of womens lib. Used to be you could buy a house with the money you earned and saved up. Used to be you could buy a car with money saved up. Now with the induction of DINK's (Dual Income No Kids) the price of everything has risen to the point of needing to borrow money just to get the simple basic nessecities, i.e. house and car.

[yo mama]

There's nothing wrong with debt, so long as you have the cash flow to support it. Its just that most people lack good judgment regarding how much debt their cash flow can support, and what is really worth going into debt for in the first place.

[Kid Cid]

There's nothing wrong with debt, so long as you have the cash flow to support it. Its just that most people lack good judgment regarding how much debt their cash flow can support, and what is really worth going into debt for in the first place.

 

There's a lot of truth to this.

 

Most people make it a lot harder than it really is. If you want more stuff you have alimited number of options. 1) Take a loan to buy the stuff. 2) Save for the things you want, don't spend on frivilous stuff. You don't need the $60 skin care cream. 3) Make more money. I spent a lot of time working on #2 then decided that #3 was the better option for me. At times when I was younger I worked 2 and 3 jobs at a time and would sometimes work over 100 hours a week. Part of that was to save money to go to college so I could earn more money (not necessarily an option for everyone). The bottom line is that common sense tells you that you can't spend what you don't have. The system is structured to make you forget that fact.

[AtomicCEO]

And you guys mock me for styling around town in my 1994 Toyota Tercel.

 

 

 

There's good sense... and then there's bad taste.

[Chavez]

There's nothing wrong with debt, so long as you have the cash flow to support it. Its just that most people lack good judgment regarding how much debt their cash flow can support, and what is really worth going into debt for in the first place.

 

As addressed in the article, though, the people loaning you the money have a vested interest in keeping you in debt. On my first mortgage pre-qual, the bank showed me the MOST they could loan me; I sat with the wife and said "if we spend this amount on the house, that is ALL we'll be able to do" - so we shaved $20 grand of what they were willing to give us, and bought the house for even less than that. On my 2nd refi, we were having no problems making the current payment, but the mortgage company was trying to steer us into a 30-yr with a lower payment. I told them to set it up so we were at roughly the payment we currently had - with a better rate we shave 5 years off the mortgage, and were paying ahead.

 

Current (and final) mortgage, we've got a unique loan that features "simple interest" (technically it's a "daily amortized balance" or some such thing) and are paying bi-weekly; we also rolled all our outside debt (which was a small credit card balance and my wife's car) into the mortgage and that is now our ONLY payment aside from my wife's school loans. And we'll have it paid off in under 11 years at this point.

 

 

But I don't think most people would do that - I'm also driving my '93 Dodge Dakota into the ground; unfortunately, Ol' Paint is going to have to be retired in favor of a grocery getta with li'l Chavez on the way.

[Ursa Majoris]

 

But I don't think most people would do that - I'm also driving my '93 Dodge Dakota into the ground; unfortunately, Ol' Paint is going to have to be retired in favor of a grocery getta with li'l Chavez on the way.

 

Join the Emancipated Union of Minivan Drivers.

[Chavez]

Join the Emancipated Union of Minivan Drivers.

 

Looking at either a Subaru Outback (popular among the granola set) or a Chrysler Pacifica, actually. I told my wife I refuse to live in the Upper Midwest without at least one of us having a 4WD/AWD vehicle (and she won't give up her PT Crooza)

[yo mama]

As addressed in the article, though, the people loaning you the money have a vested interest in keeping you in debt.

 

I'm not disputing that; merely pointing out that without debt most people couldn't buy a house, start a business, send their kids to college, etc. Not all debt is evil, though usery is.

[Chavez]

I'm not disputing that; merely pointing out that without debt most people couldn't buy a house, start a business, send their kids to college, etc. Not all debt is evil, though usery is.

 

I wasn't arguing with your comment, per se; just using it as a springboard to point out the obvious.

 

Debt is sort of a necessary evil, IMO. We shouldn't be as comfortable with it as we are.

[jaxfactor]

And you guys mock me for styling around town in my 1994 Toyota Tercel.

 

 

 

1994 is a good year. For me it's my 1994 F-150 which only has 101,000 miles on it and still runs like new. And by the way, I will be completely debt free in July this year, minus the 45k I still owe on my mortgage. It has been rough paying off my debt for the last 4 years but I now see the light and it getting closer. I will be one happy camper come July. I already called my one credit card company and told them to reduce my limit to 2k max. That's all I want and I will use that in case on an emegency only. I, like many Americans and I'm sure quite a few of you who aren't going to admit it, got into the credit hole and kept digging myself deeper. I was tired of writing checks and having next to nothing left over. So I figured out my own plan to get rid of the debt. It cost me nothing but 4 hard years of working my ass off and struggling still but I'm almost there.

[Chavez]

I will be completely debt free in July this year, minus the 45k I still owe on my mortgage. It has been rough paying off my debt for the last 4 years but I now see the light and it getting closer. I will be one happy camper come July. I already called my one credit card company and told them to reduce my limit to 2k max. That's all I want and I will use that in case on an emegency only. I, like many Americans and I'm sure quite a few of you who aren't going to admit it, got into the credit hole and kept digging myself deeper. I was tired of writing checks and having next to nothing left over. So I figured out my own plan to get rid of the debt. It cost me nothing but 4 hard years of working my ass off and struggling still but I'm almost there.

 

:airhighfive:

 

Good for you, man!