For years, I’ve heard criticisms about American spending habits, and I agree with some of them, to an extent. I think a lot of people do live beyond their means and that we rely on credit way to much. But I don’t have a problem with credit in-and-of itself. For instance, I have a credit card I use for emergencies, and the rare indulgence, but I try to use it a little as possible. And then there are those who go so far as to say things like, you should rent an apartment, save up money, and then buy a house, as opposed to taking out a mortgage. Well, if you have the kind of job where you can do that, then more power to you. In other words, for big purchases such as a house or automobile, I see no problem using credit to buy them. I think credit itself is just fine, if it’s used responsibly.
I think that the current economic crisis has show just how dangerous things can get when you’re over-reliant on credit. And I think our over-reliance is fueled by our spend, spend, spend, mentality.
So, the slowdown comes, and then we’re in a recession. It seems to me like the perfect opportunity to re-evaluate our financial system. To see about living less on credit, and more on what we actually make. But so far, both Bush and Obama have pushed through stimulus packages designed to make one thing happen. They want Americans to spend, spend, spend.
And finally, before asking my questions, I just want to say that I’m not coming at this from any sort of moral or anti-consumerism angle. I just want us to be more financially sound, as a country.
So, my first question: Do you think that our spending habits, as a nation, are bad, financially speaking? (Non-US dopers welcome to answer as well).
Second: If you think we should change our spending habits, how?
Third: If you think we should change our spending habits, is now the time, or if not now, then when?
In response to the first question, yes. Saving roughly nothing and spending beyond all reason are bad habits, and habits that could not be sustained for long even if they were good.
In response to the second question, by changing our outlook on the human race and the meaning of life. Unlike you, I am coming from a moral and anti-consumerist angle. I don’t think that the problems we’re seeing right now can be fixed economically; they can only be fixed morally. As a people, we need to stop believing that more consumption of material things is always better, that “profitable” is a synonym for “good” or “right”, and that pursuit of wealth is a worthy goal for a human lifetime. The only possible method for such changes in perspective is voluntary change on the part of the people. No bailout, no regulation, and no other sort of legislation can substitute for correct thinking.
In response to the third question, now is as good a time as any.
Here’s an article on the current economic crisis that I recommend. It was written six years ago, but I think you’ll agree that it nails the problem much better than most, if not all, of what’s being written today. http://www.amconmag.com/article/2003/feb/10/00008/
No doubt, it’s a bad idea to make a habit of accumulating obligations you cannot hope to repay. Which is not the same as getting into debt; credit has its place and mortgages and car loans have long been a part of american culture, with no negative effect if they are not more than the debtor can repay on schedule.
People should not be offered loans that they clearly cannot reasonably be expected repay. Every credit card should have a limit, which they do; every home loan should be limited based on the applicants ability to pay, which happened until a few years back.
As fun as it is to blame the masses, the masses are predictable based on knowable factors and, seriously, I don’t think people from other countries would have been any better on average if in the same circumstances. The problem here is that lenders imprudently led the sheeplike masses into traps for the lenders’ short-term gain, and are happily letting the entire economy pay for it. This should be prevented.
Not now. We have two problems now: the economy is tottering, and people being easily lured by greed. First fix the economy, and then we can afford to suck it up and start telling people to go live in cardboard boxes because their wages have dropped too far in real terms to afford a house.
If we tell them to live in boxes now, much of the population will stop buying anything, most businesses will fail, putting most people out of work, cyclically until we’re all getting our depression on.
Agreed [with my proviso], but human nature says that if pursuing some wealth is good, pursuing a lot is better.
I would rather motivate people to pursue more education, more knowledge, or more service to their fellows, as goals. Expenditure and the economy would still occur but with more worthwhile outcomes. Imagine if each PHD you earned was as lauded as each billion Donald Trump “earned” is now. If each person you saved from homelessness was as lauded as each Superbowl touchdown or person you saved from drowning is now.
I think I said this before, but I believe that there are three groups of people.
People who had no business getting mortgages, and knew it.
People who who could handle a moderate rise in rates down the road, but were caught off guard by having their rates rise larger than expected, or quicker than expected, or both.
People who planned well and thought things through, but for whatever reason got drug down with everybody else.
I agree, that would be nice, but I don’t see that happening any time soon, unfortunately.
Oh, and ITR champion I just finished reading that link. Wow, that was right on. It’s kind of scary to realize that there were people predicting exactly what would happen a few years ago, and yet, we just plunged right into it anyway.
I personally am an utter cheapskate, with an 11 year old car, no credit card debt, a small mortgage, and naturally frugal habits. If everyone were like me this economy would be in a mess.
Some debt is fine, but it has to be controlled. It would be great if each person never went above the safe level, but that won’t happen. Maybe the best solution is to force the entities that make the loans to eat bad ones, even if they package them and sell them off. They’d be a lot more careful then.
But I think the best solution is to pay people according to their productivity. In the past 8 years productivity has grown, but pay for most of us has not. People thought they deserved a better life from that hard work, and unfortunately borrowed to get it. We can build a virtuous cycle where people working hard get raises, which they use to buy stuff they want, which increases profits and allows investment to improve productivity more, and so on. We can do that without having to change human nature.
Quite correct on the credit issue. Credit is not a bad thing. The issue is the abundance of cumulative and unaffordable credit that is given to individuals. Any given John Doe can have upwards of say, 10 credit cards, plus a car loan, plus a home loan, etc. Total available credit = much more than they can pay.
Credit Bureaus should be tracking the capacity of people to sustain total debt, and not allow creditors to grant individuals more credit than they can realistically afford.
Example: Say you earn 50k annually. After taxes, that leaves you with (lets say) 42k, so your monthly take home is about 3.5k . You already have a mortgage, and a car loan which total monthly around 2k, which leaves you with 1.5k for everything else. Should an individual like this, have more than 5 times that in additional credit? Why do we grant this person several cards, which total about 30k in available credit? Because he is a prompt payer?
This is where the problem surfaces. People have access to more “money” than they actually earn. It feeds this concept of “you don’t have the money, but you want it now, so go ahead - indulge”. Granted, there are cases (emergency medical care), where a higher credit cap is welcome, but then again, that person would be better off with health insurance and not just tons of plastic to charge up. People fall into this trap. Its a trap set by credit card companies, and baited by retailers that make people believe that “you have to have this, and you need to have it now”. We (as a people), fall for it. We begin to believe our faux purchasing potential, and little by little start to live outside of our means.
People should have LIMITED credit. You want to buy that TV on store credit? You first need to pay off your Amex. You want a credit card with 3k limit? Sorry buddy you are all tapped out with what you have in credit already.
Of course this will never come to pass I think. Consumerism has taken over the planet. We now feel the need to change our iPod every year. TV’s in every room. Switch cars every 3 years. Fashion. Gadgets. Travel. Party. It’s all obtainable with credit, even though we dont really need it. And our industries have grown along side this way of life. People were more frugal, and the industry was sized to the lower demand. Whoever took the first step, the demand has changed and now, if people begin to spend less, the industry will collapse. For people to maintain their rate of spending, credit is an absolute must.
Sorry for rambling but it is late and what not.
Bottom line: Excessive credit in the hands of humans, is not a good thing in the long run. Granted, it has helped impulse the economy, and made many people a lot of money, but in the end it is a hollow economy, backed with plastic, and the end-user is the one that gets fucked. The banks get a bail-out, the merchant gets paid. The person who bought into the farce = is buried in debt, interest, etc, and gets 7 years of crap credit which is like becoming a second class citizen.
I say, let the banks and credit card companies fail. They offered and granted the credit, they bet on those individuals capacity/willingness to pay. It didn’t pan out - time to hand over those chips.
People who say that generally don’t know the first thing about finance.
The problem with that idea is while you are saving, you are also throwing away X on rent each month. I would have to crunch the numbers, but in general you are better off putting that money to a mortgage where you are building equity in a home.
The main reason people rent though is that it is usally cheaper to rent than to own a similarly sized home in most locations.
You aren’t talking about our financial system. You are talking about personal finance and wealth management.
Yes, everyone should live within their means and not excessively leverage themselves to buy a ton of crap they don’t need. There is no debate there. No sane, rational person would argue otherwise.
I also feel the need to mention the difference between good debt and bad debt. Taking out a student loan, your mortgage and taking out a business loan are examples of good debt. You are taking out money now so you can purchase an asset that will theoretically be worth more than the principle and interest. A car loan and your credit card are bad debt. You are buying something that will not add to your wealth.
Well I would hope that PhD did something that created as many jobs and generated as much wealth as your typical Donald Trump does. What I also think is interesting is how you are going on and on about saving people from homlessness while ignoring that Trump is, in fact, a real estate developer.
Education is fine, but what are we supposed to do with an entire society of lazy intellectuals smoking pipes and philosophizing about how awesome the patches on their corduroy jacket looks? Are we going to have PhDs cleaning the toilets or working in the nations farms, factories and call centers? Who actually does the work that needs to be done.
…which increases labor costs which increases the total cost of goods which leads to inflation which negates your raise.
And realistically, is your productivity today so much more than it was 8 years ago? For most jobs, you are physically limited by what you can actually acomplish using the process, tools and technology available to you. Saying an individual worker is responsible for improving their productivity is like saying one of the pistons is responsible for upgrading the entire engine.
Personally, I think one of the biggest problems is that it is no longer economically competetive to make stuff in this country anymore. One of the biggest questions people have been asking as long as I can remember is whether America can survive as a service economy. By service I mean people who do stuff that I do - accounting, banking, consulting, finance, law, other professional services.
Here’s what I have seen over the years. Companies that manufacture stuff always seem to be struggling. These companies create jobs not just for low level factory workers but middle managers, engineers, executives, and all the supporting functions like marketing, accounting and whatnot. Jobs that require education and provide experience that leads to innovation.
As those jobs disappear, they seemed to be replaced by high paying professional service jobs - accounting, banking, consulting, finance, law, and so on. Basically jobs that move numbers around Excel spreadsheets or define and enforce the rules for moving those numbers. Corporate law firms like Jones Day or Skadden Arps, management consulting firms like McKinsey or Bain, investment banks like Goldman Sachs or the late Lehman Brothers and accounting/consulting firms like Erst & Young or KPMG don’t produce anything. They just collect large sums of money from big companies for giving them advice on how to run their business, enforcing regulatory compliance or helping them with some transaction like an M&A or some legal matter. In a sense, they redistribute wealth from companies that do produce stuff to a class of highly educated wealthy and upper middle class professionals.
The compensation for an AmLaw 100 lawyer, McKinsey consultant or investment banker generally starts in the low six-figure range with an advanced degree. And they generally are on a carreer track that can lead to much higher salaries as executives or subject matter experts. Keep in mind these aren’t people who are innovating or creating a longer lasting lightbulb or leading huge companies. They are 26 year old MBAs writing reports, trading securities and generating nothing but “ideas” and paperwork.
So given that there aren’t a lot of opportunities to find steady work without a college degree, the general consensus is “you need to go to college if you want a decent standard of living”. Of course this shoots up the demand for colleges and tuition skyrockets. This creates a bit of a vicious circle as the only jobs that pay enough to cover your exorbitant school loans are the ones I mentioned above. So even if you actually went to college to become a mechanical engineer, you probably won’t find a lot of high paying jobs available and will end up working for Accenture or something implementing ERP systems.
Meanwhile, you have this huge population of college grads saddled with debt. They are underemployed because they thought all that mattered was getting a degree and they can’t find high paying jobs because they all went to the top 10% of performers, kids who studdied Poetry or Philosophy at one of a select group of elite colleges or people who’s dad happened to be golf buddies with an MD from Deutsche Bank. But of course they think they deserve a much higher standard of living because they have degrees, and they assume that in 5, 10, 15 years their career will take off like you see in the movies and they will be able to pay for all that stuff.
Of course, their income does not skyrocket in the future because…well why should it? What the heck have they done other than work the same jobs the rest of us work? But that doesn’t stop them from spending like it is nor does it stop companies from making money off their ignorance.
Yeah - this is what always confuses me. It seems like an awfully large portion of our economy consists of people who are basically “biting from the same apple” as it were. The repackaging and reselling of assets, debt, or whatever doesn’t seem to create sufficient value to support such a huge industry. And no matter how hard you work at dispersing risk, it doesn’t seem as tho you ought to succeed in making the risk go away - or shifting it to someone who is not a willing party to the transaction.
Here is a table showing productivity growth over the last 8 years. Increasing wages without productivity growth can lead to inflation - which is why I advocated the raises coming from productivity. Plus, we are talking about real increases, that is, above inflation. By that measure, wages have decreased in real terms while productivity has increased. And that, I contend, has been the problem driving the desire to overspend.
Maybe there are some people who become more productive by using tools - but even if they shouldn’t get more, the people designing those tools should. Plus there are plenty of ways people can do their job better even with the same tools. We are talking the economy as a whole here. Everybody contributes to productivity improvements - everybody should benefit, including companies, of course.
Productivity measures this also. Don’t you think the guy managing offshore manufacturing can become more productive also? I have some examples of this exact thing.
It’s ok to mitigate risk, however you need to adequately assess the risk involved. Nobody did that. Lenders handed out mortgages based on fraudulant and inaccurate applications. The mortgages were packaged into RMBS bonds that were not rated appropriately and then those were packaged into CDOs. All of this based on incorrect underlying assumptions.
The market will not encourage companies to self-regulate in these instances because the lenders are only motivated to sell mortgages and then ship off the packaged loans as quickly as they can. They have no incentive to make sure they get paid back because the loans belong to someone else now. That is where regulation would come in handy.
Those are real wages. That means it is taking inflation into account. According to your cite, production is generally increasing at a higher rate than real wages. I read that as we are producing more with less. Is that not a good thing?
That’s more or less what happens.
Oh I agree. From the point of view of an American company (let’s take Intel for example), if they can produce more with less by outsourcing manufacturing overseas, they should. I mean what should they do? Force companies to use more expensive American workers because it’s “patriotic”? That only hurts the consumers.
Crooked lenders and greedy customers may have caused our current situation, but good, decent, responsible people and companies seem to have been drug into this, and everything is so intertwined, that saving the good, and letting the bad suffer, seems almost impossible at this point.
Sometimes, I’m not as clear and articulate as I could be. When I said financial system, what I was trying to do, was use a phrase that mean, the spending habits of this country, as a whole. I guess I should have said spending habits.
I think our spending habits are messed up. When we got our stimulus checks last year, the government said, don’t use them to pay bills, use them to go out and buy things. I find that totally irresponsible. But apparently, our society is now so based on consumerism, and buy, and upgrade, and replace, that saving money and paying off the debt you already have, before incurring more, is becoming an alien concept. At this point, I’m wondering if we have gone too far, and there’s no turning back.
I saw a program last night that said American saving is at 3 % now. It was at less than zero before. Yet they claimed the right thing for Americans to do is to start spending. We are a country of mixed messages.
I agree. Just the other day my wife and I were commenting about how archaic our first mtge (20 yrs ago) seems today, where the bank retained and serviced ht loan. I believe when I refi-ed, the said they might sell it but would retain the servicing.
But I was not limiting my comment to lending. Was also thinking about areas such as insurance, product liability, and much of the practice of law. I know this is an oversimplification, but it seems like a whole lot of effort goes into folk avoiding responsibility/liability for the goods/services they produce/provide. For all these folk to keep making money off of what is essentially the same original transaction, it seems the economy is achieved all too often by screwing the original consumer. Just doesn’t seem all that desireable or sustainable to me.