Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Thursday, April 02, 2009

They Concern, Thank God, Only Material Things...

In his First Inaugural Address, President Franklin D. Roosevelt said the following:

"In such a spirit on my part and on yours we face our common difficulties. They concern, thank God, only material things. Values have shrunken to fantastic levels; taxes have risen; our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side; farmers find no markets for their produce; the savings of many years in thousands of families are gone. More important, a host of unemployed citizens face the grim problem of existence, and an equally great number toil with little return."

That second sentence is wonderfully inserted there. As bad as it all is, FDR is saying: it's only money. Of course, he knew that poverty could cripple the spirit as well, and become more than a material problem, just as joblessness and foreclosure in the middle classes can lead to despair, suicide, violence, spousal and child abuse. But FDR meant to argue that the economic depression was primarily one of institutional economics, not the result of a personal, spiritual, or cultural failure by the American people. In a country with a puritan heritage, we often ask secular or religious variants of "why is God punishing us?" when these things happen. The tendency is often to look inward (or at one's neighbor) rather than at institutional or external causes. When I studied abroad in Russia in 1992, many people expressed to me there the feeling that "communism failed because we are failures." This was not a helpful attitude. It made the political space for ultranationalists and racists who promised to make people feel good about themselves again.

Around the world and on this blog, people have wondered whether this is an economic crisis or really the result of moral and cultural failings in the United States. Many in Europe seem to be urging the latter reading. They seem to say that it is America itself that is failing, including the ideals of individualism, home ownership, the "American Dream" and all that. I think that is both self-righteous and inaccurate. The most striking thing about traveling around Europe today is how much more it looks like the USA than it did 20 years ago. Starbucks, McDonalds, and tract housing developments did not force their way into Europe.

As in FDR's time, we should be focusing on economics. However, I have argued, and I think FDR would have argued too, that there are also personal attitudes to this depression that need to be overcome. The same attitudes of the 1920s were repeated in Reaganism in the last 30 years: from alpha-male bankers (a phrase that still amazes me) to investment bubbles, we abandoned sober, grownup capitalism for adolescent behavior. I think it is useful to separate broad-brush cultural critiques (e.g, blaming all this on American individualism) from more specific attitudinal critiques (e.g., that the anti-regulatory school of conservatism was at best naive, at worst complicit).


USWest said...

LTG points out that the loss of morale in a nation makes "political space for ultranationalists and racists who promised to make people feel good about themselves again." He then mentions Reagan. That is an important thing to think about.

Americans were feeling pretty low in 1979. Archie Bunker was the voice of a good part of the nation. And then the hostage crisis happened. The economy was in the dumper and had been since the early 1970s. Industry was in trouble. Inflation was rampant, jobs were being lost. Into this marched Ronald Reagan. He started to roll back affirmative action programs, kill unions, offer tax breaks to the rich, build up the US military all over again, and destroy regulation. He put us in debt and neutered the very agenices that were meant to protect and serve the citizen. But he convinced us we were great and all would be well.

Reagan wasn't an ultra nationalist, nor was he really an ideologue. But he spawned nationalist and ideologues. Voila, Bush II. Neo-cons. That's 70's Show all over again. Reagan didn't solve the systemic problems. He paved over them and in some instances made them worse.

LTG says that our current crisis is "not the result of a personal, spiritual, or cultural failure by the American people." But that it was a result of institutional failures. I think it is both. We as a nation are not failing. Our Democracy is strong and self-correcting. We have not disintegrated into chaos or anarchy in this crisis. Most of us are forging on and finding opportunities in this crisis. I see it as a paring back of excess, part of a necessary and natural cycle. It's a big tsunami that has come through. And now we have to clean up the beaches and deal with the wreckage. And I think the Europeans are aware that they are just as susceptible to excess as anyone else. I do not think they are being self-righteous in their critiques of individualism. And I don't think the "American" dream is failing, nor do the Europeans. The dream is alive and well. But access to it has shrunk because of institutional failures and attitudes as well as our own.

We are guilty of complacence and a lack of reflection on our responsibility to our fellows. We allowed ourselves to be suckered by banks and marketers into believing that we could live beyond our means, that we were richer than we thought. We were suckered by our government into believing that capitalism won out over communism and was better than socialism. And the meanings of all three of those economic theories were distorted and lost. This was possible because we dumbed down our citizenry, the result of a decision to privatize education rather than building the best public schools in the world. We were suckered into believing that we had to let the rich get richer so that there'd be more crumbs for the rest of us; we had to lock black people away in jail rather than offering them a hand up; that consumerism was a form of public service; and that poverty is a crime worthy of punishment. And all of that drowned out the idea that we are one nation, that with wealth there comes responsibility and obligation, and that service to family and country is not just about sending money to charity to ease a Christian conscience. Somewhere, our government, both liberals and conservatives, gave into ideology, forgot reason, and in the process, they forgot us. But we just kept re-electing them. We did not hold them to task.

The Europeans are more heavily regulated than we are. Had they also lifted regulations, would they have fallen prey as we did? Yes. Were the French wrong to call out the dangers of rampant capitalism? No. Did that make them immune, no. Do they know that? Yes. But they were at least talking about it publicly. They were having national discussions about the merits and drawbacks of capitalism American style while we were slurping our Big Gulps, driving our Hummers, and getting fat.

We are not beyond reproach. We lecutred other nations about how they needed to change. We promtoted IMF policies that cut social supports in poor nations. Our wakeup call has come. We are just getting a little of what we dished out. Are we bad? No. Do we deserve to suffer? No. But we are not free of fault or responsibility.

Raised By Republicans said...

But US West, the French did go along. French banks are suffering not because American banks have invaded France and forced them into this but because French (and British and German, Icelandic, etc etc etc) banks joined this party with nearly equal enthusiasm about never ending high returns with low risk.

It's also worth pointing out that the choice has never been one of a sliding scale of some measurable amount of regulation. It doesn't really make sense to say something like France has 100 worth of regulation and the US has 80 or whatever. What went on in the last 30 years wasn't so much DE-regulation as it was RE-regulation. Things like accounting rules were changed not eliminated.

For example. Back in the old days, if you owned an asset you recorded the value of that asset in your books based on its historic value. But in the last 20 years or so we've seen the rise of Fair Value accounting (sometimes called Mark to Market accounting). Under this new scheme you value the asset based on what you forecast its future value to be. So in the case of these infamous sub-prime loan derivatives, these change make all the difference. In the old days sub-prime loans would be valued as high risk assets with value based on their historical value. But with fair value accounting they get valued based on what people THINK the houses will be worth in the future.

Now, how does this relate to France? Because just as many European interests were pushing for this kind of accounting rule change as American. Indeed, from what I have heard, British and American accountants were more conservative - that is less supportive of the new scheme - than many of their continental European counterparts - but it is important to note that fair value accounting is controversial everywhere so assigning guilt on a national basis is really not appropriate either way. The problem, according to my accountant father, was that the powers that be stopped listening to the professional accountants and listened to the "alpha male bankers" with the fashionable MBAs instead.

USWest said...

You know, it amazes me how one refence to one country, especially when it is France, gets such a knee jerk reaction.

I never said the French or Europeans were perfect or not part of the problem. My point was that there was at least some national dicusssion thus awarness about how they wanted to form their econonic system. They at least talked about Capitalism. There was some national debate. We never bothered to examine it much.

Regular folk did not make the banking crisis happen. We didn't ask for a change to accounting rules. But we didn't inform ourselves well enough. We didn't agitate for change. We sat back, feeling powerless, but happy with a big screen TV and let it all happen. We aren't just vicitms . . . no one made us buy houses that were too expensive for our budgets. We just took the bait and the rest took off. If enough of us had said "no" to an overpriced house and an funny loan, then the damn things wouldn't have gone anywhere. But was said "yes! Give it to me. I'm entitled!" No one forced our hand into our pockets for a credit card. Self-discipline would have sufficed. Saving a credit card for emergencies and the like. Refusing to buy a new coffee pot because white plastic was out and stainless steel was in would have made a difference. We made individual choices that helped drive a trend. That was my point, not that French banks are somehow better or less to blame than American banks or that French people are better than us.

Raised By Republicans said...

I don't think my response to your comment was "knee jerk." You said that French criticisms of "the dangers of rampant capitalism" were justified and I merely pointed to a couple of ways in which - criticisms and rhetoric aside - a number of interest groups in a number of countries, including but not exclusively France, went along with the root causes of this crisis and even encouraged them in their own ways.

But really, my reaction was motivated not by the mention of France but by the approach to the debate about regulation that your comment implied. I have some differences with that approach which I tried to point out. There is not a choice between a world with regulation and world without regulation. Both the US and French systems had extensive financial regulations. What's more those systems of regulation have been converging with each other for a couple of decades. The Fair Value Accounting thing is just one prominent example.

I'm sorry you felt my response was "knee jerk." It was not intended to be so.

You are absolutely right that "regular folk" didn't cause this crisis. It is definitely a result of elite behaviors. Elites in the banking industry, and the regulatory agencies that monitor that industry. My assertion is that this elite is global in nature and the kinds of regulatory changes that led to this problem can be observed in a number of countries including the US, and most of Europe and, for that matter, most of the OECD countries.

That said, I also agree with you that our own complacence about our personal finances contributed to this problem. However, it was the flaws in the global finance sector - caused by the aforementioned elites - that caused what would otherwise have been a spike in personal bankruptcies and mortgage foreclosures into a catastrophic global financial crisis.

The interaction between regular folks' and the elites' misbehaviors is critical to understanding this whole mess - and if I understand you correctly, this is your main point. But this interaction occurred all around the world not just in one country.

Dr. Strangelove said...

LTG, USWest, and RbR all agree that the economic problems we are having are not due to some overarching moral failure of the nation, but rather to the failure of certain specific attitudes and specific institutions. They disagree slightly on which specific attitudes/institutions deserve the blame. They also disagree on how narrowly the blame should be focused.

Among other things, LTG points to Reaganism and the anti-regulatory conservative movement as the principal causes of economic and moral failure. He focuses blame more narrowly onto the conservatives and their views.

USWest paints blame with a broader brush, arguing that ideology trumped reason on the part of conservatives and liberals both, and that some important values got left out in the rain such as those of personal financial responsibility and community service.

RbR is closer to LTG in that while he agrees that misguided personal finances were a contributor, he says "regular folk" are generally not at fault and he gives the conservative "elites" in the banking industry and regulatory agencies the lion's share of the blame.

I tend to be more narrowly focused than USWest on this. I think that "regular folk" were less to blame than the conservative elites. I think the failures of personal financial responsibility are exaggerated in the media now because people enjoy like to moralize, but that our cultural values have shifted *not* really shifted very much over the past couple of decades--rather the institutions (as you all agree) made the bad easy and the good difficult.

USWest said...

Re-reading the discussion while fresh in the morning, I see I misread RBR's comments, and to a degree LTG's. I apologize. RBR is correct that European banks did not shy away from buying AIG, Lehman, or Goldman products. A recent article in the Washington Post pointed out that a good part of the AIG rescue went to European Banks. And we know that part of the reason the securities market overheated was because of demand from European banks outstripping the supply of securities. Even the bloody Swiss were on board.

The Economist was running real-estate graphs over the last 2-3 years that were showing huge increases in values globally. And when I was in Frane last year, they were just beginning to talk about the ARMs reaching the traditionally conservative French mortgage market.

And as I was thinking about this discussion this morning and listening to the news, I reminded myself of the elites vs. the average person. We tend not to think in these terms in the US, and yet we should.

In Turkey, part of the reason the conservative party has been so successful is because the liberal elites failed the common people. And this happened here as well. Now the liberal elites have a chance to make it right. And as an aside, this morning an NPR reporter was interviewing a Republican congressman who had refused to vote for the new budget because of the debts it would insure, saying that we couldn't saddle the next generation with our excesses. I heard the same hackneyed argument since I was the "next generation" he was talking about. It's bullshit because every generation leaves something for the next debt, moral obligation, old conflicts, global warming, etc.

All of that said, I don't want to mitigate our personal responsibly in all of this. The reason I am so insistent on that is two fold. The first is that if we all agree that we can be agents of change (as Obama reminds us), then we have to see our individual actions as part of a collective movement. And that movement can go either way- good or bad. I think it has been bad over the last 10 years.

Secondly, if we agree that key American values are hard work, thrift, and integrity, and empathy then we have to acknowledge that we let those values slide over the last 10 years. As LTG says, we decided to take the easy road rather than the more challenging path. And, as I always say, we and our elites are both the creators and products of our society.

The Law Talking Guy said...

I think we are all largely in agreement that the economic depression was in lartge part caused by (1) economic regulation, (2) attitudes towards economic regulation, and (3) excessive risk-taking by financial institutions and their staffs, the "alpha-male bankers." USWest, at least, is willing to go further and say that (4) rampant consumerism - the desire to buy new new products with all on credit all the time - was also a cause.

What I object to is the notion that these are either (a) American diseases or (b) the results of "Americanism" that needs to be avoided. As RBR points out (and as I did too), Europeans, at least, also indulged in some of the behaviors - attitudinal, personal, and regulatory, that the USA did.

This is an important distinction for the debate. Sarkozy and Merkel (and other Euros) are misguided, I think, to say "American capitalism failed" or "this is the ruin of Americanism." That both exculpates the Europeans unduly and looks at the wrong (cultural) aspects of America. The alternate critique of Anglo-Americanism is also misguided. When it comes to broad cultural critiques, we should recall that the tremendous prosperity and maintenance of liberal democracies in the 60-year post-WWII period owes so much to "Anglo-American" ways of doing things.

Raised By Republicans said...

Much is being made of Gordon Brown's "End of the Washington Consensus" comments. But what was the Washington Consensus? It was, as President Obama accurately said, a "term of art for a set of policies adopted around the world. More specifically it was the application of the theories of economist F. A. von Hayek (an Austrian) to the management of the IMF and World Bank - two institutions conceived of and designed largely by economist John Meynard Keynes and his proteges (an Englishman).

Raised By Republicans said...

I should have added to the last comment that the G20 approach now seems to be largely a return to the original Keynesian plan for the IMF. That it would be set up as a global institutional bulwark to shore up struggling financial sectors with the goal of dampening the incentives of governments to engage in protectionism.

The Law Talking Guy said...

I don't think it's fair to associate the "Washington consensus" with Hayek. He was always way more "out there" than US policies ever were. The Washington Consensus was that developing countries needed free markets and IMF-imposed austerity measures, but developed countries did not.

Raised By Republicans said...

LTG, I don't necessarily agree with you but I'd like to understand what you mean before I respond. Do you mean to say that von Hayek is more orthodox in his adherence to the kinds of policies we're talking about than US policy makers were? Or that he was more theoretical and so less culpable?

Pombat said...

I'm with USWest - people can't just look at "them", the big banks, governments, whoever else it was who's apparently to blame for all this (points 1 to 3 in LTG's summary I think), even if "they" were all responsible in their own ways. People must also look at themselves, personally, at the fact that they happily took home loans that they maybe could not afford, and cheap credit which they used to buy all sorts of consumerist rubbish that they really didn't need (which is a large part of what I was railing against back when I exploded about Costco, and the flat screen TVs they're selling for example - super-cheap massive TVs, stacked to the rafters, with people eagerly grabbing them, despite the fact that even fairly sizeable McMansions lack rooms large enough to seat viewers far enough from the TV. And no, Aus is not immune - for example I saw a house ad here, and the thing that struck me about the pictures was that in each of the two living areas, squares at most 9-10ft per side, there were TVs about 3ft wide! And no dining space in the entire house).

We should all look at our lives and question how we're living them, and if we're doing so wastefully. And there are so, soooo, many areas we can look at. There's the over-consumption of stuff - do we really need to buy that new gadget, or pair of shoes we'll never wear? Are we being wasteful with power - could we hang our clothes outside in the sun to dry rather than running the dryer, or cook more than one dish in the oven when it's on, freezing some for later? Could we be using alternative energy sources, for example fitting solar panels to our houses for power, or for the hot water system? Are we wasting water, by running the tap whilst we brush our teeth or using an inefficient toilet? (it often galls me, the idea that we are using drinking water to flush away waste, with us here in Aus in the middle of a drought!) Are we actively reducing the amount of waste that leaves our house bound for landfill, and ensuring that which does is recycled - choosing to buy products without packaging to stop the waste entering the house to start with, or investing in a small worm farm for disposal of kitchen waste for example? (the mantra here is reduce, reuse, recycle - in that order!)

I know some people here believe that it is government's job to ensure things like this happen, but I still believe that we all have a personal responsibility to act in an appropriate manner, saying hey, even if 'they' (gov't) aren't bothering to legislate this, I still know what's right and wrong, and I want to do what's right. Grass roots movements work after all - enough people decide that they want change, and it will happen.

Raised By Republicans said...

Leaving aside the environmental issues that Pombat raises for the momment, I think the policy aspect of this a necessary and sufficient condition for the crisis.

In this instance the unwise borrowing practices of a minority of people in OECD countries sparked the crisis but its severity was caused by the bad policies enacted around the world. And if it hadn't been subprime mortgages and such it would have been the collapse of companies like Enron, World Com or Parmalat all of which were brought down by "funny" accounting practices.

The Law Talking Guy said...

I meant that Hayek is more orthodox and, to some degree, more intellectually rigorous. This is more Laffer Curve than Milton Friedman.

The Law Talking Guy said...

I don't understand how buying gaudy big screen TVs caused the economic crisis. I disagree that consumerism is a big deal.

I don't think the facts will bear up the suggestion that people took out home equity loans and spent the proceeds on Costco big screen TVs. That sounds more like Reagan's anecdotes about "Welfare Queens" than any reality. The most common reason for tapping into home equity was to buy a second home or pay for college. I literally never heard of anyone taking out a second mortgage just to buy *stuff.*

Nor did "cheap credit" cause Costco buying sprees. Credit cards aren't cheap credit.

There is a puritanical notion that all of the economic crisis was caused by Americans living beyond their means. It has political appeal, I see. But whether or not Americans were living beyond their means, the causal mechanism between consumer spending and economic depression is missing.

In fact, there's no evidence of significant overspending in consumer goods. Prices for electronic consumer goods in particular are constantly dropping, signs of a savvy and tight market.

Raised By Republicans said...

"I meant that Hayek is more orthodox and, to some degree, more intellectually rigorous."

OK, I don't think we disagree in substance on that. I only meant to point out that the "Washington Consensus" had many contributing minds some of which were European so for Europeans to talk about it as if it were some sort of American imposed regime is disingenuous.

Pombat said...

LTG: what, exactly, is a second home, other than "stuff"? No-one actually needs two houses to live in!

And "cheap credit" - ok, maybe I should've written "easy credit", in order to cover all bases here. Maybe credit wasn't 'cheap' in the US, but it certainly seems like it was easy to get, and besides, this isn't all about you - in the UK there was certainly a lot of cheap credit, with credit cards being offered at ridiculously low interest rates (usually for an initial period), many of them zero percent. And they were certainly easy to get - I had any number of offers stuffed through my letterbox. There were also lots, and I mean lots, of ads telling you how you could release some equity from your home, for those renovations, or that holiday or new car you wanted. These were aimed at people whose houses had gone up a great deal in value - hey guys, re-mortgage and buy stuff, yay!

I'm not sure where your "puritanical notion" paragraph comes from - are you hearing that a lot over there?

Now, "no evidence of significant overspending", which you justify by saying prices are constantly dropping. This depends on your definition of overspending. Personally, I'd say that throwing away something in perfect working condition to buy a newer one, because it's cheap, is overspending to the price of the new item.

Raised By Republicans said...

I think we are starting to confound the environmental aspects of overspending with the financial ones.

While I can certainly see the argument for saying that throwing away something that still works just to buy a new one is a waste of money and resources, whether it is going to cause a financial problem would depend on the personal finances of the person throwing stuff away.

Pombat said...

If you get enough people buying something new when they don't really need it, using credit they can't really afford to do so, then you get a financial problem. Equally, if you get enough people buying any items, replacement or otherwise, that they can't really afford, using credit that they can't really afford, rather than making do with less (e.g. buying a car rather than taking the bus), you get a financial problem. And this is why I have such a problem with the consumerist lifestyle that seems to be the norm in Western countries today - it results in people buying things before they have the money for them, rather than either saving up for the item, or simply accepting that they cannot have it.

Dr. Strangelove said...

Pombat: I believe the "puritanical notion" paragraph is in response to your first comment. You seemed to blame (partly) the economic crisis on waste and over-consumption--on people living beyond their means. You seemed to continue this line of reasoning in your most recent comment where you indicate the Western consumerist lifestyle has led (partly) to the current financial problem. (I say you "seemed" to be saying these things, because--given your confusion over LTG's puritanical remark--I may be misreading you.)

Unlike LTG, I believe there *is* considerable evidence that consumer debt has grown considerably over the past several years, indicating that more people *have* been living further beyond their means. And I also believe you are correct that this mounting debt is unsustainable, and will ultimately lead to financial problems. But I also believe it is clear that neither overspending nor growing credit card debt led to the *current* financial crisis and economic recession.

Which gets me back to LTG's original point: the current economic/financial crisis does not indicate some kind of collective moral failure. I believe that the irresponsible consumerist lifestyle you are talking about is indeed an important collective moral failure--something worth addressing, most definitely--my only point is that it was not the culprit here. Sadly, speculative bubbles have bloomed and burst for centuries, in every nation and every moral climate.

Pombat said...

Dr.S - yes, I am partly blaming this crisis on over-consumption, more on which in a moment, but I did not say anything about it being *American* over-consumption, in fact I specifically gave an Australian example, hence my confusion about LTG responding "There is a puritanical notion that all of the economic crisis was caused by Americans living beyond their means. It has political appeal, I see.". It seems that if I specifically say that America has done something wrong, I get shouted at for it, and if I talk generally, specifically mentioning another country to ensure it can be clearly seen that I'm not just Yank-bashing, it still gets taken as a dig against America. No win situation it would seem.

You're right, there is massive evidence that consumer debt has risen hugely over the last few years (decade or so I guess) - some of the graphs and figures I've seen have been simply terrifying, with personal debt levels now at staggering amounts - a *very* quick google found this link, talking about levels in Aus, 2006, with personal debt at close to 150% of GDP, and mortgage debt at 130% of household income. Not sure how accurate all that is, but anyway. This link I think provides enough numbers that even LTG has to agree that consumer debt has been skyrocketing.

Now, back to this current financial crisis - it is my belief that the people at the top of the banks, who were bending the scant regulation as much as possible and doing crazy things in order to get themselves massive short term gain, were doing this due to a consumerist mindset. Except that in their case, they weren't buying plastic tat from China, their 'consumerist stuff' was money itself - they didn't need the money that they were 'earning', they just wanted it, lots of it. I guess because having lots of money with which to buy stuff is how success is defined by a lot of people - consumers - these days. Additionally, consumer/household debt is already a massive part of this financial crisis - subprime mortgages & foreclosures for example - and is going to become a much larger part of it, as banks are being a lot more careful with their credit now, and people are losing their jobs, leaving them with no way to pay off their credit debts.

I saw this nice TED talk last night, courtesy of Spotted H, which is mostly about how horrible suburbia looks, and how Americans owe it to themselves to improve their surroundings, and thus America, and themselves. I find myself much in agreement with him, particularly the last few minutes. He has a few comments at the end that are pertinent to this discussion: "Please please stop referring to yourselves as consumers! Ok? Consumers are different than citizens. Consumers do not have obligations, responsibilities and duties to their fellow human beings, and as long as you're using that word consumer in the public discussion, you'll be degrading the quality of the public discussion we're having, and we're going to continue being clueless going into this very difficult future that we face". It struck me, listening to him, that the people at the top of the banking system were doing exactly that - they were thinking of themselves as consumers, grabbing that money, rather than as citizens, with a long term responsibility to the country and indeed world. And that mindset could not have come about, in so many people, without the underpinning of the rest of society acting in the same way (albeit on a lesser scale).

The Law Talking Guy said...

DR.S, I'm not sure that growing consumer debt is necessarily evidence that people are living beyond their means. Credit card debt comes from three main sources: (1) excessive spending (2) unexpected debts (e.g., car breaks down, have to fly to funeral, someone gets an illness, lost a job) and (3) acceleration of spending (paying for Christmas in January and February). Most people's credit card debt is not a significant burden on them, even when it is surprisingly high. The problem comes when the debt is unservicable. A friend of mine racked up $60K in credit card debt over 10 years. It was a matter of unanticipated expenses that could not be paid down and a variable job that could swing in income significantly. This man drowned at a pace of a couple hundred bucks a month, usually spent necessaries. The unexpected expenses were a dad's funeral, a car that died, dental expenses, and so forth. Some months he needed to borrow money for food because there wasn't much left after debt service and rent. At a certain point the minimum payments exceeded his available monthly income, and I helped him file for bankruptcy. This is not that uncommon of a story out there.

Now, you could say that my friend was living beyond his means, but doing so implies more moral culpability than is there. What my buddy never recognized was that he was systematically failing to make ends meet even with a very modest lifestyle.

I think a lot of the consumer debt/housing debt phenomenon has to do with people being unwilling to admit that they are not really middle class, not people pretending to be millionaires. Reducing one's expectations for life causes despair. For better or for worse, a campaign based on "hope" captured America very well in 2008.

Dr. Strangelove said...

Unexpected expenses are not the issue. The issue is that spending an extra couple hundred dollars each month which one does not have is the very definition of living beyond one's means. It just is.

Now I happen to agree that the moral culpability for living that way is modest. I have a lot of sympathy--it's an easy trap to fall into, especially for younger folk. Debt can mount very slowly, and one can work really hard yet still have trouble maintaining a modest lifestyle, especially in California.

A friend of mine recently emerged from 20 years of consumer debt. She put herself on a strict payment plan and followed through, despite bouts of unemployment when she had to slow down. It can be done. To me, that is hope!

Pombat said...

LTG: I'm with Dr.S. Whilst I do have some sympathy for the situation your friend found himself in, he was living beyond his means, pure and simple.

Your implication is that his $60k of credit card debt was mostly due to the unexpected expenses. Personally, I have money stashed in the bank, purely to service unexpected expenses. I, as most people, am aware that unexpected things happen, and that they cost money. And so I have saved money for these unexpected things ahead of time. I wish more people looked at their finances this way around, followed the advice of the articles that tell you to always have two months' salary stashed away.

I should probably add here that when I finished uni, I did take a graduate loan because I had no money (had a student loan and an interest-free student overdraft), and needed to buy furniture and a car. Each month my bank balance would go into the black for a day, then straight back into the red. I set up a second account for my bills money, so that it was out of the way and couldn't be spent before the due dates, lived on a minimal spend - if I was having a *really* big weekend I'd take twenty pounds out, as a massive treat - making minimal payments on my debt, and then taking any money left at the end of the month and hurling that at my debt too. Didn't have much of a life, but I was debt free by my mid-twenties (admittedly, going on a foreign secondment, with generous wages, helped!).

And then, more generally, you talk about "acceleration of spending", e.g. paying for Christmas in Jan/Feb. If I'm talking about the same situation, I call it "buying things that you don't actually have the money for at the moment rather than saving up for it".

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