An addiction to borrowing...
EVIDENCE THAT American consumers are struggling to cope with their debts - and failing - usually takes the form of statistics, such as the soaring number of mortgages in default. But the problem found more graphic expression Tuesday, when Taunton mother Carlene Balderrama killed herself an hour and a half before her home had been scheduled to go up for foreclosure auction. She left a note, police said, telling her family to use her life insurance money to pay for the house.
Hers is the most extreme version of a story that is unfolding in hundreds of thousands of households across the country. How did so many families borrow so much that any significant setback - a lost job, an illness, an upward adjustment in a mortgage rate - was bound to be ruinous?
The short answer is: easily.
Since the 1990s, consumers have been assaulted by offers from companies eager to lend them money. Graduating students begin their working years with credit card debt. And while critics of government rescue efforts today blame the foreclosure epidemic on avaricious homeowners who thought real estate prices would rise forever, greed and undue optimism are as old as humankind. Only because of changes in the financial-services industry and in government policy can consumers with spotty credit borrow as much as they please.
Last week, The New York Times published chilling data on the imbalance between Americans' saving and borrowing. In 1920, the average US household had annual savings of $1,200 (in today's dollars) and had $4,400 in total debt. In 2008, the average household is on pace to save a measly $400 a year - even though incomes have risen significantly - and owes $118,000.
To be sure, some households manage their debts better than others. The Times also detailed the woes of a Pennsylvania woman named Diane McLeod. She borrowed heavily, spent unwisely, and fell behind on her debts after two medical emergencies. Her home is in foreclosure. One can moralize: No, McLeod shouldn't have made impulse purchases from home-shopping shows.
And still there are companies that want to lend her more.
Historically, banks and credit card issuers made money by lending to people who seemed likely to pay it back. Consumers relied on advice from financial institutions about what they could afford - and assumed that no one would lend them more money than they could pay back.
But the business model of the credit card industry evolved, relying ever more heavily on fees that make borrowers with fitful repayment histories more lucrative to the card issuer than those who pay their bills each month. Meanwhile, the securitization of mortgages - packaging them together, cutting them up into tradeable securities, and then selling them off to others - reduced mortgage brokers' incentive to make sure their clients could repay their loans.
While financial institutions do run the risk that overwhelmed customers will declare bankruptcy, they sought and got changes to federal law that make it harder for borrowers to escape their debts. When credit issuers have little reason not to lend, it's no wonder the nation is awash with what the writer Barbara Dafoe Whitehead calls "a tide of anti-thrift."
And to a disturbing degree, the US economy has come to depend on consumers maxing out. Americans save less than 1 percent of their disposable income. Consumer spending now represents more than 70 percent of the US economy. After the 2001 terrorist attacks, the only thing President Bush asked of most Americans was to keep on shopping.
Even now, the short-term steps needed to keep a troubled economy moving are at odds with the kind of thrift that would benefit debt-laden households. Earlier this year, Congress and Bush approved rebates meant to stimulate consumer spending; while the measure helped to head off a more severe economic downturn, it also added to the federal government's own ocean of red ink.
Government policy is moving slowly to curb the worst excesses. The Federal Reserve Board has belatedly tightened lending rules to curb the worst home-lending abuses. Mortgage lenders are now required to document borrowers' incomes and verify that they can pay back any loan. What's astonishing is that the Fed had to mandate what bankers used to do out of simple self-interest, and that the mortgage industry squawked about even this modest reform.
In this context, it's harder to attribute the financial troubles of a family in Taunton or a free-spending mother in Pennsylvania solely to bad decisions or bad luck. Consumers are learning the hard way. What's still needed is a change in the culture of the financial-services industry, and recognition from Congress that there's more to financial regulation than letting the borrower beware. 