Friday, September 28, 2012

Credit Where Credit Is Due

According to this USA Today article, household debt in the US is shrinking.  “Consumers went into the recession carrying debt of nearly double the nation's gross domestic product. That's down to below 85% now, and on pace to approach 75% by late next year.”  My first reaction was, “Good for us!”  Americans are showing more discipline with their spending.  This is a good, long-term sign.  Being overextended affects our physical and mental health as well as our ability to cope with financial emergencies.  As we found out not too many years ago, when too many people take on too much risky debt, we face serious societal consequences.

The article states that this debt reduction is a good short-term sign; because when we once again get comfortable with our debt level, spending will increase, leading to more consumption, more jobs and higher economic growth beginning as early as next year.  The slow recovery in home equity is seen as the only problem.

I don’t have anything against economic recovery, but let’s not be too hasty.  First, disregard home equity.  As I have argued in the past, you will always need a place to live.  Regardless of what we hear from realtors, loan officers, investment advisors, and others who profit from the transaction, to think of home equity as an investment is self-deceptive.  Second, let's try to minimize other debt.  There are simple ways to minimize or eliminate auto loans, and people who pay off their credit cards every month are the banks’ worst nightmare.

How many times do we have to be hit over the head before we are more careful about borrowing money by delaying gratification, prioritizing wants over needs, and treating debt as an obligation or burden rather than as a convenience?  It’s only been a few years since bad borrowing decisions and pursuit of extravagance plunged us into a recession, whose negative effects still linger.

Yes, when I saw that news, I was encouraged about the potential for improved behavior in financial discipline.  I was not even discouraged by another article telling how a big chunk of the decrease in debt is attributable to defaults and foreclosures.   When the bank writes it off, the debt goes away – but comes back to haunt the rest of us as higher fees and restrictive lending policies.  (Remember, we are all connected by that economic web; there’s no magic money tree.) 

Long-term, a new sense of financial discipline can be a very good thing for America.  It will take willpower and patience, but it’s worth it to avoid the well-known consequences.  (If you still think the last recession can be blamed on banks and Wall Street, you missed this.)  And once we get our personal houses in order, perhaps we can force our government to do the same.

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