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Wednesday, September 13, 2006

Easy Credit - a revelation

I'm not the sharpest tool in the shed. I'm just a guy with an Idaho public school education, a bit of college, and a few technical schools. Yeah, OK I have an IQ in the mid 120's, but other than *that* I'm a fairly normal guy. I'm definitely not too quick on the uptake...

Which leads me to today's musing about easy credit and my inability to recognize it while being slapped in the face by it, hahaha.

My wife loves Home and Garden Television, and watches it religiously. Back in 2002 I recall watching one 'home makeover' program with her in which a couple was renovating their family room with a "budget of $40,000". She suddenly looked at me and asked, "Who has $40k lying around to redo one room of their house?" I said, "I dunno. Maybe they inherited some money." Looking back, I realize that this was my first inkling of what has gone so wrong with our economy. I started to pay more attention to how much money these home-owners were spending on their renovations. In show after show, people who seemed less affluent than I am were spending *way* more money than seemed appropriate for their means.

In my own little slice of paradise (Bakersfield - HA!), more and more people of ordinary means seemed to be able to afford Hummers, Bimmers, Mercedes', and Lexus'. Suddenly everyone was buying new motorboats, RVs, custom rods and Harleys, too.

I didn't understand where everyone was coming up with all this disposable income. It never occured to me that it wasn't 'income' at all, but borrowing. Interestingly I had the opportunity for an early understanding of the great credit bubble, but I failed to grasp the extent of it.

In 2003 (along with most of the rest of the country) I decided to refinance my house. I was interested in a 15 yr mortgage at the lowest interest rate I could get. I ended up paying a couple of points and got a 15yr fixed rate at 4%. Here was my chance for understanding the sudden appearance of Harleys and Hummers in front of oilfield workers homes: The mortgage guy I talked to had asked if I "wanted any cash" or needed to pay off credit cards which I could also tack on to the loan. Having no credit card debt, I answered "no", and thought no further about it.

Fast forward to 2005. I'm two years into paying off my mortgage, and driving a tired (but paid for) 1995 pickup to work. My co-workers had been buying McMansions and new vehicles galore, yet we all earn approximately the same wages. I finally stumbled across a couple of the blogs linked in column to the right and understanding ensued.

What I had apparently witnessed was herd behavior during a massive credit expansion. I had been completely oblivious to the source of the credit (in spite of the mortgage guy's question), while puzzling over the rampant and obvious symptoms.

Fast forward to today. Everyone who wants one has a Lexus, BMW and a boat. They're all "paid for" too! People have the titles to these vehicles in their name. Yet they also have more long-term mortgage debt. Some folks will be paying for these vehicles for 30 years - long after the vehicles are obsolete and the kids have worn them out.

How did individuals in this country become so fearless about taking on crippling levels of debt? Easy credit and low interest rates make it easy to justify taking on debt, but why so much excess? Consider the in-your-face consumption that typifies the 5000 sqft McMansion with matching Hummers in the driveway...

Now, I can see some folks arguing that people taking on long-term debt to finance current consumption may not be all that bad, if it's at historically low rates. In many ways it makes sense to borrow as much as you can at as low a rate as you can. So why can't I shake this deep sense of foreboding about what seems to be such reckless and irresponsible borrowing and spending?

Which brings up another (related) thought: This county has a large military force occupying Iraq. It's an expensive project, because the military contributes nothing to the US economy. On the contrary; a military occupation is a hugely expensive drain on a nation's economy. How are we paying for it, without anyone seemingly having to endure the slightest economic pain - e.g. taxes? The answer, of course, is that the pain has merely been delayed. The war *will* be paid for - not just in blood, but in the overall economy. The US taxpayer, like it or not, will pay for this military action - if not in taxes, in devalued dollars, reduced spending power, and a lower quality of life.

It took 5 years for the economic fallout from the spending debacle in Vietnam and the Great Society to hit the average American, as stagflation took hold. It took another 5 years to recover from it.

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