Living on the Edge

I’m struck by the public outcry at all those who are deemed responsible for the current financial mess. The banks and investment banks on Wall Street, the federal government, mortgage brokers, rating agencies… they are all in the cross hairs of public resentment. And they should be. All contributed bringing us to the precipice on which the economy now rests. It’s a little disingenuous, though, and perhaps hypocritical is a better word for it. After all, they haven’t done anything we didn’t do ourselves.

Look at the trappings of the typical American lifestyle. How many people don’t have a flat screen TV? Yet what is our savings rate? I’d bet more people have a flat screen TV than contribute to their 401(k). We didn’t sock it away, and neither did corporate America. In the best of times, we let our savings fall, companies operated at the edge, wasted precious capital, and ultimately failed to make the changes to plant, product, and personnel necessary to weather a storm that we all knew would eventually come.

Banks didn’t help the situation. They did what we did – they leveraged to the hilt. We bought houses our grandparents would never have purchased; did we really believe grandma was wrong? After all, she’s bailing many of us out now that we’ve blown it. Banks bought securities that were garbage, knowing that the ratings agencies were complicit, and turning a blind eye to the shady practices of mortgage brokers that encouraged people to spend well beyond their means. But it’s not all their fault. Someone on the other side of the table had to be dumb enough, or greedy enough, or both, to sign on the dotted line.

There are some basic principles that we Americans ignored, and these are things that had been established fact when “the Greatest Generation” was in charge:
1) Save your money for a rainy day. It will always come.
2) Don’t take undue risk with investments. Be the tortoise, stick to a formula, plod along, and you’ll win in the end.
3) Don’t live beyond your means. Don’t buy a house you can’t afford, don’t blow your money on things that lose value. You’re lying to yourself, and everyone else.

Somewhere along in the 1980’s, we seem to have veered off course from those three maxims that our grandparents espoused. We began to live in the moment, believing that either the rainy day would never come or that if it did, someone else would pull our rear ends out of the fire. We have now had two bubbles burst within a single decade, and I still do not get the sense we’ve learned our lessons. It occurred to me back around 2004 or 2005 that if consumers were pulling money out of their homes as they’d already depleted any savings they had, and their fantastic stock portfolios of the late 1990’s were already gone, then what would hold things together when real estate corrected? The answer? Nothing.

When the financial crisis hit in the fall of 2008, there just weren’t any good tools left with which to fix things. Consumers had nothing to fall back upon. Homeowners had nothing. The federal government had nothing, and has now created something from nothing in order to correct our course, and we will pay for that many fold down the road.

The situation is not unrecoverable, and I think the answer is pretty damn simple: consumers need to start saving again. Growth rates may suffer for a while, but take some pain economically, though it will be politically unpopular. Get deficit spending under control and begin to reverse the debt levels of the United States, both individually and as a country. We can return to the more simplistic and realistic lifestyles of our grandparents, and I think they’d be proud of us for doing it.