When I was at university, a professor described the difference in American economic attitudes today and fifty years ago. His claim was that in the 1950s, the "great American dream" consisted of owning a home, a car, and raising a family. Today, in contrast, Americans are successful when they carry six-digit debts and own nothing.
You borrow hundreds of thousands of dollars to buy a home, which you never really own (the bank owns it); you borrow twenty-thousand dollars to buy a car, which you probably sell the moment you've paid off the debt. And you carry probably two or three credit cards with revolving debt. In fact, modern Americans would be be hard pressed to have a home, car, or university education without expansive debt.
Clive Crook writes in today's Financial Times that this culture of cheap debt expectations is the root of the looming economic crisis:
The US already has what must be the world's most generous fiscal dispensation for mortgage borrowers - uncapped tax relief for owner-occupiers, plus colossal "government sponsored entities" to guarantee loans, implicitly subsidise mortgage rates and promote securitisation. This fiscal regime created an environment in which you felt a fool unless you borrowed to the hilt - not just to buy your house but to keep your equity in it to a minimum, so as to liberate cash for other purposes. This is the very root of the problem.
This environment has put the US in a precarious position - how do you back away from the recent tradition of ensuring that everyone is able to own a home without the accompanying responsibility or risk? Lenders are willing to issue bloated loans on speculation because they are able to assume that, if things don't work out, the taxpayer will step in to save the system.
Our current system of highly-subsidised consumer credit is a system that is based in market principles (consumers can borrow, but are responsible for repayment), but undercuts the risk that assures the discipline necessary to prevent overextension (government will step in to save lenders - always, and consumers - often).
As the housing market corrects itself, Americans need to take an important lesson - economic security requires discipline and responsibility. Unfortunately, this is a lesson that cannot be learned without some suffering from the current crisis. Lenders, especially, need to know that with high-risk practices comes the potential for dramatic failure. But all of us need to understand that there's no such thing as a free lunch.
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