Stop the Insanity

So how did we get here? Of all the theories regarding the root of the current economic crisis, the one that rings the most true for me is over-consumption and under-saving. It seems so simple, but true. Thanks to creative financing, our insatiable consumption was reflected in the mortgage market.

In 2006, I co-authored the paper Cohort Analysis of Credit Card Behaviors: Will Consumers be Ready for Retirement? (http://74.125.155.132/scholar?q=cache:2EMFrlTCJfoJ:scholar.google.com/&hl=en), in the introduction we summarize the credit proliferation movement that began in the early 90s. Under the new risk-based pricing models, lenders no longer questioned whether or not to grant credit, but rather what to charge in order to say yes. And in return consumers decided that because lenders were willing to lend them money, they must be able to afford it. So we buy and refinance, and hope that one day the price of our home rises high enough to sell it when we are ready. And for a while, the market was on our side. Everyone knew someone who made thousands on the sale of a home they lived in for a few short years.

What should we be doing to fix the problem? I believe we need to slow down consumption and start saving. Yep, the good-ol' live within our means concept, one most consumers resist with a passion! ACT YOUR WAGE is going to be my new bumper sticker!!! Unfortunately I have found you can't talk reason into shopaholics, especially when they are supported by the President.

Let's take "Cash for Clunkers" as an example. If you turn in your old car, we (and I mean literally we) will give you money to put on a brand-new car. So now, our tax dollars are being used to convince people to buy a new car. (Side note: what kind of cars did they buy... not American.) At the rate in which new cars depreciate, NO ONE got a deal. I know no one who has made a dollar on the resale of a car they drove for a few short years!

Unfortunately our President is hoping that more consumption is going to help us get out of this mess. But how can me spend our way out of a problem which was caused by over-spending to begin with? What does a wise person do with a friend that can't seem to get her financial act together (ie. GM)? Well, you certainly don't keep handing her money. Let her fall on her butt and experience the consequences! Hopefully she will learn and not do it again.

I say let the businesses fall! Yes, it will hurt, but eventually they too will learn and correct their behavior. Or they will go away and be replaced businesses that have figured out how to survive on their own.