Wikinvest Wire

When retail therapy fails

Tuesday, July 22, 2008

David Brooks does the near-impossible in an op-ed piece for the New York Times today.

With many people finding themselves in debt up to their eyeballs, he asks whether a "culture of debt" has developed in the U.S. over the last couple decades without once mentioning the source of all the money and credit.

That's kind of like asking if the nation has a drug problem without once looking to see how much and from where the drugs are coming. As if the free flow of illegal drugs were an acceptable cultural norm but excessive drug use was not.

Just as you can't have a drug problem without drugs, you can't have a debt problem without easy money.

This topic has been addressed here on a number of occasions over the years, the most extensive treatment appearing long before the housing boom went decidedly bust in part three of the series Three Sins, One Gift - Sin #3: Fostering a Culture of Debt.

It's funny that so few asked questions about high debt levels and low savings rates when home prices were rising, but once home prices starting plunging, it all seems so obvious to so many.

Just the idea that some still think the nation entered a "period of mass luxury" (see below) makes you wonder whether or not we still have quite a long way to go in accepting the new realities.
Some of the toxins were economic. Rising house prices gave people the impression that they could take on more risk. Some were cultural. We entered a period of mass luxury, in which people down the income scale expect to own designer goods. Some were moral. Schools and other institutions used to talk the language of sin and temptation to alert people to the seductions that could ruin their lives. They no longer do.

Norms changed and people began making jokes to make illicit things seem normal. Instead of condemning hyper-consumerism, they made quips about “retail therapy,” or repeated the line that Morgenson noted in her article: When the going gets tough, the tough go shopping.

McLeod (the subject of a NY Times story over the weekend) and the lenders were not only shaped by deteriorating norms, they helped degrade them. Despite all the subterranean social influences, there still is that final stage of decision-making when individual choice matters. Each time an avid lender struck a deal with an avid borrower, it reinforced a new definition of acceptable behavior for neighbors, family and friends. In a community, behavior sets off ripples. Every decision is a public contribution or a destructive act.

And now the reckoning has come. The turn in the market punishes many of those seduced by financial temptations. (Sometimes capitalism undermines the Puritan virtues, but sometimes it reinforces them.)

Meanwhile, social institutions are trying to re-right the norms. The government is sending some messages. The Treasury and the Fed are trying to stabilize the system while still ensuring that those who made mistakes feel the pain.

But the important shifts will be private, as people and communities learn and adopt different social standards. After the Depression, a savings mentality set in. After the dot-com bubble, a bit of sobriety hit Silicon Valley. Now it’s the borrowers’ and lenders’ turn. As the saying goes: People don’t change when they see the light. They change when they feel the heat.
Some recommended reading for Mr. Brooks who really needs to learn a thing or two about speculative manias and the one thread that is common to them all - easy money:

Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay
Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger
Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor

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Bud said...

Good points, as always, Tim. People like Brooks give the average American way too much credit for making good decisions.

SimpleGuy said...

The author of this NYT article is very typical of a type of person who is glib but really has nothing new to say. These types are common among college professors. Anyone with common sense knows that debt isn't wealth and that America and Americans are in debt up to their eyeballs.
The drivel that passes for reporting and news today is staggering to me.
I love this blog because Tim has good common sense and the information and ideas here far exceed anything I read in the so-called mainstream media.

Keep it up!

Anonymous said...

If people want drugs, they will find them. If people want guns, they will get them. If people want to go into debt, they will find a way. I think focusing on the culture is an important angle. It needs to change as well as government policy.

Bud said...

The vital distinction between debt and drugs is that one is legal, the other is not. The government and its banking system are the ones creating money and debt. Absent these parties, you have to go to loan sharks which are the equivalent of drug dealers.

Anonymous said...

brooks and his fellow nyt colmunist tom freidman are both wankers of the highest order. neither has been right about anything for quite some time. highly recommend that both be avoided like the plague. a pair of wanking wankers.

Tim said...

We're off to Yosemite for a few days so, while new material will be appearing here, none of it will be timely.
An interesting essay is on tap for Thursday AM - "Waking up from a 22-year coma".
I can't imagine what the price of oil and gold will be by the end of the week...

Anonymous said...

I'm soooo jealous. Hopefully, you're going to a high elevation. It's probably pretty hot (and crowded) in the valley.

BrunoT said...

There are plenty of culprits at fault. But I would like to see more emphasis put on the cultural phenomena where people of somewhat modest means attempt to look "upscale" and appear as if they have far more. I believe this harkens back to the 80's, when shows like "Dallas" and others as well as the media in general slowly introduced the idea that one could successfully fake being rich, or at least affluent, and that being rich was more important than just about anything else.

This is where the debt based economy came in. The culture became one of "You can have that nice car, house, clothing, etc, NOW, rather than saving for it." People even got the idea that mysteriouos things like leasing and ARMs were "magic" and would make previously unattainable luxuries possible.

But when my wife reports $30k/year single mom assistants at her office sauntering in with $800 handbags and $500 shoes for coworkers to admire, you know the culture is sick.

staghounds said...

Stupid people will borrow to their limit, they always have done. The difference is that now it's not just the stupid. Now only the stupid believe that money retains its value.

When money will ALWAYS lose its value, why not borrow for all you can? Just pay it back with less value money one day.

It's what we've been commanding our government to do, to a greater or lesser degree, since 1933.

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