When retail therapy fails

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