As I’ve said for years and years, the consumer debt in this country, while presenting a good picture of the economy now and in the near future, will eventually be our downfall into the troughs of recession. Well, I can’t remember the last time I saw a sign as strong as the one I saw today. The rest of the post will make more sense after having read the two articles, especially the first.
Exhibit A: Equity Is Altering Spending Habits and View of Debt (L.A. Times)
Exhibit B: Greenspan: End of home boom inevitable (CNN Money)
Isn’t this just the “irrational exuberance” of the .com boom in a different guise? Instead of investing tons of money that doesn’t exist in ill-fated investments, you are borrowing tons of money that is liable to be taken away by the whims of the real estate market.
To elaborate, I was utterly aghast and shocked at some of the quotes in the L.A. Times article. People, to whom people listen, are saying that by not having debt, you are squandering money you could have. Unless the interest rate you are paying on such a loan is equal to or less than the rate of inflation, taking out a loan is doing what it always does: taking what is less than the present value on a portion of your future income. I don’t care if the interest rate on that loan is four percent or fourteen. You cannot escape the fact that the very essence of a loan getting cash at present at the cost of losing a portion of your future income. That, for all practical purposes is inevitable. The only question is how much extra of your future income will you have to spend on the pleasure.
I understand that many people want to keep borrowing against the increasing value of their homes, either not cogniscent of or ignoring the fact that home prices will almost assuredly come back down. I understand that banks want to offer fantastic new services to take advantage of the aforementioned people. (As an aside, the combination checking and mortgage account actually seems like a good idea but only if you can manage it. As the bank representative said, “you can use it, you can abuse it.”) But the fact that “financial advisors” (quotation marks are almost insufficient) are now spewing this crap also is blatantly absurd. One of them equated not borrowing against your home to stuffing money in your mattress, calling so “unsophisticated.” Bullshit. Out-and-out, unadulterated, uncensored, fresh-from-the-cow’s-ass, heaping-pile-of-stench, fly-infested bullshit. (Who says a formal argument necessitates being formal? I sure as hell don’t.) His comparison is invalid for many reasons, only one of which I shall point out. When I have $500K in my mattress, I actually possess that money. When a bank gives it to me contingent on my possession of a house, I don’t actually possess the money. How? Because the bank that gave me the money now possess reams of paper that constitutes a depost, a deposit in the Bank of Me, which is stipulated to be paid back over time. Having half a million dollars is not the same when it comes attached with a liability of equal value (greater value considering the fees, interest rate, and so forth). So Mr. Owning-your-home-is-unsophisticated, I hope you enjoy your financial situation in ten years when you possess more liabilities than assets. In ten years, I will enjoy the comfort of not having borrowed any irrational exuberance, thank you very much.
For my next installment of Rant My Ass Off, I will bitch and moan about Angelino drivers. Until next week!