Well, here we are. We’ve been talking about it for months on blogs all around the Internet. All of us that are managing our money in a responsible way have been wondering how much of an impact the irresponsible could have on our financial well being. It seems to be slowly coming clear now and it doesn’t look good.
Who am I talking about? Well, I’d lump people in to a couple of categories when it comes to being fiscally responsible or not. There are those of us that spend less than we earn and save for the future and for emergencies. On the other end of the spectrum there are those people that are spending far more than they earn with no plan to recover. Certainly there are people along the spectrum between these two extremes and each of them are either contributing to the problem or are doing the things they should to remain financially secure.
First, lets look at the responsible people out there. Month in and month out, you spend less money than you bring in. You have secured a mortgage that is affordable and you live in a home that is within your means. You don’t worry about whether you’ll get some overtime to help cover the basic necessities and you always know where your next meal is coming from. You drive cars you can afford to put gas in and can repair them when they break. You don’t owe more money on those cars than they are worth. In general, you have a plan and you stick to it. You don’t normally worry about money because you, long ago, learned that it’s better to own money than to have money own you.
Then there are the other people out there. They bought houses that were unaffordable through creative mortgage loans with terms like "interest only" and adjustable rate subprime loans that allowed for small payments in the early years of the loan only to have the payment balloon up a couple years later. Take a drive through your neighborhood. I don’t care where you live, I think you’ll be hard pressed not to find a few houses that seem to be vacant, for sale, and most likely owned by a bank or financial institution. The people that lost these houses are the same people that owe thousands and thousands of dollars on their credit cards and drive cars that cost more than their annual income with little ability to cover the payments. Sure there are exceptions to this. Sometimes people lose their homes due to situations completely outside their control such as medical bankruptcies or job losses that crush a person’s financial situation. I’m not talking about those people. I’m talking about the people that wear the latest designer clothes that they won’t own for years. These people are oblivious to basic financial management and have definitely been a major part of the macro level problems we are facing today.
So, it is the second set of people that have helped drive this latest crisis. I don’t put all the blame on this set of consumers though. Another part of the blame goes to the institutions that were lending money to all of these people. Through creative financial packaging of loans and the resale of those loans to greedy, hungry Wall Street firms, pretty much anybody could get a loan for a home, or anything else, with little ability to afford the payments. Need a great example of this? Read about the Spanish speaking farm workers that were able to qualify for a $720,000 house with a payment of $5375 per month. Needless to say, it didn’t take long for them to get in to trouble.
Now, after the party has come crashing to an end, we are left to pick up the pieces. We, as citizens of this country, are facing trillions of dollars of debt to save many of these institutions. That is not capitalism. Capitalism would call for the failure of these firms and others would rush in to pick up the left over bits. Consumers that didn’t play by the rules would face the consequences of their actions without bailouts. The whole idea of capitalism is that some people win and some people lose. If people believe they’ll be saved when they "lose", they will learn to take bigger and bigger risks. This just doesn’t make sense. I understand what our government is trying to do by bailing all of these companies out. They believe that by doing this it might prevent a massive failure in our society that would make the depression look like a Sweet 16 party. If this did happen, the impact to responsible citizens like you and me would be much different. In a sense we get two choices here. We either face the impact of massive debt to try to stabilize an incredibly crappy financial market, or we let capitalism play out and we all end up sitting on our porches with guns protecting what little we have left. Either way, we all end up getting screwed by the irresponsible people in both our local communities and in our financial communities.
