Every Friday my syndicated column appears in a variety of papers in Canada. Here's this week's, about the credit crunch. It's from a Canadian perspective, but I think it's still relevant for all:
Let’s fast forward twenty years. My husband and I are living in a bungalow as a concession to my bad knee. He’s still not bald, so he’s the envy of all. And we still have two daughters.
Let’s imagine that one is married, stable, and living in a modest house while saving much of her income to launch a business. The other daughter dropped out of university to travel around the world and find herself. Mission accomplished, she returns home with dreams of starting her own organic goldfish farm. And she wants a large house suitable to her new role of a legitimate businesswoman.
Hopefully in twenty years my husband and I will still have the courage to slam our wallets shut. But let’s say we lose our minds and lend this daughter our life savings. A decade later, when she inevitably loses the house, guess who’s going to be bailing us out? The daughter who was trying to live responsibly all along.
That, in a nutshell, is what happened in the United States last week. It all started in the early 1990s, when Congress, under Bill Clinton, declared more loans should be given to those who don’t have a stellar financial footing, and offered banks incentives for being generous. All these new mortgages created a housing bubble, tempting speculators. Lenders launched subprime mortgages, which sounded ideal for the first little while, but soon became killers when the interest rate increased. These subprime loans went from comprising 2% of all loans in 2002 to 30% in 2006. And then the bottom fell out.
In effect, banks were subsidizing organic goldfish farms at the expense of those who were waiting in the wings, refusing to take risky loans. Investment firms bought these paper-thin mortgages, and soon even financial stalwarts were buried up to their necks in bad debt.
Canadian banks are much more conservative when it comes to lending, but we’re going to feel the impacts here, too. And it all stems from our culture’s insatiable demand for easy money. We think that everyone should have access to credit, and comfortable lifestyles, and large screen televisions as soon as they exit the womb, rather than having to scrimp and save like generations did in the past.
It can’t last. We can’t keep living paycheck to paycheck, paying off one credit card with another, or rolling our credit card debts into our mortgages whenever they come up for renewal. At some point all of this credit is going to come crashing down.
The media has been blaming the mess on greed, but I think it’s also plain old laziness. On those financial reality shows, profiling people who have been buried in debt so long that the red ants are gathering, the story is always the same. They spend thousands more each month than they make, and they don’t even realize it. They don’t count pennies; they just go to the ATM to extract more twenties.
In these shows, the solution is always the same, too. Cut up the cards, and make a budget. Divide your money into jars for each budget category, and then pay by cash. It’s hardly rocket science. That’s how smart financial people have been living for generations. Jars and cash aren’t anything new, but they’re still the best route out of a financial mess.
A friend of mine was once facing a credit crunch, and she and her husband sent their VISA into exile. They wrapped the card in a Ziploc bag, and then placed the whole thing in another Ziploc bag filled with water, which they then banished to the back of their freezer. It’s still usable, but it’s going to take a lot of thawing out before they can get to it. No more impulse purchases!
As I write Congress is trying to stop the bleeding. Maybe it will work; maybe it won’t. What we really need, though, is for our whole society to start using the jar system rather than handing over the plastic. Let’s live in reality, not fantasy. Fantasy crashes, and next time it crashes, it’s going to be even worse.
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Labels: columns, finances, saving, spending