Tag: Credit card

The Worst is Yet to Come

Building on Rich’s post on debt, I stumbled across this article that summarizes Harrisburg, PA’s recent attempt to declare bankruptcy. Essentially, the city got themselves $310 million in debt (that’s $6,000 per resident) on an incinerator. Yes, a fucking incinerator. They took on a bad obligation, compounded it by signing a deal with the lowest bidder for renovation (lowest bidders always cost more) and are now trying to impose a commuter tax to get out of the hole before the state essentially takes over the city and forces them to lease or sell city assets.

This is not even the only scandal among Pennsylvania small towns. Numerous towns are facing financial difficulty over interest rate swaps and mine is potentially facing millions in losses on a possibly illegal naked interest rate swap — that is, we might have to fork over millions to pay interest and penalties on a loan we never took out.

This is going on everywhere in America. Not only are cities, counties and states in debt, many are tangled in such complicated financial schemes, it’s not clear how they’re going to crawl out. All over the country, people have forgotten the first rule of finance: do not invest in something you don’t understand; do not take on debts you don’t understand. And we’re supposed to believe these twerps will clean up Wall Street?

There are some people who are starting to get it:

Some 8 million U.S. consumers stopped using bank-issued credit cards in 2010, according to the credit-reporting agency TransUnion. The average credit-card balance has fallen 10 percent this year from 2010, to $6,472; U.S. consumer debt has dropped for 12 consecutive quarters, from a peak of $14 trillion in early 2008 to $13.3 trillion last spring, mainly because of mortgages repudiated or abandoned. People are cutting visits to the hairdresser, buying used cars without financing, and living on surplus cheese as they trudge toward the promised land of a debt-free existence.

Of course, many economists are claiming that this is a bad thing because we should all be out spending, spending, spending to “stimulate” the economy. Well, excuse my lack of Economics PhD, but what he fuck do they think the last decade was all about?! We borrowed and spent like mad — in both the public and private sector. The result was an empty economy with essentially zero growth and all economic gains concentrated among the wealthiest. Is that what we want to go back to?

We keep running against this reality: there is no short-term fix for the problems we are in. We can minimize the pain, but we can’t fix the economy with band-aids. Long-term fixes that will slowly right the ship over the next decade are the only answer. And part of that long-term fix is de-leveraging the country.

There is simply no alternative. As even Ezra Klein — in a great leftish article on the economy — acknowledges that this is not just a downturn in the business cycle. Financial crises are different. And while Klein wouldn’t agree, I think this cycle is different because of the truly staggering amount of debt out there.

As mentioned in the Atlantic article, one positive affect of the Great Depression was to instill an aversion to debt in a generation of Americans. My parents’ generation is obsessed with being debt-free (some of them anyway) and not getting into complex financial entanglements. I hope against hope that one of the good things to come out of this will be an aversion to debt among younger people. The OWS crowd and their calls for student loan forgiveness make me shudder for the future. But I just had a 5 year-old girl tell me today that people spend too much and need to save. And all her little friends agreed. If we want more people like that little girl and fewer like the whiny entitled students, we need to face reality about our debts. And make that reality as crystal-clear to the American people as we possibly can.

PS – The Atlantic article has one huge flaw. It describes Japan as having deleveraged their debt. I’m not sure what parallel universe Earth that Japan is on. On this reality’s version of Earth, Japan’s debt is more than twice their GDP. They also don’t mention countries that deleveraged successfully, like Canada or Sweden.

PPS – Oh, and we can we put a fucking axe through the lie that government budgets are being slashed?