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To mix metaphors, although our great national nightmare is over, the hangover is just beginning. The great national nightmare was the Caligula-like reign of our 43rd president. And the hangover is revealed in some new Fed statistics on the decline in family net worth during that president's tenure.
The moral of the story is that debt can create the illusion of wealth, but when the time comes to pay back that debt, people end up worse off than if they had not borrowed.
Some people felt great about borrowing money to buy a house -- even if they knew the mortgage rate would reset to a level higher than they could afford to repay. They figured that the value of their house would keep rising and that if they couldn't make their mortgage payment, they could always flip their house at a profit and repay their loan. This is what contributed to the seemingly healthy 17% rise in American median net worth between the end of 2004 and the end of 2007.
But with the collapse of the housing market -- which slashed $6 trillion from the value of the housing stock -- and another $6 trillion from stock market portfolios of American families, the Fed adjusted its numbers and now estimates that family net worth actually fell 3.2% between the end of 2004 and October 2008. Of course, the housing market is still in free fall so the hangover is nowhere near an end.
The lesson is not to add more debt to the economy. Instead, it's a much harder one -- we need to change from a society that operates on borrowing and spending beyond our means to one that can profit from savings and living within them. With 70% of GDP growth dependent on consumer spending, we need to change our culture and then change our economy to one that depends less on consumer spending and more on growth through innovation.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.
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Reader Comments (Page 1 of 1)
2-13-2009 @ 10:49AM
Lela Hayes said...
As always, Peter Cohen is right on!
2-13-2009 @ 10:55AM
Jerry Catania said...
Wow. Brilliant. We shouldn't borrow more than we can pay. No wonder you teach college. You don't have a clue; the nightmare hasn't begun yet.
2-13-2009 @ 2:06PM
Thomas Paine said...
To some, Peter may have stated the obvious, which some would call common-sense, but in today's world neither seems to be obvious or common.
I'm thinking that his overall point may lie within this partial quote, ".. we need to change our culture.. ". That task is paramount to our survival; it is absolutely vital and yet, it is Damned impossible.
That's how I see it. We could sooner balance our current budget. Just look at what passes for knowledge in our society. People tossing out words like Socialism. They have no idea what it means, just that their daddy said it was something horrible.
Socialism is a social-political system of government/society/life. It is NOT a financial perspective - never has been, never will be. Certain aspects of particular Market objectives *may* manifest themselves more in a particular social framework, than others, but that's far from the knee-jerk "foregone conclusions" that some folks spew.
One tiny example: China is what? Communist? Socialist? Dictatorship? All of the above? Pick one; it doesn't matter which one. They're the "bad guys", right?
But.. but.. BUT, they've got a stock market? How can that be? Well, actually, they have several of them. Shanghai, Shenzhen, Hong Kong, etc. Oh Lordy, a Free Market, in a socialist society!
I can imagine that some people's head just exploded. Good. If we get enough of -that-, we may very well be on our way to changing our culture.