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Many Americans, after a near decade of unsustainable overconsumption, often fueled by cash-out refis and HELOCs (home equity lines of credit), will spend the next five years (or perhaps longer) repairing their balance sheets.
And the repair of those balance sheets is something that's applauded by the bulk of economists: enticed by, among other factors, low interest rates and, in some cases, by false promises of a 'perpetually-increasing value of their home,' Americans borrowed too much, with predictable results.
But one thing the nation should not do, amid the understandable belt-tightening, is overact, and look unfavorably on all credit and lending.
There are camps, economic and otherwise, that suggest the solution to bad debts and the way to eliminate future housing market collapses is to ban mortgages -- arguing that mortgages simply increase home prices and lead to bubbles, busts, and defaults.
To say the least, the above is an extreme view. While every housing boom will contain home buyers who bought too much house, did not prepare adequately for a loss of income(s), or otherwise mismanaged their personal finances, that's hardly rational justification for returning to a cash-only home purchase system.
First, mortgages have enabled tens of millions of American families to purchase homes they could not have otherwise purchased. Second, they've led to more-stable communities and created another category of equity owning citizens -- citizens with a stake in the U.S. economic system -- and a rising stakeholder percentage almost always is a good thing for the free enterprise system.
Finally, investors and home owners should keep in mind that it's not debt per se that's the problem, but both the use of debt and the accompanying ability to service debt. Reasonable amounts of debt to increase one's skills (such as medical school study), or to purchase a home one can afford and maintain, or to increase a company's productive capacity, represent constructive uses of debt, and they play an important role in the U.S. economy's expansion.
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Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.
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Reader Comments (Page 1 of 1)
11-30-2009 @ 7:30PM
william lindblad said...
So? Joe, what on earth are you trying to say?
Writs of credit have been around since the time of ancient Babylon. While there are no extensive records, they had to have some kind of similar system during the Roman period. They had a monetary system, trademarks and obviously, some kind of written math in order to do construction. The early Jewish merchant traders all used letters of credit and so did the Templars. In short, credit has been around for a real long time and getting rid of it would be a major step backwards.
The solution to "bad debt" is sensible lending and that was prevalent in the U.S. for years.
I don't know what the big deal is as we all know that the reason for this calamity is the same as what caused the depression of 1893. It has a name - it is called laissez faire. Government stay out of business and it is the Libertarian view in which business will police itself. It did not work than and it did not work now.
So what else is new?
12-01-2009 @ 6:09AM
al coholic said...
Nearly every American family dreams of owning their own home. But home ownership took a wrong turn about thirty years ago or so. A large migration south from the heavily taxed northern states by business and workers soon followed. When they sold their houses in New England for a whopping profit they were obliged to buy even more expensive housing when they relocated because of a requirement that in order to escape the taxes from their housing profits they had to keep escalating their housing purchases. This promoted the growth to larger and larger houses, which as they continued to appreciate in value turned housing into an investment. Even after the law was changed in 1986 people continued to buy houses not for their needs but for their appreciation potential.
Our grandparents built smaller, more utilitarian homes because they it seemed more prudent to fund retirement from savings and investments rather than from windfalls from their homes increased value.
Another factor is the change in how mortgages were made. Back in the day all morgages required a hefty 20% down and were scrutinized by bankers who knew that if the borrowers didn't pay it would come back to haunt them.
Contrast that with the way things were done the last ten years or so and you get a picture of why it didn't work.