Are you one of those unpatriotic ninnies who erroneously believes that you can't spend your way out of a hole? Shame on you! You are the reason that Barry's "Summer of Recovery" has (unexpectedly) turned into a "Summer of Bust". Robert J. Samuelson explains:
Why is the recovery faltering? There are many explanations: a depressed housing market; weaker-than-expected exports; cautious corporations. But consumers, representing 70 percent of the economy's $14.5 trillion of spending, are the crux of the matter.No job or worried about losing your job? Buck up! Don't put money in the bank for a rainy day. Spend it.
It isn't that Americans aren't behaving as anticipated. They may actually be outperforming. "Consumers are deleveraging (reducing debt) . . . and rebuilding saving faster than expected," writes economist Richard Berner of Morgan Stanley. In 2007, the personal savings rate (the share of after-tax income devoted to saving) was 2 percent. Now it's about 6 percent. Temporarily, this hurts buying. Declines in consumer spending in 2008 and 2009 were the first back-to-back annual drops since the 1930s. Since World War II, annual consumption spending had fallen only twice (1974 and 1980).
Correct me if I am wrong but wasn't our national spending spree the reason we are in this mess now? People bought the government line that everyone deserved to own a home, whether they could afford it or not and whether or not their credit history indicated that they would pay for the home even if they could afford it. As more and more people bought houses the prices went up and riskier loan schemes became necessary to put people in to homes. Once the ball started rolling it didn't stop until it went right off the cliff and it was straight down from there.
When will people feel secure enough to start spending? My parent, children of the Great Depression, were never spenders though they could easily afford to be. It wouldn't surprise me if the young people of today, having watched their parents lose their jobs, then their homes and cars, end up being much more fiscally conservative than the people of my generation. In any case, it is unrealistic to expect people to spend on random goods and services when they are not sure where the next meal is coming from.
Any talk of increased consumer spending is premature when unemployment is sitting at ten percent. First, get the government out of the marketplace and off the backs of employers and the jobs will come. Spending will follow, though hopefully never at the levels that spurred this crisis to begin with.
Cross posted at Carol's Closet
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ReplyDeleteWe should point out the government defines paying off debt as "saving". While I suppose that is true, it is not the definition most of us would use.
ReplyDelete"Correct me if I am wrong but wasn't our national spending spree the reason we are in this mess now? People bought the government line that everyone deserved to own a home, whether they could afford it or not and whether or not their credit history indicated that they would pay for the home even if they could afford it. As more and more people bought houses the prices went up and riskier loan schemes became necessary to put people in to homes. Once the ball started rolling it didn't stop until it went right off the cliff and it was straight down from there."
ReplyDeleteI share your frustration with people who suggest the American consumer should spend more for the good of the economy.
But while it's bad when the American consumer is berated for not spending enough, it's far worse when they are blamed for something that is not their fault.
It happened because banks and mortgage companies suddenly believed they didn't have to worry about their borrowers repaying their loans. They could write stupid loans confident that they could sell the loan for a profit.
Who was the buyer? Wall Street.
Wall Street was happy to buy loans where the person's credit score was 620 or higher, because their math said they could do it without losing money. And they were wrong.
The net result was you had Wall Street saying "We'll buy any junk you write" to lenders - and so you had lenders literally banging on doors trying to get people to buy homes. We had lenders writing 30 year loans to borrowers in their 70s - no lender does that if they care about the loan being repaid.
The banks threw open the floodgates on lending, and over time a very large number of people took them up on their offer. Then in 2007, the banks realized the money wasn't coming in and they stopped giving loans to people without jobs or assets.
The moral being - when bad loans are made, bad lenders will make them.
P.S.
If you haven't heard TAL's podcast called The Giant Pool of Money, you should - definitely worth your time.
http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money