Has America learned a lesson about consumption?

posted at 3:30 pm on November 28, 2008 by Ed Morrissey

Stephen Roach believes that the painful economic contraction we’re about to experience will remind Americans of some basic truths about consumption.  In today’s New York Times, Roach says that the period between the last recession and now has been marked by the unique phenomenon of assets-based consumption.  We need a return to income-based consumption, and the transition is going to sting:

Consumers are now abandoning the asset-dependent spending and saving strategies they embraced during the bubbles of the past dozen years and moving back to more prudent income-based lifestyles.

This is a painful but necessary adjustment. Since the mid-1990s, vigorous growth in American consumption has consistently outstripped subpar gains in household income. This led to a steady decline in personal saving. As a share of disposable income, the personal saving rate fell from 5.7 percent in early 1995 to nearly zero from 2005 to 2007.

In the days of frothy asset markets, American consumers had no compunction about squandering their savings and spending beyond their incomes. Appreciation of assets — equity portfolios and, especially, homes — was widely thought to be more than sufficient to make up the difference. But with most asset bubbles bursting, America’s 77 million baby boomers are suddenly facing a savings-short retirement.

Worse, millions of homeowners used their residences as collateral to take out home equity loans. According to Federal Reserve calculations, net equity extractions from United States homes rose from about 3 percent of disposable personal income in 2000 to nearly 9 percent in 2006. This newfound source of purchasing power was a key prop to the American consumption binge.

As a result, household debt hit a record 133 percent of disposable personal income by the end of 2007 — an enormous leap from average debt loads of 90 percent just a decade earlier.

All of this begins with the artificial escalation of home values that began in the 1990s.  Without those increases far outstripping inflation, consumers would not have had the equity to leverage for more spending.  They would not have created a demand for even more debt, which fed on itself in a vicious cycle as government policies created profit on almost any kind of mortgage for short-term lenders.

The entire precipice was built on sand, and it’s now turning into quicksand.  For some, the lesson will come too late.  For the rest of us, it’s a lesson we need to learn for good.  Many of us have heard the advice our parents and grandparents learned in hard economic times: Don’t spend beyond your means.  Many in the previous couple of generations had a well-deserved skepticism about credit, and they’ve been proven right yet again.

While we’re at it, Congress could use an instruction or two in income-based spending, rather than asset-based spending.  We’ve been mortgaging the next several generations in order to pay for our own pet programs for the last several decades.  Maybe it’s time to stop doing that as well.

Here’s a question to ponder: The economy of the 1980s — which its critics like to chide for its excesses — turned out to be a lot more rational than the economy of the 1990s and 2000s, didn’t it?


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What kind of a horse’s behind banker loans money to a guy who can’t repay? Well, I’m sure they’re well-educated at the finest elite institutions. 20% down? Nahhh, too much of a hardship. 100% mortgage? No problemo – housing prices will rise for ever and ever, right? How does a cabbie afford a million dollar home? Gotta have some “creative” financing. Hell yeah, Fannie and Freddie are down with it, ya know? Let me tell you, any day laborer who lives pay check to pay check and uses a check cashing place to get some dough to pay for supper can tell you we were heading for trouble if someone had bothered to ask. Why couldn’t Wall Steet, or Capital Hill?

littleguy on November 29, 2008 at 12:54 AM

Some of us never got in the habit of living beyond our means. Unfortunately, most of us have invested our money in supposedly conservative organizations who in turn invested in these ‘innovative’ investments schemes. So, while our day to day life and expenses are under control, our retirement funds have been gutted.

michaelo on November 29, 2008 at 1:21 AM

Why is there a lesson to be learned about “consumption”?!

Seriously, you sound like some dumbass European chiding those “stupid Americans for thinking they can have so much.” The fact that Americans think they can consume so much is because they’re optimistic that America will prosper.

Sir Andrew on November 29, 2008 at 1:22 AM

What lesson does bailing out people teach them?

http://www.conservativewomenunited.blogspot.com/2008/11/society-to-assist-irresponsible.html

Done That on November 29, 2008 at 5:49 AM

The answer is a big NO!

Americans are addicted to buying shit they don’t need to impress people they don’t like. People don’t learn a lesson about not injecting heroin in their veins. They have to reach rock bottom, wake up in a ditch somewhere and have the epiphany that it’s time to get help. Americans are nowhere near that point.

angryed on November 29, 2008 at 8:06 AM

Why is there a lesson to be learned about “consumption”?!

Seriously, you sound like some dumbass European chiding those “stupid Americans for thinking they can have so much.” The fact that Americans think they can consume so much is because they’re optimistic that America will prosper.

Sir Andrew on November 29, 2008 at 1:22 AM

Well yes. Americans are stupid for thinking they can have so much, when in reality they can’t. Americans are stupid for thinking they can buy a $500K house on a $40K salary. They are stupid for thinking they can buy all sorts of crap on their credit card and worry about how to pay for it later. They are stupid for buying the 12 MPG suv and then when gas goes to $4 not being able to drive it anymore.

And it’s silly Sean Hannity type arguments like ‘America will always prosper’ that adds fuel to the fire. America can prosper for the next 20 years, still doesn’t justify they stupidity exhibited by Americans over the past decade.

Reality is however that the US is heading into an economic shit storm that will rival the 1930s. You can put on your red white and blue blinders and think otherwise. Or you can read some history and note that the 1920s and 2000s are almost identical in every economic aspect and that the chances of a depression are very real.

angryed on November 29, 2008 at 8:12 AM

So, angryed, the precipitous drop in consumer spending doesn’t suggest to you any awareness on the part of Americans that we need to get our financial houses in order? Wouldn’t it be nice if our dumb-a**ed politicians would respond to their massive indebtedness problem by shutting down THEIR spending in a like manner? Instead of exacerbating the problem by spending even more and intervening in ever more incompetent fashion?

PD Quig on November 29, 2008 at 10:14 AM

So, angryed, the precipitous drop in consumer spending doesn’t suggest to you any awareness on the part of Americans that we need to get our financial houses in order? Wouldn’t it be nice if our dumb-a**ed politicians would respond to their massive indebtedness problem by shutting down THEIR spending in a like manner? Instead of exacerbating the problem by spending even more and intervening in ever more incompetent fashion?

PD Quig on November 29, 2008 at 10:14 AM

Well they chose Obama , the bigger spender.

the_nile on November 29, 2008 at 10:30 AM

PD Quiq,

Consumer spending is down 1%. That is not a precipitous drop by any means. And that 1% is only because there is no more money left or because the credit card limits have been decreased.

The second an American gets an extra available $1, he will spend that dollar. No lessons have been learned. If anything Americans now expect – no demand – that politicians send them a never ending supply of money. Housing bailouts. Bank bailouts. Car loan bailouts. Credit card bailouts (coming soon). The notion of actually spending less is alien to Americans. The debate now is not whether to spend more or spend less, only where should the money to spend more come from and how much should it be.

angryed on November 29, 2008 at 11:10 AM

As with my Sunday Schoolers, I tell them lessons are a three step process:
1. Being taught the lesson
2. Learning the lesson
3. Applying the lesson correctly
Way too many times people are taught but don’t learn. And if they learn, they don’t apply.
If #3 isn’t done, the process starts over at #1. And usually, the teaching portion becomes much more intense (aka the consequences become more drastic).

Amendment X on November 29, 2008 at 11:31 AM

If there is a historical connection to our current predicament, as angryred has postulated, that is, that there are a manyl similarities between the 1920′s and the 1990′s and early 2000′s. That these similarities indicate that a very large economic downturn in the not-so distant future as was 70 years ago, I will assert that if we are destined for rough times by history, then it isn’t so much the american people are ”stupid” per se — a rather uninteresting and cynical way to look at it– they’re just demonstrating an axiom of being inescapable to history.

Every year, we go through four seasons. No matter what we do, how we spend, how we live, how much money we have in our bank accounts, etc. we are going to live through a winter every year. Why not, every so often, also expect to have an economic and societal winter as well?

I will say that not only are we going to live through tough times ahead, it is going to get rather nasty. We’re going to live through tough times and there’s nothing we can do but do the things one does to get through a winter.

By the way, just as a point about the ratio between stupidity and economic spending, in the 1930′s a great deal of wealthy and well off people lost everything as well. So, the great “unwashed” are not the only one’s who get screwed from their shoddy financial habits.

Weebork on November 29, 2008 at 1:25 PM

Don’t you just love the pic of Mr. Creosote (for Python fans…) as captioning this segment? A perfect example of “just one more thin mint,” as Creosote said, before his huge abdomen exploded upon the astonished fellow diners at the classy restaurant. And that “explosion” of the debt bomb is just what we are experiencing right now, as folks, who wanted it but couldn’t pay for it, are now begging forgiveness for their gluttony. One more thin mint, indeed; one more flat-screen TV, one more boat/car/RV/overpriced home/liars’ loan mortgage, and so on. And blame the predators; but also, blame the sad state of education in this wonderful country, where kids graduate from high school, unable to balance a checkbook (or even to know what a checkbook is, the rules on how to use it, etc.) let alone how APYs and APRs are and how they can cause you financial ruin. Now it is being demonstrated, or in Latin, QED (quod erat demonstrandum…) in ample form, in the nation’s and world’s marketplaces. Hang on to your hats, folks.

jsaturn on November 29, 2008 at 3:24 PM

What kind of a horse’s behind banker loans money to a guy who can’t repay?

One compelled by law Which law has not been changed. The rot hasn’t been stopped. Buy nothing packaged by Fannie Mae and Freddie Mac.

LarryD on December 1, 2008 at 9:33 AM

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