The Illusion of Wealth

So what happens when the economy takes a downturn? On the downward curve, apparently, the economy reveals a lot about people, their attitudes to money and their lifestyles. Recently, both the New York Times and the Washington Post have run stories, featuring people and how they got into debt and how they cope [again, you may need to create free accounts to read the articles I refer to]. Overall, the stories highlight the differences between two opposing schools of thought: one side believes that the current crisis of personal insolvency resulted because of predatory lending practices by banks and financial institutions, who were greedy to make big bucks of endless fees and interest payments. The opposing camp holds that stories of personal debt reveal a lack of personal ethics. In other words, that you get into debt because you are morally lacking in essential qualities such as self-control, responsibility and so on.

The July 20 edition of the New York Times featured an article about Diane McLeod in suburban Philadelphia and her descent into unmanageable, all-consuming debt. The story is a familiar one - a woman's struggle to keep her head above water as she struggles through divorce, medical woes and job losses, while lack of fiscal self-discipline makes a bad situation worse. The reporter, Gretchen Morgenson, has quite a detailed outline of how exactly various predatory lending practices came together to pull McLeod into a quagmire of debt that ultimately ended with debt collectors hounding her and her house being foreclosed. Not to mention that her relationship with her son is in tatters as he washed his hands off the whole mess, moving in with his girlfriend (the article mentions this only in passing, but the dissolution of family bonds is quite awful, in my opinion).

The discussion in the comments section is also worth reading for the opposite view (I set the NYT comments from newest to oldest so the lower numbers are the newest comments): that debt symbolizes a lack of fundamental values such as responsibility. Many readers felt that while it is true that banks and lenders were unethical, they were only doing what businesses do: try to sell their product. Many felt that McLeod's situation is primarily of her own making. Some ask whether someone who was in such a financially precarious situation deserved to shop QVC (the shopping channel, for my Indian readers) or indulge in expensive bad habits such as smoking. One reader pointed out that:

Yes, lenders made stupid loans and offered terms that were usurious, but people can say no. Its now become the entitlement that everyone has cable tv, cell phones, video games, flat panel televisions, etc.

Here and there, some commenters (like No. 48) pointed out that what really broke McLeod was not the purchase of handbags and knickknacks (although they helped to raise the total bill), but huge medical bills from surgery and hospitalization. In other words, the rising costs of everything didn't help her situation at all. But in general, there was little sympathy for Diane McLeod and her plight. As No. 105 put it:

Are we supposed to think that these banks are giving out loans just to feel good about themselves? Of course they're going to try and maximize profits. It is the sole responsibility of those such as Ms. McLeod to make the informed decision of whether or not to take out a loan in the first place.

Here is my take on the issue:

1. Yes, Diane McLeod needs financial self-discipline. Of that, there is no doubt. Perhaps she should take some tips from Big Mama, or get counselling from local religious organizations, although stories like those also get annoying with their thriftier-than-thou attitudes.


2. But there is also no doubt that the system is geared towards the creation of debt for the profit of corporations. Let me illustrate this with a personal anecdote, for what it is worth. Some years ago, someone I knew who worked in the credit card industry told me that in order to maintain my credit profile, I should leave a small amount due on my cards from time to time. Not always, just from time to time. If I paid off my credit card every month, that signalled the credit card company that I was struggling financially and therefore was a bad credit risk (I don't know if this is true, just what I heard). Having just emerged from years of grinding poverty as a student, I did not think much of this plan. It just didn't make much economic sense to me. Now, that I am reading more on the topic I realize that for credit card companies, that made perfect business sense because the nature of their business had changed over the years. By the late 1990s, they were no longer in the business of making money by collecting on loans, but rather they made money through fees, penalties, and by selling off the loans to second, third, multiple parties. The loan itself had become the money-generator. This inverted pyramid - the debtor the point of the upside down pyramid - was bound to collapse as soon as the debtor could no longer pay his or her dues. I guess that time has come - when the debtor is unable to meet his or her obligations.
3. Turmoil is sure to follow. But how extensive will the upheaval be and how long will it last? I don't know. More thoughts later.

More About Wall Street and Main Street

Did I say that James Kunstler's outlook is pessimistic? I hope you get elegant understatement. I meant to say that he is positively apocalyptic in his outlook. So to balance out those doomsday pronouncements, I also read more measured analyses. For example, there is Robert Salomon, professor of business at the Stern School of Business at New York University. His blog posts also parse the details of the dreadful news that seems to pour out every day from Wall Street, Washington, D.C., London and Los Angeles. Like Kunstler, Salomon is downbeat but the academic calm helps to put things into perspective and doesn't send me rushing around the house in a panic-stricken tizzy, wondering if I should stock up water and firewood.

In fact, sifting through financial commentary on the internet has been amazing self-education. I have found some real gems of postings and articles in unlikely places that have helped me, a non-specialist, to understand both the bigger picture and the details of the current downturn. E.g., from the rather apocalyptic sounding website, dollarcollapse, I linked to this really well-written article in Harper's magazine that helped me understand some of what is going on. According to Eric Janszen, the American economy has shifted from a boom-bust cycle, a traditional business cycle model, to a bubble model. It is quite fascinating but I wonder, could it be true? Could the American economy have been transformed into a giant Ponzi scheme where the loser is the last sucker left holding the (now empty) bag? I need to discuss this with more economics-educated friends.

In the meantime, as I run errands in the various little downtowns of the various little towns in Fairfield County (OK, just two or three neighboring towns), I see nothing really amiss. People are still shopping, ordering salads for their lunches, eating ice cream. There are no mobs breaking down the banks or breaking into stores. In fact, calmness prevails everywhere. I hope the adjustment - and of that I am sure, a major adjustment is coming - will be like this. Calm, gradual transition to a newer, less costly system. The alternative is too awful to think about.

Doom, Gloom, and Then Some

I found the financial analysis blogs that I'm reading in the usual way - following someone's comment from another blog, browsing the internet, who knows where. But I'm discovering something new everyday as I follow the economic news. The only problem with deeper analysis for me is that I am completely math-challenged. As part of a generation of Indians who were given the choice of "Arts (Humanities)", "Science" or "Commerce", I was boxed in after Class X (tenth grade for my American readers) into the most math-deficient club of them all - "Arts". So, dear readers, I am unable to verify the accuracy or even the authenticity of any graphs, linear equations or statistics that the following websites/blogs display (but I beseech you to explain any errors if you find them, I would really, really appreciate it). And, washing my hands even further off any responsibility, these blogs should not be considered investment advice, OK? And remember K.'s warning that some of these blogs should be taken with a pinch of salt. They are, after all, opinion.

The most straightforwardly pessimistic analysis of recent financial and economic trends is by James Kunstler. I cannot type the name of his blog here for fear that my mother might be reading my blog, but you can go over to Kunstler's blog and see for yourself what he has to say. In today's post, he has a particularly bleak assessment of the American economy. Whatever happens, he says, whatever action the United States government takes or does not take, this country is going down, down, down.

Is it? I don't know. But he lays out his position for pessimism very clearly. What is Kunstler's solution? It is a return to traditional American values of hard work, thrift and enterprise. These values, he says, have been corrupted by thirty years of financial corruption as banks threw easy credit at undeserving borrowers who in turn led lives of extravagant indulgence that neither their grandparents and parents had never known. Here is what Kunstler writes:

"Painful as it is, Americans had better get a new "Dream" and fast. It better be a dream basedon the way the universe actually works, which is to say an operating procedure run on earnest effort and truthfulness rather than merely trying to get something for nothing andwishing on stars."

Meltdown

So I am in the front row seat watching the financial meltdown going on in the United States. I know that times are tough in other parts of the world too, but Fairfield County, CT is so full of people who work in finance either locally or in New York City that it's hard to ignore the fact that the economic ship is being buffetted by the biggest storm in half a century.

There are plenty of anecdotes of people stressed because of poorly-performing business but superficially, things are normal,despite the rising prices of food and gas. Kids are going to summer camp or to visit relatives, mothers are carpooling and then running errands, the mailman still looks pretty cheerful as he drops of the mail. The shops downtown seem to be full of browsing customers, and the businesses seem to be gearing up for the season of summer sales. All my neighbors seem to have their jobs (for which I am very glad). So who knows? Is the unease then only mine? Perhaps I have been reading too many blogs of the doom and gloom kind? Only time will tell which way things will go in Fairfield County.

To expand more on the doom and gloom bit: I am enjoying discovering new blogs everyday that deal with this matter. [Note: I said that I am "enjoying discovering" not "enjoying" other people's misery.] All these years, my knowledge of finance was limited to simple math: x amount of income, keep expenditure less than income, difference goes into savings. I let K. handle investments that called for anything more complicated than this simple formula. But now thanks to the prophets of doom everywhere in the blogosphere, I find that Wall Street, retail banks and mortgage companies have done some extremely complicated investing all of which is set to implode unless someone richer bails them out. Problem is, no one has $10 trillion just lying around, not even all the American taxpayers put together.

I'll link to some of these blogs in my next post. I should add that K., who is more financially savvy than I am, says that some of these bloggers should be taken with a pinch of salt, but it would be good to at least know the range of arguments out there as this economic crisis unfolds.

More thoughts on Racism in India

I have been thinking more about the racism that many of us Indians demonstrate to those who look different than us such as Africans, Chinese, etc. The most vivid display of bigotry is from those who consider themselves "mainstream" Indians towards those who are considered "outsider" Indians. I am talking of the often shocking treatment that people from the North-east of India - from the Seven Sisters states (Mizoram, Arunachal, Nagaland, Meghalaya, Tripura, Manipur and Assam) - have to endure at the hands of Indians elsewhere.

This problem always existed but thanks to the internet, these badly-treated Indians have been making their voices heard loud and clear. The news, people, is not pretty or palatable. Read for example, the blog post by Kima who writes from Mumbai, and think about how much prejudice these people face from landlords, taxi drivers, and even the police. Men from the northeast are viewed as drug addicts and drunkards, women from these states are viewed as morally loose just because they dress in western clothes and like to party into the night and don't fit the stereotypical "good girl" mould of Indian society. I feel ashamed that fellow Indians have to endure such humiliation.

[Update: Kima blogs out of Mumbai, not Bangalore as I had mistakenly assumed. But his posts about racism towards Northeastern Indians are still wrenching to read, especially because he writes about it in a matter-of-fact way with no self-pity. Read for example, his post specifically about the treatment of Indians from the Northeast.]

In his June 21 op-ed piece for The Telegraph from Kolkatta, the historian Ramachandra Guha - a Bangalore resident - provides a historical context for the stepmotherly treatment that Indian politicians and the Indian people have dealt to their fellow nationals. And yes, I insist, we have to remember that these are our own people who are being shabbily treated. Not that one should treat foreigners with less consideration, but it's saying something when even fellow nationals are so badly mauled by the prevailing culture. Small wonder that there are so many seccessionist problems in the northeast region of India. Who would want to put up with such shabby treatment?