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.