Our Future Financial Selves

Today NPR’s Morning Edition carried an Interesting report on debt (you can find the story and audio here). Economist and Financial Times reporter Tim Harford described credit and saving in terms of our future and present “selves.” Harford said: "Debt is your future self sending you money back in time.“ (Economist Thomas Schelling also uses the symbolic conflict between our current and future selves to describe problems of self-control.) Harford gets at the crux of the issue when he goes on to say: ”So the question is, are you and your future self both happy with the deal?“

Only your present self is in the position to make decisions and take actions, and yet the choices you make in the present often obligate your future self. So what would we say about all those financial decisions looking back on them with the wisdom of the future? Harford also described saving as your present self sending money to your future self, and argued that it is possible to save too much (when you have little income). Unfortunately, not being able to save enough, rather than too much, is the problem for far too many Americans. But Harford is exactly right when he says the challenge is to find the right balance between the needs of our present and future selves—a particularly difficult challenge in a world as uncertain as this one.

Something Happened in the 1970s Redux. The graphic below, which was posted on the NPR website to accompany this story, shows two interesting things. First, as I discussed in an earlier blog entry, the real uptick in consumer debt begins in the mid-1970s. This would be even easier to see if the graph extended farther to the left, perhaps beginning in 1950. Second, because the graph superimposes periods of economic recession, it shows that consumer debt often increases even in bad economic times. This is particularly obvious in the most recent recession of the early 2000s, but it can also be seen in the period of 1981-83. We have a troubled relationship with debt that transcends the current economic environment.

Indian Debt Collectors & More

Today’s New York Times has an article by Heather Timmons about debt collection agencies using phone banks in India to make calls to delinquent credit card customers in the US. Delinquencies were up to 4.5 percent of accounts in the fourth quarter of 2007, from 3.5 two years earlier. Foreign collections calling represents a small fraction of the overall collection business, but bill chasing is just the latest industry to be outsourced to India. These are boom times for the financial misery business, and the influx of well-paying call center jobs has created a group of Indian workers who, as Timmons writes, “are amassing some of the status symbols that probably got their clients into trouble in the first place— new scooters, iPods, Swatch watches and exotic vacations.”

The movement of collections jobs to India is news, but the article includes a couple of other points that I find much more interesting:

1. Collections agents are targeting customers’ economic stimulus package rebate checks. On the one hand, this sounds like a ruthless collections technique. You know the debtor is expecting a windfall, so you ask him or her to turn that money into a payment on a credit card. On the other hand, this is precisely what these people should do with their rebate checks. The stimulus package is supposed to be a bit of fuel for the consumer economy, given out in the hope that people will continue spending. But spending is what got delinquent credit card customers into trouble, so they would be much better off paying down debt. This won’t help the economy, but debt-ridden consumers have already done more than they can afford for the sake of the economy. It is time for them to take better care of their personal economies. Collections callers are a hated group who often employ abusive and unethical techniques to track down and intimidate their prey, but here is an unusual case where the interests of both the collection agency and customer are in concert.


2. According to Timmons’ article, industry analysts are seeing a new trend: “People are walking away from their homes and hanging on to their credit cards, because that is their lifeline.” If this is a valid observation—and I think it is—it shows the centrality of credit cards in our lives, a point I made in a recent op-ed, “Our Love-Hate Relationship With Plastic.” I also believe that, unlike the current foreclosure trend, the bankruptcy boom of a few years ago was a renters’ phenomena. Renters have no choice but to give up their credit cards. They are a lower income group who are more likely to be living in relatively inexpensive housing, and their debts are credit cards and other forms of commercial loans. Many of those who are now in trouble with their mortgages may be people whose incomes are not really sufficient to handle home ownership: homeowners who should be renters. But it is interesting to note that, for debtors who have a choice, walking away from the home and mortgage—as difficult as that decision must be—is often more attractive than giving up credit cards.

A final random bit: the novelist Stanley Elkin wrote a wonderful novel or short story about a telephone bill collector, but for the life of me, I can’t remember the title. Will do some more research and report back.

Priceless: Good Debt, Bad Debt

MasterCard has a new version of its Priceless advertising campaign in Condé Nast magazines. This long-running promotion is noteworthy for its attempt to encourage a very different attitude toward borrowing.

Once all lending at interest was taboo. The word usury was applied to any loan that required interest payments, and usury was prohibited by all the world’s great religions. Somewhat ironically it was Calvin and the Puritans who removed much of the stigma associated with lending, and today Islam is the only popular religion still maintaining that “Money does not beget money.”

But even as borrowing and lending began to come out from behind the veil of shame, there was a clear distinction between good and bad borrowing. Adam Smith, the 18th Century Scottish economist and father of classical free market philosophy wrote in his Wealth of Nations:

  The man who borrows to spend will soon be ruined.

Until the early 20th Century, there was a clear distinction between “productive” and “consumptive” lending. It was considered acceptable to borrow money to purchase durable goods of lasting value or to invest in something that would bring future income, but borrowing money merely to spend was reckless and immoral.

I suspect that part of this view of good and bad debt stems from a wise assessment of human nature. Most consumptive acts pass quickly—long before the debt is likely to be repaid. In contrast the durable good or the income derived from investment lasts longer and stands as a reminder of the loan. The homeowner who enjoys living in her house each day pays her mortgage to sustain that enjoyment. Similarly, each time the college graduate gets paid, he has a reminder of the value derived from his student loans. In contrast, meals bought with a credit card are forgotten long before the bill arrives.

MasterCard’s ongoing Priceless campaign has sought to change our attitudes about borrowing in two ways. First, it promotes the normality of indulging in luxuries with images of people happily enjoying extravagances. These are not things we need; these are crazy imaginings of desire. The current Priceless Search campaign has people searching for their own priceless indulgences. The magazines include a heavy paper envelope stuck between the pages that contains a card—essentially a lottery ticket—that might mean you have won a wonderful, priceless indulgence. The prize offered in my New Yorker was a commissioned portrait of me painted by Julian Schnabel. My card said “Keep Searching” and told me that I had not won. I suppose I should go out and buy another magazine.

Perhaps most importantly, the Priceless campaign promotes the view that it is acceptable—even admirable—to use credit to pay for fleeting experiences. Taking your kids on an expensive outing is “priceless.” The other prizes offered in the Priceless Search campaign are a multi-continent culinary tour with noted chef David Bouley and a globe-trotting trip for two to explore the seven wonders of the world. Although these are contest prizes, the message is obvious. Indulgence is an acceptable way to use credit. Peek experiences are worthy goals and justifiable objects of indebtedness. Unfortunately, for many Americans Adam Smith’s words are more instructive. Borrowing to spend is—and has been—the road to ruin.

The Mortgage Crisis Morality Play

The foreclosure crisis has created a kind of Rorschach test of moral judgment. Different observers look at the same events and make very different assessments of fault and responsibility. Furthermore, more than any recent issue, the cutting point is social class.

If you search the Issues menu on John McCain’s website you will not find the words housing, mortgage, or foreclosure. Instead the candidate has an issue category called “Taxes & Economics,” and the title at the top of this page is “McCain’s Tax Cut Plan.” This is a dramatic contrast with both Democratic candidates who have extensive sections devoted to on the real estate crisis. However, elsewhere on McCain’s site you can find the text of his March 25 speech to Orange County Hispanic Small Business Roundtable, which reveals his moral judgment. Here is the crucial section:

A sustained period of rising home prices made many home lenders complacent, giving them a false sense of security and causing them to lower their lending standards. They stopped asking basic questions of their borrowers like "can you afford this home? Can you put a reasonable amount of money down?" Lenders ended up violating the basic rule of banking: don't lend people money who can't pay it back.

This is a remarkably carefully worded section. It appears to blame lenders—at least in part—for being “complacent” and signing up people who “can’t pay it back.” But who is the bad person in this narrative? The text makes it sound like the lenders’ only mistake was being too nice, which opened them up to victimization by unscrupulous borrowers. Lenders are guilty of “lowering their lending standards” to allow the riff-raff to buy homes. Further blaming of homeowners is evident later in McCain’s speech in a section on solutions:

In our effort to help deserving homeowners, no assistance should be given to speculators. Any assistance for borrowers should be focused solely on homeowners, not people who bought houses for speculative purposes, to rent or as second homes. Any assistance must be temporary and must not reward people who were irresponsible at the expense of those who weren't.

The mention of speculators is, of course, a red herring. It serves to make the victims of the housing crisis seem less sympathetic, and it will tend to discourage any relief programs. It gives the false impression that much of the current problem has been created by reckless speculators.

This kind of rhetorical strategy is reminiscent of the approach used by the banking industry during its long campaign to strengthen bankruptcy laws. In his signing ceremony statement for the 2005 bankruptcy bill President Bush said: “In recent years, too many people have abused the bankruptcy laws. They've walked away from debts even when they had the ability to repay them.” Of course, the overwhelming majority of people who filed for bankruptcy were suffering from a variety of real financial problems and were genuinely unable to handle their expenses. The focus on those who “abuse” the system strengthened the banking industry’s case but also misrepresented the problem.

McCain is using a similar victim-blaming strategy in the housing crisis. In his March 25 speech, the words “irresponsible” and “responsible” appear once each and in both cases they are used to refer to borrowers, not lenders. Don’t the lenders and the “speculators” in the securities market bear some responsibility?

The Fake and the Real

The Bush Administration’s answer to the current housing and credit crisis is a fake solution. Although the new policies announced by Treasury Secretary Henry Poulson on Monday, March 31 have been widely reported in the media as “new regulation,” there is no new regulation. Poulson defended the current level of regulation of the banking industry and, instead, promoted the view that what we have here is a failure to communicate. A lack of interface among regulatory agencies. As a result, the administration has adopted what Paul Krugman calls “The Dilbert Strategy,” giving the appearance of responding by simply rearranging the organizational chart.

The Bush Administration has mastered the art of the fake response. Sometimes in the life of those in power, events demand an answer. There is trouble in the land, and the people look to their leaders for help. But President Bush and his group are advocates of small government and free markets, as a result, often they don’t really want to respond. In these cases they give the impression of caring by responding with BS. (See philosopher Harry Frankfurt’s On Bullshit)

Sometimes, if a response to a problem can serve his interests, the President responds with real, authentic policies. Examples include: tax cuts, the wars in Afghanistan and Iraq, bankruptcy reform, and the recent Wall Street woes. Fake policies include Katrina, the entire field of international diplomacy, the environment, and, most recently, the economic problems of the poor and middle class. Billions of dollars in loan guarantees—real money—is instantly moved into place when needed by the top end of the economy, but those who are losing their jobs and homes are still waiting.