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Why We Borrow Until It Hurts

washingtonpost.com — If the subprime mortgage mess has taught us anything, it is that we are leverage addicts. Nearly all of us are — from Northern Virginia, where we bought big houses with no money down, to Wall Street, where traders borrowed cash to make bigger bets on the housing market.

Bury
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  • ufia, on 03/24/2008, -13/+4I'm mirroring the link here in case Digg is down:
    http://digg.com/business_finance/Why_We_Borrow_Unt ...
  • jimmick, on 03/24/2008, -0/+5Based on contingency? No, money down.
    • Caulfield, on 03/24/2008, -0/+1ah, from the golden era of Simpsons writing.
  • EBFoxbat, on 03/24/2008, -1/+12I borrow until it hurts mostly because of Apple but a little bit for other cool things like HDTVs and Ironkeys. I would not be doing my American duty of hyper-consuming if I didn't.
    • TimDigg, on 03/24/2008, -0/+1I was looking into an Ironkey...is it really worth the extra $$$?

      What do you use it for?

      everyday or work or....
    • BESTenemy, on 03/24/2008, -0/+1People borrow and spend. What would the spending be if we didn't borrow? Probably less than a quater of what it is, considering 3/4 of the US households carry a negative balance. We've had a bit of a crisis in the 70's where the economy could not sustain itself. We separated the dollar from backing and allowed the credit, that used to be constrained to a fractional reserve ratio, to expand indefinitely. We backed the credit with itself. Turned housing debt into packaged investment vehicles and made it into a physical product that it never was. Debt is what it is. We were broke 30 years ago, but at least the bank balance was positive. We've given ourselves a boost by spending the money out of collateral we had back then, but no longer posess and the nation had borrowed through its foreign policy expansion. We're in debt on both ends. Screwed by our greed and the desire to perpetually expand, even when lacking the resource. Got us a foreign credit card to pay off the domestic debt. The same way people use housing leverage money to pay off small debts, we took "credit" from China by forming delas with OPEC.

      As our control of OPEC weakens, so does our ability to get other nations to stack up on dollars. The leverage disappears. The foreign debt that was used to offset the domestic debt is coming back to bite our asses.
  • Celeron, on 03/24/2008, -0/+4California has one of the highest prices for a house in the country. $500k minimum for a simple 3 bedroom home.We're hurting alot.
    • jzuska, on 03/24/2008, -2/+3Might be a sign to move somewhere else. In LA you can get a 5 bedroom on 40 acres for 40 grand.
      • pandaro, on 03/24/2008, -0/+3I may be Canadian, but isn't LA in California?
      • intheam, on 03/24/2008, -0/+4LA is also the abbreviation for the state Louisiana.
      • cvindustries, on 03/24/2008, -0/+3If you don't mind the occasional hurricane and lack of job prospects, it's a great place.
    • theutopian, on 03/24/2008, -0/+2500k for 3 Bedrooms? That's insane. I recommend Northwest Indiana, 3 bedroom house for 125k and your 30 minutes road/60 minutes by train from Chicago. Oh, and low taxes too. We are surround by national parks, have high quality higher ed institutions (Valparaiso University, Purdue, IU), and you have gorgeous Lake Michigan.
    • tony23, on 03/24/2008, -0/+1Maybe in Los Angeles or Orange County, but those prices aren't the same everywhere. In Riverside & San Bernardino, 4-5 bedroom, 2000-3000sf houses are running about $300-350,000, and dropping.
  • hotbeefman, on 03/24/2008, -3/+1Dugg for nova
    • doti, on 03/24/2008, -1/+2ugh, so glad I moved out of that suburban stripmall nightmare....
    • TimDigg, on 03/24/2008, -0/+3I've been thinking moving to NOVA myself...it would kick ass to live in Pentagon City or Crystal City....don't know if there's any place to live there though....I currently live in MD, VA seems like the next stop for me
      • FourthMeal, on 03/24/2008, -0/+0NOVA is awesome, but I would recommend NOT to move in to Crystal City. Used to work there, in the end I thought is sucked compared to other NOVA areas.
    • hotbeefman, on 03/24/2008, -0/+1i got buried lol
      don't be jealous, fairfax is hot
  • WoollyMittens, on 03/24/2008, -2/+6They make houses so artificially expensive that no mortal human being can possibly hope to ever make a dent in the mortgage over a lifetime.
    • tracker1, on 03/24/2008, -2/+3Not really so.. if you don't go out and buy a "NEW" house, you can generally do pretty well in most areas... Going for a 15year mortgage instead of a 30-40 year is also a good idea, it will cause a little more hurt, but worth it in the long run. Outside of the coastal cities, you can get a 3br/2ba for around 100-200K, which on a family income of $40-60K/year is very doable.
      • Odeon, on 03/24/2008, -1/+2Seriously though. Who wants to live where houses are cheap?
      • rockefeller2, on 03/24/2008, -1/+6Nah, get a 30 year loan, and make payments as if it were a 15 year mortgage. That way if the economy tanks and you get sacked from your job, you can go back to making the 30 year payment. I guess the only thing you gain with the 15 year mortgage is the slightly lower interest rate.
    • ripple123, on 03/24/2008, -0/+7"The greatest discovery of the 20th century is you don't need chains for slavery."
      forgot who said that
  • ColonelJessup, on 03/24/2008, -11/+9Here we go again with the Digg.com economic professors........................................
    • RationalXubrnce, on 03/24/2008, -3/+7 Why is it everyone who posts that commentt never has a thing to add to the discussion?
    • TimDigg, on 03/24/2008, -0/+5I also think its important for avg citizens to have more discussions about topics like this instead of who paris hilton slept with last night. Perhaps if we wer having this discussion years ago, we wouldn't be where we are now.

      Noone is an expert on everything, but at least, its popular discussion.
    • nycmac247, on 03/24/2008, -0/+1so all you can do is tear down?

      ps

      http://www.relfe.com/plus_5_.html
    • macman2k, on 03/24/2008, -0/+3Those who put faith in degrees prefer not to think for themselves. They buy into the whole idea that "economics" is too complex for a mere mortal to understand and so stop thinking for themselves! Many times in history the "experts" were proven to have been "foolish". Remember it was the small child that could see that the emperor had no clothes.
  • simplicityiskey, on 03/24/2008, -0/+12Interesting that they say "leverage" rather than "credit", which more people are accustomed to. Would have perhaps been simpler just to say "We're greedy, that's why we keep spending money we don't have."
    • BESTenemy, on 03/24/2008, -0/+2When they say credit, they normally imply something that is not necessarily backed by something solid. Credit can be backed by a promise to produce the backing or by the faith in the borrower's ability to make payments through stable employment. Leverage is something used specifically in the housing market discussion - the guaranteed sum the bank can afford to lend you that it will make up for if it gets your house as a collateral.

      That's how private property becomes government and bank property. The system had been working like a charm. People have to stop buying things they cannot afford. Leverage is a system where you sell the bigger house, move into a smaller house and spend the difference, but gamble on it before you are able to move in. Debt is always a debt, no matter how you name it.
  • gazoot, on 03/24/2008, -1/+9Why do banks allow this reckless borrowing? Because the whole financial system depends on it. Watch Money as Debt for a very interesting explanation of the situation: http://www.youtube.com/watch?v=cy-fD78zyvI
    • RationalXubrnce, on 03/24/2008, -3/+1America is a Ponzi scheme.
    • BESTenemy, on 03/24/2008, -0/+3The system's basic. FED lends with interest something that nobody but itself manufactures. It allows repayment in the same substance. The only way to get more substance than you borrowed in order to get rid of the debt is to borrow more off someone who also borrowed from the FED. As long as the nest person in line has more of the debt money than you are, the system keeps on going. As long as there is collateral to back up the debt, the FED will keep lending cash.

      The final goal of the system is not to provide a unit of exchange, but to construct a pyramid monopoly using cash that leads to eventual acquisition of every possible collateral item. Economic conquest that's coming to its logical end 100 years after the FED establishment. The result - nobody owns any land - the basic property unit without which no property can exist.

      Regardless of how much stuff you own, as long as it is stored on the land you don't own, you don't own anything. All your rights are no longer rights, but privileges granted to you by the owner of the land you stand on.
  • Crashespad, on 03/24/2008, -1/+5Part of being an American is being in debt.. it's our civic duty.. top support the real leaders of our country, big business.
    • humanerror, on 04/03/2008, -0/+2It used to be We the People. Now it's We the Consumers
  • hcharger, on 03/24/2008, -2/+3 What we have been taught in this system after the second world war is that we can all be a bunch of greedy pigs and go needlessly into debt and enjoy all the materialism that was denied to our forefathers. They tried that during the 20's and it worked quite well right up to the blessed year October 1929. And if any of you history buffs care to relate those days in comparison to ours today and have been brainwashed to believe the government has everything under control, have likewise never heard the all important phrase of: "history has a tendency to repreat itself!"
    If you don't think so..."WAIT!" LOL.
    • blackdude, on 03/24/2008, -2/+1You probably haven't been alive that long, judging by the usage of caps.
  • albertross, on 03/24/2008, -4/+3Greed is fine (drives markets) provided it's properly regulated.
    When it comes to houses, maybe this means, you can only buy if you're going to live there yourself.
    (Otherwise, the house belongs to some not-for-profit organisation regulated by the state.)
    That way, prices can't be driven up by investors, and society benefits.
    • positron, on 03/24/2008, -0/+3Communist.
      • albertross, on 03/24/2008, -2/+1That's to do with common ownership of the means of production, not houses.
    • mbonnin, on 03/24/2008, -0/+2This is quite possibly one of the most asinine comments I've seen on digg.
  • mrplinko, on 03/24/2008, -0/+1Check out "Maxed Out" on Google Video. Do you have two laundry rooms and an elevator in your house? http://video.google.com/videoplay?docid=-484043204 ...
  • sponeil, on 03/24/2008, -0/+5The whole article could be replaced by two words: Instant Gratification
  • Warptaco, on 03/24/2008, -3/+8Having lived through the 90es recession I am getting really tired of the boom and bust cycles. By now it is pretty clear that house prices get way too inflated on regular basis and that in turn crashes the economy. Usually I am into hard core capitalism, but having personally seen what these bust and boom cycles do, I think there should be some kind of cap built into house prices worldwide.

    I mean, sure property somewhere like the Hamptons can be pretty valuable since there are actually a lot of rich people there.. (but even there places like the gray gardens (opposite to Spielberg's house) have got pretty badly inflated considering it was sold with 220 000 dollars back in 1979)

    But, here in southern Finland not so rich people are buying small houses worth half a million a pop (since the euro is inflated) and people are paying for them with the 30 year loans. If the recession hits us, I imagine half of those people are going to be unable to pay the loans and then they are stuck with their half a million dollar loans growing interest till they die.

    Last time it happened in the early nineties the government had to bail out all the banks and
    the people got screwed big time. Since I remember that so clearly. I just wonder. Why in the hell do we allow this to happen again and again..

    My own personal theory is that modern capitalism has this built in "greed cycle": the closer we get to recession, the more the banks are supposed to make on their next financial quarter, so they saturate the market with loan offers and the only way to make more money in the next quarter (as the stock holders want) is to make even riskier bets, to loan more money and so the housing prices become astronomical, with no basis on the reality. Then bust happens.

    It is almost like the world wide economy was a junkie out of control sniffing borrowed money
    until its heart explodes. Every god damn 20 to 30 years. Then we bring in the "new economy" and sure soon enough it starts to sniff the stuff too.
    • Midtowner, on 03/24/2008, -1/+3These sorts of things operate to cleanse the market of inefficient practices. There will be winners and losers. The irony here is amazing. In terms of governmental action and inaction, many of the bastard children of the "New Deal" reforms meant to do away with the last great depression may be contributing to the upcoming one.

      In the United States, we're going to see a much different society emerge over the next few years. I think we'll see our social services become much more tightly regulated. I think there'll be a backlash against those who choose not to work. I think that the finance industry will finally decide that it's profitable in the long-term to police themselves.

      The great thing about capitalism is that in the long term, inefficiency isn't rewarded. No amount of governmental regulation can operate to reward inefficiency, perhaps delay the pain, but not eliminate it. In most cases, those who lose here, be it people who bought homes they couldn't afford, banks who made loans they shouldn't have, taxpayers who kept electing politicians who spent as if there were no consequences are losing justly.
      • Rioracer916, on 03/24/2008, -0/+1"The great thing about capitalism is that in the long term, inefficiency isn't rewarded. No amount of governmental regulation can operate to reward inefficiency, perhaps delay the pain, but not eliminate it. In most cases, those who lose here, be it people who bought homes they couldn't afford, banks who made loans they shouldn't have, taxpayers who kept electing politicians who spent as if there were no consequences are losing justly."

        I along with many other people of my generation did NONE of those things and are still "losing justly" as you put it. Your comment doesn't exactly hit the mark.

        I'm getting screwed out of opportunities because the current generation in power are the founding fathers of the "ME" revolution. You've heard it 'Greed is Good". Well it's not good when you're a parasite on society. And I don't mean poor people, I mean those who are putting future generations into crushing foreign debt and milking the US as hired contractors.

        The Fed having the balls to consider taking tax money to prop up a failing system takes the cake.
        • Midtowner, on 03/24/2008, -0/+1"The Fed having the balls to consider taking tax money to prop up a failing system takes the cake."

          Oh, I agree. That has me absolutely mortified.

          The current culture in Washington has taken what might have been good at the time in 1934 and created a monster out of "New Deals," "Square Deals," and "Wars on Poverty;" not to mention "trickle down economics," etc. Some amount of borrowing is ok. It's an inefficiency, but that's how the Fed controls inflation and the money supply.

          Some of a good thing, however, doesn't mean that an infinite amount of it is okay. The Washington culture (and the reality of the system) have set us up with politicians who are only able to maintain the status quo. Imagine if Republicans were in favor of tax hikes to pay off the national debt? Imagine if Democrats were in favor of decreasing the amount of "hep" going to their constituents? Pandemonium.

          Political reality bars action. You say young people like you and I are not losing justly, well, what have we done as a demographic to change things? Vote for Obama? Hah. McCain? L-O-L. We are allowing the previous generation to lead us around by the nose and we lack the political cojones to do anything about it. So yes, I think that many of these problems can be justly attributed to us. If we were out there telling granny that no, we don't think it's right for her to mortgage our future so that she can buy expensive designer drugs with government "hep," that'd be one thing. We're not out there doing that though, so we will ultimately end up holding the bag.
    • macman2k, on 03/24/2008, -0/+1you realize that you are suggesting price fixing! The real problem is the money monopoly. If the banks did not have a guaranteed government bailout via the Federal Reserve then they would have to be more conservative. The average Joe would have to be careful when choosing a bank and a bank would have to watch its reputation. The customers of banks enable the banks to behave irresponsibly. When ever possible you need to move toward solutions that depend upon FREE WILL to work. In most cases that means removing restrictions that violate the FREE WILL of individuals such as creating a money monopoly with no safe place to put your wealth to protect it from inflation!
      • Warptaco, on 03/24/2008, -0/+1Not really. I am more against banks giving people huge loans for properties that have inflated prices. I think the 30 year loans are part of the problem. But then again, since banks are often in the housing business themselves, ofcourse they have no problem inflating the prices to begin with.

        What the bank managers fail to see is that is this leads to their own bust too. If cooler heads would prevail, we might not get to the inflated mountain tops, followed by the cliffs of recession. It might be more like gently rolling hills. Which I would prefer.
  • yellowsnowcone, on 03/24/2008, -6/+2This is why I am glad I'm Asian. Saving is a part of our DNA.
    • diggopolous, on 03/24/2008, -1/+1So is Calgon
    • oldgal, on 03/24/2008, -0/+2My Japanese husband must be a mutant, then - his general philosophy is that if one is good many is better.
    • eryximachus, on 03/24/2008, -0/+3racist
      • djangoxl, on 03/24/2008, -0/+1Ha ha ha, not so hard on him ha ha ha.
    • d3dm, on 03/24/2008, -0/+1Heh, you wouldn't know it if you looked at the demographic frequenting the local Indian casinos.

  • Look4Truth, on 03/24/2008, -0/+1This is just the beginning.
  • jefuchs, on 03/24/2008, -1/+13Ye haaaa! My net worth recently hit a million. I drive an old pickup truck (1994 Toyota) and paid $134,000 for my house. I haven't owed a penny in years.

    Keep listening to the ad companies, guys. Since it's been working out so well for you! Spend spend spend your way to the grave.
    • whodoes, on 03/24/2008, -0/+2 damn straight. and all the while we have idiots taking out "ARM"s with a triple sized balloon payment starting six months into their 30 year mortgage. Somehow the banking industry thinks that making this sort of loan the cornerstone for their industry is a viable long-term strategy. MEANWHILE... we have massive hedge funds SPECULATING on the ***** SPECULATION ! I think its just dandy that now I'll have to subsidize bailing out all of these morons.
      oh yeah, lets not forget that China is financing the whole thing. Are we going to blame THEM for loaning us all this capital when we were so CLEARLY out of our f'ing minds ?!
    • martyf, on 03/24/2008, -0/+8jefuchs - I'm not to a million - yet - but we're on course.
      We bought our house in 2000, and the years before had been really, really kind to me financially. Until we bought our house, we had lived for years in a 2 room rented cottage on a farm, it was about 900 square feet. I remember distinctly the way that the mortgage companies pushed and pushed us to go for $750,000 properties, and how I kept saying we would not spend more than $200,000 under any circumstances. My logic was simple - we didn't want to have a huge monthly payment and we didn't want to start out in a new house utterly broke. So, despite being "prequalified" for an $800,000 loan, based on my 1999 income that was over $225,000, we put $50,000 down on a $200,000 house, ended up with a tiny mortgage, cash in the bank, and when the financial ***** hit the fan for me in 2001-2003, I was able to pay my bills because I had savings, and I was doing odd jobs, computer repair and the like - and then when things got better in 2004, we just started socking away again for the inevitable "rainy days". At this point, we don't have much mortgage left, and the arguments for the huge mortgage they offered are laughable. We don't regret a thing.
    • dreesemonkey, on 03/24/2008, -0/+6Kudos to you, sir. Gives me something to live up to. Currently I'm debt free and saving for a wedding :) The unfortunate part is that I'm marrying into ~$50k of student loans, but we're at least on the same page of living frugally (going to rent until the loans are paid off and then save for a house). This "more more more" american lifestyle that 80% of the country has is just ridiculous. Everyone in this country needs to learn a little fiscal responsi-freaking-bility so our dollar can be worth something by the time I retire in 40+ years ;)
  • oldgal, on 03/24/2008, -0/+6Very few of our public schools teach anything about money, credit, or economics. Our culture promotes short term gain. And we are surprised?
    • dreesemonkey, on 03/24/2008, -0/+1I agree this is definitely part of the problem, but I can't say that I remember anything from my high school career being less than 8 years removed from it. Responsible financial practices is more with how you're brought up, and something everyone has to learn for themselves. But I do agree that it wouldn't at least hurt to have a budgeting class thrown in to public schools.
    • Midtowner, on 03/24/2008, -0/+1Do they need to? Don't spend more money than you make. Financial lesson over.
  • rmxz, on 03/24/2008, -0/+2To hedge against inflation?

    $1,000,000 mortgages don't sound too scary if the dollar falls faster than the price of a house.
    • macman2k, on 03/24/2008, -0/+1this only works if you have assets that rise. Incomes are not going up so you cannot service your debt!
  • nycmac247, on 03/24/2008, -0/+2The "we" in this article are investment bankers, right?
  • sombat55, on 03/24/2008, -2/+0Very expensive for a house in the country. http://www.allfreelegal.org
  • sombat55, on 03/24/2008, -3/+0Very expensive for investment in houses. http://www.allfreelegal.org
  • IdevInull, on 03/24/2008, -0/+1Greed.
  • pentupentropy, on 03/28/2008, -0/+1Consumers spending money is a good thing for economic models of most varieties, especially that of capitalism. The person who hoards their money is helping no one by doing so. If anyone best makes this argument it would be Bertrand Russell in "In Praise of Idleness." Making and spending money is not the problem. The problem is simply the greed. If a man worked 8 hours a day and made paperclips, and suddenly new technology came out to make them 5 times as fast, the owner of the company would not say "you only need to work 2 hours a day and I can still make more money" even if he was well off already. He would continue to work the man 8 hours a day until he reached market saturation and then lay off the people he didn't need to continue his profit growth. This is fine to a point, but is measurable in how it affects society as a whole when looked at on a broader scale. It's what allows the negative trends in global capitalization.
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