Friday, July 14, 2017


Recessions, we are told, are inevitable, just a part of the normal business cycle; things are good for a while, then things are bad for a while before getting better again.  But I wonder if this cycle has more to do with our individual tendency toward forgetfulness than it does about business.

I pose that possibility because it seems to me that we as individual consumers are starting to behave like we did just before the Great Recession.  Consider:

  • Financing for the average new vehicle last month stood at 97.6% of the average purchase price, and the average term of an auto loan is 69.3 months
  • At the peak of the pre-recession mortgage boom, there were 98 million outstanding mortgage loans and about 88 million car loans; now there are 108 million car loans, topping the number of mortgage loans by 35%
  • Consumers’ revolving debt (credit cards) is $1.02 trillion, the highest level since July 2008.

So Americans are borrowing heavily to purchase their rides because their income has not kept up with the increasing price of automobiles.  Moreover, they are stretching out their loans to keep their monthly payments within reason.  And to prop us sales figures, dealers are qualifying anybody who walks in their door for a loan.

But cars depreciate quickly, so now nearly a third of cars being traded in are carrying negative equity (“under water”).  When a consumer trades in such a vehicle he will have to borrow even more to purchase the next one.  Loans of 120% of the value of the new vehicle, anyone?  The car dealers are only too happy to accommodate.  Listen to their ads: “Owe more than your old car is worth?  Leave that to us.”

Does any of this sound familiar?  Just substitute “house” for “car” and you will see my point.  The sub-prime mortgage crisis that led up to the recession was fueled by rapidly rising home prices and lenders who were approving any and all applicants, banking (if you will) on home prices continuing to rise.  But the number of defaults grew, people went under water on their house, and prices fell rapidly as the inventory of unsold and foreclosed homes rocketed upwards.

What’s just as disconcerting is the Federal Reserve chairman saying all this “economic activity” is a positive thing, that regulation will prevent any fiasco like 2008.  It sounds eerily like the reassurances we heard back then.  But regulations are reactive; they are always at least one recession behind.  The bad debts of the housing industry have just moved across the street to the auto industry.

I am not one for predicting recessions or the direction of the stock market, but in case we are heading for an economic downturn, it might be time to review your personal finances and take steps to solidify your position.

  • Don’t borrow to maintain a lifestyle; live a lifestyle to match your income.
  • Get out of any debt you already owe by accelerating payments.
  • Don’t borrow against your house with a second mortgage or a home equity loan; doing so puts it at risk if your income dries up during a recession.
  • Keep that old car on the road.  Cars have generally become more reliable.  A $1000 repair job on a car with 100,000 miles on it might scare people into trading it in.  But if that repair keeps the vehicle on the road for another six months, it will have been money well-spent since $1000 these days represents only about 3 months’ worth of new car payments.
  • Save more money once you are out of debt.  Aim to have 12 months’ of income stashed away.
  • Develop alternative methods of creating an income stream in case you get downsized out of a job.

Don’t be the consumer who contributes to the next recession and gets caught in its web of consequences.


Until next time,


“We didn’t bring anything into this world, and we won’t take anything with us when we leave.  So we should be satisfied just to have food and clothes.  People who want to be rich fall into all sorts of temptations and traps.  They are caught by foolish and harmful desires that drag them down and destroy them.” I Timothy 6:7-9 CEV

Friday, July 7, 2017

Some Personal Responsibility, Please

To read The Big Short, Michael Lewis’s book about the sub-prime mortgage lending practices that led up to the Great Recession a few years ago, is to take a voyage on the dark side of the financial world.  Lewis puts on full display the avarice and shortsightedness of “Wall Street” that laid the foundation for one of this country’s worst recessions.
One of the most telling statements Lewis makes is on page 179 of his book:  “Complicated financial stuff was being dreamed up for the sole purpose of lending money to people who could never repay it.” 
But what did the bankers care?  They got their upfront commissions and kicked the can down the road for someone else to pay the price.
It is certainly easy in hindsight to second-guess people’s actions and to cast blame, of which there is plenty to go around.  So while we are assigning responsibility, let me throw some in the other direction: the people who fell for Wall Street’s sales pitch.
Yes, I know this sounds like blaming the victim—and people saddled with sub-prime mortgages were victims—but surely they were not so ignorant as to really believe everything they were told.  Did the restaurant worker in Nevada who simultaneously owned three homes, each with a sub-prime mortgage, think in her heart of hearts that that was a sound financial decision?  Did the borrower who was told he did not have to produce any proof of income or assets in order to borrow 100% of the value of a home he wished to purchase not have any suspicions at all about the lender?
At some point we have to expect a minimum level of financial IQ, or simply common sense, of the consumer.  There will always be hucksters, someone out to cheat others or to shade the truth a bit for his own gain.  Most parents warn their children of these charlatans and teach them some basic self-defense against deception and being unfairly used.  That knowledge needs to carry over to financial dealings.  As I’ve written before, schools must be more diligent about teaching basic personal financial planning, teach history more effectively (to avoid repeating it), and instill some genuine critical thinking skills.
But just as important, consumers must not mirror the behavior of the bankers they so readily criticize.  What drives people to ignore their internal warning system, to buy what they cannot afford, to borrow what they cannot reasonably pay back?  It is the same brand of greed that drives the bankers, just on a lesser scale.  Collectively, however, those many individual decisions do have a huge impact on the national economy.
Nor do I think our government is faultless.  Home ownership is a proven way to build wealth.  It has been shown that homeowners have a higher net worth, on average, than non-homeowners.  But when bureaucrats tout the rate of home ownership as a measure of economic growth and in response leaders push policies to make home-buying easier (not cheaper, necessarily), they push unqualified people into making that huge purchase.  Home ownership requires commitment and responsibility, and not only in the financial sense.  It is not for everyone.  Just as we will never have 0% unemployment, we will never have 80% home ownership rates, and for good reason.
If you think we as consumers, the banks, and the government have learned our lessons from the last recession and will not repeat those mistakes, think again.  Next week I will cite some disturbing figures from the current economy that might presage another recession.
Until next time,
“Then He said to them, ‘Watch out!  Be on your guard against all kinds of greed; life does not consist in an abundance of possessions.’” Luke 12:15 NIV®*
*Scripture quotations taken from the Holy Bible, New International Version® NIV®
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