Out of Control Spending--The American Way?

After 9/11, the President encouraged Americans to keep the economy strong by going shopping at the mall or buying a new car. The car industry cooperated by offering 0% or low percentage loans. In addition, people were encouraged to stop renting and buy a home to help build a healthy housing industry.

Buying and spending are at the core of a capitalist society and are healthy ways to build jobs and allow people to get what they need for themselves and their families.

The problem, I feel, is that too much of the spending was financed with credit that was so easy to get without any real forethought as to how people were going to pay it back. A lot of this was because housing prices contined to go up. If a person bought a house for $200,000, in some markets it would be worth $225,00 in only a year! Banks were happy to lend in this environment because their collateral was going up in value. Consumers were happy because if they needed additional cash they could take out a home equity loan based on the new value. If people got in trouble because of a job loss or other life changing event, they could often sell the house at the increased value, pay the bank, and pay off other debts as well so they could get back on their feet debt free.

All that changed in 2008 with the collapse of the housing market in many areas, the decrease in home values, and the wholesale elimination of jobs in anything related to construction and home building.

This also had a negative effect on other industries dependent on home values rising, and hurt job growth significantly. One unusual example is the piano industry--a business one would not think would be tied to housing. However, during the housing boom, many homes were built with “great rooms” and many people wanted pianos to put in them. With home values soaring, people could get second mortgages and buy the piano and other things needed for the new house. Piano sales soared. Conversely, once the easy money second mortgages dried up, so too did the booming piano business and many businesses, some almost 100 years old, were forced to close because they over expanded.

Nowadays, people in general, I feel, are seeking a simpler life where they can provide for themselves and their families without all the pressure of overbuying and difficult to pay debt. However, some of these same people cannot move forward because of crushing debt loads left over from past times.

Considering a Chapter 7 bankruptcy if you find yourself in this situation can be a very healthy step to at least see if your situation can be turned around financially without the fear and pressure of too much debt.

Peter's Blog