I used to get the greatest charge out of listening to older people talk about the Great Depression and how their families were affected by it. This first-hand look of an otherwise “historical” period gave me a very unique perspective, so when the Clinton administration deregulated insurance companies in 1999 in preparation to also allow more mortgages to be issued to people who, frankly, couldn’t afford it, I seriously thought to myself, “Wow… we’re going to do it again… Surely they know this is a disaster… it must be a joke… are we really doing it again?!?”
We did it again.
How Did We Get Here?
When AIG and its ilk were no longer required to have the money to actually back up the insurance policies that they issued, this should have been the first clue to tuck and run. Without the capital to back up more policies, the insurance companies couldn’t cover the new mortgages that the relaxing of Fanny and Freddie standards were going to produce. How anyone missed this little point of logic is beyond me: If someone couldn’t qualify for a mortgage before because they 1) didn’t make enough money, 2) had a history of financial irresponsibility, 3) were buying houses in an artificially inflated market or 4) all of the above, how does not having the money to back up a foreclosure policy make any kind of sense? The Fanny/Freddie groups increased their chances of dealing with foreclosures by at least a magnitude, and yet they were surprised when history proved itself again and foreclosures started happening.
To be fair, there was a lot of double-talk going on. Families who had never qualified before were given a chance, but at a higher interest rate and with increases in that interest rate in the case of the inevitable missed payment or two. So, people who really didn’t have enough money to pay a regular mortgage were charged more than they would have paid on a regular mortgage, and there’s confusion still about how that happened? The thing is, these people essentially trust the mortgage companies to make wise decisions, so if they are approved for a mortgage, surely the mortgage company knows what it’s doing. Of course I should be able to come up with $1200 a month just for my house payment – the bank told me so.
Well, it didn’t happen that way. A rash of bad luck started cropping up after 2001, including a very expensive war, an artificial (and possibly illegal) hike in gas prices, a downturn in people’s ability to pay for ever-increasing interest rates on credit cards and loans… and like dominoes, down they went. We’re now in February of 2009, and we’ve seen record numbers of job losses, just in the last two months. What’s worse is that it doesn’t look like it’s going to get any better.
What Can We Do to Fix It?
There are two schools of thought on this one:
The allegedly fiscal conservatives are suggesting that tax cuts for the rich and for corporations will bring us back to Trickle Down Economics. Their logic is that since rich people spend more money, if they have even more money to spend, they’ll “stimulate the economy”. The problem with this is that we already know that this doesn’t work. When you cut taxes on people who already don’t pay taxes (most corporations are well-known to have hundreds of loopholes and write-offs to avoid paying taxes at all), but still have to support the cost of running a government, the money has to come from somewhere… and that’s why we have an $11 TRILLION national debt in the U.S. (most of it owed to China).
The extreme fiscal liberals suggest that we make everyone pay taxes and that we pump money back into the economy with public works programs and grants and loans, but don’t make bail-outs and don’t cut taxes at all. The idea is that the government needs the money to create almost a kind of second infrastructure to hold up the primary infrastructure that is currently collapsing. Pump more money in to renewable energy and art programs! Except… both of those fields have very, very few actual people who are qualified to work in them.
I tend to believe that the truth lies somewhere in the middle.
A Realistic Proposal
If we insist on looking to the government to save our heinies on a situation that they were not exclusively responsible in creating, then we probably deserve what we get (and that’s not a nice thing to say). The real and true first step in avoiding being overwhelmed and instead taking on the problem is to prioritize.
There are three only elements of survival: Food, Clothing and Shelter. Without these, what do you really have? Not a lot. But, there are ways to trim the fat off of these things without dangerously tightening a belt. If you’re in an apartment, think about if you really have enough room. If your junk takes up more space that you or your family, think about down-sizing. Clothing does not need to cost more than the arms and legs they keep warm, so avoid designer labels if you can find the same item for half as much or less elsewhere. (It’ll usually last longer, too.)
Big-ticket toys are NOT for survival. Things like internet access, big-screen televisions, the latest gaming console, a new cutting-edge computer every six months, eating out at fancy restaurants three times a week, and having three times the square footage you actually need are NOT needed for survival. Credit card bills, loan payments and luxury services are also “not food”. Now, if you realistically need one or two of these things to generate the income so that you can work, then more power to you – but go easy.
Cut the fat as much as you can, but not at the grocery store. There, only buy healthy foods. It’s not so much the daily trips to the fast food joints that’ll kill you so much as the long-term effects of eating there. Most families can keep themselves afloat just fine – right up until someone has a heart attack or develops some other seriously life-threatening illness. If you clean up your diet now – avoid bleached flour and sugar, avoid pork, stay away from refined foods, food dyes and anything hydolyzed – you will find yourself taking a lot fewer sick days now, and you’ll have years less of down-time later.
Consider planting a garden, even if it’s only in containers. A good container garden can save a lot of money per month in food that it produces, and most of the materials to establish them are a one-time expense (that you can usually minimize by repurposing household items). Depending on what you’re growing, a single standard-sized lawn, if it were repurposed for growing food, could meet all of the vegetative nutritional needs of a family of six, every year, for about $200 – compared to the $2000 plus that most people spend on vegetables. Plus, gardening is a wonderful hobby that seriously can improve your mental health.
Cut back with the intention of paying off debt sooner. If the money just isn’t there – you’ve had a pay cut or had to take a lower-paying job – then it’s hard to imagine cutting back for any other reason besides survival. Still when it’s the interest rates that are eating your lunch, you will do yourself and your family a big favor by getting out from under them earlier. Most cards and loans do not have an early pay-off penalty, but some do, so double-check with them before working towards a payoff. Instead of pocketing the payment that you normally would have made to a now-paid-off credit card, apply it to a different debt. Keep doing this until they’re all gone, and then start putting that money into a savings account (or even under the mattress) for a few months after that. You’ll be astounded at how fast it adds up.
Learn the Magic Formula for knowing your budget. Way back when I was in high school, we were taught in Home Economics that the average household should spend NO MORE THAN 30% of its income on a housing payment (mortgage or rent). Another 20% can go to transportation costs (car note, insurance, maintenance, public transit). At the very most, another 30% should cover your utilities, including any ongoing expenses like club memberships or loan payments. This finaly 20% should take care of your groceries and food expenses. When you work out your budget, figure out how much each of these things are, and then see what you’re actually spending. For instance, let’s pretend someone makes $1000 a month (just because it’s a nice round number).
They should be able to spend: $300 on rent, $200 on transportation, $300 on utilities, and have $200 left for food.
For a single person, this isn’t difficult, assuming they also have a roommate or still live with their parents. If your costs exceed any one area AND are not made up in slack in another area (i.e. your rent is $400, but you have all-utilities-paid apartment), you need to cut some fat and/or downsize.
The Times, They Are A-Changin’
Depending on who you ask, it’ll be anywhere from a year to ten years before we recover from the cascading failure that our economy is going through right now, and some doom-sayers believe it’ll be even longer. For those who fear the contraction of resources (that is to say, that families are no longer spending extra money and “not stimulating the economy”), they seem to have lost touch with the fact that you can’t skin and eat a Playstation 3 when the kids get hungry, and that surround-sound stereo system does you no good when the power’s been shut off, again.
Don’t let the “depression” side of a Depression eat you alive. Yes, times are tough and it’s going to be a while before we can get through it, but the more we try to find someone to blame instead of doing what is within our power to do to fix it, the longer we’re going to be wallowing. Like Dick Armey says, “You can’t get ahead when you’re getting even.”