Monday, September 08, 2008

The American Way of Debt by the NY Times, plus some comments on a nonprofit business and debt

The Times has an interactive feature tracking the progress of debt in the US, as part of its 3 part series on the debt trap that many Americans now find themselves in.

I can't embed the flash presentation, so you will have to click through the link to see it. You'll be taken to the main page; click on the index, and select the American Way of Debt feature. That feature basically shows that the amount of debt held by American households has progressively risen since the 1950s, and really really took off in the 21st century.

In 1944, the average American saved $12,700 and had $7,500 in debt. In 1955, they saved $3,300 and had $21,000 in debt. Mortgages started to become more popular in the 60s. Things slowed down in the 70s, with a combination of high interest rates and inflation plus little economic growth.

In the 1980s, securitization of debt allowed lenders to package multiple mortgages. This allowed them lenders to make riskier loans, since one default wouldn't kill the whole package. Things really took off then, and in 2007, the average American household had $121,000 in debt and barely any savings. Then, things crashed.

I've had occasion to see some of these trends up close. I was an executive at a nonprofit housing cooperative. That title is in some ways less impressive than it sounds, since it's basically a local corporation in a university town; however, we do have over 500 members, and we are one of the largest coop housing systems in the nation.

The cooperative basically went with the times. We embraced the advent of debt to finance the purchases of new houses. More recently, we had been leveraging our existing home equity to take on new debt. This allowed us not to raise member charges drastically while still acquiring new houses.

If you click on the feature labeled Equity vs Debt, you'll note that the average American household now has more debt than home equity. That's very bad.

My cooperative is, fortunately, pretty far from that point. Although we got swept up to some extent in the debt frenzy, cooperatives also tend to be very left-leaning and mistrustful of corporations like banks. Debt hasn't been a huge part of our financing, although lately it's been increasing.

Not long ago, at a national conference of housing cooperatives, one of the leaders of the movement gave a presentation titled something like "Sitting on our Assets", where he basically said that we were doing a disservice to the cooperative movement by not leveraging ourselves to the hilt and using the money to buy new houses. The cooperative system he runs is indeed leveraged as far as the banks will let them. Ours is not, although we will have to increase our operating leverage to perform needed maintenance. We must price under regular landlords to attract members, and we can't afford to raise rents fast.

The Hebrews prohibited lending money at any interest. Debt can make it seem like you're getting free money, and if you use too much of that free money, you're trapped. This, presumably, is why the Bible enjoins us against usury. In fact, modern Muslims still follow this tenet. Now, I don't believe that debt per se is bad, but it is a bit like nuclear energy. It can be used for good, or it can destroy you.

America's profligate spending was in some ways financed by other nations - for example, many countries seeking a safe return and a stable currency bought US debt, and the amount of money flooding into US treasuries reduced borrowing costs for the government. If you think American household debt is frightening, the national debt is worse. As the Times feature shows, the use of debt is spreading to other countries. I would hope that they'll learn from what's happening to the US, but humans aren't all that good at learning. We tend to think that no, it can't possibly happen to me.

Either way, I think the cooperative movement in general does offer a strong counterpoint to the debt movement. As I posted earlier, American credit unions are weathering the credit crisis much better than banks. To recap, credit unions are member owned and non-profit. They don't have quite the same incentive to go gangbusters on the loans.

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