Forgive Us Our Debts

Reading an economic report at Moody's Economy.com, I was struck by one sentence. It read something like: "If the U.S. falls into recession, it will be because the American family couldn't make good on its debts."

While that oversimplifies all the factors that went into the creating and popping of the housing bubble (including deceptive practices and fraud on the part of lenders and the "irrational exuberance" that accompanies any such asset price inflation), the basic cause of the country's economic problems is the fact that a huge number of borrowers couldn't pay their debts.

As we are seeing, fiscal irresponsibility can be devestating not just to those whose houses are foreclosed upon, but neighbors, lenders, other borrowers, the growing numbers of unemployed, and on and on as the effects ripple through the economy. So, it's about time that some thinkers have begun discussing debt not simply in economic terms, but moral ones.

In a terrific essay, Barbara Dafoe Whitehead, co-director of the National Marriage Project at Rutgers University, lays out how our country instituted a culture of thrift and fiscal responsibility only to give in to hucksters pushing payday loans and the lotto.

Whitehead reports that in 2004–when home prices were escalating and families were easily able to borrow against the inflated value–the typical family spent more than 18 percent of its income on debt payments, 12.2 percent said debt payments exceeded 40% of their income. One in seven families has filed for bancruptcy or sought the help of a credit consolidator. "Few other advanced countries confront a debt debacle comparable to that of the United States."

Financial deregulation, allowing for a massive increase in what lenders could charge borrowers in interest, in the 80s began to unravel the once-wary attitude Americans had toward debt. Lenders began to market their products as bringing the advantages of credit to the masses. No longer did the less than affluent need to save up for the new sofa or pay for a car in cash.

This democratization of credit, however, led to the widespread propagation of debt. Between 1989 and 2001, credit card debt almost tripled, from $238 billion to $692 billion. By fall of 2007, the amount of revolving consumer credit had reached $937.5 billion, a 7 percent increase over the previous year.

In the generally flush 1990s, many families were able to manage higher credit card debt without undue distress, but in today's more troubled times, families who once kept on top of their credit card balances - even if it meant paying only the minimum on several cards - are now toppling into delinquencies and defaults. Nearly half of all credit card holders have missed payments in the last year.

Creditors today structure loans and repayment terms to keep borrowers borrowing–and creditors flush with fees, interest, and other finance payments. Loans "are structured so that it is hard for the borrower to repay the loan in full. Instead, many consumers end up with little choice but to pay special fees to "roll over" the original loan into the next payday, a practice that can lead to chronic dependency on expensive credit."

Whitehead points out the "loan sharks" are nothing new in American society. As the country industrialized, there were plenty of unscrupulous creditors taking advantage of workers in America's burgeoning cities–workers fresh from the farm who had nothing but their next paycheck to borrow against. "But this was the Progressive Era, and a handful of reformers set out to combat the 'loan sharking evil.' "

Reformers fought to make lending to the poor profitable–allowing banks to charge enough interest to cover the extra risk but not too much to forever impoverish borrowers. Other reformers took on the task of creating "pro-thrift" institutions such as the credit union.

Whitehead's article is based on a report by the Institute for American Values . David Brooks calls the paper, titled "For a New Thrift: Confronting the Debt Culture," "one of the most important think-tank reports you'll read this year."

Brooks does admit that may not be saying much.

But he agrees that financial decadence is something those concerned about the country's moral shift need to be paying more attention to. There are policy fixes to implement, but, he says, "the most important is to shift values. [Benjamin] Franklin made it prestigious to embrace certain bourgeois virtues. Now it's socially acceptable to undermine those virtues. It's considered normal to play the debt game and imagine that decisions made today will have no consequences for the future."

A shift in values is needed in part because those we should be calling upon to bring payday lenders and fast and loose mortgage agents back into line are the politicians. And they're as enslaved to debt as the rest of us. "The debate about our nation's fiscal problems," writes Andrew L. Yarrow in the Balitmore Sun, "is on the wrong track. Debt is a moral issue; by any objective standard, it is wrong to beggar your children."

Our country runs a $9.4 trillion tab and has promised another $50 trillion in outlays (think Social Security and Medicare) that is currently unfunded. What happens to organizations that make huge promises that they can't possibly fulfill? Think the Big Three: Ford, GM, Chrystler. Think Detroit and the Michigan economy.

Yarrow argues that this kind of debt is immoral. "Our culture's Judeo-Christian tradition offers powerful counsel on this subject, words that we should not be afraid to wield. The biblical book of Proverbs, for example, warns that 'the borrower is servant to the lender,' and Psalms 37:21 offers the more pointed injunction that 'the wicked borrow and don't pay back.' "

He offers specific and helpful policy positions and persuasive moral arguments for getting our country's revenues and expenditures back into line: "Increasing the Social Security eligibility age, indexing benefits to price (not wage) inflation and establishing carve-out personal retirement accounts because these are the right things to do for our kids. Speak of sacrifice (whose Latin root means "sacred") for future generations when advocating taxes on those most able to pay." He goes on to address health care, the evironment, and energy.

"As theologian Dietrich Bonhoeffer said: 'The ultimate test of a moral society is the kind of world it leaves to its children.' "