pnms-beem-012109 The economic crisis is all in our heads

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According to the Social Security Administration, in 1980 I had a taxable income of $24. That paltry sum must have been interest income as I was employed at the Portland Public Library at the time and, therefore, was on the state retirement system and not paying into Social Security. In 1981, however, Carolyn and I and our new baby Hannah apparently managed to live on the $5,500 I made as a freelance writer. I remember not having any money. It wasn’t so bad.
I sometimes sold review copies of books when we needed quick cash, but we never went hungry or missed a rent payment. We had no health insurance, but when I went to the hospital to work out a payment schedule for Hannah’s delivery, I was told that Medicaid would take care of it. Not having any money even enabled us to buy a house through the good offices of the Farmers Home Administration.
Having benefited from federal assistance when we were starting our family, I am more than happy to support social programs with my tax dollars now that we earn a comfortable living. Still, it bothers me greatly that the economic distress this country is experiencing was apparently caused by the sub-prime mortgage debacle, home loans made to people who couldn’t afford them under terms that were unfair and unsustainable. Those bad loans were then bundled into the now worthless investment securities that resulted in the collapse of financial markets and the credit crisis that are working their way through the American economic bloodstream like a virus, sucking the life out of a sick society.
The real problem, of course, is that we all live beyond our means. We live on credit. We borrow to buy homes. We borrow to buy cars. We borrow to pay for college. Odd that we can’t seem to save enough in advance to pay for these things, but we can pay for them, plus interest, after the fact. Or, given the current state of affairs, maybe we can’t.
Lately, I have been hearing speculation that we are headed for a pay-as-you-go cash-only society. Now that would be a disaster for everyone except those with generational wealth or incomes in the high six figures. But then cash itself, legal tender, is only a form of credit, a promise to pay backed by whatever it is the U.S. Treasury has stored in its vaults. Gold? Silver? Bernie Madoff’s Cartier watches?
The awful irony of our current economic crisis is that it’s all in our heads. Nothing really changed when we discovered that bankers had made a mess of bad loans. There’s no less money out there, no fewer homes, no less demand. The losses aren’t real, they’re speculative. All we’ve lost is our confidence.
Yeshiva University, for example, at first reported that its endowment had lost $110 million in Madoff’s investment Ponzi scheme, but, upon reflection, university officials realized that most of those gains were “fictitious.” You can’t lose what you never had. All Yeshiva really lost was its original $14.5 million investment.
When we pull out of this recession, someone really ought to re-think the whole concept of investment. I’ve always thought there was something fundamentally dishonest about the idea that you can invest a dollar in some stock, bond, or security and, without doing a damn thing yourself, expect it to turn into $2 or $10. That’s why I have no intangible investments – and not much money either.
Meanwhile, as long as we’re all hunkered down in survival mode, thinking we’re in trouble, cutting back here, consolidating there, planning for a bleak future, we will be in trouble. It’s a self-fulfilling prophecy. It’s herd mentality.
But watch what happens. The government will pump more money into the banks and create “bad banks” to purchase their “bad loans.” The banks will start extending credit again. Consumers will start borrowing and consuming again. Orders for retail goods will go up. The real estate market will revive. People will go back to work. We’ll be back in business again.
And, yes, we’ll repeat all the same mistakes and eventually be back in a pickle again. I seem to recall that we went through all this in 1989-1990, but it didn’t make the slightest bit of difference in the way we lived. If you want to avoid getting flattened in the next downturn, try living beneath your means.
The Universal Notebook is Edgar Allen Beem’s personal look at the world around him. The ideas and opinions expressed are his own and do not necessarily reflect those of The Forecaster.