Debt-Driven Consumption – It Won’t Be Stopped

June 15, 2009 by  
Filed under Debt and Credit

All of the talk in Washington about financial reform is just that: talk.

The Obama administration wants radical change in the way that financial institutions are regulated. But that will not happen because well-entrenched political interests won’t let it.

As stupid as it seems (and it is stupid), the primary obstacles to reform are that Congressional Committees and Sub-committees don’t want to lose oversight authority over their pet federal agencies. So rather than upset the committee chairs by consolidating bureaucracy and authority in a way that makes sense, nothing substantial will be done.

Oh sure, we will have some changes in executive and board compensation rules but nothing radical. The structural problems, scattering of authority, and lack of cohesiveness in financial regulation will remain. So much for solving the first problem that led to our current state of affairs.

The same can be said for the second problem: debt-driven consumption. Our nation of out-of-control borrowers and spenders is still driving the bus, and that includes the Obama economic bus.

First, can we all agree that over-borrowing to support excessive consumer spending was a major contributor to our economic collapse? If you can’t agree with that principle, you probably need to be reading some other blog where everyone loves to discuss 0% card balance transfers and credit scores.

What has the government done to prevent the debt-junkies from taking over our economy again?

I say it has done nothing.

Indeed, the pattern of government action has been to kick the borrower-spenders in the pants and tell them to get busy. Let’s review.

First, we have the infamous credit card reform. What did it do? It took away a lot of the pain being felt by cardholders who missed payments or went over their credit limits. It spread that pain among all cardholders. So the over-spenders are now in a better position to do what they do best:  buy stuff they don’t need and put in on plastic.

Second, we have the latest version of the first time home buyer credit, courtesy of the taxpayers. We are giving people a little bit of money ($8,000), hoping that will be a catalyst for them to borrow a lot. But that wasn’t enough, as we will see.

Next up is the cash for clunkers which, under the guise of removing gas guzzlers from the highways,  is designed to encourage consumers to borrow to buy new cars.

More recently, the government introduced rules allowing first-time home buyers to borrow against the $8000 credit to help with a down payment or closing costs. Sort of like the popular tax-refund anticipation loan.

Frothing-at-the-mouth consumers to Obama: “I want my tax credit and I want it now because I don’t have enough cash reserves to afford this house and if you won’t give it to me then I want to borrow against it and if you won’t do that I won’t vote for you.” Obama to consumers: “Done.”

This is the hard truth: The government is committed to have all of us – from the government on down – borrow and spend our way into the next economic bubble. As long as the bubble re-inflates and stays there through the next presidential election, our “leaders” are content.

What perturbs Mr. ToughMoneyLove even more about the borrow and spend encouragement being offered to consumers now is that our tax dollars are being used to provide that encouragement.

Personally, I would like my tax dollars used to slow the pace of debt-driven consumption. What about you?

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4 Responses to “Debt-Driven Consumption – It Won’t Be Stopped”
  1. Rick Beagle says:

    Keep digging… there are people who support these chairs that do not want substantive changes. Follow the money and follow the donations and you will find the impetus to a working government is old fashion greed. It is funny that a site dedicated to the pursuance of the mighty buck finds itself at odds with the “winner takes all” mentality that permeates our markets and have for at least a century.

    Personally, I am a huge fan of a free market with a big fat asterisk right after the term. I do not understand why money can not be made without irresponsible actions on the part of the consumer and the business owner? Irresponsible of course being defined by actions that are contrary to the laws of man, laws of nature (cut down a tree, plant a tree kind of thing), and the laws of common sense (does anyone think that rampant greed should have a place in our health care equation). Unfortunately, regardless of party affiliation, there is always someone willing to sell their votes to insure long term profits for their benefactors (or start and then prolong a war even).

    Rick Beagle

  2. Ahead of the curve? says:

    It’s Keynesian economics, as you know. If the consumers and businesses won’t spend, then the government needs to. It stops the “death spiral” of people saving and not spending, which leads to further cutbacks in business spending and more layoffs, which leads to more saving and less spending, and so forth. Overspending and overlending is not good, obviously, and got us into this mess, but stopping all spending and going into a Depression mentality will lead us further into this mess. There’s a balancing act. The government and tax policy has always provided incentives which drive portions of the market. Now we have incentives to get people to buy houses (instead of sit on the sidelines and wait for prices to go lower, a vicious circle) or replace their gas guzzlers (instead of sit on the sidelines and watch the car companies wither and fall). A lot of people I know are not spending money, even though they have it, and are not in debt, because the “zeitgeist” is to not spend money and hoard cash. This is damaging to the economy and the President’s economic team knows it.

    • dwhite2762 says:

      I agree, Ahead of the curve! I am so saddened by the number of people in my city that are out of work. I think that the relentless consumer spending was so bad for our planet and for our economy, but now regular workers are out of work (janitors, construction workers, mechanics). This is due to a siege mentality that any spending is bad.

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