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  • Homeowners Walking Away: Strategic Defaults

    2009 is the year of the strategic default. The Wall Street Journal has several articles this month on homeowners walking away from hefty mortgages even though they can afford to pay. ( This article from James Hagerty and Nick Timiraos is a good place to start). And the Journal's online map of strategic defaults from 2004-2008 is a good tool for seeing just where people are using this "financial strategy": ( click here to us the interactive version): Earlier this month, The Atlantic 's Megan McArdle wrote about her disdain for people who can pay but don't: I am afraid that I am one of those people who have no patience for people who refuse to pay their debts. People who can't pay their debts? All the sympathy in the world, even if they accumulated those debts through a series of stupid decisions. Easy bankruptcy is a good thing precisely because it helps us sort out those sorts of situations quickly, allowing the unhappy bankruptee to get a fresh start. Yes, some of them go on to make even more stupid decisions. But most people who declare bankruptcy do so only once, which means they don't make that sort of mistake--or at least, that magnitude of mistake--again. It is hard to argue on moral grounds that people should live up to their promises. But Daniel Gross cautions in his MoneyBox column at Slate that homeowners who walk away from their fiscal responsibility are just following the lead of America's financial leaders: Strategic defaults are the American way, and I'm not talking about strapped middle-class borrowers who prefer spending money on vacations to staying current on their payments. Deep-pocketed companies, billionaires, and institutions that can afford to stay current on payments strategically default all the time. Morgan Stanley, for example, is a gigantic corporation. As of the second quarter, it boasted total capital of $213.2 billion. It certainly has the ability to make good on obligations incurred by its many operating units. But earlier this month Morgan Stanley said it would turn over five San Francisco office buildings to lenders rather than pay the debt on them. Why? Morgan Stanley foolishly paid top dollar for the buildings in 2007, when prices were really high. The values have plummeted, and tenants are hard to come by. "This isn't a default or foreclosure situation," spokeswoman Alyson Barnes told Bloomberg News. "We are going to give them the properties to get out of the loan obligation." Smells like a strategic default to me. This makes for an interesting debate. Read McArdle's post here . And Gross's post here .

  • Consumer Debt and Frontline's 'The Card Game'

    The Wall Street Journal reported this week that credit card delinquency is near an all-time high in the US . And just yesterday, a new financial overhaul bill that includes the creation of a new consumer finance protection agency made it through a Congressional committee and will proceed to go up for debate in the full House of Representatives . So it would appear that changes are coming in the way that banks and credit cards are regulated. In Frontline 's latest documentary--now available online--correspondent Lowell Bergman takes a look at the consumer loan industry, how Americans built up so much credit card debt, and what changes might be in store for the industry. In this excerpt, he talks with one former industry banker about "stealth pricing": You can watch The Card Game below, or by clicking here. Frontline provides excellent supporting material on the program website, here .

  • American Consumers: Resetting Behavior and Refocusing the Economy

    John Gerzema , Chief Insights Officer for the marketing firm Young and Rubicam , sees a major shift in the "post-crisis" behavior Americans. He says the American consumer is "de-leveraging," and he is bullish on what that means for the future of the US economy. The consumer is newly empowered, in Gerzema's view, and he outlines how this will bring about positive change in the economy in this Ted talk:

  • The Economist: Debt Slows Spending Climb

    Consumer spending rose in the first quarter of 2009, causing some to conclude that consumption hit bottom and good times are ahead. But The Economist notes that the bottom does not mean "vigorous rebound...Consumption may be growing again, but there is every chance it will remain depressed in coming years because of weak income growth, depleted wealth and tightened credit." For the last three decades, spending has outpaced personal savings and GDP. But that was not necessarily a crisis situation, as long as income continued to grow. But income stopped growing in 2000, as debts continues to rise. So now the growth that consumer spending should prompt will be tempered by the debt consumers have built up. A sudden rush to return debt ratios to where they were in 2000 would require ridding households of some $3 trillion in mortgage debt—an almost impossible task. More probably, mortgage debt will grow more slowly than income through a combination of lenders writing off impaired loans, homeowners paying down existing mortgages and new homeowners taking out smaller mortgages than in the past. Bruce Kasman of JPMorgan Chase estimates that the most dramatic phase of increased saving has already occurred, and spending will grow only a bit less than income. Read the full article here .

  • 'A Nation of Children Drowning in Debt'

    At The Atlantic's Brave New Deal , Jim Manzi wonders whether American comsumers are learning their lesson about buying beyond their means. American consumers are awash in debt, drowning in it. This is the fundamental issue with the stimulus proposal. We're trying to borrow our way out of debt. Unfortunately, we need a recession. That is, consumption must decline because for some time we have been consuming more than we produce or have reasonable prospects of producing. Monetary policy has been used to inflate a series of bubbles to avoid the consequences of excess debt, and the more we try to hold it off, the worse it's going to be. Bourbon works as a hangover cure, but only for a while. Read the full article here .
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