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What the Great Depression Did That This Recession Won't

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One of the most important things about the Great Depression was not how bad it was, but how long it lasted. The downturn itself was 10 years long, but the impact it had on how people lived lingered for decades. Well after the Depression ended, households shunned debt, loved saving, and were wary of risk -- a mentality that lasted until the 1980s, when those who lived through the Depression retired.

It's still too early to tell how the recent recession has altered how we manage our finances, but the early indicators give us some clue: Unlike after the Great Depression, not much has changed. The personal savings rate jumped sharply in 2009, but has already drifted back to a pitiful 3.5%. Consumers are shedding debt, but they're doing it almost entirely by defaulting on it -- credit card debt has declined by over $100 billion since 2009, but banks wrote off over $180 billion of bad credit card loans over that period, meaning consumers were actively racking up new debt. A recent Fannie Mae survey shows that 60% of homeowners say a major reason they bought a home is because they think it will make a good investment. Legions of homebuyers are lining up at the Federal Housing Administration for mortgages with paper-thin down payments.

Not much has changed.                                                                   

I've been thinking about why this is -- why, after seeing their wealth decimated and jobs disappear, households haven't been scared into saving more and borrowing less, as they were after the Great Depression.

Maybe it's because the past four years paled in comparison to what took place during the 1930s. But I think there's more to it than that. For a while, I thought it had to do with stimulus packages and monetary policy, or maybe a newfound view of American exceptionalism that makes U.S. consumers unwaveringly optimistic.

But then I found this chart, which may explain it better than anything else:

Source: Federal Reserve.

Note that this isn't the total number of bankruptcies, but bankruptcies per 1,000 people, making it a true apples-to-apples comparison over time.

What it shows is clear: Personal bankruptcy during the Great Depression was virtually unheard of; today it's an everyday occurrence. About the same number of people were awarded bachelor degrees last year as filed for personal bankruptcy (1.6 million).

The effect that has is tremendous. During the Depression, those with too much debt largely dealt with it the hard way -- by selling assets, depleting savings, finding extra work, seeking help from relatives, or other ways of being shackled to the figurative debtor's prison. Today, a trip to bankruptcy court and a few years with a tarnished credit rating suffices for millions of Americans. And keep in mind, household debt as a percentage of net worth was about the same in the early 1930s as it is today.

It's hard to say exactly why bankruptcy has gained so much popularity. One likely reason is that bankruptcy was more ruthless in the past than it is today. Personal bankruptcy in the early 1930s usually meant an obliteration of financial well-being that left debtors virtually unable to live. As one firsthand account notes, debtors "threatened judges in bankruptcy cases; in one case a mob dragged a judge from his courtroom, beat him, hanged him by his neck till he fainted -- and all because he was carrying out the law." Going through a bankruptcy could be so damaging that people would collude to soften the blow. A family member or friend would often purchase assets in bankruptcy liquidation auctions and return them to the former owner the next day.

The laws have since changed dramatically. In 1938, after most of the carnage of the Depression had already taken place, the Chandler Act created bankruptcy options other than liquidation, such as debt reorganization, making it easier to go through personal bankruptcy. An even bigger change came in 1978 with the Bankruptcy Reform Act, which many argue made bankruptcy more appealing and sent filings through the roof.

Another reason bankruptcy has grown may simply be cultural. One study by Rafael Efrat of California State University, Northridge, found "a noticeable shift, beginning in the 1960s, in public attitudes toward individuals filing personal bankruptcy." Defaulting on debt simply lost its stigma.

Efrat explained: "[P]eople began to ascribe more sympathetic feelings toward the bankrupt. This sympathetic mind set was largely due to a shift in societal attribution of fault for financial failure." Not surprisingly, many came to view lenders, not borrowers, as responsible for consumers' debt loads -- a point reinforced by the recent Occupy Wall Street protests and the rising acceptance of walking away from underwater homes.

Whatever the reason, bankruptcy is far more common today than it was during and after the Depression. What that means going forward, no one knows. It's not hard to argue, however, that it could mean consumers don't need to save like they did in the past, don't need to avoid debt like they did in the past, and can accept risks that used to be off limits -- all rationally. The ironic truth is that those who levered up on debt during the bubble and then reneged on their promises ended up in a better position than many of those who played the game prudently. As long as that's the case, consumer behavior may not swing conservative like it did after the Depression.

Is that a good thing? You tell me in the comments section below.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On December 13, 2011, at 2:31 PM, KJHValue wrote:

    Good article Morgan.

    IMO the biggest reason that not much has changed is because of the culture today in America. It is ingrained in people, especially younger people, that they deserve certain things. Also, the pressures to compare ourselves to others leads to buying things that we don't really need... or shouldn't be buying in the first place.

    I'm 27 and one of the few left of my friends that hasn't bought a house. I am constantly told that I should buy b/c "it's a great investment". Meanwhile they are still putting almost zero down on their houses. They are saving next to nothing. They are having expensive weddings that just wasn't heard of in my parents day. They have massive student loans to pay off. They grew up getting what they wanted and the financial crisis hasn't done much of anything to change it.

    Parents get pressure from there kids or the next door neighbor to buy the new Iphone or new car. In my grandfathers day (WWII vet) saving and buying only what you can afford was easier. It wasn't looked down upon, it was the norm. In much of America today that is not the case. Everyone is comparing themselves to the next. The social pressures to keep up and not be "cheap" are tough to ignore.

    Combined with the feeling that they will be bailed out, either by the gov't, their parents or who knows... but someone, results in no change.

  • Report this Comment On December 13, 2011, at 2:33 PM, DJDynamicNC wrote:

    No discussion of rising bankruptcy rates would be complete without pointing out that business bankruptcies have been systematically counted as consumer bankruptcies for the last several years (see the paper here: )

    Businesses use bankruptcy as a means of staying in business after they've made decisions that should put them out of business, or been subject to difficult situations which may have nipped their business model. In other words, it's a second chance. Since scaling up a new business takes time and resources, it is often more efficient from a macroeconomic perspective to go through bankruptcy proceedings with existing large corporations rather than trying to reinvent the wheel.

    Since consumers are now, like it or not, a part of this same market economy, it stands to reason that they will make use of the same tools of industry that businesses use. And since there is nothing but tattered shreds where the social safety net should be in the United States, bankruptcy may be the only viable option many consumers have to survive after bad luck or bad decisions - two things from which every single human being in history has suffered.

    Those of us in the working class understand this, which is why the stigma has evaporated. If the choice is bankruptcy or paying for yet another Wall Street bonus by taking food out of your child's mouth after one bad bet or one unlucky break or one bad loan sold to you by a bank you used to trust, well, that's no choice at all.

  • Report this Comment On December 13, 2011, at 4:16 PM, freedom14U wrote:

    It is in our humane nature to find someone to blame for all the bad bets, unlucky breaks, or bad loans we have agreed to, it's easy and natural.

    Why do we think we are entitled to a government social safety net in the first place?

    I believe we were a much greater people when we did not believe we were entitled to anything, other than Life, Liberty and the pursuit of Happiness. (notice pursuit not guaranteed)

    What has happened to the American that just wanted opportunity, to be self reliant, responsible for our actions and decisions. The American that was not afraid of hard work or taking a job that might be less than what we would like.

    Seems the stigma for not wanting to default on our debts is easy to shed but the stigma of taking a job or two that might require us to get dirty or work below our education is out of the question.

    What has happened to us America? I pray that we will once again yearn for freedom, self reliance, and a belief in ourselves and the God of our constitution.

  • Report this Comment On December 13, 2011, at 5:06 PM, hbofbyu wrote:

    Bankruptcy pays!

    I have a friend who racks up credit card debt, medical bills - buys cars, toys, furniture, vacations and when he neeeds to get out from under it all declares personal bankruptcy. He does this about every 7-10 years. After bankruptcy he gets more credit offers than ever because the banks love the higher interest rates they can charge him. He maintains his primary residence and could give a flying flip about his ruined credit rating. He plans to play this game until he dies.

    I understand why bankruptcy regulations were created but whenever you pass laws or try to legislate charity you create incentives for opportunistic people to abuse it. Whether it be welfare, government housing, child care, grants, student loans, or bankruptcy.

    People will continue to take advantage of these programs as dogs will continue to lick themselves.

  • Report this Comment On December 13, 2011, at 5:21 PM, Linesntubes wrote:

    I sincerely loved (but disagreed with) Djdynamicnc's thoughtful post. I would agree only to the extent that bankruptcy laws should not differ for businesses versus individuals.

    Personally I tend to think that the social safety net has not disappeared as much as it simply never existed as some wished. -- Just because we live in the wealthiest or greatest nation on earth, does not guarantee anything -- except the most basic things, and certainly not a standard of material living.

    Perhaps I am wrong but I am puzzled by questions like "how can this happen in America?," as if there is some guarantee that it can't. When people are free, they are free to succeed and to err, and all of us do both.

  • Report this Comment On December 13, 2011, at 5:39 PM, Turfscape wrote:

    freedom14U wrote: "What has happened to the American that just wanted opportunity, to be self reliant, responsible for our actions and decisions."

    He probably died of acute false nostalgia toxicity.

  • Report this Comment On December 13, 2011, at 6:20 PM, Hawmps wrote:

    Great article and good comments too. +1 rec

  • Report this Comment On December 13, 2011, at 6:20 PM, VoiceintheCrowd wrote:

    I am truly surprised to hear the fact asserted above that household debt as a percentage of net worth was about the same in the 1930s as it is today. I would want to delve into that statistic more. I might also want to complement that statistic with other statistics, such as aggregate debt to income, to see if that illuminates anything.

    It's true that exemptions are more generous today than they might have been in the past, which means that bankruptcy does not leave one utterly penniless. However, they are never so generous as to make bankruptcy a wealth management tool.

    One of the leading causes of personal bankruptcies in the United States is medical bills. That is a category of debt that probably was far, far smaller in the 1930s because medicine was far more primitive than it is today. (Correspondingly, life expectancy was shorter.)

    Another leading cause of bankruptcy, particularly recently, has been excessive real estate debt. This is one reason I'm truly shocked to hear that debt to net worth was so high 80 years ago. Before the advent of Fannie Mae (1938), almost no one could incur that kind of real estate debt in the first place.

    Student loan debt is not dischargeable in bankruptcy and therefore is unlikely to be an impetus for many bankruptcies (though of course people may attempt to discharge their other debts in order to focus solely on student loan debts). Again, though, speaking of debt-to-net-worth, it seems a serious stretch to suggest that this category of debt was higher as a percentage of net worth in 1930 than today.

    The same applies for unsecured consumer debt. The concept of the credit card was in its infancy during the '20s and did not go mainstream until decades later. Were there other forms of unsecured consumer debt available in those days that were so prevalent that they might make up the missing part of the debt-to-net-worth ratio?

    On a different note, divorce is also often the impetus for a personal bankruptcy. Divorce rates are, to put it mildly, significantly higher now than they were in the 1930s.

    I'm really curious to know the breakdown of household debt in the 1930s that allowed their debt-to-net-worth ratios to reach the levels seen today.

  • Report this Comment On December 13, 2011, at 6:23 PM, cmfhousel wrote:

    <<I am truly surprised to hear the fact asserted above that household debt as a percentage of net worth was about the same in the 1930s as it is today. I would want to delve into that statistic more.>>

    Thanks for the comments. The stat comes from hedge fund manager Ray Dalio.

  • Report this Comment On December 13, 2011, at 6:42 PM, xetn wrote:

    My observations are a little different: Pre WWII, welfare and bankruptcy were not socially accepted. It mean you were a failure. Now, entitlements (the new welfare) has been ingrained into the American culture as something "they deserve", even though it is provided by taking it from others by force to give to the receivers. And debt is welcomed as a means to buy all manner of things now while paying for them as they decline in value. Nobody wants to save to make purchases. But since the dollar has been on the decline since 1914 when the Fed was started, it seems like a good idea to emulate the government and pay back loans at ever declining purchasing power. This is good for the debtor, but bad for the creditor.

  • Report this Comment On December 13, 2011, at 6:52 PM, richie54 wrote:

    As usual, well done, Morgan. Unfortunately, nowadays, unlike The Great Depression, America has become "The Land of Entitlement." And that alone will undo this country quicker than any economic downturn ever can.

    When, seemingly, many Americans' mantra comes down to these three things, we are indeed in trouble:

    1. Me

    2. Myself


    3. I

  • Report this Comment On December 13, 2011, at 6:55 PM, Doris411 wrote:

    As for "taking responsibility", freedom14u, how many men abandoned their wives and children to pursue bright opportunities in those halcyon days of the past you think were so wonderful? There have always been those who eschewed hard work -- ever hear of snake oil salesmen? Only the names change.

    One reason people are looking to the government for a social safety net is that it spreads the burden more widely. Churches and other associations used to provide some level of safety net. My father grew up in an orphanage funded and administered by a fraternal order, for example. The existence of large and close-knit extended families also provided a level of safety for their members.

    Smaller families that may be widely dispersed geographically, thus less closely tied to their members, diminish this effect. Associations such as the Masons, Moose, Elks, and so forth are far less popular: even if they wanted to provide a safety net for their members (and dependents), only a fraction of the population would be covered. As for churches, what percent of the population is active in organized churches now? Not to mention that economic hardship tends to hit whole areas, so everyone in the congregation may be having troubles.

  • Report this Comment On December 13, 2011, at 7:17 PM, richardrollo wrote:

    I think the chart is somewhat misleading. Is there any real statistical difference between six tenths of one per cent and 1 tenth of one per cent, assuming that 10 bankruptcies in a 1000 households would be a 1 per cent bankruptcy rate. Seems like we are talking about smaller differences than the chart implies. Don't get me wrong, 1 bankruptcy in a 1000 households is one too many and too many people accumulate too much debt for the wrong reasons.

    Another problem, a bigger problem, is the looming student loan debt crisis that cannot be discharged in bankruptcy.

    I think your concerns are well founded, I just don't think this chart reflects that very well. I look at that chart and think, wow, it's not as bad as I thought.

  • Report this Comment On December 13, 2011, at 9:59 PM, CaptainWidget wrote:

    1) We're a nanny state full of adult children now who have no concept of personal responsibility. Thank you welfare state

    2) We have no reason to save because the value of our dollar will have less purchasing power next year than it will today. Thank you Ben Bernanke

    I think that about sums it up. People are making the rationally self interested choice by spending their money as soon as they get it and shirking responsibility to their benevolent overlords.

  • Report this Comment On December 14, 2011, at 1:28 AM, zgriner wrote:

    "...making it a true apples-to-apples comparison over time."

    No it's not.

    Does this population include people under 18, who can't sign contracts and incur debt?? Or how about that fact that people filing bankruptcy are older, so you need to eliminate those people that are too young to accumulate enough debt to file?

    Is this population normalized for people's life span where the longer people live, the more chance they have to incur debt?

    I have no doubt that the touchy-feely society of the last 50 years has decided to blame the people that lend money as the bad guys, instead of the spendthrifts that borrow too much. But let's make sure the graphs truly tell the whole story.

  • Report this Comment On December 14, 2011, at 1:35 AM, sharpx2 wrote:

    Ah, way, way, too much ranting about nanny states and entitled youth; these comments miss the point, which is truly the lack of opportunity. Given a chance to work and (here's the crux of the matter) to make a living wage that even provides a bit of money to get ahead, and given a future that looks brighter than today's prospects, most 'entitled' people would simply get to work. It is not laziness at all, but rather a lack of desire to spend one's entire life as a wage slave in a system where expenses keep going up but wages don't. Borrowing is a natural response to this situation; the inability to pay back loans is a logical outgrowth of the borrowing.

    For all the blather about the free market and the wonders of capitalism, what we are staring in the face of is a failed system - - failed in the sense that there are too few opportunities available for too many qualified people. Until the poobahs who control the flow of capital recognize this fact and do something in response to it, you will have an ever-growing cadre of dissatisfied, disaffected people who have no pathway for their growth and creativity. No wonder they lack motivation.

  • Report this Comment On December 14, 2011, at 1:40 AM, whereaminow wrote:

    Interesting article Morgan. My only correction is to point out that despite what Keynesian economists believe, the Great Depression's downturn was 17 years, not 10, from 1929-1946.


  • Report this Comment On December 14, 2011, at 2:39 AM, asdfk123 wrote:

    As is indicated in the article, bankruptcy reform has been a contributor, among others, to an environment that encourages debt. Generally speaking, servicing debt will contribute to a lower savings rate. Apparently this environment is beneficial enough for financial institutions as they keep extending credit to borrowers.

    As heinous as this will sound, it might actually be beneficial for the economy if Americans continue to default on unsecured debts, such as credit cards, and strategically on secured debts. The result would likely force the financial industry to allocate credit more efficiently by reducing credit for consumption and forcing Americans to save in order to pay for their consumption.

    I understand the argument of personal responsibility on behalf of the borrower, but the creditor has a personal responsibility to extend credit efficiently. Continued defaults might create tighter lending restrictions for consumption and better incentivize more productive loans.

    We have a misallocation of capital here.

  • Report this Comment On December 14, 2011, at 3:16 AM, rjbilimor wrote:

    people are just greedier than they ever were....simple things that make life meaningful are eschewed expensive accumulation that only adds to life's woes

  • Report this Comment On December 14, 2011, at 11:00 AM, DJDynamicNC wrote:

    @Linesntubes: "Perhaps I am wrong but I am puzzled by questions like "how can this happen in America?," as if there is some guarantee that it can't. When people are free, they are free to succeed and to err, and all of us do both. "

    You're right that living in the wealthiest nation in history does not guarantee anything. I cannot argue with that. I just think that it SHOULD. And we as a nation have the choice to build a society that does guarantee people a certain basic decency, certain fundamental economic rights. If someone is willing to work, they should be able to have food on the table and a home in which to dwell, I think almost every American would agree - and yet we've built a society where even those who WANT to work are often unable to do so. And what do we do to those people? We mock them. We deny them unemployment benefits. We deny them health care. We punish their children. And we cut what limited social services exist so that those with millions of dollars can pay even lower taxes.

    Freedom is more than just freedom from government interference. If I work hard but my wages are too low to survive, is that freedom? If I am barely scraping by on my bills and I can't go into business for myself or look for a new job because I'll lose my health care, is that freedom? If I was born into a poor family and can't afford a quality education, and can't take the time to fill out scholarship applications because I've been working minimum wage jobs since I was 14 to help take care of my family, is that freedom?

    Let us not confuse "freedom" with "heartlessness." Let us not confuse "profit" with "purpose." There is more to life than efficiency - and there is more to this nation than corporate growth.

    We do not pledge allegiance to the flag of rigid capitalism. We pledge for liberty, and justice - for ALL.

  • Report this Comment On December 14, 2011, at 11:09 AM, DJDynamicNC wrote:

    @Zgriner: "I have no doubt that the touchy-feely society of the last 50 years has decided to blame the people that lend money as the bad guys, instead of the spendthrifts that borrow too much."

    When I am sick, I pay my doctor to make me well because I don't have the time or resources to become a doctor.

    When I need clothing, I pay for manufactured clothing because I do not have the time or resources to become a clothier or cobbler.

    When I need a home, I pay an architect to design it and a construction crew to build it because I do not have the time or resources to become those things.

    It's called specialization, and it's the basis of modern society. At some point, you have to focus on your own specialization and trust others to do a good job of theirs.

    Similarly, when I take out a loan, I pay fees to a banker to give me reasonable terms, and I trust that that banker is not lying to me or hiding traps in the fine print, because I do not have the time or resources to become a banker.

    That is how the system is supposed to work. You pay others to do their job and you do yours.

    It would be astonishingly obtuse to then go on and blame the borrowers who were deceived for not being sophisticated enough with a subject outside of their own specialty to know that they were being set up for failure.

    That's like blaming a burglary victim for only having two locks on the door instead of seven.

  • Report this Comment On December 14, 2011, at 11:13 AM, fool3090 wrote:

    The culture of bankruptcy has changed. Not only is the stigma gone from "going BK" on a personal level, entire governments think BK is OK. Just look back at this fall's congressional failure. Holy crap! The fact that our "leaders" would even remotely consider a bond default, let alone openly talk about it as a "strategy," demonstrates the utter contempt for a lender-debtor contract. No one keeps their promises. Not even nations (the PIIGS of the eurozone come to mind).

    Because everyone seems so unbound by their vow to repay, interest rates should rise significantly to compensate for risk. Oh, wait. That can't happen because the Fed wants to keep money cheap "for an extended period." Who gets punished? People who pay their bills on time, people who don't overspend, people who save, people who live within their means. Sorry. Ranting here. I'm just mad as hell.

  • Report this Comment On December 14, 2011, at 11:32 AM, Turfscape wrote:

    richie54 wrote: "Unfortunately, nowadays, unlike The Great Depression, America has become "The Land of Entitlement." And that alone will undo this country quicker than any economic downturn ever can."

    Ah, yes...if only we could return to our glory years of depressions past.

    Why is it that everything is sooooo much better in sepia tone? Maybe that's what we need to do to solve this country's economic problems: take it out of living color and make it a nice, warm bronze duo-tone economy!

    Maybe if we just give all the welfare recipients fedoras, like they had in the 30s, then we'd all feel better about it.

  • Report this Comment On December 14, 2011, at 11:34 AM, CMFTomBooker wrote:

    "Defaulting on debt simply lost its stigma."

    IMHO, not if you read the the WSJ op-ed, NYT and watch CNBC and FoxNews. They crucified personal bankruptcy on moral basis alone.There was a continuous tide trying to smear the outcomes of the known bogus mortgages onto the families.

    In 1985, you didn't get a mortgage unless you had a down payment, and the balance of the mortgage was no more than 2.5 times your current salary.

    Also in 1985, if you were a lending officer and made an iffy mortgage and it failed, you got reprimanded. If you did it again you got fired.

    Those are the financial standards that lasted 2 generations. Another standard which also came with that was people's compelling desire to own a home, and it is a known and traded upon fact, that people are in a very emotional state, probably the second biggest of their lifetime, when they get near the home thing. Ask anybody who has been selling houses for longer than one real estate cycle.

    But i digress into meme discussion. And i haven't even gotten to the fundamental reckless lending that credit cards constitute.The great birthbaby of the '70s.

    Great subject as usual Housel. And yeah, more people are going through bankruptcy. Could it be they have gotten more educated and informed in the '90s and '00s and know its smarter to act first and settle, rather than wait for seizure or foreclosure?

    And check out some of your own articles. If there are more bankruptcies, go back to your stats on the predominant reasons for bankruptcies.

    Wasn't the top one the monumentally gouging and piled medical bills that go along with a family busting illness, where one of the household incomes is severely damaged or lost indefinitely?

    You have kids? Want to be a good Father and provider? I have a simple tip..... don't you or your wife get a serious illness.

    As municipal hospitals privatized to predominantly private equity groups in Phila... I wonder if they had employed Fool analysts who said "hey, 20% net margin with nice FCF is excellent" or did they just set profit plans on the numbers "more", and "morer" and "morerer"?

    Nah, it couldn't be that. The bankruptcies have to be those dirty , unwashed sub-prime people. Whose total notional value of $1.3T (100% loss, houses = $0) caused the massive fiscal and Fed balance sheet bailouts, interest paying massive "printed" Bank reserves, 2 QEs, and the now Bloomberged Fed's Trillions in alley-window loans to Banks' prop desks and lethargic lending facilities.

    (Not to mention the bailouts and dollar swaps for European Banks with US affiliations)

    Spit yeah, bankruptcies are the new welcomed fad..."Hey, Honey its gonna be a pain to pay off the credit cards, let's throw a Bankruptcy party.."

    Ya know, people are just lazy, ignorant, and don't take any pride in themselves anymore.(hey, i keep talking like that, and I'll have a shot a David Brooks' job ;)

    But here's the coup de gras for a tin-foil capped moonbat like me.

    That little personal Bankruptcy Act in 2005. It's no big deal after all. The "Means test" for the path to either Chapter 7(liquidation, except for assets protected by your individual state, with complete discharge of debt) and Chapter 13 (the onerous payment plan, and garnishing) isn't really that much tougher.

    Oh, I almost forgot. You know those student loans which went from $100B nationwide to $1T in <10 years? The ones that the 20 somethings have, along with the highest unemployment and underemployment bracket?

    They must have been thinking ahead on the 2005 Act. Because there is virtually no way to ever discharge that debt, even through Bankruptcy. There are only 2 ways...

    1) If the loan is solely private and the lender and loan are 100% disassociated from the Federal Gov't.

    2) You can prove an extreme and protracted "hardship" in paying off the loan. Talk to any Bankruptcy lawyer, this is literally impossible to get, unless there is a clear and total disability.

    So except for alimony and child support, and any money you owe someone because you were drunk and injured them with your car.... this is the only other debt which can't be discharged.

    But" AHa!" you say. "More private banks are making student loans now."

    You're right, but lets check out some history behind this....

    Remember those Auction Rated Securities which were "good as cash" to our companies' CFOs? Until the exact moment they weren't?.

    They were a construct of our favorite Bank/Broker/Dealers, They did the securitizing and held the Dutch auctions for them, every 7 or so days. They even put some of their own money in the auctions to make sure the take-downs were nice and tidy and complete.

    One day they decided they didn't want to do it anymore, because the bond markets were going to crap.

    When the ARS fails at auction, the underlying asset reverts to its normal form, with a penalty.

    Of the $300B "good as cash" ARS's which died that day, 60% of them were bonds based on federally guaranteed State Agency Student Loans, And the penalty was a raise in the interest payment on the bond.

    This closed down at least one State Student Loan Agency in 40 states. Many have none now. They were not-for-profits with the expected razor thin, thin,thin, thin margins.

    That was why they were such low interest loans.

    Even though the federal government was already well into killing loan reserves available to these agencies, they now needed new channels.

    Guess who they went to?

    Aw, I knew you'd guess right.

    So, now you can get your Student Loan from a "private" lender. But not really, because the gov't still backs the loan unless you want to put collateral on the loan, and pay at a non-student loan interest rate.

    The bank is in a purely cost + whatever spread/margin they want.

    Plus the government and bank have no other risk, other than the loan outliving the person.

    So, what is worse, losing everything and discharging all of your debt in a bankruptcy in the '30s or being 25 today, with a $60-70K indenturement?

  • Report this Comment On December 14, 2011, at 12:17 PM, PositiveMojo wrote:

    How long can this continue? I often wonder when we are going to hit the wall. Many individuals expect a bailout and why not? The banks accomodate them because they too are being bailed out. There haven't been very severe consequences for making bad loans. But just look at the conditions of the banks.

    I've worked hard all of my life since I was 10 years old and as I approach retirement I'm worth millions. I've tried to teach my children financial management but they have all trashed their finances - except for my youngest. She has seen what the older ones have done and doesn't want to go down that path. She is probably the one that I will leave my assets to because I don't want them squandered.

    If there is a crash, those without cash are going to be in big trouble. I can tell you that something has changed during the past year that I did not see between 2008 and 2010. The stock market has developed ADHD. I handle all of my own investing in the stock market and in 2009 made a 96.4% return. In 2010 I achieved almost 50%. But in 2011 the swings have been absolutely huge and volatile to a degree that I have never seen. They have no basis in fundamentals and using technical indicators as I have in the past hasn't done much good. These shock waves are clearly being caused by countries having the same attitude toward bankruptcy as many individuals. It is unprecendented in many ways because the financial markets of the world are so interconnected.

    The solution to this problem is quite simple. Stop spending money you don't have. But this requires a behavioral change, which is usually brought about by having to face consequences for bad behavior.

  • Report this Comment On December 14, 2011, at 1:41 PM, robyrob wrote:

    Every American is afforded basic human rights: 5 or 6 credit cards, a huge mortgage, a cell phone, cable, a 50" flatscreen...

    I think the 3.5% savings rate is too high. Those are the people that accidentally hit "monthly" instead of "one time" transfer from their checking to their savings account...

    If you're ever feeling good about the direction of the country, go to a fancy mall and watch entitled kids walk around with $400 in merchandise they just bought like it was nothing.

  • Report this Comment On December 14, 2011, at 2:02 PM, DJDynamicNC wrote:

    ^^^ Indeed. And outside of suburbia, people are literally starving in the streets.

    It is this dichotomy between what America purports to offer and what America actually delivers that is driving the rage we see across the country. We're hacking away at the New Deal and replacing it with a raw deal.

  • Report this Comment On December 14, 2011, at 2:57 PM, mtb297 wrote:

    Great article. Enjoyed the comments, even those with which I disagree. I always wonder about the financial status (and reason for same) of all those who want to blame the victims. Always easy for the rich to judge the work ethic of the underprivileged. As for entitlements, I assume we are talking about SS, medicare, and medicaid. Never knew a rich person to turn down any of these three entitlements. In fact some do their best to give money away to get medicaid. Entitlements should not be a dirty word. If we do something (like put money in) to get the entitlements. Don't forget that Social Security is not just retirement. It is also for disabilities and for children who have lost parents. The reason that we hear so much about the SS problem is that Congress is finally going to have to pay up for the 2.3 trillion borrowed from the fund. That will happen when the SS income does not match the outgo. Any politician who thinks SS is a serious problem is either being disingenuous or dishonest or both. I could "fix" SS and medicare tomorrow. But then I am not up for election or reelection.

  • Report this Comment On December 14, 2011, at 5:17 PM, nerd1951 wrote:

    One big contributing factor is the ease of getting credit today. Products like credit cards, personal loans, and 90%+ mortgages were unheard of until the 1950s. The wide availability of these forms of debt correlates nicely with your graph.

    Bankers today take greater risks at every level. The banks were pushing credit cards on my kids before they ever graduated from college. It's in the banking industry's interest to foster this culture of debt, knowing that if things really get bad they have the government to bail them out.

    I think both consumers and creditors need to learn the lessons my parents learned during the depression.

  • Report this Comment On December 14, 2011, at 7:25 PM, glenrgraham wrote:

    I believe that too many people are fundamentally financially uneducated. Too many state governments tell people to buy the state lottery tickets and get rich easy! Many people do not even know about "dividend" aristocrats. They do not know that there are many USA companies that have consistently paid dividends for over 25 or more years! Lawyers and journalists and other professionals do not understand about buying a simple DRIP or having merely $25 dollars per month automatically transferred to an IRA and automatically purchasing stock. They think you got to have thousands of dollars. Lastly, I believe that people should be allowed the option of posting their IRA or house or cash for INSURANCE = self insured. It would encourage people to put away $100 or more per month for retirement. People are not told enough about good company stocks and compounding dividends and saving money for retirement. Even educated professionals are financially under-educated!!!

  • Report this Comment On December 14, 2011, at 7:27 PM, glenrgraham wrote:

    You can go online and buy one share of stock in a dividend aristocrat like --- PG or JNJ or similiar and then go to the companies website and sign up for a DRIP once you own one share of stock.

  • Report this Comment On December 14, 2011, at 10:15 PM, donvesco wrote:

    None of the bankrupt Americans are "starving in the streets". (sorry leftists, it just ain't happening)

    Debtors are the new "wealthy", the elite have lengthened their lead in the race for material wealth. (Yacht builders are busier than ever)

    Prisoners live far better than the unemployed of the Great Depression, and FDRs world war is no longer an option.

    Those lower and middle income people who consider debt to mean nothing will learn what "to be eaten by their fellows" actually means, starting in southern Europe, shortly.

  • Report this Comment On December 14, 2011, at 10:55 PM, Shawnerz wrote:

    I got my copy of the Verizon Super Pages yesterday. Right on the front cover is an add for a law firm. Right next to the title of the firm: "AFFORDABLE BRANCRUPTY".

  • Report this Comment On December 15, 2011, at 1:22 AM, CaptainWidget wrote:

    <<Indeed. And outside of suburbia, people are literally starving in the streets.>>

    Where do you get your statistics? The CDC indicates that more people die of hypernutremia (excessive water intake) than die of starvation in the US....

    I know everyone feels entitled to a HDTV, nintendo Wii, Android cell phone, and their own personal transportation in the US.....but they're no necessities of life. I managed to (within the last decade) survive on less than $800 a month.

    Everyone can afford food, clothing, and shelter in the US. It's not "societies" fault if they aren't satisfied with the necessities of life.

  • Report this Comment On December 15, 2011, at 10:37 AM, DJDynamicNC wrote:

    Look. I grew up in a home where my mom worked three different minimum wage jobs to scrape by. Because of that, most of the time we had enough money for food and heat and electricity - although some months we had to choose to forego one of those.

    This is somebody working HARD and yet at times she was forced to go without food (starvation - lacking sufficient food) - and don't even mention cell phones or video games, of which we had none. Is that really the best this country can do? Not even provide a living wage to people who work hard at one job, or let alone two or even three jobs?

    And nowadays you might not even be able to GET three jobs at once.

    And let me tell you something else; we had it GOOD compared to some of the places I've seen in my travels around this country.

    So you can preach all you like about how "nobody is poor" in America, how "everybody" can afford food and shelter and clothing. But rest assured, "ignorant" is the very mildest word I can apply to that position.

  • Report this Comment On December 15, 2011, at 10:44 AM, DJDynamicNC wrote:

    Try volunteering at a soup kitchen and then tell me nobody is starving. Try volunteering at homeless shelter and then tell me everybody can afford a home. Try volunteering at a church mission and then tell me everyone can afford clothing. Try doing ANYTHING to actually help instead of sitting here moralizing about how superior your are because you managed to scrape by through all your hard work and dedication (not that luck or privilege could ever have anything at all to do with it). I don't even care if you volunteer just so you can continue indulging in your fantasy of moral certitude, so long as you're volunteering and actually helping people, because people NEED HELP. That is a simple fact.

    We must all hang together or surely we will all hang seperately, to quote yet another fellow American.

  • Report this Comment On December 15, 2011, at 4:42 PM, TMFDarwood11 wrote:

    Good article!

    "It's hard to say exactly why bankruptcy has gained so much popularity." I'd have to agree, but it is because it seems to afford the "easy exit." I see ads on the TV repeatedly from attorneys extolling people to "get out from your debts."

    Yesterday there was an article in the WSJ entitled "Should ‘Occupy’ Promote Strategic Defaults?" with regards to real estate debt.

  • Report this Comment On December 15, 2011, at 5:11 PM, DJDynamicNC wrote:

    "Strategic Default" is just another way of saying "defaults that make economic sense."

    If people were serious about free markets requiring rational actors to seek to maximize their own self-promotion, thus leading to the most efficient system, then we should all be wildly in favour of such things.

    The fact that we're not - and that "free market" proponents are so frequently the most strident in demanding that people NOT act in such a manner - makes clear that what people call "economics" is frequently nothing more than a morality play.

  • Report this Comment On December 15, 2011, at 7:38 PM, asdfk123 wrote:

    @DJDynamicNC: Excellent point regarding free markets.

  • Report this Comment On December 15, 2011, at 8:01 PM, Runupper wrote:

    Great comments and i think most of them are spot on. As the son of 2 first generation immigrant parents 1 form Italy and 1 from Great Britain both depression era parents, who would have cut off their right arms before filing bankruptcy. I can tell you the value of "Living within your means". Of course I never heeded their advice and unfortunately was forced into bankruptcy.. Or Banco Roto ...translated. Unfortunately even in Europe that mentality has long since been dismissed right along with the evening family dinner. So as we all embrace the new technology of texting each other from our living room sofas I would offer... expect more of the same. In fact embrace it..because its going to be a bumpy ride. The next generation is going to be far worse because they are now living in an entitlement world. Keeping up with the Jones' will be an ever difficult and depressing task for them. As a self made credit clown millionaire of the excess consumer credit lending policies of the 90's I can tell you from personal experience that extending credit to people in the 90's was like opening up the vault turning off the alarm and sending the bank staff home. And a huge contributing factor of most of the bankruptcies we are seeing today. 25k +credit lines with zero or very little verification. 0% Apr for years. I watched as some of my employees ran up huge amounts of debt to later just go back home to their respective countries and say god bless the USA. I don't seem to see any discussion of that anywhere but I can tell you it was real. There is no dignity in bankruptcy. A lesson learned the hard way however painful always has more legs.

  • Report this Comment On December 15, 2011, at 9:09 PM, whereaminow wrote:


    In free market economics, "rational actor" means that actor has a means-end framework. It doesn't mean he has perfect knowledge or incredible intelligence.

    In Keynesian economics, rational actor is often confused with perfect knowledge.

    The popular term for rational today is not the classical economic definition of rational. This is a fairly common occurrence. For example, anarchist used to mean living in a state without coercion, and today it means lighting cars on fire at G8 protests.

    As far as Strategic Defaults, from a free market perspective the most optimal default would be to repudiate the national debt, since no single liberty loving American signed any agreement to pay such a debt or are privy to the rates and terms negotiated.


  • Report this Comment On December 16, 2011, at 12:19 AM, CaptainWidget wrote:

    @ DJDynamicNC

    Starvation=/=Being hungry

    You insult actual impoverished starving people by suggesting that going to bed without once a week as a child is the same calibur of suffering they have to endure.

    Get off your high horse.......

  • Report this Comment On December 16, 2011, at 2:21 AM, DJDynamicNC wrote:

    @WhereamInow - fair points. We'll agree to disagree on the last one, as I'm sure you already knew, but good post all around.

  • Report this Comment On December 16, 2011, at 2:26 AM, DJDynamicNC wrote:

    @CaptainWidget: I think when we reach the point where your only response is to split semantic hairs over whether people are starving enough to be worthy of our compassion, it's about as illuminating an end game as our conversation can achieve.

  • Report this Comment On December 16, 2011, at 3:11 AM, CaptainWidget wrote:

    I think it's just a convenient way for you to demagogue the conversation.

    If your version of "starving" is the worst that happens in America, then I'd say we're doing alright.

  • Report this Comment On December 16, 2011, at 6:00 AM, KNIDCfool wrote:

    Morgan, I love your articles and your kindle book. You have some of the best insights into modern economics.

    However, I think you may have left out one major consideration here. Bank attitudes about bankruptcy have changed just as much as consumers, if not more so!

    Your graph of personal bankruptcies correlates strongly with the rise of banks issuing much, much more risky "speculative" uncollateralized debt.

    In 1977, the first Visa-branded credit card came out. In 1977, the modern corporate "junk bond" was created. In the mid-80's we see a rise in bankruptcies. Unlikely to be coincidence.

    People and businesses can escape collateralized debt through foreclosure and repossession, long before bankruptcy becomes necessary.

    However in the late 1970's and early 80's, people and businesses began taking on larger and larger uncollateralized debt. When some of those loans inevitably defaulted, there was no house or car or business assets to repossess, leaving bankruptcy.

    Of course, unsecured debt existed long before the 70's. But many images of the Great Depression we see are of farm foreclosures and bank auctions, and I think history suggests that many of those post-1980 personal bankruptcies were driven by high credit risk, speculative unsecured consumer loans that probably would not have been made in the decades prior.

    One might argue then that the "new" bankruptcies of the 80's and later were consumers who would have never even had the opportunity to declare bankruptcies in an earlier era, because they never would have received the unsecured loans in the first place!

    Banks started to make unsecured loans at high interest rates assuming some borrowers would default, and sure enough we see more borrowers default. Banks stopped caring so much about consumer borrowers returning their principal, and started caring more about balancing credit risk with high rates.

    I genuinely look forward to your insights on this. :)

  • Report this Comment On December 16, 2011, at 8:47 AM, DJDynamicNC wrote:

    Even if it's "only" starving that was truly the worst thing happening in America - and I'd argue that it's just one of a bevy of problems that could use some of our vaunted American ingenuity and material wealth - I'd still say we could do better. This casual dismissal of the suffering of human beings remains shocking despite its prevelance.

    Just so we're clear, your argument is now: people starving and suffering in the richest society in human history in no way indicates that something is wrong with the system of resource distribution and actually means we're "doing alright." And apparently this is the case because some people somewhere else might have it worse, and because lacking food doesn't "count" as starving unless it actually kills you.

    I propose a new slogan for the nation to reflect that indomitable spirit. "America - probably not the worst!"

    Anyway, enough "demagoguing." We've shifted to topics of morality and ethics, and while I thank you for making quite clear the nature of your principles and priorities, we're unlikely to reach an agreement on those principles and equally unlikely to convince one another of our own views.

  • Report this Comment On December 16, 2011, at 12:09 PM, pmagnier wrote:

    I agree that younger people have an ingrained sense of entitlement now, and, to use market terminology, "a correction is overdue".

    However, please don't bracket everybody who goes bankrupt together, and say that the Welfare State is the cause. It is not in my opinion, rather is it a cultural phenomenon and more particularly a fault of modern parenting. The Welfare state in America is minimal compared to many European countries. In addition, unlike bankruptcy, there is a strong stigma attached to receiving social security benefits and food stamps.

    There is room for honest capitalism and good old money making, side by side with helping underdogs and people down on their luck.

  • Report this Comment On December 16, 2011, at 1:56 PM, gjett95008 wrote:

    Another difference. The Great Depression did not lead to a second civil war in America. This one certainly will in my opinion.

    There are simply not enough jobs for our population due to outsourcing and not enough money to keep them on food stamps forever.

    You may not agree with my severe outlook, but most of you do agree the Federal government and most States are well past being bankrupt now.

    So if the handouts stop and the jobs don't materialize in very large numbers, then what...?

    I don't expect this to get through the censors. I understand comments like this are bad for the market and thats the Fools business.

  • Report this Comment On December 16, 2011, at 7:56 PM, Sunny7039 wrote:

    I admit that I scrolled through the comments rather quickly, but I didn't notice any mention of medical bills as a reason for bankruptcy, when we know this is a major factor in roughly half of all bankruptcies. This has nothing to do with any "social safety net," but quite the opposite -- no ADA or FMLA can save a person's job if that person simply is not capable of doing it any more due to illness. And no employer is required to keep a former employee on their insurance, or to offer COBRA, indefinitely. Of course I'm not suggesting that many of the people who are forced into bankruptcy due to medical bills weren't overextended in the first place. I'm sure many were. Yet it was illness that pulled them under. Is there some reason to be ashamed of that?

    As for strategic bankruptcies, well . . . I have never carried consumer debt, I have never bought something I couldn't pay for (not even a car), and I always have savings on hand, just in case. But after the last decade, I could not advise anyone to emulate me, or at least I couldn't do it with a straight face. If investment bankers can engage in the most far-reaching capital destruction in history and still rake in bonuses subsidized by you and me, then why shouldn't the ordinary middle-class person get a house in a homestead state, pay it off, and then game the system? Is there some reason they shouldn't declare bankruptcy as often as possible? How many times has Trump declared a business bankruptcy? Do you even know the number offhand? And has it hurt him, or turned him into a bigger star?

    Seriously, where is the disincentive? And if there is none, how can you bemoan the fact that people will do this? People will do just about anything if it pays. Isn't that what we've been trained to view as savvy, and tough-minded? Aren't people who value other things over material possessions just sour-grapes losers, liars, or chumps?

    (Small p.s. to jgett95008 -- I don't think things are that bad. But I've been overly optimistic more times than I'd want anyone to know about, and I'd hate to be caught short yet again.)

  • Report this Comment On December 16, 2011, at 10:55 PM, CaptainWidget wrote:

    @pagmier- "However, please don't bracket everybody who goes bankrupt together, and say that the Welfare State is the cause. It is not in my opinion, rather is it a cultural phenomenon and more particularly a fault of modern parenting. The Welfare state in America is minimal compared to many European countries."

    The US is the best welfare state in the world. Social Security as a single program as bigger than any other welfare state in the history of mankind.

    The idea that the US ISN'T a welfare state is one of the biggest myths of our day. It's the biggest welfare state in the history of humanity.

  • Report this Comment On December 17, 2011, at 9:10 AM, ShaunConnell wrote:

    It's both good and bad. It's good in the sense that financial ruin has less of an "impact", if you will.

    But it's bad in the sense that people's mental framework is becoming absurdly entitled -- entitled to a lifestyle not paid for. That's horrifying, economically.

    I dropped out of college to work full-time because I couldn't afford it without huge loans. Now I'm starting to take more classes again. And every few days, I'll see some kid who majored in something moronic with a sign for tax-payers like myself, demanding we pay for XYZ.

    That mentality -- screw everybody and pay my bills -- will absolutely have an economic impact, just just directly, but indirectly for everything else. Welfare spending will keep increasing, and no not just for those actually hurting. Deficits will keep growing, and eventually we'll hit a point where issuing new t-bills just won't work -- and then we'll all pay for the entitlement of a small percentage of the population.

  • Report this Comment On December 17, 2011, at 10:33 AM, rfbraunjr wrote:

    With no job and little money coming, what choice do people have than to scam the overly eager credit card companie's offers for more credit? Interest rate be damned.

  • Report this Comment On December 17, 2011, at 12:09 PM, taiwanted wrote:

    Six percent bankruptcy rate with high unemployment is still not a silver lining.

    People need work, even if they are not highly educated or particularly talented.

    Corporate America in conjunction with large temporary employment agencies - such as Adia - has long circumvented labor laws that were intended to offer the average American a reasonably secure job.

    One can rationalize all they choose, but the USA took a wrong turn a few decade ago and decided that consumerism could take the place of industrial productivity in a world of want.

  • Report this Comment On December 18, 2011, at 2:14 AM, Sunny7039 wrote:


    WE have a big "welfare state," and it's a myth that others have a larger one? You're kidding, right? You've heard of cradle-to-grave healthcare and free education from preschool through the doctoral level, right? Not to mention reasonable benefits for job seekers who are qualified and actively looking for work, regardless of whether they worked before or are just starting out at the wrong time in the business cycle because their parents lacked the foresight to give birth to them in the right year.

    Whatever may be wrong with core "old Europe," Germany and France have had both education and health care, plus decent maternity leave and 6-week paid vacations, AND what is most important, a much higher savings rate than other countries -- the U.S. included, of course -- for generations.

    That was considered part of the bargain of getting people off the farm and into the big cities, where the economy is far more cyclic and you can't grow your own food or eat concrete, for that matter.

    If you want people to be truly self-reliant, highly skilled trades, small shops, and family farms have to be part of the program for just about everyone. Especially farms -- with hunting and fishing to supplement. Or do you think that every time the investment banking crowd "makes a little mistake," millions should be thrown out of work and lose their homes? I mean, if you don't want to go all Jeffersonian on me, I really don't see other possibilities. (Not that I'd mind the Jeffersonian model, actually. Good luck bringing it back, though.)

  • Report this Comment On December 18, 2011, at 4:24 AM, CaptainWidget wrote:

    Take whatever figures you're using, and then add in Social Security, Medicare, and Medicade. Our welfare programs are bigger than France's entire economy.

    Just on quick tally I got 2.2 trillion a year in Welfare to find me another nation that's bigger??

    And there's only one country in the world which spend more one welfare as a percentage per capita, which is the great socialist republic of Norway.

    Don't come with rhetoric talking about cradle to grave this and that. Use numbers. They're handy for figuring out the relative size of things....

  • Report this Comment On December 18, 2011, at 10:23 AM, DianeinMichigan wrote:

    The effect of the numbers of bankruptcies not addressed is the fact that businesses and individuals owed by the filer receive nothing or pennies on the dollar for services and/or materials already provided and paid for by those businesses and individuals. As small business owners, the write-offs for the business my husband and I run grow every year - we cannot make plans to hire or grow when an increasing percentage of what we believe to be receivables simply evaporates.

    Bankruptcy has a ripple effect on the economy - especially the local economy. Mortgage holders are not the only ones left holding the bag - they are just the most visible. Also in line at the bankruptcy court for payment of any kind: lawn services, roofers, cleaning services, et al and in the case of a business bankruptcy: accountants, media, office supply, heating/cooling services, et al. These are small, local providers that have to eat these costs all the time.

  • Report this Comment On December 18, 2011, at 9:30 PM, AWLinNC wrote:

    One thing that Mr. Housel leaves out of his commentary is that the nature of debt changed greatly in the 1970s. Credit cards did not exist in the 1930s. In the 80s, credit card issuers were pushing cards on anyone who turned 18. Having lots of unsecured debt became the norm. When people realized they'd been encouraged to get in way over their heads, they did not feel so bad about walking away - after all, owing money to a bank holding company is not like owing money to your butcher up the street or the little old lady who collects the rent for her apartment building. If you lend money to your brother-in-law even though you know he's unreliable, you can't complain much when he fails to pay you back.

  • Report this Comment On December 19, 2011, at 4:22 AM, Sunny7039 wrote:

    Captain W, did you think I wouldn't examine your link? Or know how to read it correctly?

    It is NOT based on any official government numbers, or OECD numbers, or CIA numbers. Furthermore, every single figure in red is identified as a "guesstimate." A "guesstimate," based on "projections," by some person whose credentials for making "guesstimates" and "projections" are unknowed.

    The website is very official looking, I have to say. And a person actually has to read the footnotes to get to the stuff about guesstimated projections.

    Nice work. If this is how smart everyone is these days, no wonder other countries get more bang for their education, health, and welfare buck.

  • Report this Comment On December 19, 2011, at 2:45 PM, DJDynamicNC wrote:

    @CaptainW - interestingly, part of the reason health care spending is so high in the US is that we get so much less care for so much more money; capitalism, it turns out, is vastly less efficient than single payer at delivering care (unless you're rich, of course, in which case it's quite a bit better for you). I realize this doesn't square with your Austrian theories, but it does seem to fit rather squarely with the empirical evidence, which I tend to find somewhat more compelling than ideology.

    Oh, and your link to an array of guesses about the budget was written by one Christopher Chantril," who opens his biography with "I am a member of the international capitalist conspiracy" and goes on to rail against living in Seattle in the "Soviet of Washington" while promoting "enthusiastic Christianity" taking up the slack of caring for citizens (which, as you'll recall, is why there was no suffering whatsoever in the Middle Ages - the Spanish Inquisition was all about health care).

    You'll understand if I find the credibility a bit suspect.

  • Report this Comment On December 19, 2011, at 2:47 PM, cmfhousel wrote:

    <<I realize this doesn't square with your Austrian theories, but it does seem to fit rather squarely with the empirical evidence, which I tend to find somewhat more compelling than ideology.>>

    clap, clap, clap ....

  • Report this Comment On December 19, 2011, at 8:36 PM, CaptainWidget wrote:

    Man I can't believe that you guys are so upset about getting budget information from a non-gov source..and more so that you're so skeptical of it, as if you didn't know what the budget breakdown was? Are you guys really this uninvolved in your own country? Hell wikipedia has the same answers...

    There's at least 1.5 trillion dollars spent every year in the US on welfare in the form of social security, medicare, and medicade.

    A quick glance over the official budget indicates that HUD alone takes another 100 billion just in outlays, and another 800 if you count guarantees (which you should...they're liabilities). If you guys want to sort through it yourself, feel free. I was just trying to find condensed sources. But if you want to ad homenim, feel free. Until you post your sources, shush.

    @DJD- "interestingly, part of the reason health care spending is so high in the US is that we get so much less care for so much more money; capitalism, it turns out, is vastly less efficient than single payer at delivering"

    It IS interesting that our socialized, non rationed health care costs more than say, the UK's socialized, rationed health care. But....I think the rationing may have something to do with it.

    Don't make the mistake of confusing the overall US health care system (which is majority socialized) with the private care system here. The private system (AKA cash) is cheap, quick, and efficient. Once you start getting involved in medicare pricing (aka insurance prices) and government subsidies, things get out of hand quickly.

  • Report this Comment On December 19, 2011, at 11:36 PM, Sunny7039 wrote:

    CW, I was wondering what you'd come back with, if you were planning to come back at all. Talk about straw man arguments!

    Does the website you posted try to appear "official," as in, government sponsored, or doesn't it? I would say it does, and deliberately so. Is it? No. What information does it provide about state and federal expenditures? "Guesstimates," based not on any real numbers but on "projections." It says so itself. I'm simply quoting directly. No methodology is provided for making these "guesstimates." There is no way to check their validity at all.

    And you chided us for failing to provide real numbers! Now you suggest that we find them ourselves. How . . . disingenuous. (By the way, the OECD isn't a government, and the CIA Factbook is actually pretty good.)

    I'm curious. Do you base your investment decisions on "guesstimates" from sources whose reliability is guaranteed by nothing more than their ability to obtain web hosting and access to nice American flag and eagle graphics? I thought not.

    What I don't understand is why you're not embarrassed. I would be. Although anyone else who is still reading has just gotten a very good lesson in how blather and smokescreens work.

    It's by these types of tactics that naive people are convinced to make poor decisions with their hard-earned money. And that is what is really sad. It is much too easy to blow smoke -- still.

  • Report this Comment On December 20, 2011, at 12:32 AM, CaptainWidget wrote:

    Are you seriously questioning my ability to read a balance sheet? Check my caps score and check yours.

    You want the real numbers?

    Yet again....the report is 105 pages. And it doesn't matter where you read it, the totality of US welfare spending is still over 2 trillion dollars per year.

    If you think it's another figure, post it. Post sources, post your logic, and then explain how wrong I am. Otherwise you're just moving your goal posts. It's impossible to argue with you.....because you haven't said anything other than a very long, paraphrased version of "you're wrong". I could be wrong (about everything in life) but until you prove it, I'll always be more correct than you.

    Man up, post your exact figure where you peg US welfare spending so I can rip it to pieces.

  • Report this Comment On December 20, 2011, at 9:50 AM, DJDynamicNC wrote:

    "It IS interesting that our socialized, non rationed health care costs more than say, the UK's socialized, rationed health care. But....I think the rationing may have something to do with it. "

    I'm afraid the claim that our system does not ration care is false. We just ration differently - if you're too poor to afford a procedure, you either drive yourself into bankruptcy or you die. In either case, once you're out of money (or hit points), your care is rationed. The manner in which Canada or the UK ration their care is different, but until medical care is provided by cheap, self-replicating nanobots or some other essentially magical technology, care will be a resource that needs to be rationed. The question is not whether we'll ration it, it's how we'll ration it.

    Even if socialized care delivered a less efficient product, I would still support it as a more equitable format. And I'm also not saying there aren't strengths to the private format, not by any means. But on net, it's hard to argue with a system which provides care for all people who need it, all while costing substantially less and providing more. There's a reason you see political ads in Canada accusing the opposing parties of wanting to impose "American-style" care on the country - it's considered an inherently terrible thing. That is not an accident.

    Of course, the direct transaction costs are not the only costs imposed by such a system. How many entrepreneurs never quit their jobs to pursue their dreams because they can't risk being without health care? In Canada or the UK, that number is zero. How high do you think it is in the US? How many medical bankruptcies rip apart lives and families and businesses in the US? In Canada and the UK, that number is zero. These are not minor costs.

  • Report this Comment On December 20, 2011, at 5:39 PM, cashclash wrote:

    keep printing, Mr. Bernanke, keep printing... there is no need for bankruptcies anymore as soon as the dollar inflation reaches toilet paper value. This is the point where the rich get poor and all the poor will start helping each other.

    When that happens, the system finally will be proved wrongful and misleading and perhaps even a little too accommodative over the past 20 years.

    Until then, people should accumulate as much debt as possible to speed up the proces of true changes in the system that encourages people to own debt in stead of assets.

  • Report this Comment On December 20, 2011, at 5:59 PM, DJDynamicNC wrote:

    CPI year over year holding to historical averages.

    In very simplistic terms, general price level is equal to money supply size times velocity of money. With the velocity of money in a tailspin, increasing the size of the money supply adjusts the formula back towards the trendline.

    Obviously it's more complicated than that, but expnasionary monetary policies do not automatically lead to hyperinflation.

  • Report this Comment On December 21, 2011, at 2:25 PM, systemBuilder wrote:

    Households are trying to be responsible, increase their savings rate, pay down debt, and live more frugally.

    The government is DOING EVERYTHING HUMANLY POSSIBLE to annihilate this move towards thrift.

    The government is controlled by business interests now. Only Ron Paul can stop them - and I'm a lifelong democrat !!

  • Report this Comment On December 21, 2011, at 2:45 PM, DJDynamicNC wrote:

    @System - you'd better hope the government succeeds, if that's truly what's going on.

    If every household is more "responsible" and cuts back spending, that means the entire economy shrinks. Contraction is not going to help right now - look at how the austerity that Europe is trying keeps causing contraction instead of the claimed expansion that is always "just around the corner."

    Remember, one person's debt is another's asset. Every single dollar spent is, at the same time, a dollar earned for somebody else.

    With debt financing at historic lows, this would be a perfect time for the government to get a lot more money into the economy to get things moving again. The US Government can actually borrow money at rates lower than the inflation rate, essentially earning money on its own loans; there is no excuse for not snapping up as much of that money as possible and putting it to work.

  • Report this Comment On December 21, 2011, at 2:56 PM, whereaminow wrote:


    Austerity = taxing the people to pay the bankers for foolish government borrowing.

    Contraction = clearing malinvestment caused by monetary inflation.

    Savings = the only sustainable way to grow an economy.

    More government borrowing = pumping more heroin into the addict and cheering when his "sickness" goes away.

    You are one messed up puppy ;)


  • Report this Comment On December 21, 2011, at 3:33 PM, Hawmps wrote:


    Great article and you brought forth many interesting comments that moved to a brilliant discussion lasting for more than a week. You are a good writer and I don't think you would have had nearly as much of a response with a video or podcast. Keep it up.

  • Report this Comment On December 21, 2011, at 4:58 PM, DJDynamicNC wrote:

    @whereaminow -

    "Austerity" in this context refers to service cuts and concurrent decreases in government spending. I'm not familiar with any definition of austerity that refers to tax increases coupled with bank bailouts, as I've never seen it used in such a manner. I'm not certain it means what you think it means.

    "Contraction" in this context refers to a retraction in growth as measured generally by GDP as a proxy for other economic indicators, although I recognize that other indicators may provide a more precise picture. Your use of the term is unusual; I'm not sure how accurately it fits the actual state of affairs, but I do note that it fits perfectly within your stated ideology.

    The notion that "savings" are the only way to sustainably grow the economy would seem to indicate that no business should ever take out a loan, that no household should ever hold a mortgage, and that no city should ever offer a bond issue. I think that speaks very clearly to your understanding of economics, and so I offer no further comment on it.

    I'm looking forward to additional bald assertions of certitude, though. :)

  • Report this Comment On December 21, 2011, at 5:09 PM, whereaminow wrote:

    ---> The notion that "savings" are the only way to sustainably grow the economy would seem to indicate that no business should ever take out a loan <----

    And where does the money come from to LEND to the business? If you'd like to understand my economics, you should ask, rather than thinking you have it all figured out.

    Loans made from saved capital are sustainable because the rate of interest reflects the consumption pattern of the consumers that must ultimately purchase the future goods.


  • Report this Comment On December 21, 2011, at 5:25 PM, DJDynamicNC wrote:

    Money isn't a real thing. It's just a system of accounting. In a very real sense, it is made up out of thin air.

    How much money is there in the entire system? Well, if I get 100 dollars and put it in the bank, then that means I have 100 dollars. But it also means the bank has 100 dollars in deposits which it can use to offer loans (while witholding a reserve). That money goes back out into the economy, where a business can get that money in a loan and use it to pay for capital improvements, which means that money goes to another business as profit which it can then put in a bank to loan out again, and so on, ad infinitum. That's why a dollar of stimulus can have more than a dollar's worth of impact on the economy.

    You're not stupid by any means and I'm sure you're aware of all this. The fundamental disconnect we have is over the proper role of government in managing that economy. I think government can be used to set a baseline of economic stability, prevent the most egregious offenses, and help smooth out the boom-bust "business cycle." You either think government can't or government shouldn't.

    Rather than continuing to hash out that disconnect by proxy fights over terminology and asserted claims, I'm going to take a step back and ask you to describe your ideal economic system.

    I'm genuinely curious; I think we both have a lot of preconceived notions about what the other person believes that may or may not be accurate.

    I'm open to changing my mind and I hope you are too.

  • Report this Comment On December 22, 2011, at 1:29 AM, whereaminow wrote:


    Money isn't a real thing. It's just a system of accounting. In a very real sense, it is made up out of thin air.


    As my opponents often smirk, I will smirk. If your money isn't a real thing, I'd be happy to take this non-real thing off your hands.

    If it can be created from nothing, it's not really money. If it is really something, it is money. When I came to understand that, I came to understand economics.

    If money is not a real thing, then an interest rate is not a real thing.

    If an interest rate is not a real thing, then a price is not a real thing.

    If a price is not a real thing, then economic calculation is not a real thing.

    If all of the above were true, ownership of the means of production by the commune/state would work, since exchange is no longer necessary if you have no prices, no money, no interest.

    You would have also have nothing. Which is what they had.

    If you want a real economy with real prices, real economic calculation, and real exchange, then you need real money.


  • Report this Comment On December 22, 2011, at 1:30 AM, whereaminow wrote:

    And finally DJ,

    If I wasn't open to changing my mind, I wouldn't be an Austrian School economist. I didn't learn this in school, from my parents, or from my friends. I learned it because I had an open mind.


  • Report this Comment On December 22, 2011, at 1:02 PM, dvlasman wrote:

    I think this is disgusting. This is how lazy and inconsiderate people have become. We are so materialistic that we want and want, buy and buy even though we know we can't afford it... and then when it comes time to pay we go bankrupt and leave everyone else holding the bag! Nice attitude. When you screw the bank like that you are infact screwing your neighbours and friends who are also customers. I don't get that attitude. If I can't afford something, I go without. It seems pretty simple to me.

    I have a friend who is on social assistance and they have a fancy new iphone and all the latest gadgets... I don't because I can't afford or don't need them, but this person who has no job thinks they are entitled to have these things... while taxpayers pay for it. I think its disgusting and I would be embarrased if I where her.... heck I would never have the nerve to do it.

    We need to stop the attitude that we are entitled to have all the crap we buy, and learn to live within our means... its pretty simple.

  • Report this Comment On January 03, 2012, at 4:04 PM, infopackrat wrote:

    I wish I remember who i was talking with when they mentioned an aquaintence of theirs: he would spend stupidly, declare bankruptcy, have no trouble getting loans again (because banks LOVE

  • Report this Comment On January 03, 2012, at 4:11 PM, infopackrat wrote:

    (Sorry, my computer's actring up and posting prematurely)

    I wish I remember who I was talking with when they mentioned an aquaintence of theirs: he would spend stupidly, declare bankruptcy, have no trouble getting loans again (because banks LOVE

    an excuse to give out high-interest loans), and repeat the process all over again. Not like he's got any permanent property in this hopelessly-obsolete-after-six-months disposable society we live in. Our government is hell-bent on talking away the consequences of stupid descisions, so you can make them all over again (and collect a bunch of innocent bystanders in the process each time).

    And another thing my boss's wife pointed out: there's no realy differnce in going belly-up with $90,000 of debt or $200,000 of debt, so why not beg for the loan and hope you'll make it?

  • Report this Comment On February 01, 2015, at 11:03 PM, curvycom wrote:

    <<I realize this doesn't square with your Austrian theories, but it does seem to fit rather squarely with the empirical evidence, which I tend to find somewhat more compelling than ideology.>>

    <clap, clap, clap ....>

    Really, Housel?

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