So what have we learned from this economic mess so far? Here's one lesson a lot of people are wishing they'd learned earlier: Looking rich and being rich are two different things.
Put another way: Debt can be a big problem.
For years now, many American households have lived quite well -- on the surface -- by focusing on monthly cash flow and little else. If we can make all the payments, this line of thinking goes, why shouldn't we live really well? Like a juggling act, it was all about keeping the balls in the air. And why not? That's what lots of good upstanding citizens were doing.
At first, the balls were manageable ones: the mortgage payment, a couple of car leases, a few hundred a month toward the balances on a few credit cards. If things started to get a little out of hand, or if they wanted to splurge on something, they'd just do a refi and "take some money out of the house."
The balls are falling
It all worked, until the downturn hit. You know how this story goes. The home equity disappeared, the mortgage reset, the credit card companies stopped raising the limits, and suddenly $1,200 a month to lease a pair of Mercedes looked like a reckless extravagance, even if all the neighbors were doing it. The juggling act got tenuous, and sleep got hard to come by, especially once the rumors of layoffs started at work.
And now, for many American families, those balls are dropping.
It's an awful situation -- and I'm not saying that by way of moral harrumphing about the sin of indebtedness. There are certainly plenty of people who had it coming, people who were flipping properties or who bought houses they had no prayer of affording. But it's hard for me to blame many of those being hit, those who really thought they had it under control until the economy turned. If everyone else could handle it, why couldn't they?
Unfortunately, sympathy alone won't help them. Their problems are going to continue to hit all of us.
America needs a do-over
I don't have a crystal ball, but I'm inclined to think that the debt bubble has a lot of bursting yet to do. We may see many more bank failures in coming months, and while the pile of securitized credit card debt isn't as big as the pile of mortgage-backed securities, it's big enough to cause some havoc once credit card delinquencies pick up steam. That's already happening, as this week's American Express (NYSE:AXP) results showed.
It's going to get worse. The three biggest card issuers in the country are JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), and Citigroup (NYSE:C). Not that any of those banks might have any reason to reduce their risk exposures or anything, but super-analyst Meredith Whitney expects banks to cut $2 trillion (yup, with a T) worth of existing credit lines by mid-2010.
Think about where that leaves us.
- Home equity: Greatly reduced for most, gone altogether (or negative) for many.
- Investment portfolios: Clobbered.
- Job security: Layoffs loom everywhere -- just skimming the news for the last couple of days, I see new announcements of thousands of cuts at AstraZeneca (NYSE:AZN), Textron (NYSE:TXT) unit Cessna Aircraft, and IBM (NYSE:IBM), and I'm sure there will be others.
And now:
- Credit card limits: Coming down.
Further proof, as if we needed it at this point, of the old adage that banks are always happy to lend umbrellas -- until the rain starts.
Make your own umbrella
This thing is going to affect nearly all of us before we're through it. Even if you've budgeted wisely and spent conservatively, your margin for error is almost certainly much thinner than it was a year ago. Having your financial ducks in a row is more important now than it has been in decades.
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