My brother Gary sent me a copy of David Brooks' Op-Ed column from yesterday's NY Times titled The Great Unwinding. It got me thinking about where we are in this economic stage of things, which I have opined on before in early blog postings, from last year, with a modicum of prescience. So, I have awakened from my blogging slumber so I could think aloud about what Brooks wrote and where we are at the moment, economically speaking. And here's what I wrote back to Gary:
Interesting article. Got me thinking...
So, I'm no economist (obviously!), but there are a few flaws in Brooks' suppositions and there are also some interesting counter-arguments.
For instance, capital is at an historically low cost these days. That's why your savings account at the bank only pays about 1.0% interest, if that. 
The government has kept capital cheap to keep the meager flow going and to catalyze some assumed critical markets. The upshot is that people will not save as much because:
(1.) People can buy stuff and the cost is "subsidized" by cheap capital. That's how the housing market ballooned into a bubble in terms of pricing, borrowing, and expectations. We now all believe that a home will and should cost many, many multiples of our household incomes. A generation ago, this was not the case. Our mom and dad bought our childhood home in 1962 for about $20,000.
(2.) The "normal" prices for certain necessities, like housing and cars, are now set way outside the reach of the vast majority of cash buyers. Borrowing for these things with only 20% down is our expected norm. Households, therefore, will always have much higher debt to income ratios compared to 20 - 50 years ago.
(3.) Borrowing is not always a bad thing if the cost of the capital is reasonable, you can afford the debt service payments, and you have both a reasonably secure income stream to support the payments and a back-up plan (known as an "exit strategy") if things don't go well.
Also, there are some other things to consider, such as the fact that while it might be 
mind-blowingly expensive to overhaul the US healthcare system into something that is accessible, affordable and technologically advanced, the comparative cost of not doing so is probably about the same in terms of picking up the expense of taking care of the non and under-insureds, not to mention the lost opportunities and drag caused by people making life and job decisions based on their lack of healthcare insurance options. Or the actual physical pain we inflict on the under-treated and non-treated.
We'll spend close to $1 trillion bailing out the financial sector, $500+ billion on waging wars in Iraq and Afghanistan to protect our security, and $300+ billion to stabilize some of the automobile industry. What would $1 trillion buy us in terms of healthcare and the net effect on individuals' families, lives and long-term health?
Political expediency and an inherent misalignment between long-term needs and short-term practicalities is set in our electoral system. As long as our federal legislators, congressmen, senators, and president, are stuck in a 2, 4 & 6 year election cycle, they will only be able to do so much that might seem like it is going to cause near-term challenges and pain to their constituencies. The brief window of opportunity to do anything that trades near-term pain for long-term gain is only at the very front end of a politician's term.
This problem is intrinsic and institutionalized in a democratic process, but to paraphrase Churchill, Democracy is a terrible form of government, but it is still better than any of the other options. So it is easy to point out the problem, but the reality is that legislators, on the whole, are not going to change strategies or behaviors as long as they need to get elected or help a party-affiliated candidate get elected.
It will take an "exogenous shock" to the overall entrenched system to get people
to sacrifice in the short term or change their entrenched consumer perspectives. So, a war, natural disaster, terrorist attack, true pandemic, prolonged recession, sustained spike in oil prices, etc. will be outside anyone's control and will force the issues and changes in behavior. The current recession is causing some of the ills and evils to be faced in the light of day, to the dismay of piggish banks, over-extended homeowners, and charlatans like Bernie Madoff. Good people are also hurt in the cleanout (middle-class employed workers in fragile sectors, kids, some home renters, sick folks, lower-income households, etc.).
My opinion is that, as a country, we have not experienced anywhere near the pain and structural upending that will come at the true day of reckoning for the binge that was advocated in the last decade or more.
And we live in a new information 
and consumer world that did not exist a decade ago (think internet news, Facebook, Amazon, iTunes, and app stores). The speed has been ratcheted up exponentially and the consumer decision-making has followed suit. This means that any economic news or shock or fear spreads globally as fast as it can be reported. We've built some huge momentum. So, trying to slow down this train before its hits a bad patch of rail may be futile.
On a personal level, however, you can prepare for what may come. It's the same simple advice that's become cliche: Don't live above your means. Keep some rainy day funds available. Live a healthy lifestyle in terms of sleep, eating and exercise.
And you may even be able to take advantage of some opportunities. There are some excellent investment and real estate opportunities out there, and if they fit in with your lifestyle and your financial means, you can take advantage of them. And remember that sometimes circumstances align to make debt not necessarily a bad thing, so you have leverage power for these opportunities, if you can afford it, especially while the cost of capital is so low.
So what's the bottom-line?
In my view, we haven't hit bottom yet and all of the extraordinary efforts by the Treasury Dept, and 
Obama Administration have just been pumping up the economy to soften the immediate blow. It is an economic experiment with a very uncertain outcome. And until the markets reset at sustainable price levels, and until there are some major systemic failures that cause us to bear the pain that will be needed to adjust our financial, personal and political expectations, the day or reckoning is still yet to come
Set your expectations accordingly.
. . .
OK, so here's scant solace and a bit of adult sobering perspective, like it or not.
So let's catch our breath, regroup and get back to work. We only have the luxury of feeling crushed for a short time. We still have a world to change and children to protect.
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