High Black Cons
For Fathers Day this year, Tim and Megan got me a pair of black Converse sneakers. They weren’t the high tops; they were the low cut style. Back in the day, however, I wore the high, black Converse sneakers. Who would have thought I was a fashion trendsetter all those years ago? Certainly not me! Why do I tell you this? Well, now it seems that what is old is new again. With the challenges in the economy, some commentators are now calling this the “New Normal.” I know what new means, however, I have not figured out what normal is. It would appear to mean something you have gotten used to.
Besides high, black Converse sneakers making a comeback, what else is in style? Saving is back in vogue even though the personal savings rate has been declining. As early as 1990, the savings rate was over 5%. By the year 2006, the savings rate had gone negative. That’s right, a negative savings rate. As a country we spent more than we made. This, of course, coincided with the peak of the housing market. How did this happen? There’s a multitude of reasons, but lets just address the basics….
Many people had little or no savings. They would just spend all the money they had. When they ran out, they spent whatever money they could borrow. Today there is no money to borrow. So people have to save or at least start to pay down their debts. This is a good thing in terms of cleaning up their balance sheet. While this may be good for the individual, in the short run it may not be the best thing for the economy. It’s good for people to save…its money they aren’t spending. Instead of going out to dinner or playing a few rounds of golf, the money is going…gulp…into the bank. So the restaurateur and the golf course are going to have few less customers this week and likely next week.
In the longer run, however, it is healthy for people to save money. An increase in the savings rate means more pain for the economy now to make it better down the road. The parallel here is working out. You know…no pain, no gain.
What’s out of style? Conspicuous consumption is out because almost no one can afford it anymore. For the few that can afford it (but clearly not all) they don’t want to come off that way. McMansions, expensive European cars, and extended family vacations are out. The Ferrari dealer is lonelier than the Maytag repairman.
How did we get here? Well, there are lots of reasons. We’ll just hit the biggest highlight—the ability for consumers to obtain credit. We won’t dwell on the greed, fraud, or any of the other illustrious traits that transpired during this time period.
It started in 1982 when interest rates began a long and steady decline. This lessened the cost of borrowing. Additionally, whatever lending standards there were on mortgages all went away. I should retract that. There still was one standard…you needed to be able to sign your name on the loan documents. That’s it. Anyone can sign their name. As my brother-in-law said, “There’s a lot of ink in this world.” And everyone got mortgages and bought houses.
It was rock-and-roll time for the American Dream. Borrowing money for everything else including cars, appliances, and home furnishings was even easier. You didn’t have to go to a closing and sign your name twenty times. Just sign your name once and mail in the application. You didn’t have to worry; once the ink was dry you qualified. So, with low interest rates, no underwriting, and the need to have all of the latest “stuff”, consumption was good. Well, it was probably too good.
Times have changed just a wee bit. Banks have something new now called under-writing criteria. This term may be strangely familiar to some of you over the age of forty. At any rate, a loan applicant now has to prove he has a job so that they can pay back the mortgage. Banks also now expect a borrower to put down a down payment, provide copies of tax returns, and be subject to a credit check. Can you believe this? No wonder real estate sales have slowed down. All of this due diligence, fact checking, and paperwork must really slow down the process of buying a home. There are even rumors of some borrowers now being declined for loans.
Back to the Future
Where do we go from here? Banks and mortgage companies that have underwriting criteria is actually a good thing. A solid and performing loan portfolio should produce a profit which will encourage shareholders. But I’m not convinced that hula-hoops, pet rocks, and polyester leisure suits are making a comeback anytime soon. I’m also not convinced that the majority of people are on this austerity bandwagon. Why? Although it is somewhat more difficult than it was, it is still far too easy to borrow money for consumer loans. So, if you want to continue trying to keep up with the Joneses (yes, they’re still here; it’s just that their extended family is much smaller now) you can. And it is also far too easy to declare bankruptcy if you get in over your head.
With that said, the thrifty mindset appears to be gaining some traction even if this new found love for penny pinching is mostly out of necessity. How long will this go on? Who knows? Economic cycles can go on for a long time… sometimes far longer than they are predicted to. What we do know, or at least strongly believe, is that it won’t go on forever. The tide will turn and spending and consumption will again be the “New Normal.” It’s only natural and it’s only a matter of time.