I abhor debt

September 23, 2008 By: erik Category: Complaining, Musings 481 views

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Fourteen Thousand EurosI suppose my parents get the credit or blame for my feeling about loans. The only actual tidbit of wisdom I recall receiving was “If you pay extra every month on your mortgage, in the long run, you pay less interest and you save money.” Owing money to someone makes me feel bad. I’ve only ever bought one car myself and I paid off the tiny loan within two months. The car we have now was paid for in cash. I just can’t stand being in debt. My life has been fortunate enough that I have not been forced to spend much time in debt. But I could have, if I wanted to take more financial risks. Luckily I married a woman who feels the same, if not more strongly than I do. I cannot imaging how a marriage could function if the two parties were not in agreement on what acceptable debt levels are.

Over the past 6 years, particularly during the time we spent in England during the housing bubble expansion, I could have made a ton more money by taking out huge mortgages and buying property. We had a friend who, on an engineer’s salary, owned a half dozen houses he was renting to pay his half dozen mortgages. In two years, the value of his properties went up hundreds of thousands of pounds. But to do that, you have to be fine with debt. I was annoyed at owing the bank for my own mortgage. How could I ask for another one? My mind is just not wired to be able to ignore my debts in the interest of greed.

This is why the current economic meltdown pisses me off so god damn much. The media says, “Well, we are really all to blame.” Bullshit. I would never ever ever have taken any of the thousands of actions that led to this debacle. My mortgages are never the maximum amount the bank is willing to loan me. I don’t ask for loans to make dodgy investments. I would never lie to someone to make more money off them (this is why I could never be a salesman). Absolutely nothing that went into this mess is something I would have done. And I’m not just speaking with 20-20 hindsight.

I’m a little heated right now after reading this amazingly clear and concise article about why, exactly, this meltdown happened. I cannot recommend it highly enough: Economic Disasters and Stupid Evil People

The reason the financial industry needs government regulation is exactly the reason we need laws in the first place: so that bad people don’t steal from good people.

  • KP

    Enjoyable rant, Erik. I couldn’t agree more. Some of us learn the hard way – such as paying back my student Mastercard bill at 23% – and now I fear any debt (and have none). Your comment about Britain is spot-on – I know people who own two or three properties, consider that their pension, and rent or live with family. The bubble here is bursting, though, to which I rub my hands together and let out an evil cackle – yes, people, £500K for a one-bedroom flat is a ridiculous price to pay, even in Kensington.

    Excellent link, by the way. Stupidity breeding stupidity indeed. Love this comment, below the article: You are just bitter and envious because liberals like you don’t have the balls to make that kind of money.

    Debt whores beware!

  • Thanks for the link. On the drive into work I was thinking that I really needed to investigate this topic as I didn’t truly understand what had happened.

    anti-spam word: ropearmed (made me laugh)

  • aquariumdrinker

    The linked article elides a fair amount of the action when it talks about “insurance” — to me, the packaging of sub-prime mortgages into collateralized debt obligations and use of structured investment vehicles are interesting both from a technical perspective, and also because of the impact they have on the morality of the participants’ actions.

    All things taken together, the risk that a bunch of people won’t be able to pay their mortgages is not the proximate cause of our problems, and neither is the collapse of the “housing bubble”. (If someone just didn’t pay their mortgage, the bank would take their house and sell it, no harm done; if the house were only worth 80% of the loan value, then the bank has a small write-off.) It’s the fact that all of the bad debt ended up in a stew everyone had paid in advance for, now everyone wants their money back at the same time.

    Looking at it a different way, I’m pretty sure AT and I have benefited from one or more high loan-to-value sub-prime mortgage loans. We’re not having any trouble paying our mortgage, but there’s no sufficiently quick mechanism to sort ours out from the the endangered loans in the CDO/SIV stew. So in a panic, all of the mortgage-backed securities get treated as toxic, the short-term loans to finance long-term debt dry up and everything stops.

    The good people/bad people thing seems a bit harsh, though. There’s enough places to spread the culpability that I think it unlikely that very many people have a share large enough to justify calling them bad. I’d say the purpose of regulation is to use our heads to avoid learning by catastrophe. A species of ants that builds a nest prone to collapse will eventually be ‘corrected’ over thousands of generations. If they had regulators, it wouldn’t take so long (even if there were short term gains to building shaky nests).

  • aquariumdrinker

    I’m jealous of your blog, by the way. I have a hard time finding time to post thoughtful stuff, but you do it like clockwork. Much appreciated.

  • aquariumdrinker, I agree that the structured investment did a pretty amazing job of spreading responsibility like a firing squad or senators stabbing Caesar. It won’t be the last time we see something similar.

    But the fact remains that some people in the industry did things that they knew were immoral and would end up screwing other people. You’re not guilty just because you benefited.

    I have a hard time finding time to post thoughtful stuff, but you do it like clockwork. Much appreciated.

    Thanks. I wonder how long that will last, what with life changing and all.

  • I have nothing to say about the economy as my eyes cross whenever I try to understand anything that involves numbers. I will say that working from home when the little ‘un arrives may have some impact on your ability to regularly blog thoughtfully.
    I regularly thank my lucky stars that I have an office to escape to.

  • vision

    Man, I feel like I’m stepping into a confession booth, and I’m not even Catholic.
    I am the biggest hypocrite I know when it comes to debt, specifically credit card balances, and a student loans.
    While I too say that I detest loans and debt, I so often don’t ‘put-my-money-where-my-mouth-is’ and live within my means. The amount of debt I have come accustomed to living with in my private life is quite high, but most of the time I either don’t think about (as if it would ever go away on its own) or I ‘reason’ with myself that I could always get that second job, and be done with it all in a year (but I never do.)

    The only times it really sinks in, and I realize just what a disgusting misuse of resources I have, is when I make it to church, where we are taught that much happiness can be found in self-reliance, being debt-free, and to NOT pay attention to propaganda that makes you want to always get the bigger house, more than you need, the sportier (more wasteful) cars, etc.etc.

    I feel remorse, (for saying that I agree, but living like a slave for big banks) and yet I still only pay the minimum on my loans, and the credit card balance fluctuates no lower than ‘okay this is tolerably justifiable’ and ‘holy carp, this is way too much interest!’ at it’s high point, before I actually start paying it down, for a few months, until I get bored, or the computer feels like it needs a new… ‘anything.’

    Why is it that all the atheists I know about, all seem to be sooooooo much better about this than the majority of the religious people know? I covet your work ethic, and your self-determination.

    I need to go repent now.

  • Ray, I seriously doubt that belief in a supernatural sky deity has anything to do with personal finance and debt reduction. But in the interest of discussion, let’s pretend that they are related. Everything in this comment below this sentence may contain trace amounts of bullshit.

    1) Jesus was all about getting rid of your material possessions, which is why it’s so paradoxical that the heavily religious and the filthy rich vote for the same political party in the US.

    2) Maybe it has to do with compartmentalizing your mind and guilt and sins. In the same way that it’s darn near impossible to live your life without ever being in debt, especially small debts, the way sins are defined by the Christian church makes it impossible to live a life without sin, especially small sins. So perhaps the practice that devout believers get from pushing guilt from sin out of their mind also enables them to do the same with debts.

    3) And then there’s the topic of usury, which any discussion about loans, debts, and religion would be amiss without. It’s my extremely simplistic understanding that early Christian tradition banned charging any interest on loans, which is why only the Jews did it and why the Jews ended up becoming the world’s richest bankers.

    4) As for work ethic and self-determination, could there be any better motivation than the belief you’re all alone in the world and there’s no sky god to help you? The irony is that deists think that it must be the exact opposite, that feeling alone must be a demotivator.

  • paola

    Thanks Erik,
    I enjoyed reading this and I totally agree with you. The house mortgage is the only form of borrowing that I can conceive and I have never really understood the British mentality of borrow-borrow-borrow. A lot of (mostly British) expats used to complain that the Belgian system does not leave much room for speculation on the home market (high taxes on purchase make you think twice about buying a house, you certainly don’t want to “upgrade” every couple of years, it just wouldn’ be worth it) and especially that banks won’t lend you more than a third of the combined salary, whatever the salary and no matter how much you try to convince them that you can manage with less. Now who’s laughing?
    Is it a cultural things? Or am I just stingy?

  • Lance

    Re Belgium, I understand that the mean personal income tax rate in Belgium is around 55%. (It’s around 35% in the UK, and under 30% in the US.) One might take the position that lending to 33% of income in Belgium is riskier than lending to 50% of income in the US.

    (Of course, one might lead an argument with “one might” when one has reason to believe such argument to be specious.)

  • I don’t know about Belgium tax law or much tax law from any country really, but I do know that I was very surprised to find that Spain taxes me exactly the same amount as the US. I am only one instance, but I suspect that the “Income tax is ridiculously high in socialist western Europe” idea is largely a myth told to the US voters by the Republican right.

  • aquariumdrinker

    Let’s Wiki! (I hope that if I ever invent anything useful, it will have a name that makes people think ‘wheeeee!’ whenever they say it.)

    It looks like Spain is not so far off from the US. Complicating matters is the question of whether people actually pay the posted rates. US corporate income tax rates appear to be pretty high, but I happen to know that we are world leaders in not paying that shit.

    (Of course, I tend to assume that people in Belgium, Germany and France are getting something back for their contributions that those of us in the US (and Spain?) are paying for out of our own pockets. Like, idunno, healthcare.)

  • Of course, I tend to assume that people in Belgium, Germany and France are getting something back for their contributions that those of us in the US (and Spain?) are paying for out of our own pockets. Like, idunno, healthcare.

    That’s what I thought, too, but I don’t think the roads, town centers, or socialized health care is that much better in northern Europe than in Spain. Perhaps the difference is in schools or unemployment welfare.

    Michael Moore did a pretty good debunking of the “but we don’t want the government paying our doctors!” argument. I can only assume that Spain has money left over for public healthcare that the US doesn’t because Spain doesn’t singlehandedly topple foreign nations and pay corporate contractors to pick up the pieces.

    It kind of boggles the mind to think that Spain, with the same (more or less) tax rate as the US can afford public healthcare and free university for anyone that wants it. Spanish sales tax is 17%, but I can’t imagine that making up the difference.

  • aquariumdrinker

    I can only assume that Spain has money left over for public healthcare that the US doesn’t because Spain doesn’t singlehandedly topple foreign nations and pay corporate contractors to pick up the pieces.

    Lack of initiative, I guess.

  • I have been looking into my personal case of Spain vs US Taxation.
    When I was working in Madrid, I got a paycheck that was approximately 3/4 of what I was paid in the U.S. I had a very similar percentage of my paycheck withheld, just as Erik has found in his particular case.
    Then, I had to compare other ways that I get taxed.
    Sales tax is enormously greater here than in Georgia, or even Tennessee.
    Fuel taxation is also a MUCH larger portion of my expenses than in the U.S.
    Getting a driver’s license cost me nearly a thousand bucks here, as opposed to six in California (back when I was a 16)
    My personal experience with healthcare? “You get what you pay for.”
    I would rather have a little withheld from my paycheck by my employer, rather than by the government, and get quicker, more attentive care, rather that the slower, indifferent care I’ve gotten here. (I am fully aware that I have that option here, too, but since I’m already getting free healthcare through taxation, I can’t justify the expensive, re-insurance health companies here in Spain.)
    Anyways, my own experience is that I get taxed more here in Spain, after considering the difference sales and fuel taxes. But, it is not as dramatic as we have been led to believe it is.
    I also believe that society is responsible for providing care to those that cannot help themselves, especially mental health, as well as unemployable people.

  • Forgot to mention:
    Yearly tax on the car.
    Yearly ITV on the car.
    Significantly more expensive than back home.

    Man, owning a used car is a pain here. (But it may be comparable, cost-wise depending on the state you compare it to back in the U.S.)

  • Hilltop

    “The reason the financial industry needs government regulation is exactly the reason we need laws in the first place: so that bad people don’t steal from good people.”

    It’s only a hair, but laws don’t prevent people from doing bad things, their purpose is to give people a recourse for justice. I wonder how many investors had suspicions about what they were buying, but simply said “F’ it, I’ve got to get mine.” I didn’t invest in these packages, so why should I have to bail them out? Many financial houses are NOT involved in this – why should they have to suffer more regulation?

    The more complicated regulations get, the more people find loopholes that don’t get discovered quickly, the more people writing the regulations can create advantages for themselves, and the more unintended consequences there are. Although there is a place for government regulation, I find it highly disingenuous to believe the somehow we can’t trust business people, but we can trust government people to do the right thing. We aren’t talking about laws of one sentence “Thou shalt not kill” or “Don’t dump cyanide in the water” here, we are talking regulations of thousands of pages. This is why I prefer the market solution of 10% or 25% of the people getting screwed over the government solution of everyone getting screwed.

    In any case, I too abhor debt. It’s too bad the ants always have to pay for the grasshoppers bullshit.

  • Excellent comment, Hilltop. I share your concerns. We need intelligent and reasonable regulation. We need laws saying “Company A cannot insure Company B if Company A is planning to pay B’s insurance claim with a loan from Company B”. It’s these logical loops that got us in this mess. Investment safety ratings should be provided by the government, not by a private company that is out to make a profit. Things like that.

    Many financial houses are NOT involved in this – why should they have to suffer more regulation?

    Just because I don’t steal from my neighbor doesn’t mean that I don’t deserve to have a law saying that I will go to jail if I do. Yes, the good guys have to “suffer” regulations too.

    Damn grasshoppers.

  • Hilltop

    I guess I always picture regulations as something you have to prove you meet, whereas laws are (supposed to be) something they have to prove you break. So more regulations mean more overhead to the companies.

  • Paul

    It does seem additional regulation is necessary. I’m tired of hearing people who know they did something wrong declare “Everything I did was legal”.

    When the partial bailout does happen (I think our generally uninspired politicians are both unable to do less and unable to do more), people will feel good for about 24 hours. Then logical analysis will be amplified by bloggers and media, and the markets will tank until the wall street billionaires are only millionaires. Credit will dry up. People who don’t have enough money to do things (buy cars, buy homes, keep almost dead businesses going) won’t be able to do them. Although many of us will end up with smaller retirement accounts, excuse me if I see a bright side to that dark cloud.

    I miss the simple days. To buy a house, you visit your bank. They hold your mortgage until you pay it off. To start a business, you find a partner, and each put in $500 you saved from your after-work job. When your business runs out of money, it stops operating. I hear now that when the credit dries up, many businesses will be affected, since they have to constantly borrow money to stay alive.

    I guess hating credit is pretty much the same thing as hating debt.

  • I guess hating credit is pretty much the same thing as hating debt.

    Exactly. Good one, Dad. Way to validate the first sentence of this post. 🙂

  • Lance

    My parents kind of screwed me on the credit front. (Sorry, mom and dad, but’s true.) Neither one of them had any idea how to use it. My dad over-indulged, and my mom was downright superstitiously averse. So I didn’t do so good with credit originally.

    Then I married an accountant with a finance background, and now credit is our little bitch!

    On laws and regulations, the difference is that laws are passed by a legislature, and regulations are created with delegated authority. At least, common U.S. parlance puts the two words on the opposite side of the legislative/administrative gap. Either one can say “shall”, and either can say “shall not”.

  • Brendon

    Is it too late to chime in? Seems everyone likes bashing the gub’ment, so I’ll consider that done… but about the original topic:

    I, too, abhor debt. I, too, married someone that more intense about it, then I. However, I wish I didn’t abhor debt (but still glad I married that someone). You see, all my life I had heard about “good debt” and “bad debt”, and like many things I had heard of while younger, I never made much attempt at learning more. I know now enough to know why each is called good or bad, and a little bit on why good debt is actually really, really good. I’d don’t like the terms, though, and prefer to think of it as healthy vs unhealthy. Or maybe even sustainable vs. unsustainable. These terms allow me to still think of all debt as “bad.”

    To dip my toes into gub’ment bashing… Mortgages are considered “good” debt, which I’ve always known, b/c once upon a time, the lenders actually screened the people getting the mortgage and what was being bought. When the lenders got so used to the idea of it being good, they stopped spending money to screen. The gub’ment let them, and it didn’t take long for many people to take advantage of that. This led to a lot of “good” debt becoming “bad” debt. And behold, the housing crisis is born. Had I known the about “Good” vs “Bad” before the crisis (rules have now changed, long explanation needed to explain why) I too would have taken advantage and I’d be in a very different place right now.

    Related topic idea: Pros and cons of the free market economy while considering morals and ethics. Interesting stuff…

  • Hilltop

    I agree with Brendon’s statement that good debt soon became bad debt as lenders stopped screening the borrowers. For example the existence of so called stated income or “liars loans” which require no actual proof of income. But I think it’s a mistake to say the gov’t “let” them do that. The reason these companies took that risk is because the gov’t was there to buy the loans through Fannie Mae / Freddie Mac. These companies tried to produce as many loans as possible knowing that they always had an outlet backed by the very producer of money to resell those loans to.

    Now if Freddie and Fannie maintained higher standards that would have helped prevent this. But if they hadn’t existed in the first place then that would have placed all the risk with the companies making the loans. With that much risk you better believe those companies would have to stuck to making good loans.

    I’m pretty severe on the abhorring debt thing myself, even good debt takes some of your freedom away. I wonder how the US would have shaped up if people didn’t take out any loans, even to buy a house. Seems like family units would have had to remain much tighter and people would have been much more concerned about inflation taking away the purchasing power of their savings.

    • Lending to unqualified borrowers is a problem, but it should be a self-correcting problem. Good debt became bad debt when lenders (led by the big private banks) wrapped the loans into complicated collateralized debt obligations, then arranged for the cdos to be rated as low risk debt. The loans to unqualified borrowers were a result of the artificially lubricated credit markets. They were no more a cause of the crisis than having sex with someone you wish you hadn’t was the cause of your hangover the next morning.

      I’m having a hard time understanding how “even good debt takes some of your freedom away”. Without credit, you can’t buy anything that costs more than what you have in your bank account. That’s a great standard for a kid in a toy store, but my life doesn’t work like that. I’m 34, and expect to be making money for another 30 years. Without credit, I have little choice but to rent living space. With credit, if I’d prefer to buy a house that I could never pay cash for, I have the option to do so. How is that less freedom?

      I suspect what you mean is that making bad credit decisions take away some of your freedom. This is true, but its the foundation for an argument in favor of making better credit decisions, not avoiding credit altogether. Let’s not blame the technology for its misuse. A US where nobody ever took out a loan for fear of debt would be a lot like a US where nobody cooked any of their food for fear of getting burned. It would suck.