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Friday, January 25, 2008 10:00 AM

Changing Social Attitudes About Debt

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There has been a slow, steady shift in consumer sentiment towards debt since the beginning of the year. For quite some time, many were debating whether it was even happening. At Thanksgiving, the first real hints of what was coming could be found in poor turnout for pre-Christmas sales. Still, most assumed consumers would come through at Christmas like "they always do". Except this time they didn't. Christmas Retail Sales Disappointed in spite of bigger than ever discounts. After Christmas sales disappointed as well.

Consumers Are Retrenching

It's now clear to everyone that Consumers Are Retrenching As The Economy Weakens.

Joi Freemont, a dentist in suburban Atlanta, doesn't have to look further than her appointment book to tell that people are worried about money.

Patients who used to get their teeth whitened all the time "now want to think about it a bit," she said. Braces? "People were getting them for the kids, for themselves, but now they're waiting," she added. And when people get cavities, they have their fillings done one a month, not five or six at a time, she said.

As a result, Freemont and her husband are worried their income could drop and are trying to be more prudent with their money. They're monitoring spending more closely and continuing to whittle down their credit card balances and her dental school debt, she said.
Professor Depew was talking about the above article in point number 3 of of Tuesday's Five Things.
And so the consumer balance sheet repair meme continues to grow. As those who have read Five Things over the past couple of years know, this is not a behavior that began in August or September as the credit crunch began to manifest, it's something that has been building for years.

Consider talk show host and television personality Dave Ramsey. Chances are pretty good that by now you know who Dave Ramsey is, but just in case, he's the host of a popular, widely-syndicated show, "The Dave Ramsey Show," that is heard on the more than 300 radio stations and seen on Fox Business Television.

Ramsey has been talking about the evils of debt and the virtues of debt-free living for more than a decade. In fact, his career began in 1992 when he began selling books on financial health following his own personal bankruptcy crisis in the late 1980s. But only recently has Ramsey really been able penetrate the mass public's consciousness. Why? It's not because Ramsey suddenly improved his message, it's because social mood finally reached a point where his message is not just acceptable but sought out.

The psychological factors that have made Ramsey a household name are the same factors now working against the ability of the Federal Reserve and the government to stimulate credit demand.
I found 26 different versions of the same story, in various newspapers or magazines. Here is a sampling of the headlines.
  • U.S. consumers pull back on spending, worry more about debt as economy weakens
  • Consumers are cutting back
  • US consumers worry about debt, pull back on spending
  • Consumers pull back as economy weakens
  • Americans buckle up for slowing economy
  • Empty Malls as Economic Fears Spread
  • Americans tightening their belts
  • Consumers now spending less, worrying more
  • More consumers start to show financial restraint
Changing Attitudes Are Now News

Even Starbucks is affected.

The AP is reporting Starbucks tests $1 coffee, free refills. "Faced with growing competition from cheaper rivals, Starbucks Corp. is selling small cups of drip coffee for $1 with free refills as part of a test in its hometown."

Coffee is a minor thing, but unwillingness to spend $5 for a cup of coffee had to start sometime. This attitude is spreading. And it's the attitude that's important, not the coffee.

Bernanke can't reflate if consumers won't spend, banks won't lend, and businesses won't expand. If prices are coming down (as they are with houses), consumers will wait. Those worried about their job will wait. Those starting to worry about retirement will wait. People will wait for houses, cars, and boats. People will vacation closer to home and spend less eating out. People will cut back in all sorts of ways.

Homeowners just Walking Away

Cutting back on coffee and dental work is one thing, walking away from houses is another. Bernanke has to be petrified about homeowners just handing over the keys and walking away. The New York Times calls it Jingle Mail.
WHAT do banks call it when a troubled borrower abandons her home, sending them the keys? “Jingle mail.”

And what do they call it when an irate borrower abandons his home, yanking electrical outlets from walls, leaving faucets running and otherwise trashing it on the way out? “Taking the inside of the house with you.”
Calculated Risk was talking about "walking away" in Wachovia: Homeowners just Walking Away.
From the Wachovia conference call: “Part of one of the challenges is, and we've mentioned this before, a lot of this current losses have been coming out of California and it's -- they've been from people that have otherwise had the capacity to pay, but have basically just decided not to ..."

This echoes the comments of BofA CEO Kenneth Lewis last month: "There's been a change in social attitudes toward default," Mr. Lewis says. ... "We're seeing people who are current on their credit cards but are defaulting on their mortgages," Mr. Lewis says. "I'm astonished that people would walk away from their homes."
I do not know why anyone should be astonished at people walking away. It should be expected. Right or wrong, how hard is it for anyone to see consumers blaming appraisers, bankers, real estate agents, processors, and homebuilders (many of whom cashed out millions or even a billion in the case of Countrywide's Mozilo) for their woes. Yes, many were greedy and some were willing participants to fraud, but the banks were even greedier.

Citigroup CEO Chuck Prince's statement No End Soon to Buyout Boom: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing".

Chuck Prince typifies the arrogance of Wall Street that people are starting to resent. I talked about Prince and Mozilo's "golden parachutes" in Nationalization of the Banking System. Meanwhile, in the face of billion dollar bonuses at the brokerages, Joe Homeowner is left holding the bag.

Should People Just Walk Away?

I stumbled across an interesting blog called "Dad Talk" the other day. You might want to check it out. In Should Money-Troubled Americans Just Walk Away From Their Homes? Dad gives some pretty good reasons for doing just that. Let's take a look.
If Americans immediately walked away from negatively amortized mortgages, the crisis would end much faster. Here’s why:

1. Stressed homeowners who walk away from their properties can move into a rental and cut their monthly expenses, easing financial stress. Yes, their credit would be wrecked for a few years, but not as severely as if they foreclose or declare bankruptcy.

2. Financial institutions could unload properties more quickly because they would gain control faster than in foreclosure proceedings. By the way, this is already happening to some degree. The less time a home spends in limbo, the less likely it is to be damaged.

3. Here’s the really painful part: home prices would plummet, forcing additional homeowners to consider unloading properties. This was going to happen anyway, but bailouts and lower interest rates will just prolong the whole mess.

4. Financial institutions would be forced to come clean much faster than to date. Trust would be restored in surviving institutions once the carnage ended.

5. The economy will go into a full recession too fast for the Fed to lower rates and for politicians to enact wasteful bailouts.

6. Once home prices reach a low enough level, investors will snatch properties up and offer them as rentals.

7. This will stabilize the home market and offer a steady income source for property investors. (Currently, home prices are too high for leasing purposes.)

8. After the initial pain, the economy should begin its rebound.

Of course, few economists will ever make a suggestion such as this. Why? It sounds defeatist. It’s cruel to homeowners. It’s anti-American. Financial institutions would howl in protest.
What's cruel to homeowners are the work around plans guaranteed to make the participants debt slaves forever. Those bailout plans were specifically handcrafted so that only those with no equity would benefit.

Those "bailed out" may be happy at first, but eventually the participants will realize they are being played for suckers. A day of reckoning will come when people $40,000 underwater on their home and struggling, start to realize they can walk away and save up a down payment by renting rather than paying off a mortgage where they can never catch up.

Others, struggling, but still making payments will eventually come to resent those who walked away and became debt free. They too will walk. And thus walking is guaranteed to become more and more socially acceptable over time.

With the economy heading into recession, many will be forced out of a job. For those, walking away will be the only way to survive.

Throwing Away Money

Remember the catchphrase "throwing away money on rent"? The bottom will come when people start bragging about the day they stopped "throwing away money on an overpriced house". That's a long ways away from here in terms of both price and time. For a hint at how long, please see When Will Housing Bottom?

The secular trend towards consumption has peaked.

A year ago only fools saved money. Saving money is becoming more socially acceptable with each passing day. Eventually it will be embraced. Attitudes towards risky lending practices by banks are changing too. I talked about risk aversion by both banks and consumers in Banks Attempt To Freeze Balance Sheets. Changes in social attitudes about debt, risk, and spending, are about to make Bernanke's life miserable. Changing attitudes are exactly why Things That "Can't" Happen will happen.

Mike "Mish" Shedlock
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