Tuesday, December 16, 2008
Al goes to the doctor.
Al: "I'm still short of breath. I know you told me to quit smoking, and honestly, I've tried. But kicking the habit is really stressful. Doc, can you help me?"
Doctor: "I understand. Let me find a way to help you continue smoking."
No serious medical professional would ever offer that response. Smoking caused Al's breathing problems. However difficult quitting cigarettes may be, it is the only way Al will get better.
Likewise for the sick consumer economy. The cure will require discomfort. While Washington should take the panic out of shoppers, it should not impede their pained efforts to change unhealthy behavior.
An example of the conflicts involved comes in the report that American families started paying down their debt in October. (This is the first time household debt has contracted since records were first kept in 1952.) Sounds like a fine piece of news, but here is The Wall Street Journal's take: "That is a punishing turn for an economy in which consumer spending accounts for 70 percent of gross domestic product."
We appreciate the concern, but too much borrowing is how we got into trouble. There is no way to reduce debt other than to reduce debt. If the consumer economy hurts for that reason, well, isn't this a side effect of the needed pill? Eventually, consumers won't owe so much, and so they'll feel confident enough to shop again.
There are things the federal government can fix and things it shouldn't. Washington must help unfreeze the credit markets so that people can borrow for such big purchases as cars. But it will have to passively watch a lot of stores and entire malls go broke. The "overstoring" of America was fueled in part on consumer borrowing. Many retail chains are themselves debt laden and will not survive this downturn.
But a consumer switch from borrowing to saving should leave a smaller but healthier retailing infrastructure. As financial advisers like to say, saving is nothing but delayed spending.
Some may remember the old Christmas clubs. All year round, workers would put, say, $40 a month into special holiday savings accounts. Come November, they take out money to blow on presents.
As with falling debt loads, swooning house prices are not an entirely bad thing. Some of the business interests that benefited from inflated home prices now demand intervention to prop up the flattened values of these assets. To hear them speak, you'd think that soaring prices were the natural order of things and tumbling prices abnormal. Of course, the market price of something is whatever someone is willing to pay for it.
Lower house values mean that consumers can buy homes for less money and with smaller mortgages. That will leave them more to spend on other things.
The new economic reality is curtailing the practice of borrowing off one's home equity to free cash for other spending. Consumers will regard their home as their shelter, not their piggy bank. Once that mental change happens, they won't care so much what the house was worth in 2006, but that there be a stable market when they need to sell.
Like Al's smoking, Americans' love of debt and taste for real-estate speculation made the problem now needing treatment. The cure in both cases is to stop the bad habits that caused it.
The big question: If the good times were caused by consumer borrowing, and consumers shouldn't go back to their old ways, how can we bring back the hot times? Answer: The times won't be as hot, but they'll be fine.
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