WASHINGTON – In the midst of this unprecedented maelstrom caused mainly by overleveraging on the part of everybody, financial institutions and consumers who collectively piled up a mountain of debt, we are now being warned that: “Spending beyond one’s means is [no kidding] a bad habit that should be corrected”. OK, let’s try and get this straight. Stephen Roach, eminent economist and currently chairman of Morgan Stanley Asia just wrote an op-piece for The New York Times (“Dying of Consumption“, November 28, 2008) in which, after providing a vivid short summary of the over consumption history of the last few years and how it led to the current financial crisis, he admonishes Americans to stop overspending and to embrace instead a life style in which they would save more and stop consuming beyond their means.
What is truly remarkable about this otherwise competently written piece, is that it has actually been written and published. I imagine for a moment another hypothetical piece in which the author would explain why theft is a bad thing and that it should be stopped by all those who got involved in this activity as a way to make a living. Totally unobjectionable, right? Yes, but also redundant; in as much as this position stating that “robbery is a bad thing” is supposedly well understood by the majority of the people. And this is probably why op-ed pieces admonishing against the perils of a life style founded on robbery do not appear. But, if this logic about avoiding stating the obvious would apply as a general editorial rule, what would be the point of an op-ed piece stating the obvious about the danger of overleveraging, especially now, as we contemplate the disastrous consequences of a period of overspending? Indeed….
Well, someone thought that there is a point, hence the publication of this piece. In truth, the very fact that America, as a society, embraced a life style founded on excessive leverage is an indication that the obvious is not obvious at all. What is even more remarkable is that this basic wisdom about not overextending oneself may not have been properly understood even now, as we are all suffering the consequences of this collective insanity.
And so, the once upon a time unobjectionable, worn platitude whereby “You are not supposed to have a life style in which you consistently spend beyond your income; thus getting deeper and deeper into debt” is presented to us as some kind of new thinking, as the “new paradigm”, the new way of looking at things.
All this is truly remarkable. If what once was deemed to be obvious is presented today as new and fresh and forward looking, well, then it probably means that for a large chunk of public opinion it was not obvious at all. It means that they truly believed that runaway private consumption financed via (supposedly) ever growing real estate equity was actually a good long term strategy, based on solid foundations. In this light, if people really believed in the soundness of that model, what we are experiencing now is not a collapse due to the consequences of flawed thinking; but some kind of rough patch, to be quickly forgotten as soon as it is over.
And so, this article is published now, even as more bad news caused by the crisis piles on bad news; with the attendant commentary that all this is due to overleveraging. So, as you are watching your house destroyed by the flames, someone comes along and feels obliged to tell you wisely that you should not have allowed your kids to play with matches. Just in case you had failed to make the connection between fire and matches in the hands of children.
In the same fashion, here a distinguished economist has to come along and state, in plain English, after you know you are broke, having just spent your last borrowed penny, that from now on you should save more and spend less. Just in case you missed the connection between spending too much and being now in debt.
If The New York Times provides space for this wisdom, at this very time in which we are witnessing the collapse of spending because people have run out of money, it is because it was probably felt that this warning about the dangers of unsustainable debt had not been made before or perhaps not with the necessary strength. Plainly stated: “Whatever may have happened thus far, our hunch is that the American people still do not get it”.
If this is so, may be this small episode is an illustration of the astonishing depth of this crisis. This is not a financial crisis. This is a crisis of values that created the premise of a financial crsis. Stephen Roach goes as far as writing in his piece that in this environment in which people are already deeply in debt because of excessive consumption, a tax break that would allow people to have more cash in hand would be a bad idea. Indeed, I add that it would be the same as giving the habitual drunk more cash so that he can go to a bar and get some more of the same. In the context of the consumption addicted average American: “Hey: If you let them have more cash, they’ll run out and by another flat screen TV. So, take the money away from them”.
Again, the fact that we need to spell out this notion that a new administration should be careful about avoiding policies that would encourage more spending should be taken as an indication of the seriousness of the disease. It would appear that the pursuit of clever ways of extracting spending money from……whatever… is now so deeply ingrained in the ethos of the society that it has supplanted the old fashioned idea that first you need to produce some wealth through activities that create value and then you should manage it prudently. If, serious recession and all this financial chaos notwithstanding, there is the perception that many people are just waiting for things to calm down a bit so that they can concoct some other scheme to feel rich and start all over to spend at will, then Stephen Roach is right about issuing warnings.
But, if this is so, then we should also appreciate that the underlying causes of this mess we are in go much deeper than the reckless financial wizardry that produced all these instruments that now most “experts” meekly admit that they themselves did not understand. It means that the values of the society on which we built the largest capitalist economy have evaporated.
If the rather quaint idea that the consumers should watch their budget and be careful not to spend more than their income, while making sure that some of their earnings are socked away for retirement or emergencies, is being presented as some kind of new deep truth, worth pondering upon, this gives us the measure of how messed up we really are. If this is indeed so, then it will take a lot more than one sharp op-ed piece to change the mood and the values that sustain it.