"Anatomy of a Financial Crisis"-The Consumer's Role in the Financial Crisis
Thursday, October 30, 2008SUSIE GHARIB: This week we looked at the roles of Washington and Wall Street in the financial meltdown. Tonight as we conclude our series, "Anatomy of a Financial Crisis," we look in the mirror, at ourselves. How did the greed of American consumers contribute to the mess? As Suzanne Pratt explains, our bad behavior is now forcing us to face the music.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Since the 1980s Americans have been on a serious shopping spree. Our homes, our cars, our wardrobes and our gadget collections have gotten larger and more expensive. At first we paid for things with cash or few major credit cards. Pretty soon, however, our wallets were bulging with plastic. To make matters worse, by the middle of this decade, interest rates were at historic lows, allowing banks to offer loans we couldn't refuse. And as home prices surged, many Americans extracted the value by refinancing mortgages or taking out home equity lines of credit. We used the extra cash to bankroll lifestyles we couldn't afford and some of us got greedy and irresponsible. Financial historian and NYU Professor Richard Sylla says consumers deserve at least some of the blame for the current mess.
RICHARD SYLLA, ECONOMICS PROFESSOR, NYU STERN SCHOOL OF BUSINESS: The American public is responsible, the consuming public because the American public has been saving less and less over the years and went on this borrowing binge. You know there have to be two parties to a loan transaction. Somebody says yes I agree to borrow it and the other person says I agree to lend.
PRATT: Our need for things has gravely injured our household finances. Just look at the stats. Between 1990 and 2007, credit card debt more than quadrupled from $214 billion to $937 billion. At less than 1 percent, our nation's savings rate is the lowest in the developed world. Much of Europe is saving in double digits while China is at a whopping 24 percent. Nobel Prize winning economist and Princeton Professor Paul Krugman says we're bad savers partly because of easy credit.
PAUL KRUGMAN, ECONOMICS PROFESSOR, PRINCETON UNIVERSITY: You have to come up with a lot of cash if you want to buy a house in Japan and in a lot of Europe. In the United States, the money has flowed freely so saving doesn't seem quite as important.
PRATT: Still, others say our urge to splurge is also cultural. Psychotherapist April Benson is an expert on compulsive shopping and has written two books on the topic. While only a fraction of us suffer from the actual disorder, she says we're a society of excessive spenders.
APRIL BENSON, PH.D., PSYCHOTHERAPIST: We think that happiness is only as far away as the next purchase. But really nothing could be farther than the truth. And, in the pursuit of all of these goods, we really miss out on what's good: community, time with family, there's such a race.
PRATT: OK, so maybe we over borrowed and we did so to feel better about ourselves. But some experts say don't be so quick to blame our fondness for debt on emotions. Blame instead our desire to keep up with the Joneses, while our income was stumbling.
SYLLA: How is an American going to maintain his increasing standard of living, which he's gotten used to throughout American history, at a time when real wages aren't going up? The way to do was to go into debt.
PRATT: Still, others say blame stretches well beyond U.S. households or busy suburban shopping malls. Krugman questions why we expect the public to have seen the folly when our leaders did not.
KRUGMAN: It's not up to John Smith in the street or Joe the plumber or whatever to say, hey, this is a housing bubble, look at the price-rent ratio. You expect, you expect responsible people in Washington and New York to be saying that and they didn't.
PRATT: Historians will debate for many years who or what should bear the blame for the 2008 financial crisis. But, most experts already agree the experience will limit our irresponsible spending. Whether that change is permanent is another matter. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
