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The Power of Denialby James Scurlock
Ms. Orman, the best-selling author and television host, is far from controversial. Indeed, it's not the substance of what she says but the style in which she wraps it Breck blonde hair, bomber jackets, intense close-ups that has really set her apart from the pack of far less wealthy financial gurus. While I don't begrudge her success (and I must say that I admire her honesty speaking about her personal life) I have to ask, What if it's actually Suze Orman and not her fans who's in denial?
Ms. Orman's favorite fan is a woman who claims to have racked up nearly $30,000 in credit card debt by going to Kentucky Fried Chicken. Her books are sold in what is commonly referred to as the "self-help" section of the bookstore. Publishers refer to such works as prescriptive, because, in theory, they provide guidance. Many promise results. If someone is in too much debt, for example, a common prescriptive is to stop going to Starbucks and save fifteen-hundred dollars a year or whatever. The trouble is, the more and more such self-help books have been released, and the more and more ubiquitous Ms. Orman has become, the more indebted Americans have gotten not just individually, but collectively. Last year, the federal debt creeped up by a few hundred billion more while, according to the Commerce Department, our savings rate sank to negative one percent the worst since the height of the Great Depression.
Could it be that people are ignoring the experts' advice and going to Starbucks too often? Or is it that Suze & Co. are confusing a behavioral problem with a systemic one? Despite the expedience of blaming Paris Hilton or Robin Leach for being bad role models, there's a great deal of evidence that the experts have got it wrong.
Over the past generation, incomes have basically stagnated while the costs of some pretty important items e.g. healthcare, housing and education have skyrocketed. At the same time, the financial industry discovered that it could make a lot more money getting us to spend than to save. Of course, if we were already being pinched, handing us a magical card that could bridge the gap wasn't such a hard sell. Early on, it was actually harder to convince the bankers themselves that mailing customers the "noose with which to hang themselves financially" was not an unethical thing to do. Then, in the late eighties, they discovered how magical credit cards really were to their bottom lines. Now we are encouraged to make up long-term, systemic gaps with short-term, high-interest (and high-fee) loans. In the past week, I've been told to pay for my taxes and my groceries with my Visa card. There's a good chance that someone has told you to do the same.
Of course, the debt eventually comes due a reality that we've managed to put off for some time by using our homes as ATMs rather than as savings vehicles. If home prices continue to inch down, the home will quickly become its own debtors prison, or "cement life raft" as one professor I interviewed called it. In the past few weeks, the banks themselves have had to face reality. It turns out that they were in more denial than any of us, and the massive losses they've been forced to shoulder from bad mortgages (many of which went bad in just a month or two!) has made Wall Street very, very nervous. Apparently, everyone assumed that the charade could last a little longer, including two chief executives at the giant bank HSBC, who are now out of their jobs, though it's unclear whether they get to keep their eight-figure bonuses, negotiated when irrational exuberance still ruled the day.
What could possess a financial institution to make billions of dollars in loans that their customers couldn't afford the day they signed the papers? Easy profits, of course. After all, most of these mortgages are bundled with others and sold to investors within days, sometimes hours. But it also takes a whopping dose of denial, girlfriend, and not just pretending that, Enron-style, these loans were assets. The greater denial is that these are just "numbers on paper", as President Bush famously dismissed the national debt. They are, of course, numbers on paper, but they are also families who now lack a roof over their heads.
I interviewed a lot of families while making Maxed Out poor families, rich families, black families, white families, military families, you name it. They weren't experts in contract law or financiers. They were people who trusted that the bank would treat them fairly, so they signed on the dotted line. Too often, they were taken advantage of, and, in some cases, they lost their homes or their dreams or both. Some lost their lives. Maybe they should have been more careful, less trusting. But if we can't trust the bank, who are we supposed to trust? The pawn broker? It's in no one's interest to see the banking industry lose the faith of the people. That's why the federal government backs the currency issued by the Federal Reserve. Yet today's largest banks have quietly swallowed "sub-prime" lenders, because sub-prime lenders can charge much higher rates and therefore make a lot more money. But in the process, the good name of the bank becomes blurred with the not-so-great name of the sub-primer (I'm thinking of Washington Mutual and Providian, but there are plenty of other examples). There's also a disturbing trend for the ivory-tower banks to imitate the practices of their less reputable brands, not vice-versa. Wells Fargo, having funded the nation's largest pawnbroker and the nation's largest check-cashing joints, for example, has now rolled out its own payday loan "service" to its regular customers.
I'm all for preaching personal responsibility, but the story in the past generation has been an erosion of corporate responsibility and regulation. The industry has blessed us with credit cards for students, illegal immigrants and even dead people. They have convinced us that mortgages can make us rich and they've convinced the government to allow contracts where the terms and conditions can be changed by one party at will not to mention denying their customers the right to their day in court if a grievance arises, which seems pretty likely given the circumstances. In return, the industry has seen its profits jump year after year after year, even as defaults, foreclosures and bankruptcies have skyrocketed. Anyone who believes this anomaly can sustain itself much longer is in the most denial of all.