Maybe I’m skimming the wrong articles and half-listening to the wrong news reports, but in all this belly-aching about declining consumer spending one thing seems to be missing. Now, correct me if I’m wrong, I don’t seem to see any mention of the fact that consumers have been overspending for so long and it might actually be economically healthier in the long-run for there to be a cutback. IANAE (I Am Not An Economist) but it seems to me that if you just keep building magic castles on magic castles, eventually there will have to be an implosion. The earlier it happens, the less catastrophic the end result.

(Photo: Papasama)

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  1. petrarch1608 says:

    consumers have been overspending? what is your source? that seems like an arbitrary thing to say.

  2. XTC46 says:

    but the consumers were overspending OTHER peoples money (credit card companies, banks, etc) not theirs. So it is ok right?

    /sarcasm

  3. B says:

    There was an article in the Sunday Boston Globe about this. It discussed all the things that are good about a recession. On the business end, it gets rid of under-performing companies. On the consumer side, people buy less junk, and working less is good for your health.

  4. spryte says:

    Considering the amount of debt the average person has, I think it’s sort of a given that a lot of people have been living beyond their means, Petrarch.

    I agree with you, Ben, but I don’t think those doing the bellyaching will ever see it that way. I’m surprised the tax rebates won’t be in the form of department store gift cards, considering how unhappy some of them seem to be about most people using them to pay off debt.

  5. You will never, ever find an economist that will agree with you that a decline in economic growth is a good thing. I understand the thought – given our savings rate, it seems like the easy correlary – but trust me here.

  6. petrarch1608 says:

    @spryte: the amount of debt the average person has? I dont even know how to compute that. I dont think its that obvious. Where do you pull these numbers from?

  7. MonkeyMonk says:

    Can anyone explain to me exactly why the taxpayers are contributing many billions of dollars to JP Morgan to buy Bear Stearns? It’s not like JPMorgan can’t afford them on their own.

    This seems like a pretty big spending indiscretion by the Fed to me.

  8. AaronZ says:

    The major discussion is the cost of fuel. The gov keeps talking about economic stimulus and ‘taking steps’ etc, but until something is done about the cost of energy, things will get worse before they get better.
    Release some of the strategic fuel reserve to lower the cost of gas (and heating oil), and watch people suddenly start driving out places and spending money.

  9. AlteredBeast (blaming the OP one article at a time.) says:

    Overspending? I just overspent 10 minutes ago, spending $20 on something when I really couldn’t spare it…for something I don’t need.

    I feel so patriotic.

  10. @MonkeyMonk: They arent contributing. They are insuring JPM against a potential lost by packing the most risky part of the Bears sale. Odds are very low that that money will need to be paid out, and the investment is well worth it if it prevents a chain reaction collapse of the major players. Thats what the Fed/Treasury is supposed to do.

    They arent giving JPM money for nothing, they just made the purchase more attractive, since otherwise no one would have made the move.

  11. nequam says:

    Ben, you make a great point about how things may be better in the long run. But that’s small comfort to the person who loses his job today or tomorrow. The reality is that the artifical buoying of the economy by overspending has put plenty of people to work.

    I fear things will get much worse before they get better.

  12. B says:

    @ADismalScience: Economically, yes, but there is more to life than the Economy.

  13. teapartys_over says:

    @ADismalScience: This interests me though – how can something so bad for an individual or family (lots of debt, no savings) be so good for the economy? How can our government continue to urge people to do the less personally responsible thing? I understand that economic models say less growth is bad, and I trust you on that, but i feel like something isn’t adding up here if our economy needs people to spend themselves into ruin in order to be “good”. Explain, Dismal Scientist!

  14. The Porkchop Express says:

    @petrarch1608: So we should just ignore you on this one eh?

    I don’t know that I agree that this is a good thing, but I may be with you on the sooner rather than later. The higher you get, the further you can fall down.

  15. marsneedsrabbits says:

    It could be a good thing economically, but only if a few other things happened. Like…
    1). people finally get rid of the huge amounts of unsecured debt they are carrying (by paying it down, not through bankruptcy).
    2). people start saving some of the money they are suddenly saving on not buying useless “stuff” and on no longer paying high interest. Americans generally have a lousy rate of savings.
    3). people begin to invest in the market. People with a daily sense of how the economy is doing would make better citizens, I would think.

  16. kittenfoo says:

    @Steve Trachsel, Ace. No, really, ACE: I can’t help but wonder if they made it too attractive, though. The way I understand it, of the $30 billion rescue, only the first billion came out of JP Morgan’s pockets, with the fed (us) shoveling in the rest. Yeah, maybe it is the only solution, but it’s bound to build resentment among … well, at least among those who remember Bear Stearns refusing to help an ailing hedge fund 10 years ago.

  17. Ex_EA_Slave says:

    Shhhh, you’re going to wake up the 800 pound gorilla in the room

  18. MattO says:

    @AaronZ: as much as i want to agree with tthis, i cant (on the gas prices at least). i would bet the average person fills up around once a week, and thats GENEROUSLY 20 gallons a week. if gas goes up $1/gallon, its an extra $20/week..if you cant afford another 20 a week, tyou have bigger problems…

  19. krose says:

    @petrarch1608:

    The Fed actually does calculate this and it’s up on their website. It even breaks it down by type of debt and demographics.

  20. Landru says:

    @petrarch1608: Shill

  21. krose says:

    @petrarch1608:

    The fed actually does estimate this in their consumer surveys, which are up on their website. They even break it down by type of debt and demographics.

  22. petrarch1608 says:

    @krose: yeah, where exactly? gotta link?

  23. krose says:

    @petrarch1608:

    [www.federalreserve.gov]

    Surprising we’re not as in debt as people assume…

  24. Sudonum says:

    @kittenfoo:
    The Feds are’t “shoveling” anything into JPM. As Steve Trachsel, Ace. No, really, ACE: stated, the Feds are guaranteeing $29 Billion worth of securities that Bear Stearns has on their books. If they did not issue this guarantee then no one would have taken the risk and bought Bear Stearns. And, if I’m not mistaken, the last time they did something like this was during the Great Depression. When all was said and done, they made a couple bucks on the deal.

  25. ephdel says:

    Seems to me that the US economy runs on cycles in which ever few decades theres a major recession in which the whole thing balances out and re stabilizes. IANAE but maybe its just part of the american economic life cycle. give it some time and always be somewhat frugal, as you should be anyway.

  26. petrarch1608 says:

    to answer Ben’s question, I think that the reason that the media hasn’t been reporting on this because it is not an issue. Sure some people overspend, but you can’t generalize that to all americans.

  27. Beerad says:

    @ADismalScience: But won’t most economists agree that “proper valuation” is overall a good thing for the economy (e.g., puncturing overinflated real estate budgets, stock markets resetting to reflect actual company values, etc.)? Not that that entirely explains our current economic climate, but what Ben seems to be saying (let me just jam these words into his mouth) is that if we were bound to rush headlong off the precipice, better to do it sooner rather than after we’d climbed to even more dizzying financial heights.

    Non?

  28. montecon says:

    @ADismalScience: There are economists that don’t believe that. They just dont work in positions where you’d hear them on TV or get quoted in newspapers.

  29. Mr. Gunn says:

    ADismalScience: With a nick like that, you’d know, right?

  30. sleze69 says:

    @Sudonum: If they did not issue this guarantee then no one would have taken the risk and bought Bear Stearns. And, if I’m not mistaken, the last time they did something like this was during the Great Depression.

    The last time a large investment group went bankrupt was during the Great Depression?

    Not to be TOO ignorant but would someone please give me a play-by-play of what would likely happen if Bear Stearns went belly up?

    Something like: Bear Stearns declares bankruptcy -> someone else goes bankrupt -> someone else goes bankrupt -> 2nd Great Depression.

  31. Mr. Gunn says:

    MattO: I guess I have bigger problems. $80/month is a lot to a guy like me. Not to mention that we don’t just pay at the pump, we pay everywhere that needs goods trucked to it, like the grocery store. Noticed how high flour and eggs are lately or are you too busy counting your money?

    Lo-Pan: Yeah, it’s called a bubble.

    Things will definitely get worse before they get better, and no, the solution isn’t to start another bubble.

  32. disavow says:

    @ADismalScience: Um, except for the entire Austrian school of economists, who believe that recessions are necessary to mitigate inflation, reallocate capital, and curb excessive risk-taking. The stagflation of the late 70s was cured not by stimulating activity but by first forcing a recession. Preventing recessions is a political exercise, not an economic one.

  33. CumaeanSibyl says:

    @petrarch1608: Our country has a negative savings rate. That can’t just be the fault of “some people.”

  34. Snarkysnake says:

    @ephdel:

    “Seems to me that the US economy runs on cycles in which ever few decades theres a major recession in which the whole thing balances out and re stabilizes.”

    As I see it,the problem is that we haven’t really been through a FULL cycle in a long time.The political pain becomes too great and the government starts inflating like mad to paper over the underlying problem to get through the next election.This means that stupid bankers,traders and assorted con men construct a problem so big that the only way to “fix” it is to fuck the taxpayer. ( S&L “crisis”, LTCM “crisis”, Dot Com “crisis” and now, the Subprime “crisis”).After every one of these things had run their course and the music stopped,guess who got the bill ? The really big players know that they are “too big to fail”,so what point is there in not going for broke ? If things go boom, they can make enough noise and scare the shit out of the public about a total collapse of the banking system and they’re home free.

    Does anyone else see how the financial community had become distorted by the knowledge that there will always be a bailout if the problemjust gets big enough ?
    Anybody?

  35. jtheletter says:

    @AaronZ: Release some of the strategic fuel reserve to lower the cost of gas
    I really hope you’re joking. You need to be aware that the fuel reserve is just that, a reserve, not a reservoir. Without going out and doing all the math I can pretty confidently state that the US could burn through ALL of it in under a month at current levels. Even if all of that reserve were released the impact on fuel costs would be negligible and fleeting. Here’s a thought, instead let’s lower the rediculous percentage of tax on every gallon. Or make it illegal for anyone to trade commodities that isn’t actually using them. I.E. energy traders who add no value to the system other than to shuttle contracts around and increase the price as it passes through their hands. The first time oil sold for $100/barrel was a complete stunt by one trader who just wanted bragging rights. He set off a huge market reaction and cost genuine businesses untold amounts of money because he wanted to say he was the first to buy at that magical number. If that doesn’t illustrate a problem with how energy commodities are traded then nothing does.

  36. jtheletter says:

    @sleze69: No, Sudonum meant that the last time the Fed performed a bailout like that was during the Great Depression. Major investment firms have certainly gone belly up before. The impact of Bear Stearns going under I can’t speak to however.

  37. SuperSally says:
  38. petrarch1608 says:

    @SuperSally: an article from 2005?

  39. @disavow:

    I would argue that this intervention slowed the natural recovery process after the collapse of the US energy economy in the 1970′s and the last major financials collapse under Volcker in the 80′s. By curbing lending ability in a downturn, we forced reliance on industries that already existed rather than facilitating the creative destruction and competition that economies require to be successful.

    Liquidity provision in a downturn is a gambit that says “Our economy is failing to function well, get out there and innovate.” The opposite approach is to become insular and protective and to backstop the industries we already have. Look at a graph of the Dow or S&P from 70-2008 and see which strategy you think was best.

  40. Silversmok3 says:

    While I am a simple college Econ student, I understand exactly why the economy is where it stands today.

    Ready?Its INFLATION

    The way the government calculated inflation in the 1970′s and 1980s is different than how its calculated today.Because of the formula change, the published inflation rate is waaayy lower than the actual, mathematical inflation.

    The bad news, is that your paycheck is designed to adjust for the published inflation rate.Never mind the fact that the local Citgo will charge you prices based aganst real inflation.

    So how do working people make up the difference ? Hello ,AmEx,HELOCs,Platinum Cards,and my favorite (/puke),Student Loans.

    As long as the credit is fast and easy,bills get paid, stuff gets bought, and life is great . When the credit line is cut, and folks have to use real money to buy stuff,and that real money is not enough(due to above mentioned inflation gap),that leads to greater econmic problems.

    To get an idea of how bad things can get when governments live in denial , check out Zimababwe’s 14,000% inflation rate.

  41. Former Secretary of Labor Robert Reich has been making this point on his blog several times lately. Basically Americans have been living on cheap credit for far too long, and our financial chickens have come home to roost.

    I’m happy because we’re using our home equity line of credit to partially fund our house remodel, and the interest rate is Prime minus 25 basis points. But I’m sad because my savings interest rate is going in the toilet.

  42. SuperSally says:

    @petrarch1608: Yes, an article from 2005. Considering that now more than then people are defaulting on loans, the problem obviously got worse instead of better.

  43. taka2k7 says:

    @MonkeyMonk: Yeah, the taxpayers since we’re underwriting the risk, hows about we get a cut of the profits when the economy recovers?

  44. taka2k7 says:

    Charity Froggenhall said:

    Basically Americans have been living on cheap credit for far too long, and our financial chickens have come home to roost.

    Can I get an Amen?!

  45. @Charity Froggenhall:

    Bob Reich is, quite possibly, the most devious pied piper in American political economics. His beef is that the cheap credit in the 90′s accelerated the outsourcing process, and he’s spent his entire life arguing for protectionism. Throughout his tenure before he got canned for incompetence, he ineffectually waged war against the most important and effective trade bill in the history of America in NAFTA. From the perspective of his economic colleagues, it’s a little like he’s only scientist in the room that believes in cold fusion.

    As for your savings – the whole point is that now you’re motivated to invest in growth instead of trying to preserve your capital. Go buy real estate! Go buy stocks! Go start a business! Low credit is designed to enable your creativity. This nation has enormous resource problems and is giving away the funding for you to go solve them. Take it!

  46. The Porkchop Express says:

    @petrarch1608: How about you find some stuff to prove your point and then you can debate the facts?

  47. RandomHookup says:

    @AaronZ: The high cost of fuel has really dampened that European economy.

    It’s really a “rob Peter to pay Paul” argument. We can cut fuel costs now through some means, but will take a major hit later when oil supplies start to dwindle. It will cost more to get what’s left of the oil out of the ground and if we haven’t switched over to less oil consuming means of producing energy, we will really pay for it then.

    Wait until all the Chinese and Indians start owning cars at even a rate approaching Europe. $200 a barrel oil might be a distant memory.

  48. cerbie says:

    @MattO: gas goes up $20/week, and…
    Bread goes up $.15.
    Pasta goes sup $.10.
    Juice goes up $.25.
    Your favorite restaurant’s prices go up 20%.
    Newegg and Amazon’s prices go up 5-10%.
    UPS and Fedex shipping rates inch up.
    …and so on. It’s not just your fill-up that costs more. As it gets more expensive, we may start really seeing it in plastics.

  49. sabrinad says:

    @jtheletter: Speculators do not “add no value to the system other than to shuttle contracts around and increase the price” — they provide additional liquidity in the markets that would not exist if they were not allowed to participate. I.e., if Tom the Futures Trader couldn’t trade wheat futures (since he has neither a field nor a bread machine), Fred the Farmer and Bob the Breadmaker both pay more stagnant prices than they otherwise would, because they only have each other to trade with. Having a liquid marketplace which actively responds to conditions benefits the speculators and the “actual” product sellers/buyers. Banning derivatives speculation across the board is not a solution. It’s like saying you wouldn’t allow anyone to shop in a charity thrift store if you knew their intent was to list the item for sale on ebay, even if the donor and the thrift shop benefited by the speculator causing additional product turnaround in the shop (so donors can donate more things, thereby getting tax writeoffs, and the shop can sell more things, making more money for the charity).

    And yeah, by allowing more people access to the markets you do get more idiots, but that’s true of anything. (And it could be argued that the $100 barrel guy served a purpose, since, at a minimum, at least it got all the CNBC talking heads’ “OMG OMG OMG RECORD-BREAKING $100 OIL!!!!!” flailing out of the way. And since I wasn’t watching at the time, that means that’s some more CNBC “BREAKING NEWS!!!” I never have to sit through — bonus.)