Financial Planning

Who’s to blame for the financial crisis? Look in the mirror

BlameHave you ever had one of those moments when it feels as though you've been sucker-punched by a new perspective on a nagging problem?

It happened to me today, and it was unexpected and jolting.

It came about halfway through this week's edition of "This American Life," just about the finest radio program ever produced. The episode, titled "Bad Bank," offered plain-English explanations for the banking crisis, and at one point reporters Alex Blumberg and Adam Davidson cornered Columbia Business School professor David Beim and asked for his opinion on the state of things today.

Beim responded by pulling up a graph on his computer. The graph charts the ratio of American household debt to our gross domestic product. That ratio usually falls between 30 to 50 percent -- that is, the cumulative debt of all American households usually amounts to between 30 and 50 percent of GDP.

From 2000 to 2008, though, the graph shoots upward "like a hockey stick," Beim says, to the point where household debt now equals a full 100 percent of GDP -- about $13 trillion each. "That is a ton," Beim says.

But the really eye-opening thing is this: According to Beim, there has been only one other year in American history in which household debt hit 100 percent of GDP. That year? 1929.

And then, Beim sucker-punched me.

"That chart is the most striking piece of evidence that I have that what is happening to us is something that goes way beyond toxic assets in banks. It's something that has little to do with the mechanics of mortgage securitization, or ethics on Wall Street, or anything else," Beim says. "It says: The problem is us.

"The problem is not the banks, greedy though they may be, overpaid though they may be," he continued. "The problem is us. We have overborrowed. We've been living very high on the hog. Our living standard has been rising dramatically in the last 25 years, and we have been borrowing much of the money to make that prosperity happen."

Beim's final point is this: Telling banks that they can help fix the economy by lending more money is exactly the wrong thing to do. "The name of this problem is too much debt," he said. "We have overborrowed, and we have done that over many, many decades, and now it has reached an unbearable peak where people cannot repay the debts they've got. In the face of that, it is no solution to try to lend more."

That argument renders calls for increased consumer spending laughable.

It also lends a renewed air of credibility to the CPA profession's "Feed the Pig" campaign. Decreasing household debt and increasing personal savings are not only good for your financial health, they could go a long way toward fixing our nation's financial problems.

Yes, lenders made tons of questionable loans to credit-challenged consumers. Yes, analysts offered blind blessings to complicated new investment vehicles with no track record. Yes, respected Wall Street veterans pulled the wool over gullible investors' eyes.

But none of that should excuse our own lack of financial literacy. If all of us had exhibited even the slightest bit of financial acumen, we wouldn't be in this mess today.

What do you think? Are we as much to blame as they for this financial mess?


Bill Sheridan