Tuesday, May 15, 2012

Coming of Age in a Bubble

bubbles (5)A few weeks ago, I caught an episode of Frontline about the housing crisis and accompanying recession.  It answered so many questions that I had asked back when I was in college.

How it’s Supposed to Work

My parents raised us in a frugal environment focused on needs, balance and temperance rather than wants and extravagances.  We didn’t resent our classmates’ name brand clothing; we thought they were stupid for spending so much extra money for a logo.  We loved our quirky hand-me downs and our “Made with Love by Mother” labeled clothes.  Mommy and Daddy taught us to keep debt to a minimum, that there were trade-offs and wanting two things meant needing to make a choice and that sometimes you just have to wait.  They taught us the basic rules of living within your means and led by example.

And the Credit Flowed

By the time I was in college, I was questioning everything they’d taught me.  It was the turn of the century and the credit bubble was inflating.  The method of using business loan risk as its own investment product invented by young bankers at Chase had started spreading to other banks and other types of risk.  Credit was as free-flowing as water.

Mommy and Daddy had taught me that you needed to pay off the credit card balance each month or you would lose a lot of money to interest, eventually have a maxed out card and be unable to get more credit.  But life was telling me a different story. 

I was 20, a college student with a part-time job that paid barely above minimum wage and I had close to a dozen credit cards all with ridiculous limits. My Victoria Secret’s store card alone had a several thousand dollar limit.  (Who needs several thousand dollars worth of lingerie?)  Nobody turned me down. Nobody I knew was ever turned down.   Somewhere along the line, I stopped paying the full balance. Further along, I was only making minimum payments.  Whenever a balance approached my credit limit, I’d receive a letter in the mail telling me my credit limit had been increased.

I didn’t understand the logic of what Mommy and Daddy had taught me.  Why would anyone ever pay the whole balance each month?  It didn’t make sense when you could pay $30 – $100 each month and go out and buy as much as you wanted and basically never pay for it.  There was always another credit card to get, another limit to increase.   And there were no repercussions.  There was always more credit.

Luckily for me, the teachings of childhood were resilient.  Even though I couldn’t make sense of things, I believed what I was taught, figuring my parents must understand something I wasn’t getting.  So I started to work on getting rid of that debt while the bubble was still inflating.  During the summers, I worked two jobs, nearly 60 hours a week. I took a less-than-ideal job because it paid higher wages and I attempted to go bare bones on further spending.* 

Banking in the Bubble

That less-that-ideal job was as a loan collector for an American bank.  A bank that, while I was there, purchased a whole bunch of defaulted mortgages.  Again, life in front of me was going against my upbringing.  I phoned customers who were behind on their house and car payments.  I listened to their stories, and I couldn’t understand why the bank had made the loans in the first place.  People’s jobs had not changed; they just spent too much. 

They wanted to put their mortgage payment on a credit card.  Interest on top of interest.  But who cared when those cards came with unlimited credit?  A doctor whose mortgage was in default yelled at me that I didn’t know what I was talking about when I told him he could lose his house if he didn’t catch up on the mortgage.  “I filed bankruptcy before and I’ll just do it again before they take the house.”  Even a bankruptcy history didn’t stop the credit from flowing.


When the bubble burst, I blamed the spenders.  The people who didn’t follow Mommy and Daddy’s rules, the rules of the depression and previous recessions.  The people who did exactly what seemed to make the most sense.  The people who relied on the banks and credit lenders to make responsible business decisions.

I didn’t understand why the banks would make so many bad loans. It was downright stupid lending to people who couldn’t pay, people who already had mountains of debt.  I thought banks couldn’t survive if they made bad loans.  But I didn’t realize, the banks weren’t considering the risk of each loan because the banks had no plans to keep the risk.

By the end of the Frontline program, I still scorned the spenders for attempting to live beyond their means, but I also pitied them some and I was mad at the banks.  I was mad at the banks not for taking advantage of people, not for encouraging the lavish excessive of the ‘90s, not even for being lavish themselves.  No, I was mad at the banks for being so incredibly reckless that they weren’t even paying attention to their own best interests.  They broke the market.


*Honesty disclaimer: it took my college fund helping before I was fully bailed out.  On my income, I wouldn’t have been out before the bubble burst. And note, that said “attempted;” I have this thing for shoes.

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