Habit-Forming: Borrowers Keep Piling On Debt

The Wall Street Journal

Habit-Forming: Borrowers Keep Piling On Debt
As Lenders' Tighter Standards Cut Off Some Avenues, People Tap Credit Cards, Equity Lines
By JANE J. KIM
April 10, 2008; Page D1

The credit crunch has made it harder for Americans to indulge in their love affair with debt. So what are they doing? Borrowing more. While tighter lending standards have cut off all but the most credit-worthy borrowers from auto loans and home loans, many people are turning to credit cards and tapping more of their home-equity lines of credit to dig themselves in deeper. And lenders, once eager to lend to those with even spotty credit records, are trying to rein in borrowing by cutting consumers' available credit lines.

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The rise in borrowing shows just how addicted the U.S. consumer has become to credit. Even as borrowers are cut off in one area, they promptly look for new sources. Workers have increasingly been raiding their 401(k) plans to take out loans over the past year, according to plan administrators and nonprofit groups. Now, mortgage brokers say some clients are calling them in a panic, worried that their bank will freeze their home-equity lines. Deborah McNaughton, president of Legacy Financial Services Inc., says several of her clients have recently borrowed more from their home-equity lines of credit and stashed the money in bank savings accounts. Theresa Leick of San Juan Capistrano, Calif., a loan processor who works with Ms. McNaughton, pulled $21,000 from her available home-equity line of credit in February to park in a certificate of deposit.

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Credit counselors say they have started seeing more people turn to their credit cards to cover everyday items. "Food, fuel and medicine -- people are charging their day care, even their tithes to church, and any incidental items," says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling in Silver Spring, Md.

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But home-equity lines, once a major alternative to credit cards, are also getting harder to access. In recent months, certain lenders, such as Countrywide Financial Corp., Washington Mutual Inc. and Bank of America Corp., have reduced or frozen certain borrowers' home-equity lines of credit, especially in markets that have been hit by a slump in housing values.

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as opposed to actually buying new things.

Elizabeth Warren talks about this a lot.

What happens when these "debt addicts," no longer are able to get their "fix?" What happens when they are unable to pay off those debts?

I think they're going to run out the clock on 2008, and the true collapse might still be a year off. But make no mistake, it is coming.

Am I the only one who sees NO WAY out of this? A recession/Depression of epic proportions on the horizon?

You are definitely not the only one.

I saw this coming years ago. Neither an individual nor a nation can keep a negative savings rate up forever. Eventually the money runs out.

which often means going to the mall to purchase things whether you need them or not.

When the news come that retail sales tanked this quarter, and this is bad news, I have to ask: why?

Well, I know the answer. When 2/3 (some say now 3/4) of our economy is service driven than, yes, people stopping shopping is bad. But, really, we should applaud people who pay their debt and save and eat home more often and even skip the daily Starbucks that cost, what, $5.00?

really shitty wages. People expect to achieve a certain lifestyle, one their parents raised them to expect to achieve. They've been supplementing inadequate paychecks with debt at an increasing rate over the last 30 some years.

Very few of us out here had the discipline to suck it up and live out of thrift shops while all our relatives, friends and coworkers were taking European vacations on credit.

Now the whole house of cards is ready to collapse and we'll get hurt, too.

That's what conservative rule does, and we've had unbroken conservative rule by both parties since 1969.

... that just because someone has been crying wolf and the wolf didn't show up, that the wolf is never going to show up.

They think that since it's not really on the evening news, it's not happening.

They are very wrong.

When a person's lifestyle exceeds their means to support that lifestyle they very often deny that their lifestyle is unsustainable. So instead of adjusting their lifestyle to a more realistic level, they take desperate measures to try to continue to sustain something that simply cannot be sustained. Thus they not only merely postpone the crisis, but guarantee that the crisis, when it does come, will be all that much worse.

The solution is an attitude adjustment; adopt a philosophy of voluntary simplicity. It is so much easier, and more pleasant, to voluntarily adjust your lifestyle than to have changes forced upon you; changes which you resist, resent, and are not psychologically ready to handle.

.... true and well said.

"people are charging ... their tithes to church"

The 'real' habit-forming debt junkies that matters most to this economy today are found in the financial arenas.

There is no comparison to the collective American households borrowing power or habits to these actions:

- The Federal Reserve 'injecting' money into the markets.
- The Feds emergency 'auctions' for the banks.
- The U.S. Treasury sounding an alarm to curtail 'business' borrowing from sovereign wealth funds (vulture capitalist).
- The hard to suppress bursting bubble from a multi-trillion dollar shadow banking system which eclipses the American economy.

It's the business 'credit crunch' that will change the course of the country. And, it is also time to end the pretext that there's a direct linkage between the spending habits of an average American household and this country's multi-trillion dollar taxpayer burden generated beyond their control.