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"consumers rein in borrowing"
Old 10-07-2008, 02:19 PM   #1
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"consumers rein in borrowing"

From CNN.com:

Consumer borrowing down for first time in 10 years - Oct. 7, 2008

I wonder how many of the folks who are "reining in borrowing" are doing it by choice, and how many are simply unable to get loans due to the liquidity crunch in the credit markets.

I'm hopeful it's the former, and not the latter....
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Old 10-07-2008, 02:21 PM   #2
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Do not know the reason; but I see it as a GOOD sign anyway.
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Old 10-07-2008, 02:30 PM   #3
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This is one of those things that causes pain in the near term but can be very good for economic stability in the much longer term.

It's just unfortunate that it takes something this ugly to teach people about the wisdom of living within their means.
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Old 10-07-2008, 03:04 PM   #4
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Originally Posted by ziggy29 View Post
It's just unfortunate that it takes something this ugly to teach people about the wisdom of living within their means.
But does it? If the reason you're not out there financing a new Suburban is because they won't give you the financing, you're being forced to wait on a purchase you by definition can't afford. My guess is, though, that no "lesson" is being instilled -- since it's an external set of factors that's affecting your spending power, it seems unlikely that you're internalizing the moral of the story, and as soon as the credit markets open back up you'll be out there playing interest-rate roulette again.
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Old 10-07-2008, 03:08 PM   #5
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But does it? If the reason you're not out there financing a new Suburban is because they won't give you the financing, you're being forced to wait on a purchase you by definition can't afford. My guess is, though, that no "lesson" is being instilled -- since it's an external set of factors that's affecting your spending power, it seems unlikely that you're internalizing the moral of the story, and as soon as the credit markets open back up you'll be out there playing interest-rate roulette again.
Some will, some won't. I don't want to throw the D-word around willy nilly, but many people who lived through the 1930s were changed forever. They became much more conservative financially -- saved more, spent less, invested less, stuck more under a mattress, et cetera.

I have no doubt some of this is people who want to overspend but can't get the loan. But I do think at least some of this, if the current economic and market downturns last for any period of time, is "getting religion" about the value of living below your means and having a solid emergency fund, among other things.
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Old 10-07-2008, 09:53 PM   #6
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Originally Posted by ziggy29 View Post
This is one of those things that causes pain in the near term but can be very good for economic stability in the much longer term.

It's just unfortunate that it takes something this ugly to teach people about the wisdom of living within their means.
I read this and thought it was my post. Exactly what I've been saying the past few weeks ziggy, well stated.

This is one reason I did not want the bailout to pass. We need a heavy dose of reality. If the bailout cures everything soon (which I doubt it will), then likely all the yahoos that lived beyond their means before will go right back to it. I think learning this lesson the hard way would be good for us...I'd love to see a lot of people moving in with relatives, fewer people buying SUVs, more Kmart clothes vs. Tommy Hilfiger, more Miller Light and less Heineken, etc.
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Old 10-07-2008, 10:21 PM   #7
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Originally Posted by ziggy29 View Post
Some will, some won't. I don't want to throw the D-word around willy nilly, but many people who lived through the 1930s were changed forever. They became much more conservative financially -- saved more, spent less, invested less, stuck more under a mattress, et cetera.

I have no doubt some of this is people who want to overspend but can't get the loan. But I do think at least some of this, if the current economic and market downturns last for any period of time, is "getting religion" about the value of living below your means and having a solid emergency fund, among other things.
Agreed again on the value of learning lessons in hard times. I just don't think that the average debt-driven consuming American has gone through enough yet (or understands well enough yet) the gravity of our situation to significantly modify their behavior. They're used to relatively mild economic downturns that are softened by lowering interest rates and injecting more easy money and debt into their pockets and our economy.

It will take more of this, for longer, before they truly start getting that new religion. But I'm terribly cynical about this topic.
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Old 10-08-2008, 08:02 AM   #8
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I think the folks with marginal and bad credit should be thankful for the large screen TVs, vacations, and homes they got they probably didn't deserve.........

I talked to a banker I know, and he said that the HELOC business is on life support, and his bank is only loaning to folks that have stellar credit and a long-term relationship with the bank...........
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Old 10-08-2008, 08:37 AM   #9
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This article from our local Charleston SC paper had some interesting insights from the director of a non-profit counseling company as to what brings people to her door:
Charleston, SC Latest Local News: Lowcountry feeling squeeze

There are many others, however, who don't have enough money to worry about losing it in a bearish market. The nonprofit Family Services Inc. in North Charleston has never been busier. Hundreds of folks are coming in every month for help with their home foreclosures and credit counseling.
Debbie Kidd, the director, might be the only person in town hiring. They have 25 people doing the work that five people used to handle, and they could use a few extra hands. She says the instant gratification generation has caught up with people. They have the big houses, the flat-screen plasma TVs, the $600 car payments — and no way to pay for them. Six out of 10 of them, Kidd said, are juggling at least five payday loans.
"To be quite blunt, families are overextended," Kidd said. "They have the I-want-it-now syndrome. They've got all these things but can't afford to pay for them."
Family Services offers credit counseling in Kidd's Homeownership Resource Center, and says they are teaching folks how to budget. The first thing that goes is entertainment and superfluous stuff, like daily trips to Starbucks for some frappin' cappucino thingy that costs $3.50.
People eat out for lunch every day, go out to eat at night, and go to the movies every weekend. Entertainment budgets, Kidd said, add up. When you show that to folks, they are amazed and sometimes horrified.

The fact that 6 out of 10 of them are juggling at least 5 payday loans is remarkable. Let's hope the current "cold turkey" credit cutoff for these folks has a good effect in the end.
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Old 10-08-2008, 10:11 AM   #10
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I hate payday loan places. I've never used one but I think they prey on the poor choices and tight spaces people get into, and they charge truly horrific levels of interest. I can't imagine juggling five of those sharks.

I have a lot of sympathy for people who are trapped in a consumer lifestyle (I'm fighting that battle myself to some extent). I don't feel sorry that they aren't going to get their goodies, but I am sorry that they struggle so. My hope is that more are reining in spending because they choose to, because to me that signifies a wider cultural change that I think we need.

Sarah in SC, I've wondered about working for one of those counseling services, because it could be so fantastic to help people make real and lasting change that leads them to a freer life. But then I wonder, would spending all day helping people in horrible messes be a major downer instead? (Moot point, I've already got a full-time job with the kiddos)...
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Old 10-08-2008, 10:29 AM   #11
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Urchina, that is interesting, because it is one of the reasons I did the CFP, was the idea that I could work in consumer credit counseling at some point, either paid or as a volunteer.

I think that my frustration level with what I call "stupid spending" would have to be dialed back considerably to be able to assist folks, though. Like my DH has said, "Sarah's got some good information, if you can get past her presentation skills!"
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Old 10-08-2008, 10:33 AM   #12
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Like my DH has said, "Sarah's got some good information, if you can get past her presentation skills!"
You mean like looking the client in the eye and screaming, "WTF were you thinking!!!"?
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Old 10-08-2008, 11:01 AM   #13
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Yeah, well, there's that.
And the chilling look of "you really are a moron, huh?". I'm working on a poker face, but no luck thus far.

I sure hope there is a hell, because payday lenders should roast like chestnuts.
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Old 10-08-2008, 11:06 AM   #14
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There is actually a Ballot Initiative here in OH trying to "limit" these things. The limit is way too little, but it is an attempt to rein them in a bit. Have to see if it passes or not on the November voting.
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Old 10-08-2008, 11:07 AM   #15
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I hate payday loan places. I've never used one but I think they prey on the poor choices and tight spaces people get into, and they charge truly horrific levels of interest. I can't imagine juggling five of those sharks.
If a person is going to a payday loan place they are in trouble. But without them we would be back to organized crime loan sharks. To get rid of them would be like prohibition - people didn't stop drinking instead they went to organized crime.

Credit card interest rates, penalties and other fees are also outrageous.

Payday loan - Wikipedia, the free encyclopedia
Net profitability

A study by the FDIC Center for Financial Research[citation needed] found “operating costs lie in the range of advance fees” collected and that, after subtracting fixed operating costs and “unusually high rate of default losses,” payday loans “may not necessarily yield extraordinary profits.” Based on the annual reports of publicly traded payday loan companies, loan losses can average 15% or more of loan revenue. Underwriters of payday loans must also deal with people presenting fraudulent checks as security or making stop payments.
Critics concede that some borrowers may default on the loans, but point to the industry's pace of growth as an indication of its profitability. Consumer advocates condemn the practice as a whole, regardless of its profitability, because it "takes advantage of consumers who are already hard-pressed to pay their debts".[26]

[edit] Proponents' stance

Proponents claim that cash advance loans provide a service that is not available from other sources. Many credit unions have attempted to offer similar products, but have been unable to do so without government subsidies or grants, a fact that many lenders and reports have highlighted. Furthermore, most of these programs offered by credit unions have ended due to the high default rates of borrowers.[citation needed]
A staff report released by the Federal Reserve Bank of New York concluded that payday loans should not be categorized as "predatory" since they may improve household welfare.[27] "Defining and Detecting Predatory Lending" reports "if payday lenders raise household welfare by relaxing credit constraints, anti-predatory legislation may lower it." The author of the report, Donald P. Morgan, defined predatory lending as "a welfare reducing provision of credit." However, he also noted that loans are very expensive, and that they are likely to be made to under-educated households or households of uncertain income.
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Old 10-08-2008, 11:17 AM   #16
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I talked to a banker I know, and he said that the HELOC business is on life support, and his bank is only loaning to folks that have stellar credit and a long-term relationship with the bank...........
Geee.... just like the "good ole days!"
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Old 10-08-2008, 11:32 AM   #17
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Originally Posted by ziggy29 View Post
This is one of those things that causes pain in the near term but can be very good for economic stability in the much longer term.

It's just unfortunate that it takes something this ugly to teach people about the wisdom of living within their means.
Amen to that. Not to make light of the situation facing those who are truly in need (which isn't, thankfully, the vast majority of Americans), but I think we'll see a number of positive things come out of this downturn, not just a hard earned less about living beyond your means. As I'm fond of saying these days, "I think the current market corrections will trigger some long overdue lifestyle corrections."

In addition to Americans taking on less debt, they're also driving less and starting to eat lower on the food chain (which is not just cheaper, but healthier). They're also staying around home more and spending more time with family.

Gosh, I hate to think of the dire headlines in the months ahead if this continues. Things like: "American Obesity Epidemic Declines" "U.S. Families Closer than in Decades" "Environmental Qulaity Improves and Oil Prices Drop as Demand Decreases" (actually, that last headline is already making its way into the news).

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Old 10-08-2008, 12:18 PM   #18
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My parents grew up during the Depression and never forgot the lessons they learned from living through it. My brother and I were raised hearing the stories of unbelievable poverty and struggle. There were no food stamps or welfare. My grandparents did whatever they could to get food on the table and the rent paid. These were horrific times.

Those of us with parents like mine and my husband's, who suffered greatly, taught us to avoid debt and always have a nest egg in a safe place for tough times. My brother and I and my husband's siblings all learned the lessons of our parents and grandparents as I'm sure many of you have. LBYM is survival.

What we need to do for future generations is teach them the same lessons of survival and self sufficiency that have been lost over time. I hope our schools and media and places of worship will rise to the challenge. I'm not sure many parents are up to the task.
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Old 10-08-2008, 12:39 PM   #19
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Those of us with parents like mine and my husband's, who suffered greatly, taught us to avoid debt and always have a nest egg in a safe place for tough times. My brother and I and my husband's siblings all learned the lessons of our parents and grandparents as I'm sure many of you have. LBYM is survival.

What we need to do for future generations is teach them the same lessons of survival and self sufficiency that have been lost over time. I hope our schools and media and places of worship will rise to the challenge. I'm not sure many parents are up to the task.
As I've said here before -- I don't think it's a coincidence that we started repeating a lot of the same reckless mistakes of the 1920s once your parents' generation was increasingly no longer around to serve as a first-hand reminder of the economic hangover that comes from a debt-fueled consumer binge and speculation with borrowed money.

They were, to a large degree, the compass that guided prudent personal finance -- and once they started dying off in large numbers, we were seduced into steering off that course and right back into the abyss that we sailed into nearly 80 years ago.
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Old 10-08-2008, 02:33 PM   #20
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As I've said here before -- I don't think it's a coincidence that we started repeating a lot of the same reckless mistakes of the 1920s once your parents' generation was increasingly no longer around to serve as a first-hand reminder of the economic hangover that comes from a debt-fueled consumer binge and speculation with borrowed money.

They were, to a large degree, the compass that guided prudent personal finance -- and once they started dying off in large numbers, we were seduced into steering off that course and right back into the abyss that we sailed into nearly 80 years ago.
Couldn't agree more, Ziggy.

For those who have never seen "Cinderella Man" with Russell Crowe, it is an excellent depiction of true desperation during the Depression. I highly recommend it. It also paints a positive picture of what true "character" is all about.
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