Subprime Mess Proves That Household Deficits Do Matter After All

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Well, Henry Paulson spoke Monday. He said Americans could expect some relief from the subprime mortgage problem very soon.

What could he have in mind? The ‘teaser freezer‘ program we discussed yesterday. Isn’t it wonderful how government can make things better by decree? By edict! By passing a law! Got trouble with your contracts? We’ll just change ’em. Can’t pay your bills? We won’t let the Constitution’s right to contract stand in the way… we’ll alter the terms… or impose a moratorium on collections. Lickety split, no problem. Spend too much money? Running a little short? Don’t worry about it; we’ll print up some more.

Who says government can’t be a positive force?

“World War II was the last government program that really worked,” George Will used to say. And we’re not even sure about that one. In Europe, we defeated one monster… but saved one that was just as bad, or worse.

Well, now we have another chance. This time, we’re going to rescue Americans from the evils of predatory financing. That’s right. The evil predators hunted for poor people. These people had no money, and often, no jobs either. And then, the predators got ahold of them – duping these people into accepting a cheque for US$100,000… US$200,000 …maybe even more.

The poor people moved into a brand spanking new house. They enjoyed their new digs – they spilled beer on the carpets…broke the handles on the cabinet doors… left hand prints on the walls…

…and now, wouldn’t you know it; those evil predators want their money.

Of course, the poor people can’t pay what they don’t have… so they’re being forced to pack up and move out. How’s that for a national tragedy? Surely, something can be done!

Ah yes… the teaser rates can be frozen… so the poor people can stay a little longer without having to pay for what they get.

And while we’re at it, say the feds, we’ll lower interest rates, and maybe print up a few more US$20 bills… that ought to help, too.

That’s the trouble with government tricks: they don’t really work. You can’t really make people richer… or erase their mistakes… by edict. You can’t even make them richer by giving them more money.

Think of people who are on welfare. Are they richer simply because they get a cheque from the government? Not the ones we knew in Baltimore. They would have been better off without the checks; they would have been forced to get jobs… to straighten up… to acquire the habits, skills and discipline of successful people.

Think of the people who win the lottery. They get a big dose of cash. For a while, they’re able to enjoy it. But then, usually after a couple of years, they’re broke.

Or take Spain in the 16th century. It was the richest nation in the world. But the wealth came from larceny, not industry. It stole the gold from the Incas and Aztecs. Scarcely two or three generations later, Spain was broke. It lived in poverty for the next 300 years – until low interest rates from the European Union brought a boom.

Easy come, easy go.

“It works that way on Wall Street, too,” said a friend, “The guys I know make a fortune. They get bonuses of more than US$1 million per year. But do you think they have any money? Not really. Their expenses rise to meet their income. Pretty soon, they NEED US$1 million a year just to come out even.”

And think of the poor people of Zimbabwe. If money could make people rich, they’d be the richest race on the planet. The Zimbabwe government is printing up new money so fast the printing presses are melting down. The Economist reports that now “Zimbabwe’s chief statistician said he can no longer work out the country’s inflation rate because there are not enough goods left in the shops to count. In September inflation was reckoned to be almost 8,000%.”

Stick with us, dear reader… we’re on our way down to Jo’burg. We’re flying high… and reaching for a bigger point.

True prosperity doesn’t come from money… but from habits, ideas, and attitudes.

As we were speaking to an investment group on Friday, we realised that we had stumbled onto something. The idea first surfaced while watching British television. There is a show in which entrepreneurs try to get funding from a group of rich people. The moneybags act like they know what they are doing – and sometimes they do. But what is interesting is that the supplicants readily accept humiliation; they believe that the route to success lies in getting the big shots to back them.

What are they thinking? They believe that making money is so important… and that the way to do it is to start a business… with some rich SOB as your partner. Most amazing, viewers seem to think so too… or at least are willing to be entertained by the process.

This kind of show would have been impossible a few years ago. Making money was a private matter; you wouldn’t want to put it on display. And in most societies, throughout most of history, grubbing for money was not especially laudable either. Most people… in most eras… have had better things to do. The idea of making money was actually reprehensible to many. “Behind every great fortune lies a great crime”, said Balzac. The French still believe it. There is something slightly foul about having a lot of money. And if you do have money in France…the last thing you want to do is to flaunt it; or someone will soon be trying to take it away from you.

Not so in the Anglo-Saxon countries. We believe in money…in getting as much of it as possible…and in spending it too. Just look at the streets of London or Los Angeles; compare them to the streets of Paris or Rome. The English-speaking cities are full of flash – big, expensive cars. The streets of European cities have fewer Hummers plowing through the lanes. The rich tend to hide their wealth, as if they were embarrassed by it.

Even in the English speaking countries, people used to have less faith in money. Most importantly, they weren’t so sure it was so easy to come by.

They didn’t talk about it so much. They didn’t lust after it so avidly.

We live in a New Era, dear reader… without even realising it. Until the 1980s, people didn’t believe in modern capitalism the way they do now. They didn’t think that our American-style capitalism, entrepreneurship and the free enterprise system were so dynamic that we could deny the lessons of centuries. They didn’t believe that ‘deficits don’t matter,’ in other words. Or that you could buy what you don’t need with money you don’t have and expect to prosper.

Now, at least in the subprime mortgage business, we’re rediscovering ancient truths… that household deficits do matter after all. Watch out, dear reader… more truths are headed our way.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. A few comments:
    -Quote: “The English-speaking cities are full of flash – big, expensive cars. The streets of European cities have fewer Hummers plowing through the lanes.” This may be technically true, but I have spent some years in Europe. I saw plenty of nice gadget cars careening dwon the roads. The Med-Euros don’t drive big cars, but plenty of them drive nice cars, they just have a sleeker sense of style. But it is still fliashy. Have you priced a Lamborghini lately?
    -As for the whole thrust of the article, I am not sure where you going with it. Are you saying that you shouldn’t use money at all or just paper money? Even if you use gold, you are still just using a basically valueless subtance to represent something valuable. Money isn’t worthless, paper or not, unless everyone around you agrees it is. You seem to be implying that, according to the “lessons of the centuries,” one should only barter. Also, where it comes to credit problems, you are confusing the problem of taking on reasonable debt and unreasonable debt. This is simply the lesson that Ben Franklin tried to teach us all – moderation is the key to happiness. If you need a little credit to get a shop started, one that you have reasonable reason to believe will be profitable, then you should take the credit. This whole concept of giving credit and loans is what allowed small entrepreneurs to arise in the Western World, as opposed to those in Asia and Africa who had no such options. Other areas that did not have such a systems saw more of their poor people who had great ideas stay poor. And their societies never benefited from their good ideas. A little credit can benefit everyone. Of course, too much and too rashly given, credit is a very stupid idea.
    -You seem to need a return to basic principles. Why do we have money? We used to barter, that worked for thousands, maybe millions of years. What advantage does using money give us? Money allows us a uniform unit of account, a widely accepted medium of exchange, and a storage of wealth. These uses only work if the currency is universally accepted. People have chosen all sorts of things to serve as money. Gold is obvious, but paper serves as well. It is not the substance itself but what it represents in the minds of its users that is important. Cheers.

    PatricktheRogue
    December 5, 2007
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  2. It’s very true what the person above just said, that “people have chosen all sorts of things to be used as money”. Heck, back in the olden days, people used to get paid in salt. That’s where the word salary comes from- from the word salt. The term salary comes to us from sal, the Latin for salt, along with the story that Roman soldiers were often paid with salt, which at that time was both valuable and tradable. Some scholars doubt that, and suggest the term comes from the money given to Roman soldiers to buy salt.
    Whatever, salary definitely comes from the Middle English salarie, from the Latin salarium, from the neuter of salarius, meaning pertaining to salt.

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  3. Ps- did you know that the word mortgage comes from french words “mort” meaning dead, and “gage” which means pledge. The word mortgage literally means: “a contract until death”, and by the way did you know that the word mortuary is also derived from the same word as the word mortgage. Kinda makes you think doesn’t it?

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