Bankrupt Nation - Whatever Happened to America

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I was born in 1942. I was born into a nation in which even the poor saved. I now live in a nation where even the rich cannot save. To understand what went wrong you must understand the past. To an amazing extent our financial ruin was caused by the creation of two debt instruments, the credit card and the 30 year mortgage.

Prior to the 1930s the only mortgage that existed was a 5 year mortgage with a 50% down payment. The usual mortgage interest rate it is interesting to note was 6%. And yes everyone put 50% down or they could forget about buying a home. When the 5 years were up you went down to the bank and kept rolling over the mortgage until you were able to pay it off. In those days Americans were ferocious savers. It was common for people to pay off their homes in 15 years or less.

The only notable exception to this was the well known Sears kit-built homes. These homes were in vogue in the two decades prior to the depression. Since Sears knew the cost of construction of these homes they sold them for only 25% down.

In the depression 1930s the government stepped in and created the 20 year mortgage and reduced the standard down payment to 10%. You will notice that I said 20 year mortgage and not 30 year mortgage. That hideous beast had not yet been created.

Under the old mortgage system of large down payments and a 20 year payoff your equity accumulation was rapid. Under the new 30 year mortgage system you were in debt forever. On a 30 year mortgage after 15 years of payments you have amortized only about 24% of the mortgage. What is even worse is that the average American moves every five to seven years. In those years there is almost no repayment of principal at all. It is almost all interest. And the impact of this mortgage on your ability to accumulate wealth was brutal.

On a 20 year $200,000 mortgage @ 6 1/2% you pay a total of $260,000. On a 30 year $200,000 mortgage @ 6 1/2% you pay $390,000. That is an additional $130,000 in payments. Now you know why it is so difficult to get ahead. The 30 year mortgage is killing you.

The other doomsday weapon of financial destruction started out very innocently. In 1950 two businessmen started the Diners Club, the first credit card company. Its primary purpose was to enable businessman to prove to the IRS how much money they spent taking out clients. And until about 1960 only businessmen and rich playboys had credit cards.

I still remember how shocked I was when I went home on leave in 1961 and discovered that my mother had acquired a credit card. She didn't look like a rich playboy to me. I was a hard case. I was 30 years old before I broke down and acquired a credit card.

The credit card has wreaked havoc on the American people. It has transformed us from a nation of savers into a nation of debtors with dire consequences. As late as the 1980s the US savings rate was 10%. Throughout our history we were routinely able to save 10%-15% of our income. Not any more. Since 2005 our savings rate has been less than 1% and now hovers at zero.

Total credit card debt is up an astounding 435% since 2002. Those credit card households that carried a balance in 2007 averaged $9,840 in credit card debt. A new record. Total household debt is now 131% of disposable income. Another record to be proud of is that 25% of all college graduates owe at least $20,000 of tuition and credit card debt. An astounding one in seven households has either filed for bankruptcy or is under the protection of a court appointed credit counselor.

None of this is surprising when you take a gander at the brutal interest rates that credit card companies charge. The best credit rates are about 9.9%. The rates for bad credit are a suicidal 22%-28%.

There are many Americans who are walking around today that are bankrupt and don't know it. The debt loads that millions of Americans today regard as normal are not normal at all. They are suicidal over the long term. At 10% interest compounding debt doubles every seven years. How many Americans can double their income every seven years? At 22% compounding debt doubles every three years. These are suicidal numbers.

The subprime crisis is not the end of our debt problems but only the beginning. The only reason the debt crisis has been staved off for as long as it has is because the American people were able to use their homes as an ATM machine. An astonishing number of Americans are living in homes they cannot afford and are carrying debt loads that can no longer be sustained.

There is only one question that remains to be answered. What were the banks thinking of? For generations banks have possessed the know how to ascertain how much debt their clients could safely carry. They have insanely violated these tried and true standards on a massive basis in return for abnormally high short-term profits. And they are now reaping the whirlwind.