Greeks Got Cheap Money and Went Hog Wild

Planet Money has a great, easy to understand story on what happened in Greece.

Essentially, Greece borrowed money by selling bonds, which led to an influx of money to Greece, which caused cheap credit, which then caused the government and its people to go hog wild in spending. Sound familiar?

The average Greek citizen has been borrowing from the rest of the world for decades.

Greece has 120% debt to GDP (the value of all of a country's goods and services). The U.S. could have a 100% debt to GDP by 2014.

Listen to the Planet Money story here.

I'm hoping Americans are saving their money, making wise investments and feeling less entitled to a house and other material goodies, because in the coming years, once jobs have returned, as Obama keeps warning (he did in Buffalo today), serious reforms are going to have to be made in the U.S. and it's going to hurt.

The main issue for the U.S. is long-term deficit, which can't be fixed by spending cuts alone:

Here in the United States, we’re likely to have the chance to solve our problems before our lenders demand it. Those lenders continue see the American economy as a safe haven, thanks to our history of strong economic growth and political flexibility.

It is even possible that future growth will make the current deficit projections look too pessimistic. That sometimes happens when the economy is weak. In the wake of the early 1990s recession, for example, almost no one imagined that the budget would show a surplus by the end of the decade.

But the main issue isn’t the near-term deficit — the one created by the recession, the wars in Iraq and Afghanistan, the Bush tax cuts and the Obama stimulus. The main issue is the long-term deficit. NYT

Some of the possible fixes:

A plan that included a little bit of everything, and then some: say, raising the retirement age; reducing the huge deductions for mortgage interest and health insurance; closing corporate tax loopholes; cutting pensions of some public workers, as Republican governors favor; scrapping wasteful military and space projects; doing more to hold down Medicare spending growth.

Much of this may be unpleasant. Read more at NYT

A Scary Debt to GDP Chart Suggests Depression

Former banker and professor David Beim says the real problem with the economy is that we over borrowed. I think we all realize that. He says that household debt is now 100% of gross domestic product (the measure of all of our goods and services). It's usually 50% of GDP. 

Some say GDP is over rated. But if we're going to listen to Beim, he says the only other time in history that was the case was 1929. Perhaps this is why banks aren't lending -- because there are few people left who are worthy of a loan. People are up to their eyeballs in debt.  

Planet Money: He has a chart illustrating how much debt American citizens owe, how much we all owe — with our mortgages and credit cards — compared with the economy as a whole. For most of American history, that consumer debt level represented less than 50 percent of the total U.S. economy, as measured by gross domestic product.

And then …

"From 2000 to 2008, it's almost a hockey stick. It just goes dramatically upward," Beim says. "It hits 100 percent of GDP. That is to say, currently, consumers owe $13 trillion when GDP is $13 trillion. That is a ton."

This has happened before. The chart shows two peaks when consumer debt levels equaled the GDP: One occurred in 2007, the other in 1929.

And that scares Beim.

"That chart is the most striking piece of evidence that I have that what is happening to us is something that goes way beyond toxic assets in banks. It's something that has little to do with the mechanics of mortgage securitization, or ethics on Wall Street, or anything else," Beim says. "It says: The problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us."

We have overborrowed, Beim says: "We've been living very high on the hog. 

Beim also says that there is no solution that will punish only those who over borrowed. All of us will have to suffer. He says lending more money is not the answer but he doesn't suggest any solutions. Everyone predicts doom and gloom and throws tomatoes at Obama for his multi-pronged strategy, but no one actually presents a solution. At least the republicans are consistent -- tax breaks. I'm not sure that's the answer but it would be nice to live in a parallel world where we could try both. Beim does say that the federal government needs to buy up all of the banks' bad assets, sooner rather than later. It seems we all just need to get used to living without borrowing so much. If we need a car, we should save a big down payment or buy a used car. If we want a house, we should put down at least 20%. We should pay off our credit card balances every month. We shouldn't go back to the way it was. It would also be nice if the very wealthy (who really are the winners in terms of how little they will need to sacrifice compared to everyone else) would trickle down some of that money to their workforce instead of hording it in overseas bank accounts and paying exorbitant salaries to executives. Obama's "redistribution of wealth" (that's right all the Joe the Plumbers out there) should be a help in creating a more equitable tax system. Reforming healthcare and education will go a long way toward a more stable economy in the future. The stimulus should plug some holes. But who really knows what the answers are. I think the one thing we've learned is that there really is no such thing as an expert. 

These were the good ol' days when Lending Tree would lend you money to pay off your debt. I'll bet they made themselves a fortune for a while.