Common Sense

You’re a financial institution, who just issued a newly married couple their first mortgage, to help pay for their new house. Everything’s going well until one day, going over security camera footage, you see that at midnight before the last payment came due, the husband & wife had come into the public lobby of your bank, and argued loudly about whether they should even continue to pay you at all.

Eventually, they decided to pay, of course. But only after a long and angry debate, where it actually looked like the couple might default. You’re not sure why they came so close to not paying. But, it looks like one of the newlyweds wanted to ignore their responsibility as a couple, based on some matter of principle, and probably to gain an upper hand in the marriage.

Puzzled, you play the security tape back again. You wonder, what happens next month? Thank God that one of them has some understanding of financial responsibility, but… how much longer can will balance of power hold?

Two weeks later, the couple comes in to ask for a loan to pay for a new car. What do you do? How much interest do you charge — a little or a lot? And who’s most to blame for your decision?

Exactly.

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10 comments

  1. Another analogy:

    A different couple makes a combined $225,000 per year. The have a nice home, nice cars, life is good. Because of their good fortune they also start giving back to their community. They start a non-profit to help inner city kids and infuse it with their own cash. They donate to several other charities. They also provide for the security of their neighborhood by paying for an off-duty cop to patrol several times per week.

    But at some point they over-extend themselves and start having trouble making their bills. They find themselves borrowing money so they can live the same lifestyle, help the community, etc. At some point they need to have a come-to-Jesus moment. In the short term, do they trim their obligations, or do they ask their booses for a raise?

    1. Mike,
      Most people I know would do BOTH; or at the very least would look for additional income in some fashion while trimming expenses. Your Party seems hell bent on only cutting back.

      And the household budget analogy continues to be dead flat wrong – when the price to mow your lawn goes up, that doesn’t change the cost of your mortgage. Unfortunately out here in government land, that’s exactly what happens, and it happens routinely

  2. Your blog ate my first comment. Basically, while your little story is wonderful partisan politics, it’s misleading because the core comparison – the U.S. to a newlywed couple going for a first mortgage and new car – is invalid and you ascribe the downgrade to the debt ceiling red herring and not the craptacular debt-to-income ratio (or if you prefer, debt-to-asset and debt-to-GDP ratio).

    The U.S. is at the point where it’s comparable to a person routinely taking out payday loans. After all, we needed to raise the debt ceiling in order to get more loans, and we needed those loans in order to… make payments on outstanding loans. Just as a person in that situation doesn’t deserve an 800 FICO score, a country in that situation doesn’t deserve an AAA rating.

  3. These bedtime stories are all very nice, but if I may speak on behalf of the rest of the world for a moment here, I think were all just sort of waiting for you guys to wake up from your shared fantasyland and do something.

    I mean, for God’s sake, even the Greeks are being more responsible than the US right now. Sure, the mess they’re in is much worse, but at least they’re making some hard choices to solve it.

    1. Greece also has much more of a debt load than the US so it’s not exactly a fair comparison.

      http://stats.oecd.org/Index.aspx?DataSetCode=GOV_DEBT

      1. Yeah, but the point is that the Greek politicians have actually made some pretty hard choices to clean up their mess, and some of them have probably killed their careers doing so, whereas the US government continues to do absolutely nothing.

        Even that would be fine if it were just your own affairs at stake here, but the problem is the US is such a huge part of the world economy that anything you do (or not do, in this case) affects everyone else as well.

  4. I’d be curious to hear Ames’ prescription for fiscal solvency.

      1. Looks sensible, although I’m afraid you’ll probably have to find another $150bn pr year for increased debt interest following the debt downgrade.

        And of course now I’m curious to see Mike’s ideas as well.

      2. An alternative, using the same simulator: roughly a 30/70 split.

        I’m not super-fond of that simulator, though, mainly because it’s 10 months old and doesn’t reflect policy proposals that have been made since then, changed economic conditions, or changed situation in Iraq/Afghanistan. Also, one of my “spending cuts” really should’ve been treated as a “tax increase”.

        Honestly, my favorite “budget simulator” online is the American Public Media “Budget Hero” game. Its interface is a little too cartoony for my liking, and it doesn’t give you enough “fine control” with the tax options, but it’s pretty thorough on the spending side of things, gives you a breakdown on the category of spending (health, social security, military, interest payments, etc.), and lets you include spending increases for certain programs as well as tax cuts if you’re so inclined.

        There’s also a simulator at crfb.org that would be good if it didn’t appear to be using what looks like 2009 data. Also, the output’s primarily in the form of Debt as % GDP, which is kind of annoying.

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