Borrow: The American Way of Debt

This book is about the history of consumer borrowing in the U.S. It is not some kind of a personal finance book.It starts out with a scenario where a young couple needs a mortgage. They go to a local bank, where they are encouraged to take an “interest-only” balloon mortgage. They take it, but when the economy tanks, and their monthly payment soars, they realize that they made a mistake. The house is repossessed.The year was 1932…not 2008.With this, the author sets us up for a history of consumer borrowing in the U.S., including for real estate.About my only complaint with the book is that I would have liked more information about the consumer boom in the 20s. This was the era when personal loans began to be based less on assets, and more on repayments. Stores did not want to repossess refrigerators. The 20s were the first great age of consumer debt in the U.S., and this went strong until the advent of The Great Depression, which began in the early 30s.After that, it would not be until after WWII that a consumer boom would reappear. By the late 40s and through the 50s, incomes were steady and few lost their jobs. Borrowing and the accumulation of debt were back in style. In the words of the author, “The postwar suburb was a debtor’s paradise.”Per the author, the thesis of the book is about “how Americans came to rely on expected future income, rather than money in hand.” It is also about how credit “has the capacity to enrich our lives and to make our dreams come true.” But all this is not without risk.The author gives us a history of consumer debt in the U.S., and he makes the point that, as it was promoted and perfected, it led to the mentality that “never before has borrowing been so central to how (an) economy works.”Although there was credit for farmers and mortgage brokers going back to the 1880s, up until the 1920s, for the most part, Americans paid for what they could afford in cash. Even the Model-T Fords were bought in cash, the price of which had dropped by the mid-20s down to less than $300. Henry Ford wanted nothing to do with promoting sales via financing. But the General Motors Acceptance Corporation was all about financing, and it soon put Ford Motors out of business, as it urged consumers to buy on credit.The collapse of the real estate market in the 30s meant that consumers needed government protection. In 1934, the Federal Housing Administration (FDA) was established to provide a means for people to buy homes, as a way to pull the country out of The Depression and restart the economy. Up until this time, the mortgage industry had been a local and regional industry. This took it national. Per the author, the suburbs were built through this mortgage program.On to consumer goods, most televisions bought in the U.S., starting about 1950, were bought on credit. This was the age of the large department stores, and the more credit issued, the more merchandise was sold. Americans embraced debt; and, as a bonus, interest paid was deductible at tax time.The 60s ushered in the discount department stores, such as Wal-Mart, Kmart and Target. These stores reduced their overhead by introducing self-service shopping. Customers loved it. And the discounters welcomed something else that was growing in acceptance: credit cards. These cards eliminated the need for the discounters to offer credit and/or to chase customers who were late in their payments.In 1970, only about 15% of American households owned bank-issued credit cards; by 1980, that percentage was up to 35%; by 1990, it was up to 65%.Borrowing increased even more in the 70s, as more and more women entered the workforce. Even small stores and independent chain stores prospered. People with money paid off their credit card balances each month; those with less money paid interest of 18% on their continuing balances. General Electric Corporation made more and more of its money via its financial component: GM Capital, or GMC.For homeowners, the 70s were also a boom in increased equity. As the value of their homes rose, American households could afford to buy more, take more vacations, etc. Mortgage debt was thought of as “good debt.” And by the early 90s, home equity loans would become the prime way to “consolidate” debt.Up until 2007, home prices and the stock market rose, for the most part, in concert. Debt was not a major concern for most homeowners, who saw only rising values in their investments.To close this review, there is a good deal in the book, as well, about the secularization of mortgage loans, the sub-prime mortgage crisis, and other elements involved with The Great Recession that begins in 2008. I found it a good read, overall, and a good source of American consumer borrowing history.As an addendum, recent data from the federal government discloses that the U.S. public has a total credit debt of $3.84 trillion, and this does not include mortgage loan or home equity loan debt. Geeeezzzz!

I think this is a relevant book for these times. Credit is not a sexy topic, but a book like this is useful in providing the background to the evolution of credit with our modern economy. By illustrating the significant relationship between consumer credit and what composed so much of the driving forces in our economy emerging before the 1920s, the author demonstrates the key role that consumer credit played during these times. After reading this book, I cannot simply point the finger and state that all things would be ok if we had limited the extent of credit. It is so tightly integrated with that relationship that I have no idea how our system (I extend this to the world) would be if credit had been as constrained as it was before the 1920s. I think he does a good job at breaking down the components of a credit relationship; that being why would would somebody extend credit to someone in the first place, to show how the misinterpretation of information, such as the ultimately useless meaning of bond ratings, contributed to the recent real estate bubble. On a personal level, I think the take away message is pretty clear; our system loves it when I am left holding the bag. His suggestion for resolving the current situation, that being that credit from an investment standpoint is preferred to tradtional investments that result in improvement in middle class living standards, is unique and thoughtful, although lacking in detail.

Excellent book to understand the roots of credit and consumerism in the U.S. It relates how we converted from savers to spenders with money we didn't have. We became spenders with money we EXPECTED to have.

I have been practicing bankruptcy law for over 20 years. This book reflects what I have seen in my practice. I am not sure another government agency is the solution though.

Fast delivery, great book.