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How good credit trumps thrift as all-American virtue

(Shanghai Daily)

08:31, August 15, 2011

FERNANDO Bensuaski wonders in his article "America loses despite debt deal" (Shanghai Daily August 6) "When did it become fashionable to be a loser? When did it become fashionable to be a debtor?"

I have been wondering as much, particularly since the recent downgrading of the US credit rating by Standard &Poor's.

And in my bewilderment, I picked up a copy of "Debtor Nation: The History of America in Red Ink" (2011) by Louis Hyman, sent to me this January by the Princeton University Press, the publisher.

Part of my bewilderment is due to America's arrogance as a debtor, and its readiness to intimidate and belittle those who dare to lend trillions to it.

I am more puzzled by the fact that, in order to reduce its crippling dependence on American consumption without compromising its dazzling growth, the Chinese government has been calling on its citizens to spend.

Years of assets bubbles and runaway inflation are dictating a new code of ethics: those clinging to traditional values of thriftiness will turn out to be losers, while those willing to spend - even on borrowed money - are winners.

But to fundamentally create a nation of big spenders remains a herculean task.

Reading Hyman's history of American indebtedness, I find that Americans were not born big spenders.

According to the book, before 1917, lending money to individuals was not part of the normal business for banks.

"When friends and family were tapped out, loan sharks - whose interest rates dwarfed even the most subprime of lender's rates today - could provide cash, but these small-timers could never compare in power or wealth to the Gilded Age titans of steel and rail," Hyman writes.

As time went on, borrowing shed its social stigma of "semi-slavery," and became part of the American democratic aspirations to make modern amenities and luxury available to all.

When credit-worthiness, not thriftiness, becomes the hallmark of respectability, it represents the triumph of capitalism.

Borrowing was at the center of post-war American prosperity, fueling suburbanization, personal cars ownership, and shopping as a past time, not a necessity.

The change was perceived to be democratic because the differences between those who have money and those who have not became less apparent.

Economists of the 1950s claimed credit and indebtedness was not a moral failure, but a rational allocation from the future to the present. It maximizes the total pleasure of a lifetime.

Such rationalizations have been repeated half a century later as efforts are made to convert Chinese into good consumers.

As "Suburban Americans left government-mortgaged homes in installment-financed cars to shop on revolving credit at shopping centers," borrowing was redefined as normalcy, while thriftiness, as an aberration.

Some even believed this plenty for all was an alternative to socialism.

Of course, when banks began to lend to individuals, they were motivated not by democratic or socialist aspirations, but by profits.

Financial institutions began to turn good profits after adopting new methods to review personal loans applications.

The changed perception of personal borrowing was also part of US governmental crisis management strategy in the 1930s, when home mortgages were recast from being a heavy debt, to a responsible long-term investment, a bridge from owing to owning.

People were made more comfortable with debts on the assumption that debtors did not owe money to someone they knew, but to large, impersonal corporations.

Moral judgments were replaced by credit ratings.


This extravagance went on well until the 1970s, when post-prosperity America could no longer provide so many well-paying jobs, though Americans continued to borrow as their parents had done.

Their optimism had been buoyed by booming housing prices and new financial instruments that made credit anonymous and global.

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