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How To Walk Away From Mortgages, Credit Card Debt, Medical Bills, Loans, and Stress






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What's Good For Main Street Is Good For America:
The Case For Walking Away From Personal Debt



Nicholas Carroll
Originally posted: 11/6/2009
Updated: 6/25/2010 (dates changed to "2010")


This article is about making the decision to walk away
from overwhelming medical, mortgage, or credit card debt –
and how walking away from those debts may both benefit the
American economy and help level the playing field
between the rich and the rest of us.

Mainstream Economic Myths That Have Failed

Does anyone remember the classic Wall St. slogan "What's good for General Motors is good for America"? (They used to teach it in high school Civics classes.) This might have made some sense in the 1970s – until several million Americans lost their high-paying manufacturing jobs in the first half of the 1980s, and moved on to low-paying service jobs.

Today, does anyone still believe that what's good for big business is good for America? I don't. In late 2008 a Danish businessman told me that the economy was still OK in Denmark, saying "We don't have your problems. But of course Denmark doesn't have big businesses. Just medium-sized businesses that didn't get reckless."

End of that argument, I think. No one in their right mind still believes that huge financial conglomerates are inherently good for America. Huge businesses just happen to be a side-product of a big nation full of ambitious people. Of these huge businesses, financial conglomerates had the least reason for existing, and provided the least benefit to America.

Then there is the "trickle-down theory," which was a lie from the beginning – all we've seen in the last decades is trickle-up, with the rich getting richer. Warren Buffet laid that truth out clearly in a 2006 interview with The New York Times: "There's class warfare, all right," Buffet said, "but it's my class, the rich class, that's making war, and we're winning."

This trickle-up has if anything accelerated as the financial crisis has deepened. In Fall 2008 the U.S. Treasury handed $700 billion of the taxpayers' money over to big reckless lenders, and asked for little in return. There was some vague notion they would resume lending to consumers and keep the economy rolling, but the Treasury didn't get it in writing.

So the big reckless lenders gave themselves more bonuses, socked away the rest in the vault – or invested it in Treasury bills – and continued to slash consumer and small business credit lines.

Meanwhile the Federal generosity continues – if less openly than in Fall 2008 – but the money is not trickling back to Main Street, much less flowing. The Financial Times on Oct. 23rd 2009 ran an interview with George Soros titled "Soros calls Wall St. profits 'gifts' from state." In the article Soros is quoted as saying "Those earnings are not the achievement of risk-takers. These are gifts, hidden gifts, from the government, so I don't think that those monies should be used to pay bonuses. There's a resentment which I think is justified."

A New Capitalist Formula For Regular Americans

I propose a new formula: What's good for Main Street is good for America.

By Main Street I mean the worker bees, the 99% of the American people that get to divvy up 62% of the nation's wealth, not to be confused with the one-percenters who own 38% of the wealth.

By good I don't mean mega-homes for all, with SUVs in the driveway. Those were the dreams created, packaged, and sold to us by the one-percenters, in an effort to grab even more of our money.

This is the core of the formula: the quickest way to reverse the trickle-up is prudent walkaway, the growing practice among Americans in financial trouble of walking away on most or all of their debts without any warning to lenders – while they still have assets. This keeps more money in Americans' pockets, which can be used for things more useful than mega-homes and SUVs:

  • Your family's education. A lot of jobs are disappearing because of the Great Recession, and others for reasons like economic globalization. In either case most Americans will be paying for their own education and re-education.
  • Put some money "under the mattress" for emergencies. We used to rely on unused credit cards for emergencies, but by mid-2010 many people won't be using credit cards anymore, since the annual fees will have skyrocketed ($99 from Bank of America) and the interest rates will be even crazier (29.99% from Citi).
  • Put some money in a credit union that will lend locally instead of funding Wall St. (Also, the money will be safer than in a bank. And they'll hand you a debit card, which is what we may all be using by the end of 2010.)
  • Not least, put some money into "personal infrastructure" – maybe more than you put under the mattress or in a credit union – which would include things like new tires for the car or staples that can be bought cheaper in bulk or at sales. Aside from being a better return on your money than the 1% banks and credit unions are paying, infrastructure holds its value if high inflation sets in. (Yes, hyperinflation is a doomsday conspiracy scenario to people who have never been through it, but plenty of serious financial observers are watching the U.S. dollar very nervously.)
  • Lend to family and friends for education or business startups with solid prospects. (Repeat, "solid prospects" – people and businesses that are serious, and serious about repaying investors. 2010 is not a time to be gambling.)
  • If you have friends in solid seasonal businesses, consider lending to them directly. Many of these are reliable businesses that happen to be seasonal, such as farming, and have now seen their credit lines cut despite years of reliable payment.

The proposal is that in the long run, debt walkaways are good for America. If we can't stop the Treasury Department and Federal Reserve from handing our tax money over to the bonus babies of Wall St., at least we can stop funding the bonus babies directly with mortgage balloons and 29.99% credit card payments.

Basic Economics of the Walk Away From Debts Formula

A caution on putting too much money under the mattress. Money has to move to work.

Economists and bankers like to talk about "MV" – the velocity with which money changes hands. Common sense can describe it more simply: if everyone keeps 100% of their money under the mattress, the economy freezes. If you don't buy a quart of milk, the store can't pay the dairy farmer for milk, the farmer can't pay the feedlot for grain, the feedlot can't pay the gas station for gas ... you get the picture. Some money has to flow through the economy or there is no economy. If everyone stops paying on debts to the big crooks but keeps 100% of their money in buried cash, pretty soon we'll have no economy at all.

So put some of the money you don't send to Wall St. in a credit union, where they'll actually lend it out ... locally. Keep the money on Main Street, working for Americans. Invest in yourself, and in family and friends.

Guilt About Walking Away: Morality and Duty

9/17/2011 - after over three years of interviewing people in debt, I finally figured out why people are so reluctant to walk away from debt. It's because morality and duty have gotten mixed up, or – much to the delight of the rich – we working stiffs have come to consider them the same thing.

Dictionaries' first definition of both duty and morality are usually "what's right." If you dig deeper into the roots (etymology) of the words, they are quite different.

Duty describes deep obligations that transcend time and cultures: rescuing a drowning child, carrying an injured friend off a mountain, or dragging a wounded buddy out of battle. These values are the same in ancient Rome, the Amazon jungle, or the USA today. They are obligations so deep that you don't think much about obligation, you just do it.

When you do think about duty, the obligations are still quite clear. World War II was about saving half the planet from totalitarian rule, and most Americans considered it their duty to put their shoulder to the wheel, or even put their lives on the line. The war in Vietnam was a different critter, and today few people would say that any American had a duty to fight in Vietnam – but if you were fighting in Vietnam, there was no question that you had a duty to drag a wounded buddy out of battle.

Duty doesn't enter into business much, it never did. As recently as a couple of hundred years ago in the U.S. it meant to "hold up your end of the log" (literally, if you were building a barn), or keep your end of the bargain. In bargains, as with logs, the other person was expected to hold up their end.

Morality is a quite different word. From Latin, through French, to Middle English, it has been defined as "correct behavior in society." (In Medieval French it didn't even mean that, it just meant "customary.")

Because societies change, morality is not a near-constant value like duty. Today, for example, we consider it immoral to steal from our employers. As recently as 1870 in the U.S., "dipping the till" was considered a standard part of a clerk's income (just as taking bribes is a standard part of a policeman's income today in many parts of the world). Then cash registers were invented, clerks couldn't steal anymore, and then employers had to pay them higher wages so they wouldn't quit. In just 30 years, stealing from the cash drawer went from moral (or at least customary) to immoral. Society had changed, and proper behavior had changed with it.

The morality that average Americans are trying to work under today was, in my opinion, created by Henry Ford in 1914, when he raised worker's salaries from $2.34/day to $5 a day, in part to reduce turnover, but also "so they can afford to buy my cars." The rich howled in rage, then realized that Ford was making even more money, and got on the bandwagon with a new social covenant: "The rich shall not excessively rip off the workers." Our part of the deal, we the non-rich, was to pay our bills on time and be good boys and girls (at first by working on factory lines, then in cubicles), and buy more stuff.

We did our part, the rich did their part, and in the 1920s there was a growing middle class in America. The covenant was working well. After the little speedbump of the Great Depression, the deal started working beautifully in the early 1950s. The rich were getting richer, and we were getting cars and air conditioning and steak twice a week.

Starting in 1978, when all 50 states abolished 9% interest limits on credit cards, on through the savings & loan scandal of the 1980s, to the last 10 years of massive fraud by investment and mortgage banks, as they played Monopoly with people's homes, the convenant collapsed. So paying big banks was moral – or correct behavior in society – in 1977. It was correct behavior because it kept the system working smoothly. Thirty-four years later, it's no longer correct behavior.

It was a man who'd grown up in Wisconsin farm country who brought home the difference between duty and morality for me, "A farmer can't survive a hard winter without the help of the community. You take care of your own, because they're the only ones who will take care of you."

Then I knew why on radio interviews I always work in "I've never endorsed stiffing family, friends, or local merchants; you pay them back when you can." That's because I consider paying them a duty.

Paying big banks 29.9% interest, on the other hand, is a matter of morality – and the big banks have changed those rules.

Your Own Best Choice On Total Walkaway

I saw this walkaway/don't-walkaway dilemma in the recession of the early '90s and again in the brutal collapse of the dot-com bubble at ground zero in the San Francisco Bay area in 2001.

In those recessions the main theory was "you can hang on by your fingernails!"

A lot of fingernails broke, and a lot of people fell a long way to hard dirt. It took them years to recover a decent quality of life, and most of them never did recover their dreams.

I've worked in financial analysis, and in those earlier recessions several friends in trouble asked me to go over their financials. When friends were troubled enough to ask me to look at their personal finances, about 80% of the time my advice was "walk away, as soon as you can lay out a game plan."

Though I don't know your specific situation, I can say that in this Great Recession I will probably be advising 90% of my financially troubled friends to walk away – because this time it's going to take longer to replace their job. By the time they're working again, the car's tires may be bald and their clothes worn out – and they'll need cash to bridge that gap to a new job.

Walking away is not for everyone. Those who can pay off debt safely – without danger of eviction or losing their medical insurance – will find that is the least stressful course of action.

So, do the math. If you're going to hit bottom, then do it before it is done to you. Walking away early and aggressively is a lot easier on your fingernails, your blood pressure, and your family. The "fall to Earth" is remarkably easier when you have cash in your pocket. With cash in pocket you fall a couple of feet, land on your feet, and then walk around the corner and away into a better future.

Conclusion

If you are in dire straits, forget about paying off Wall Street and the finance industry. Keep some of the money in cash and some in a credit union. Spend on necessities, preferably bought from good companies. And invest the rest locally and wisely, preferably in yourself and your family.

Then we'll keep the economy running – and we'll keep the money on Main Street ... where it belongs.

###

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Supporting articles since "What's Good For Main Street Is Good For America: The Case For Walking Away From Personal Debt" was published:

12/16/2009 The Wall Street Journal quoted real estate analyst Christopher Thornberg of Beacon Economics: "It's a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."
http://online.wsj.com/article/SB126040517376983621.html (paragraph 14)

10/1/2010 The Los Angeles Times pointedly endorsed the view in an entire article titled: "Millions of homeowners keep paying on underwater mortgages The payments absorb billions of dollars that might be used for other forms of consumer spending, creating a drag on the overall economy."
http://articles.latimes.com/2010/nov/01/business/la-fi-economy-mortgages-20101101

7/2/2011 The New York Times quoted economist Sam Kater of CoreLogic: Being underwater, as it is called, can prevent these owners from moving and taking new jobs, and places the households at greater risk of foreclosure. "It's a huge problem,' said economist Sam Khater. "Reducing negative equity would spark a housing recovery."
http://www.nytimes.com/2011/07/03/business/03loans.html (paragraph 7)

5/16/2011 USA Today's lead economics writer cited me on the subject on page A1
http://www.walkawayfromdebt.com/press/usa-today-110516.html (paragraph 3)

9/12/2011 The issue has exploded on newsblogs following Wall Street Journal columnist Brett Arends' column in Marketwatch titled: "Massive default is best way to fix the economy"
http://www.marketwatch.com/story/massive-default-is-best-way-to-fix-the-economy-2011-09-12



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