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Article Excerpt
Original Source: YOUR MONEY
(NEWSBREAK)
VELSHI: Welcome to YOUR MONEY, where we look at how the news of the week affects your wallet. I'm Ali Velshi.
Today, we have got a special, "Debt Free Forever." Coming up, from mortgages to car loans to college loans, we will help you figure out what's good debt, what's bad debt and how you can pay it all off.
Plus, how your shopping past dictates your buying future. We will break down credit scores and what you can do to raise yours.
And your questions on credit and debt, we will answer your e- mails and get you back on the right track.
But for American consumers, a 20-yeet debt spree and a buying binge might be coming to an end. Gas prices, as you know, show no signs of cooling down, and that is sucking billions more directly out of the pockets of American consumers.
Americans' homes are not longer their cash machines. In fact, many Americans owe more on those homes than they own and they have bled them dry of equity. The rising food prices are putting a strain on family budgets across the country.
Our Christine Romans has a closer look.
(BEGIN VIDEOTAPE)
CHRISTINE ROMANS, CNN CORRESPONDENT (voice-over): The party is over. Americans gorged themselves on debt for two decades. They bought ever-bigger houses, and they spent with abandon at Wal-Mart and the mall just as U.S. trade policy allowed our ports to be flooded with cheap imported goods. And how did they pay for it? By opening credit cards, Americans hold four cards each on average.
And by taking money out of their homes. As home prices rose, Americans borrowed $1.1 trillion in home equity loans. Lenders peddled ever more exotic home financing, and the amount of money Americans borrowed from their homes soared more than 1,700 percent over the last decade.
And a housing crash means Americans are tapped out, at the same time basic costs are rising. Of course for many, it was never really much of a party.
TAMARA DRAUT, DEMOS: I think if you ask the typical American consumer, they would gladly trade the iPhone and the iPod for a decent affordable health care plan or for cheaper college tuition. We have been sold that the quality of life is so much better because we have all these great gadgets that are relatively inexpensive.
ROMANS: At the same time, especially in parts of the Midwest, manufacturing jobs have disappeared at an alarming rate.
(on camera): A generation ago, a full-time worker could support a middle-class family, today, it takes two incomes, that's according to government statistics. In the short run, this downturn means belt tightening for American consumers, but ultimately it could mean lower living standards.
Christine Romans, CNN, New York.
VELSHI: And Christine is not with me, because she has just added, in the business terminology, a new dependent to her household. Christine is now the proud mother of a second little baby boy. We wish you well and we miss you and come back soon.
From credit cards to mortgages to student loans, as Christine says, we are a nation in debt. But how did we get here and more importantly, where are we going? For answers to those questions, let's turn to Robert Manning from the Rochester Institute of Technology.
Robert, good to see you. Thank you for being with us. How bad is this? I mean, is it really -- would you call it a horribly unique situation in American history? Is that true?
ROBERT MANNING, ROCHESTER INSTITUTE OF TECHNOLOGY: Well, this is truly a unique situation, Ali. I mean, in the last five years we have literally seen the economic laws of gravity suspended. And by that I mean in the late '90s real household income was rising in the historic norm and growth of housing prices really retained a stability, but after 2001 housing prices, of course, doubled in most metropolitan areas while home household income actually declined.
VELSHI: Tell me -- explain why did household income decline? I mean, I don't talk to most people who say that they have had negative wage growth. They got little increases, maybe they didn't keep up with inflation, but how did that actually happen? Why did wages decline?
MANNING: Well, what is striking of course is that with globalization, what we are seeing is more and more outsourcing around the world, and as wages have become stabilized and we are seeing inflation rising, the overall cost of living as we saw with housing just took such a huge chunk out of people's paycheck that they had to start turning to other sources of income.
And in fact, what we see is that this is really the first time that most households became dependent not just on their earnings of two people, but two incomes plus extraction of equity out of their homes.
VELSHI: Right. And that is a big deal.
MANNING: And as a result, this was unprecedented.
VELSHI: That is a big deal, because in my parents' generation, you just really didn't touch that. If you went into your home for more equity, it was because you were either buying something else in terms of another home or doing some massive renovation that was going to increase the value of your home.
The idea that you would tap into your home equity to either spend or pay off credit card bills was unheard of. What fundamentally changed? Did that money become available to us because the banks said so? Did we do that? How did we become this society that tapped into our homes for credit?
MANNING: It's truly striking, because if you look at the growth of consumer debt over the last decade, the greatest growth is mortgage debt, from $3 trillion 10 years ago to over $10 trillion today. And a lot of this starts back in 1986 with the Tax Reform Act.
Many people forget that all of our consumer debts, the interest was tax deductible until 1990. And that is when home equity loans became popular. That's where banks started aggressively marketing to people that they had money tied up in their homes and it was time to free it up and unleash it.
Now we have seen, with deregulation such a tremendous effort to get people to purchase and refinance and take money and put cash in their hands...
VELSHI: And by the way, we used to tell people...
MANNING: ... that they're not getting from their paycheck.
VELSHI: We used to tell people that that is the good debt, mortgages and home equity and student loans is the good kind of debt. Credit cards are the bad kind of debt. And now in 2008 we found out that some mortgages are the bad kind of debt. What is the bigger problem, the debt that is in mortgages or the debt that's on credit cards right now? What is the bigger problem facing America?
MANNING: Well, the big problem is we haven't reached the floor in terms of housing values. And because so many people have psychologically consolidated their bad debt from credit cards into the perception of good debts being their mortgage, they had a false sense of security that they were really handling their household finances.
The reality of it is, is that many people today can't handle their personal finances simply because the interest rates are rising on their mortgage debt.
VELSHI: Tell me what I can tell our viewers. Tell me what they can do right now. If you are saying it is an uncertain situation, tell me what we can do if you think it is only going to get worse.
MANNING: Well, I think what is crucial is that we've got to start taking a stock about how much debt can a household really afford to pay? As corporate America is now going through workouts and writing off their debts, Americans are going to have to take a look, is their $500,000 mortgage on a house that is worth $300,000 feasible?
What kind of workout, what kind of debt relief can they get on their secured...
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