It's too simple to blame the global credit crisis and its consequences on covens of greedy bankers, incompetent regulators or do-nothing politicians. The fundamental cause of the enormous debt bubble of our times is firmly rooted in the way post-industrial societies evolved in the last half of the 20th Century. After the Second World War, values based on thrift and savings were gradually replaced by a culture of having it all. Now that culture is in danger of cracking up.
Those of us with a sense of history, or whose personal memories go back to the 1940s and '50s, remember some of the maxims of the old society -- values forged during many generations when good times inevitably gave way to hard ones. Our parents told us stories of the wrenching effects of the Great Depression and how it caused them never to feel right about spending lavishly or going into debt. It was important to save money in advance to pay for the things a person wanted -- education, a household, a home.
Some people systematically saved all year to get ready for Christmas. Would-be college students often worked for several years after high school to accumulate an educational nest egg. Marriage was postponed until a career was well-enough established that there was money in the bank. Consumer credit was used carefully, with credit card balance always paid in full to avoid interest. We took on huge debts to buy our homes, but never committed to mortgage payments higher than a third of our incomes, and with at least a 10% payment.
Money was never frittered away in the mindless, addictive, losers' pastime of gambling. Investment policy was: never risk money that you can't afford to lose; nothing wrong with being satisfied with 3% real return on investments, the historic average. Buy Canada Savings Bonds, leave the stock market to the professionals. Live within your means.
These were some of the principles of a thrift culture that was already beginning to crumble in the teeth of affluence and seemingly endless growth after the Second World War. It turned out that you could have attractive consumer goods now -- the new cars, the big TVs, the flashy appliances, even the dinners out -- on credit, so long as you paid your installments.
By the 1960s, periods of economic expansion became so prolonged, interrupted by only occasional recessionary hiccups, that young people, politicians, investors -- practically everyone -- felt confident wagering on a golden future. So college students, encouraged by governments and bankers, began to think nothing of going into debt to have a college education now rather than later. Down payments on houses shrunk, mortgage payments went up -- no risk in getting into the housing market now because prices are bound to go up, the thinking went.
Since the 1960s, practically every form of gambling has been legalized and legitimized by government agencies. When advertising bombards ordinary people with inducements to spend their money on lotteries, in casinos and playing Internet games, the ubiquity of the high-rolling mentality on Bay and Wall Streets should be no surprise. When the trend of markets and growth is always upwards --as it
has been in Canada for the adult lifetimes of a whole generation of young people -- old expectations seem out of date. Why not presuppose six, 10, 12, even 15% annual returns on your investments? In the long run stocks never go down--do they?
Politicians thoroughly bought into the culture of instant gratification and easy money. The postwar growth of government was based on the assumption that voters could have anything and everything--generous social programs, student loans, cheap mortgage money, deregulation to goose economic growth, guns and butter, free health care, subsidized concerts, subsidized circuses.
In Canada in the early 1970s, the personally ascetic prime minister, Pierre Trudeau, was widely criticized for musing that government was not Santa Claus, and so he gave up and turned on the spending spigot. In the 1980s, the glad-handing arriviste, Brian Mulroney, saw nothing wrong with running what were then enormous budget deficits, year after year, to keep putting cash in people's pockets.
Brian Mulroney was supposed to be a conservative. So was George W. Bush, who, with the bipartisan help of his Congress, has presided over the greatest orgy of deficit spending in American history. The left had always been utopian and narcissistic, but the abandonment of thrift and prudence even by conservatives signalled a great social change. Everyone had bought into the culture of having it all.
It's true that we have sometimes tested the limits. It's ironically fortunate that in the mid-1990s the government of Canada hit a debt wall that forced it to reform, become reasonably prudent and begin running budget surpluses. Even more ironically, Paul Martin, the finance minister who was (probably unduly) credited with this return to responsibility, morphed into a free-spending prime minister who wanted to give everyone everything all at once.
The only people Martin ever denied were Canada's bankers: In rejecting their proposals to merge and create big banking players on the global stage, Martin unwittingly saved the Canadian financial system from being as badly imperilled as the American system is today. He saved the Canadian bankers from themselves.
Who but the old and out-of-touch remembered the old saws about hard times, rainy days, staying out of debt? What kind of fool put his money in Canada Savings Bonds or GICs or warned against buying million dollar bungalows? At both the macro-and the micro-levels, the old laws of economic gravity seemed to have been repealed. Just ask maestro Alan Greenspan and his fiddlers at the Federal Reserve. As the band played on, the dancers whirled faster and faster.
In 2007 the music began to fade. Confused, the dancers slowed to a walk. Now, in 2008, they have gone from bewildered wandering to the verge of panic. Bubbles are bursting, houses of cards teetering, bears foraging. The Pollyannas of the financial pages and in politics are still telling us that things are OK. The fundamentals are sound. Governments can provide fixes, we can all be bailed out, the hiccups will end and growth will return. No need to stop spending or stop buying. Maybe a few bad guys are going to get hurt, but all you good people who count on having it all. You can still do it.
Perhaps. But you shouldn't bet on it.
- Michael Bliss is University Professor Emeritus, University of Toronto. He has written extensively about the history of Canadian business. His books include A Living Profit, A Canadian Millionaire and Northern Enterprise.
Financial meltdown is all in the attitude
The real cause of the credit crisis is a society that wants everything now