Are Consumers Finished. . .This Time?

BusinessWeek’s current cover story, The Consumer Crunch by Michael Mandel, struck a chord with many readers. Mr. Mandel contends that consumer spending is finally going to come down this time, to the tune of $200 to $300 billion, because the sub-prime crisis is ending the “borrow-and-buy boom” that people created with credit. In essence, now that it’s harder to borrow money to buy a home, and it will soon be harder to get a credit card, shopping will slow way down.

There’s a simple way to test this: apply for a new credit card. You’ll have it almost immediately. Just look at what’s available with a few clicks of your mouse. Credit Land is even offering “credit cards for fall shopping” to help the economy out.

Mr. Mandel says this free-for-all is over: “But executives from Capital One Financial (COF ), Bank of America (BAC ), Discover Card (DFS ), Washington Mutual (WM ), and others have told investors in recent conference calls that they are using more caution in extending credit.”

Ha! There’s a laugh. How could they use less? When you read that lenders are “tightening standards” and “using caution” just know that it means they now require both first and last names on the applications. New credit cards and higher credit limits are still about as easy to get as a drink of water.

I have mixed emotions about all this. In my personal finance book and countless articles, I advised readers to avoid credit card debt. I never carry a balance on credit cards, and neither should you. Smart readers of mine long ago learned to see through the shiny lures of cash back plans, mileage plans, point systems, and other goofiness to trick the unsophisticated into running up the balance and then paying usurious interest. So, in a way, I’m in favor of the great shopping spigot getting turned off.

I just don’t believe it will happen. Frankly, people are too financially stupid to ever get it. They always have been, and that’s why a multi-billion dollar economy based on credit rose up around us. What’s more, it’s not going to disappear because a small portion of banking business is encountering a small portion of customers who can’t pay. That’s all sub-prime is, folks. It doesn’t affect all mortgages, much less all of finance, much less all of the economy.

Another thing to keep in mind is that people in debt, people with bad credit, are not new. They didn’t just pop up last spring when the phrase “sub-prime” entered the popular lexicon. I’ve been lecturing to them for more than ten years — to no avail. There are more than 34 million Americans with poor or “damaged” payment history, and banks do a brisk business figuring out how to make money off of them in second and third attempts, even being brash enough to define financial sophistication as the ability to go into debt in more ways than one! “Get the new Pyrillium card exclusively for the finer lifestyle that you deserve.” Flexible payment plans, no interest for a year plans, swap land for credit plans, you name it and it’s been tried.

In fact, the root of sub-prime trouble lies in the creativity and boldness of financial companies. Who else would have ever lit upon the idea of lending mortgage money to people who can’t afford a house? More frightening, look at how many morons took it. So, now a portion of the morons are in trouble and the holders of the loans are in trouble, and for that we’re to believe that decades of making people believe they’re entitled to the good life is simply over?

I don’t think so. I wish so, but I don’t think so.

Even Mr. Mandel admits that his call for the end of the consumer is a cry of wolf we’ve heard for the past 25 years:

Truth is, economists have been complaining about excessive borrowing and spending since the early 1980s. Journalists began writing about consumers being “tapped out,” “profligate,” and “spendthrift.” Magazines and newspapers regularly ran stories about debt-ridden Americans not being able to buy holiday presents for their kids.

Yet, the holiday presents were bought, new cards were issued, new homes were built, the internet happened, and somehow all those borrowing and buying morons were even convinced that they needed to drive SUVs getting 14 miles to the gallon, and not even $3 gasoline could convince them otherwise.

I’m afraid it’s time we admit that nothing will ever stop the American consumer. We’ve demonstrated that we’re willing to kill for what we want, literally. Look at headlines from the Middle East sometime. More apropos, people have been overpaying for coffee, cars, houses, clothes, jewelry, handbags, shoes, and cosmetics for longer than I’ve been alive. That’s America. That’s how people want to live and it will not stop.

I know Mr. Mandel thinks that it’s different this time, but the numbers from stores don’t support that so far this year, any more than they did in years past, as I wrote last Thursday. Wal-Mart says all’s well. Last night, Nordstrom beat earnings estimates and issued a positive forecast. People are employed. Incomes are growing at 7% year-over-year. We might just have, yet again, a holiday season better than expected.

You want to know one reason why? Because all the credit cards that have already been issued carry untapped credit worth $4 trillion. Combine that with America’s insatiable desire to buy and we might just get one heck of a shopping spree.