BORROW: The American Way of Debt, by Louis Hyman. Vintage, 273 pp., $15 paper.
Everybody knows the old saying about what happens when you give someone enough rope. But few realize just what an effective rope-producer our nation has become.
The financial crisis of 2008 and our subsequent hardships are the best evidence of this. As Louis Hyman shows in "Borrow: the American Way of Debt," nobody has democratized credit on the scale we have, making it possible at one point for every Tom, Dick and Mary to borrow absurd sums without regard to income or assets. The result was a financial catastrophe.
How did we get to such a pass? And what should we do to make sure excessive borrowing -- or, as the author might put it, excessive lending -- doesn't bring us to the brink of economic Armageddon again? Hyman provides a satisfying answer to the first of those questions -- and only the first -- by giving a concise account of the rise of credit in this country since the 19th century, in particular the ways public policy and private profit joined forces to plunge us all deep in hock. As Hyman puts it, "The way in which we borrow in the United States today is unprecedented."
Credit by itself isn't evil, and for a long time the middle class was badly constrained by a lack of it. People had to save up for what they wanted, usury laws limited consumer borrowing, and when credit was given, it came from a merchant limited by his own patience and resources. That retarded economic growth.
A host of developments changed all this. Detroit needed to finance America's insatiable desire for cars. In the Depression, federal regulations and loan guarantees laid the groundwork for modern mortgage lending -- and modern suburbs like Long Island. But the key was enabling lenders to tap into the world's vast capital reserves by bundling IOUs into bonds and selling them, often in complex securities sanctified by bond-rating agencies whose indulgence was easily purchased. Thus was loan-making separated from risk-taking.
We'd been down this road before. Writes Hyman: "Many of the 'new' financial instruments of the 1970s and '80s -- such as the mortgage-backed security -- had actually existed in the 1920s and before and then had subsequently been eliminated for their contributions to the Great Depression."
How can we prevent another debt crisis? Hyman mumbles something about the need for government bureaus to evaluate business borrowers and securitize loans to them, but this is neither sensible nor realistic. More important would be finding ways to stop subsidizing outsized single-family homes through the deductibility of mortgage interest and property taxes and the capital gains exclusion for profits on home sales, to say nothing of government guaranteed home loans. Inequality, stagnant incomes and soaring college and medical costs also drive excessive borrowing.
One also wishes for a broader vision in this otherwise useful book. Hyman pays little attention to the powerful shifts in culture and ideology that made borrowing so widely acceptable, and none at all to forgotten figures such as economist Simon Patten, who tacitly gave us permission to eat tomorrow's lunch today.
When it comes to borrowing, culture counts. We'll probably always be good at making rope. What we need is a way to make use of it without hanging ourselves.