A new WSJ piece describes the current financial landscape for a bunch of people, including myself! We are in tons of debt. Though being in debt is nothing new, the type of debt has changed quite a bit. 

Most of the debt normal Americans would take on in the past was attributed to housing. But since 2013, non-housing consumer debt shot up by $1 trillion, while housing debt only shot up by half of that. Total consumer debt is higher than it has ever been.

Like this article, most will point to the top 1 percent, the finance folks, as the culprits of why this is happening. This may surprise you, but… 

I agree!

Well, kind of. Though, money from financial services has flowed to the top of the socioeconomic ladder, it is hardly their fault. When the government is supposedly at the helm of the economy, it is helping steer the money in that direction. And, this is not due to “deregulation.” But, mainly due to moral hazard. 

No Risk, Tons of Reward

Let’s think about it for a second. 

By deregulating an industry, it opens the door for innovation, more competition, and better quality services. This is exactly what happened in the airline industry when it was deregulated in 1978

Moral hazard means that people are less likely to guard themselves against risks when they are protected from the consequences. For example, I would be much more likely to be more daring on the ski slopes if I have health insurance. Why? It’s because I know that if I break some bones, my insurance will cover it. 

The same thing has happened in the financial sector. The Financial Crisis of 2009 is a testament to how the government will act if the financial system is on the plank of the ship. That said, banks will lend out much more than they would if they knew they would have to bear all of the consequences. 

The moral hazard in the financial sector has also driven interest rates down. Low-interest rates increase the number of people wanting to take out loans. It also decreases the number of people wanting to save in less risky accounts. In a world of low-interest rates, millennials need to learn how to save more

The same thing can be said about the education system. For the past 40 years, at least, bank loans to pay for college were backed by the federal government. Remember moral hazard? Since 2009, the government has been the sole financier of college degrees. They have subsidized schools and students willy-nilly and have made it very easy to not have to pay back the student loans. So, universities can increase tuition (since the access to funds for students has increased the demand for a college education). And, students don’t have to try so hard in class or in finding a job comparable to the money spent on the degree. The new generation has no clue as to how to work and pay for college on their own.

Given our inclination to borrow more money with such low-interest rates, we tend to have more expensive tastes. A new couple doesn’t want the 1-bedroom, 900 square foot home. They want the three-bedroom, 1,400 square foot home. Moreover, zoning laws have mandated square footage necessary for building homes. So, governments are essentially forcing people into larger homes. Larger homes mean fewer homes are built because they take up more space. Fewer homes mean prices increase

How to fix all this?

I dunno. Sorry. But, we could start saving more, right? I mean, stop buying stuff you can’t afford. And, let’s shoot for policies that reduce the moral hazard. It seems the government safety net under these sectors is not so safe after all.

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