I am sitting in on the fascinating conference "A Debtor World: Interdisciplinary Academic Symposium on Debt" hosted by the University of Illinois and the American Bankruptcy Institute. Teresa A. Sullivan, Provost, Executive Vice President for Academic Affairs and Professor of Sociology at the University of Michigan, has just finished a very interesting presentation entitled "Debt and the Simulation of Social Class." Provost Sullivan's paper seeks to use data to explore how Americans actually use debt and hypothesizes that debt is not used to simulate a higher status but instead to maintain the illusion of one's status and prevent sliding into a lower class. Provost Sullivan also, as an aside, pointed out that better-off debtors use debt wisely (invest in education, etc.) at the same time poorer debtors use debt as damage control.
This helped solidify some vague thoughts I've been having lately on consumer debt. One cannot turn on the television or read the newspaper (especially the NYT, it seems), without reading a personal story of a family being forced out of their home after foreclosure or being in fear of such foreclosure. The stories always seem to involve people who seem just like me -- or even much wealthier than me. The ads on television that tout consumer credit services show what appears to be a family that looks just like mine being forced out of their house that looks just like mine. I think I'm developing debt anxiety -- I have real fears that I am going to become just like these nicely dressed, nicely coiffed WASP-ish people who through very little conscious effort on their part lose their nice McMansion. Can this happen to me?
I'm not really joking. Although we have literally no debt beyond our 15-year mortgage, which we are in no danger of being under water on, I get nervous every time I see these ads or read these personal stories of how the economic downturn is affecting a stereotypical family. How does this tie into Provost Sullivan's statement about how better-off Americans use debt? Here it is -- I'm afraid to use debt. I used to be a finance attorney. I understand leverage. I used to throw around statements such as "I don't want to eat the negative arbitrage." I know that debt is tax-preferred. But I am letting my fears get in the way of my math ability. For example, we are involved in a remodeling project that is fairly expensive. I know that paying for this out of savings is not mathematically wise. I should take out a home equity loan, which will have a much lower rate of interest (after taxes) than I should be able to earn off my savings if invested. But I just can't do it. That would take me one step closer to being profiled in the NYT and quoted as saying, "I thought we were doing what we were supposed to do. I thought we were living the American Dream. But now we can't pay our mortgage and no one will work with us."
My colleague Amitai Aviram writes about bias arbitrage and how the media and regulators prey on upward miscalculations of risk to their advantage. I'll have to talk to him about my hypothesis of homeowners miscalculating the risk of mortgage debt upward.
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1. Posted by M.D. Fatwa on May 2, 2008 @ 12:28 | Permalink
I don't get it -- you have tenure! You're the equivalent of a utility stock back in the days before they opened the utilities up to competition.
2. Posted by M.D. Fatwa on May 2, 2008 @ 12:30 | Permalink
And by that I mean, demand for what you produce is steady and environmental uncertainty is low... For you, it's not debt, it's capital.
3. Posted by Tracy McGaugh on May 2, 2008 @ 15:40 | Permalink
I get exactly what you're saying. I feel the same way about the foreclosures and about incurring debt on reasonable expenditures like home improvements. Ack!
4. Posted by NonVoxPop on May 2, 2008 @ 16:46 | Permalink
How does Sullivan differentiate between (or define) "status" and the "illusion of status"?
5. Posted by Jake on May 2, 2008 @ 18:46 | Permalink
A home equity loan does not have a much lower rate of interest after taxes, thanks to the AMT. Properly used, a home equity loan may solve short-term liquidity issues for the homeowner, but it is not a tax play.