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"I think everyone knows that something just isn't right."
The Country Music Hall of Fame sits on the edge of downtown Nashville, across Broadway Street from a row of run-down buildings, one of which houses a FedEx Kinko's store. Downtown is, like most midsize American cities, oddly quiet. The busiest spot is a Starbucks tucked into the mezzanine of a mid-rise office building occupied by a bank. At night, retired couples and newlyweds wander past the Hall of Fame and the FedEx Kinko's on their way to a little strip of bars and restaurants, like the Hard Rock Cafe and Sbarro, the pizza place popular with tourists. The only clue that this is Nashville, and not Louisville or Minneapolis, is a young man in a wife beater and a cowboy hat strumming a guitar on top of a box. He tells the few good folks who pause to listen that he's looking for a record deal, and they seem to appreciate the lonely note of authenticity he's lending their vacation, but it's hard to figure how he's going to end up across the street someday, in that museum. The fans he'll need are being bused from their hotels over to the Grand Ole Opry, a huge entertainment complex near the airport. And the music producers are scattered around the suburbs, working out of small offices and home studios. He'd have better luck perching outside a strip mall Starbucks, waiting for one of them to emerge with a Frappuccino.
But if this cowboy decided to make that short trip, setting out past Vanderbilt University and into the suburbs, he'd discover just how much the world has changed. He'd pass countless pawnshops, check-cashing outlets, bank branches, title loan stores, and financing companies. He'd see that most billboards were advertising loans of one kind or another and he'd also see plenty of smaller ads, mostly on the sides of the city's buses, for credit repair companies and bankruptcy attorneys. He'd soon learn that Tennesseans have become obsessed with debt: how to get it, get rid of it, or, most commonly, how to "surf it," i.e., how to ride larger and larger waves of debt without wiping out.
Indeed, if the cowboy headed east along the interstate toward Brentwood, the state's plushest suburb and home to many of his idols, he would see several billboards advertising a middle-age man with a bald head and a silver beard, a man who could easily pass for an aging country music legend, a man promising "Freedom." This man, the cowboy would discover, has the number-one radio show in Tennessee, and one of the fastest-growing audiences in the country. This man reaches millions of Americans in over 260 cities who listen to him religiously. He travels the country and commands adoring audiences in the thousands. He has his own reality television show in development. And he can't even sing or play the guitar.
His name is Dave Ramsey. He sells freedom from debt. And he is arguably the most popular recording artist in Tennessee which, incidentally, has the second highest bankruptcy rate in the nation.
I first meet Dave at a two-story brick office building that sits across the street from the state's most expensive shopping mall. The building is home to Dave's radio show as well as "Financial Peace University," Dave's twelve-step program to get out of debt. Dave is of medium height, stocky build, and bald. He could be Dr. Phil's nephew. For the uninitiated, his intensity can read scary. Onstage he prowls and contorts every muscle like the evangelist he is. When Dave starts preaching the word, there is no room for argument. He's been to the mountaintop. And he's come back to save your soul from the demon that is debt.
Before every show Dave huddles with his staff in a prayer circle. A rock song leads in, then a quick anecdote or bad joke, and then Dave starts taking calls. The callers, as ever, are lost. They are trapped. They cannot help themselves. They do not understand their lives. They do not understand the terms of their credit card agreements and car loans. They are afraid. They are good people, however. They are just confused. Their hearts are willing but their minds are weak. Math scares them. They need a leader, someone to lead them out of the valley of the shadow of debt. Dave is the man.
He listens to them. Then he yells at them. He probes. He scolds. He exposes their hypocrisy and their secrets, which they didn't really want to keep anyway. He is the stern parent they never knew but wish they had. He tells them to sell the minivan, to live on "rice and beans and beans and rice," to get out of school and start making money. He tells them to hold garage sales. Lots of them. Then, during the commercial breaks, he urges his listeners to visit a mattress store where they can get "the really good $5,000 mattress sets for only $3,000" and why not stop by the pawnshop that has been a sponsor of his show from the beginning? That's where rich folks shop, he tells them. The plugs are not so much advertisements as they are testimonials, though it seems more than a little absurd that someone drowning in debt would plunk down three grand for a trophy mattress or spring for a bargain Rolex.
In many parts of the country, "Dave told me to sell it" is a perfectly good explanation to the buyer of a used Jet Ski, an SUV, or any other toy. Dave knows his audience and he makes allowances for their weakness. The centerpiece of Financial Peace University is what he calls the "debt snowball," which means paying small bills first, regardless of the interest rate. Of course, this is not such a good idea from a strictly mathematical standpoint (most experts advise paying off the highest-interest debts first). But Dave has succeeded by being a realist, not an academic. He knows that his listeners have short attention spans and Americans aren't so good at math in general. Dave defends the debt snowball by pointing out that it makes people feel as if they are achieving something quickly so they stick with the program longer. In other words, the debt snowball is no different from the crash diets which have become so ingrained in American life. What counts is fast results.
And, like Stop the Insanity! Susan Powter, the queen of diet infomercials, Dave can relate. He can tell his flock how, in the mideighties, he built a multimillion-dollar real estate fortune, only to lose it all by being stupid. He had to sell the Jaguar the day before it was going to be repo'd. He lost his house. He almost lost his marriage. He declared bankruptcy. The empire was built on a fantasy on debt. Debt is evil. Debt is so evil, in fact, that Dave advocates paying cash for everything, with the exception of a mortgage, which should be no longer than fifteen years. When I ask Dave to define predatory lending, he responds, "All debt, to a degree, is predatory."
The day after I meet Dave, I decide to visit his bankruptcy attorney, Edgar Rothchild. Edgar is perhaps the most successful bankruptcy attorney in the state if you define success by sheer volume. Edgar mostly processes Chapter 13s, where debts are not discharged but repackaged into a court-supervised plan. Debtors then make a monthly payment to a bankruptcy trustee, who pays off the creditors. But the vast majority of Chapter 13s that Edgar processes are eventually converted into Chapter 7s, where the debts are discharged, for the simple reason that most debtors can't keep up the payments.
Edgar won't talk about Dave on the record, but the mention of his most famous client brings an immediate smile that says, I operate in the real world. When you ask Edgar why so many Americans are declaring bankruptcy the rate is now ten times that during the Great Depression he can cite a number of reasons, but they all revolve around a simple truth: Americans' incomes have not kept pace with expenses. And, as far as Tennessee is concerned, the educational system is failing its students. A lot of Edgar's clients are illiterate. They can't get good jobs and they are easy prey for con artists. His wealthier clients have other problems: divorce, medical bills, job losses, children. "Do you have any idea what it takes to feed a teenage boy?" he smiles.
That afternoon, I return to Financial Peace University to ask Dave a few questions. I wonder if his "tough love" approach might be for show if, off-air, Dave might have more sympathy for his listeners than he demonstrates on-air. If he might have some insights into why debt has become a cultural phenomenon. After all, the notion that millions of Americans woke up one day and willingly ensnared themselves in a trap they could never escape seems a little far-fetched. It also seems to me that the government bears some of the responsibility. After all, didn't President Bush tell Americans, in the wake of September 11, to go to Disney World, to enjoy America as we want to enjoy it? Didn't Tom Daschle, then the Democratic leader of the United States Senate, tell us to "go out and buy that suit you've been thinking about"? Hasn't the United States Congress put every American family $80,000 in debt in a single generation, using our full faith and credit to pay for thousand-dollar toilet seats and countless "fact-finding" missions to exotic island nations and ski resorts?
But Dave will have none of these excuses. His listeners change their lives, he tells me, when "they look in the mirror and say, 'You! You're the problem! It's the guy I shave with every day.' If I can change his behavior, I can be rich and thin." (Like a number of people I will meet, Dave thinks that obesity and indebtedness are flip sides of the same moral failing.)
"Is it any surprise," he continues, "that people who go into debt elect people who go into debt? I don't think it's the other way around." Finally he adds with a little smirk, "My savior doesn't live in Washington, DC. That's not where he lives."
I leave Financial Peace University contemplating God and debt. And feeling a little like the cowboy with the guitar: that maybe I've missed the boat. After all, I've spent two days in Tennessee and seen dozens of bumper stickers advertising how Jesus saves. I am smack in the middle of the Bible Belt. If the good people of Tennessee were having so many problems with money, surely the first question on their tongues would be "What would Jesus do?"
(Note to cowboy with guitar: Christian music sales are growing much faster than country and western.)
As it turns out, a lot of ministries have started to answer that very question. Earlier that week Jerry Falwell had delivered a sermon from his compound in Lynchburg called "People Who Steal from God." The message? People get into financial trouble because they don't give the church enough money. I've heard about a preacher in North Carolina holding debt revivals, where families cleanse themselves by destroying their credit cards at the altar. There was a pastor at the West Angeles Church in Los Angeles who's developed a ministry called Millionaires in Training. No matter that some of the highest bankruptcy rates are to be found along the Bible Belt. God wants Christians to be debt free.
After trolling the Internet for less than an hour, I find myself with an invitation from an evangelist named Steve Diggs to attend his No Debt, No Sweat! ministry that evening in Antioch, an undergentrified suburb fifteen miles southeast of Nashville whose finest establishment is the obligatory (and cash-only) Waffle House. Steve is a former advertising man who used to be fat and in debt. With the Lord's help, he and his wife conquered those demons. Now he is trim, debt free, and out of the advertising business sort of. Steve sells a plan to help Christians get their financial house in order for $36. The No Debt, No Sweat! mission(ary) statement is "to teach you to handle money so you can take off like a bullet with a tailwind." On the phone Steve is a nice guy, full of energy, and he promises a great show, complete with feathered boas, loud Hawaiian shirts, sunglasses, and a female impersonation. I can hardly wait.
The seminar turns out to be quite tame, but then again, I am from L.A., a fact that Steve receives with a look of some consternation or apprehension or both. Later on he will tell his "L.A. story": Steve and his wife win tickets to the Emmys from a local radio contest and go to Hollywood, but the moment they arrive at the red carpet, they find that their people are protesting the industry's immoral agenda from the other side of the velvet rope. Steve has a crisis of conscience, realizes he's on the wrong side of the rope, yet he and his wife decide to go to the Emmys anyway. They even go to the after-party to mingle with the hedonists. Steve has had an epiphany not uncommon among the evangelical crowd: It's better to be an insider if you want to effect change. Plus, there's the gift bag...
The Antioch audience listens politely (they are in church, after all) as Steve paces the center aisle talking very fast into a Garth Brooks-style headset. When a gray hair complains that Steve needs to slow it down, Steve shocks me by telling the old guy tough luck. This turns out to be by far the most dramatic moment of the evening.
Steve tries to be funny, but the crowd doesn't laugh much. Maybe he is talking too fast. And maybe they are more confused by the campy antics (feathered boa and otherwise bad drag) than amused by them. He gratuitously mentions his dislike of the "homosexual agenda" to reassure them of his conservative Christian credentials. But no matter. I am here to learn what Jesus would do if he got into debt. And you know what? He wouldn't give up everything he owned. He would hold a garage sale, call his credit card company and renegotiate his interest rate, and probably get rid of the SUV, unless the disciples ponied up some dough for the gas, maybe.
I leave Antioch admiring Steve's spirit but with no more understanding of why Christians, like everyone else in America, are drowning in debt. Except for the obvious that some of them have left his seminar with an extra $36 on their Visa card. For all of their good intentions, the financial gurus that Americans turn to offer just as many contradictions as solutions. A pastor I'd visited in South Central Los Angeles, for example, chastised his congregants for driving cars they couldn't afford as we cruised South Central in his Range Rover. Suze Orman, the nation's best-selling financial adviser, has done ads for Cadillac (which have among the worst resale values of any automobile). Dave Ramsey has his sponsors (the pawnshop and discount luxury mattress place come to mind) because he's got to pay the rent too. And when Jerry Falwell holds himself up as an example for tithing 30 percent and being plenty prosperous, it's more than a little self-serving. When he tells his congregants that giving his ministry more money will erase their financial troubles a strategy he calls "spiritual mathematics" it's just plain slimy.
Yet, I've come to learn that, for all of their apparent contradictions, the financial gurus are a pretty accurate reflection of the times. We live in a country where the government tells us that the economy is getting better and better, but most polls show that we believe it's getting worse and worse. A country where foreclosures and bankruptcies have skyrocketed, while the numbers of millionaires and bank profits have increased year after year. A country whose citizens can afford the brand-new Hummer H2 and H3, but whose soldiers are expected to fight a war with the old ones (and with no body armor). Is it really possible that all of these catch-22s will be eliminated by holding biweekly garage sales and skipping the a.m. latte? Where is Susan Powter to jolt us out of our collective denial? Stop the Insanity!
Several months after I visited Tennessee, Hurricane Katrina rolled over New Orleans. A day later the city flooded. And then for seven long days, as the world watched, the people of New Orleans begged for help. Hundreds drowned in their own homes. Babies died in their mothers' arms for lack of water. And I watched in amazement as conservatives demanded answers to the questions many of us had been asking for some time. How could extreme poverty exist in a country of such enormous wealth? Why hadn't we taken better care of our infrastructure? Where was the money going to come from to fix it and pay for the war in Iraq and pay for Social Security and Medicare and all of the other entitlements? Was bankruptcy reform, which President Bush had just signed (really bad timing, Karl), too harsh? Katrina had changed everything, I told myself. People were finally asking the tough questions. Americans were beginning to realize that credit was not the same as wealth that a generation of debt surfing had left us extraordinarily vulnerable.
The president gave a dramatic and hopeful speech in the French Quarter, shouting out to the huddled masses who'd been ignored for too long. But then he seemed to lose interest. The telethons came and went. New natural disasters and new scandals took center stage. The death toll in Iraq passed 2,000. A bill to exempt hurricane victims from bankruptcy reform died in the House, as did a measure to offset the costs of rebuilding New Orleans with budget cuts. Insurance companies refused to rebuild homes because they claimed the damage resulted from hurricane-induced flooding and not from the hurricane itself. Private companies, which owned most of the hospitals in New Orleans, expressed doubts that they would ever rebuild. The Small Business Administration offered loan guarantees, but only to those with near perfect credit a cruel joke which has so far shut out 80 percent of those who have applied for help. The most hopeful sign was the return of white real estate speculators.
In other words, the status quo quietly eased back into place. The government would take on more debt to rebuild what it could. And the people would take on more debt to do the same. The only difference would be that that debt would be more expensive than before. In other words, we would surf the hurricane, even though the waters were getting far more treacherous. Why? We have no choice.
The federal government and the majority of Americans can no longer get by a single day without taking on additional debt. And as more borrowing goes to simply pay off old debt, or to make interest payments, the new debt does little more than increase banking profits. Eventually the higher levels of debt will lead to higher interest rates, which will lead to more debt, creating a cycle as vicious as it is inevitable. Over the past generation, banks and credit card companies have made trillions of dollars of high-interest, unsecured debt available, and Americans have scooped it up. Our incomes have risen an average of 1 percent in real terms, while our household debt has increased over 1,000 percent. As a result, we no longer save. We have no choice but to keep spending until our credit is exhausted and we own nothing. As Marriner Eccles, the legendary Fed chairman during the Great Depression, noted, "The economy is like a poker game where only a few people control the chips and the other fellows must borrow to stay in the game. But the moment the borrowing stops, the game is over."
How did we allow this to happen? How could we be so shortsighted? How could banks keep lending to people who can't afford to pay them back? Doesn't that fly in the face of tradition, if not common sense? Don't bank executives realize that they are sowing the seeds of their own destruction? After all, when most Americans can no longer stay afloat, the banks will sink alongside them as they did back in Marriner Eccles's day.
The simple answer is that Americans are a lot like the cowboy with the guitar. While the banking industry has gone through its most profound change since the Venetians invented modern finance hundreds of years ago, Americans have clung to old assumptions. In particular, we've continued to believe that banks wouldn't extend us credit unless we could handle it, and that banks want us to save. Yet, the big banks realized more than a generation ago that they make far more money teaching us to spend than to save. They've also learned that making money upfront, mostly in the form of fees, is a lot more fun than waiting for a revenue stream to trickle in. The reason is simple: Fees can be booked as profits immediately; revenue streams take years. This is why most mortgages, car loans, and even credit card receivables are bundled together and sold off, sometimes instantly, to Wall Street.
Take Enron as an example. Enron executives didn't want to wait for their brilliant ideas to bear fruit. So, with the help of an accounting firm called Arthur Andersen, and the blessing of the S.E.C., they applied a short-term accounting rule called "mark-to-market" to long-term contracts, so that executives could decide how much a new business idea was worth, book it as immediate profit, and then collect a bonus on that profit all in the same quarter. When these new businesses instead generated huge losses, executives turned to the world's largest banks to hide those losses for a fee. Enron would "sell" the losses to a large bank before reporting its financial results, then buy them back afterward at a greater loss. The bank collected a fee without taking a risk, the bankers got a bonus based on generating that fee, and, most important, the Enron execs rewarded themselves with huge bonuses based on phony but consistently growing profits. Of course, mark-to-market guaranteed Enron's eventual failure. But consider that the top ten CEOs in America now earn more than $100 million per year, and you realize how quickly short-term gimmicks can create vast fortunes.
The same gimmicks are now being applied to consumer debt. Most mortgages, car loans, and credit card debt are packaged and sold off to investors at a profit within a short period of time, sometimes seconds. Banks create an estimate of how much the credit card debt is worth and sell it to investors, pocketing a profit. There is no banker carefully tending to your mortgage or your credit card down at the local branch, any more than there is a record executive strolling down Broadway Street searching for the cowboy.
But there is an even greater misconception at work. A misconception that debt is not what it used to be. That there is "good" debt, for example, and "bad" debt. Tune in to Suze Orman, for example, and she will tell you that a single number, your credit score (aka, FICO), is the key to your financial future. But while a good credit score gets you better rates on your mortgage and credit cards, it also opens up the floodgates for more "good" i.e., cheap credit to pour into your life, and this credit does not usually remain good or cheap for too long. The idea that one should stay out of debt, period, is now considered unrealistic. After all, who lives without debt? The Unabomber, maybe?
Even more frightening is the notion that debt is our friend a magical tool that allows us, in the words of Napster's new ads, to "own nothing, have everything." No less a fiscal conservative than President Bush has dismissed the federal debt as "numbers on paper." His vice president has flatly stated, "Deficits don't matter." But the apathy prize goes to two-term Florida senator Connie Mack, who was hired to give Bush ideas on reforming the tax code in 2005. Here's a recent exchange between the senator and the New York Times:
Interviewer: Where do you suggest we get the money from?
Sen. Mack: What money?
Interviewer: The money to run this country.
Sen. Mack: We'll borrow it.
Interviewer: I never understand where this money comes from. When the president says we need another $200 billion for Katrina repairs, does he just go and borrow it from the Saudis?
Sen. Mack: In a sense, we do. Maybe the Chinese.
Twenty years ago, when the federal debt passed the trillion-dollar mark, politicians, including Ronald Reagan, as well as economists, including Alan Greenspan, warned of dire consequences. Seven trillion dollars later, borrowing more has become the solution to every conceivable problem. Take Social Security as the largest, and perhaps most insidious, example: In order to reduce deficits, the past four presidents have borrowed $1.5 trillion from Social Security and the "trust fund" now holds nothing more than a very big IOU. In effect, we've been surfing, borrowing from Social Security to pay off the interest on the federal debt every year. In the 2000 and 2004 elections, George W. Bush promoted an idea called "private accounts." In theory, every American would own their Social Security account. The account would contain real money so it could buy real investments, i.e., not IOUs. In theory one could also borrow against it, of course. The trouble is that since the Social Security Trust Fund has no cash, no one can say where the money would come from to fund these accounts. The Chinese again? Probably. But Bush hasn't told us yet. He has, however, loudly warned working Americans not to count on Social Security. (Note to cowboy: Keep strummin'.)
The media never really took the president to task on the math of private accounts. It was the AARP that killed the idea, and, ironically enough, they hated it because private accounts would have reduced the amount of guaranteed benefits to their members, not because it would have indebted their future members.
Pete Peterson, one of the smartest financiers among us, has correctly pointed out that "benefits" like personal accounts are simply deferred taxes if they're not paid for. Yet neither the anti-tax president nor his adversaries once questioned whether borrowing the trillions of dollars needed to fund private accounts was a good idea, much less possible. After all, Americans have accepted the surfing lifestyle in all of its absurdities. We have watched advertisements that say "Pay off your high credit card debts!" and we have called the 800 numbers and attached our homes to new loans in order to pay off our credit cards, then bragged to our friends that we are "debt free." We are encouraged to rent things we used to own including music and, paradoxically, the down payments on our homes. We have accepted this new bargain that we will never be out of debt as inevitable, preordained by the God of our choosing. We have forgotten the feeling of solid ground as we have taken on larger and more treacherous waves. We have ignored the greatest investor among us, Warren Buffett, who has derided our "sharecroppers society." He sounds old, cranky, and un-hip.
Until we wipe out. Until we lose our jobs, until we get divorced, until we discover that our health insurance doesn't cover thousands of dollars of "extras," until we lose our job or until our home doesn't appreciate at the anticipated rate. Until we can no longer surf. And then the "debt hell," as a consumer advocate I interviewed calls it, kicks in. The fees pile up. The interest rates increase. The bargain we accepted ceases to be a bargain. It becomes prohibitively expensive. We learn that we are not middle-class at all. We are poor. We own nothing.
And then, just maybe, we finally ask, "Well, how did we get here?"
Copyright © 2007 by James D. Scurlock