Business December 2009

Lead Us Not Into Debt

Finance guru Dave Ramsey wins followers with a simple message: find God and lose your credit cards.

Just like me, our nation has experimented with the “educated” overuse of leverage, aka debt. Homeowners who believed that they would have been fools to rent when a mortgage-interest tax deduction was available have poured their savings and their hearts into homes they are now losing to foreclosure. M.B.A.s are shuttering the companies they leveraged to the hilt as they chased tax deductions and higher returns. Even our politicians speak of deficit spending as a sort of investment opportunity. In industries from autos to housing, even as the private sector has retreated to repair its balance sheets, the government has dangled money it has borrowed in front of potential buyers to tempt them to further purchases.

Debt magnifies our fortunes, whichever way they’re going. When incomes are rising, debt helps us live even better. When incomes are falling, fixed debt payments can push us into the abyss. If you have substantial assets, you can lose a lot more than your sterling FICO score in a bankruptcy, and bankruptcy makes it hard to save, or start over. Even if you don’t go bankrupt, debt payments make it difficult for you to accumulate wealth, or to take the kind of risks that can make your life better, like switching jobs, starting a business, or getting married. And of course, if everyone takes on too much leverage at once, the whole system can collapse.

Really, we know all this. We knew it before. Just as G. K. Chesterton once remarked of Christianity, the Grandma Plan hasn’t been tried and found wanting, so much as found difficult and left untried. It’s hard to make a collective decision to delay gratification—and even harder to “get your grandma on” when everyone else is out charging the good life to MasterCard.

After all, many people who got caught out in the housing bubble didn’t exactly want to take out an adjustable-rate mortgage with a 3 percent down payment. But there was no other way they could afford even a modest-size house in a decent school district. Houses were being priced, not on some notion of intrinsic value, but on the maximum payment that likely buyers could afford. As other buyers and many bankers became more willing to take absurd risks, even previously prudent consumers felt they had to follow suit. They couldn’t get “weird” without sacrificing their children’s education.

Dave Ramsey has little patience with this sort of argument. Some of his most scathing mockery is reserved for people who take out loans to pay tuition at an expensive private college. No school, he avers, is so much better than the local college that it’s worth gambling with your financial future.

There’s some evidence that he’s right about this; a study by the economists Stacy Berg Dale and Alan Krueger famously found that students who were accepted by schools with high average SAT scores, but chose to go somewhere else, earn about the same as those who actually attend the higher-ranked school. But there is also evidence to the contrary; and what nice upper-middle-class family is willing to, well, gamble with their child’s financial future?

This may be why Ramsey and the other evangelists for a debt-free existence have thrived most in a subculture that offers something even more sacred than a Harvard education. Though Ramsey’s television and radio shows have attracted a large secular audience, his hard-core followers still seem to be overwhelmingly evangelical. Ramsey closed his talk in Detroit with a sober lecture on taking care of yourself mentally, physically, emotionally, and of course, spiritually. “Bluntly,” he said, “I’m talking about this man named Jesus, and if you don’t know him, you need to be introduced.” The arena erupted in a joyous roar.

Though I did take the audio CD of Ramsey’s personal witness being handed out free at the exit, I’m afraid that Jesus and I aren’t really any better acquainted than we were before. Nonetheless, Ramsey has made a convert out of a secular journalist with one of the pricey M.B.A.s he likes to poke fun at. I have never felt as serenely in control of my finances as I have during these months of knowing that every single dollar is where it is supposed to be: either in the bank, or on a well-chaperoned date with our envelope organizer. The process has been surprisingly painless but, even more surprisingly, pleasant.

Of course, both my fiancé and I have already acquired our expensive educations and a pair of decent cars. We don’t have any kids, we don’t own a home, and it won’t hurt us to rent a few extra years until we have paid off the last of our student loans and can afford a 20 percent down payment on a house. It is easier for us to be weird than for most of our peers.

On the other hand, Americans aren’t going to fix our national financial problems until a lot more people decide to drop out of the “normal” competition to see who can borrow the most money in order to bid on a fixed number of homes in affluent school districts and places at selective colleges. You don’t need to be a Christian to look for a better way. Even an unbeliever knew enough to listen up when he saw the bright light on the road to Damascus.

Megan McArdle is The Atlantic’s business and economics editor, and the editor of the business channel at theatlantic.com.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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