Swinging Away From Debt

It’s often the case in our society that when the pendulum of a trend extends too far in one direction, it eventually swings back with a vengeance. We’ve see it in everything from politics to fashion and now, I suspect, we’ll see it in personal finance.

The mortgage banking crisis and the crash on Wall Street have revealed the reckless extent to which we have piled up debt in the U.S. People borrowed money to buy homes they couldn’t afford. The country’s largest investment banks stood like sand castles against the wave of losses that washed away their reserves.

Now we have the shocking aftermath at the federal level of adding $700 billion in debt to keep the economy moving. That’s on top of a national debt already more than $10 trillion which, when divided by the nation’s population, comes to a taxpayer liability of nearly $34,000 per person. Meanwhile states across the country are slashing their budgets because a rapid drop in tax revenues is leaving their budgets drastically unbalanced.

Savvy socially responsible investors have steered clear of this trend. For example, Todd Cohen, co-founder of the CRA Qualified Investment Fund, once told me that his fund included mortgage-backed securities. But they were small custom-created packages that allowed him to know the borrowers of the mortgages and their ability to pay. The mortgages went to low- and moderate-income borrowers, but they didn’t include gimmicks such as teaser rates that eventually jumped up, for example.

Where is the pendulum swinging? I think towards a simpler mindset among investors. Debt-free is the new black. Perhaps we’ll be reading more articles about boosting your portfolio return by calculating savings from slashing credit card debt? Or maybe something about the sensibility of driving a payment-free “pre-owned” car, rather than borrowing to buy new. Maybe “10 Ways to Love Your Local Bank.”

You might also take a look at the fall issue of Green Money Journal, which includes a look at debt and sustainable investing. Don Shaffer, president of RSF Social Finance, argues that the era of Wall Street domination is over. Small is beautiful. Community banks will thrive.

Perhaps the pendulum will swing that far. In the meantime, what about your own debt?