Friday, October 25, 2013

A Modern Parable


A MODERN PARABLE

 

Last year, I met a same-sex married couple, Jack and Tom, who have adopted two children, aged 12 and 14 (their gender is not relevant.) The couple are conscientious, competent, and devoted parents but they are at loggerheads over their financial situation and have asked for my advice. Both partners work, but Jack, who earns the most, is clearly the lead partner and makes most of the decisions.

They are deeply in debt. Their debt exceeds 4X their combined annual, after tax, incomes, and current spending exceeds that income by around 30%. They have a variable rate mortgage.  Tom has been pleading for years for Jack to cut back before it's too late, but Jack argues that it will all work out.

I've met with each of them separately in an effort to help them cooperate on some sensible plan.

Jack tends to regard his spending as necessary for the here and now: 'We're only young once.' (they're both in their fifties); expenditures on the kids are an investment. 'If necessary, they'll be well able to support us when we're older'; 'When the kids are out of college, our expenses will be a fraction of what they are now; we can live in a cheaper place'.

Tom believes that they are headed for a crash in the near future when Jack runs out of sources of more credit and he does not believe that expenses will drop; a major illness for either partner would throw them into bankruptcy. He argues with Jack over specific expenditures, such as private school for the kids and expensive European vacations, part of the kids' cultural education. Jack has ready justifications for these and more.

Before I met with them together, Jack offered a compromise: he would cut back spending to no more than 115% of their income. Tom feels that they should be saving some money.

At our subsequent meeting, I tried to be entirely objective, pointing out that when interest rates return to historic norms (well before the kids are out of college), they'll be paying about 25% of their annual income for interest only. Also, I expressed concern for where the loans were coming from and what the legal implications might be.

 FOR THOSE UNFAMILIAR WITH PARABLES and the literalists out there:

The aforementioned couple does not exist. The story is intended to roughly approximate our federal situation. State and local debt are not included, nor are unfunded liabilities at all levels of government. Many analysts calculate our situation to be much worse.

All the current activity (blame the bad guys) and all proposals to fix things are hopeless--completely useless, the system masquerading as a democracy in DC can't cope.  We're headed for a point where arithmetic takes over, just as surely as it did in Greece. You can watch it all take place on TV.

Who cares, as long as we know who to blame?

 Simpson-Bowles* anyone?

*President Obama's bi-partisan commission charged with recommending an optimum budget. They did, but it was rejected.


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