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Culture of Debt

The opinions expressed by columnists are their own and do not necessarily represent the views of Townhall.com.

How did we get here? Only when we answer that question can we try to prevent it from happening again.

When your house is on fire, all you care about is putting out the fire. You call the fire department, get the kids out of the house, and do whatever you can to stop the blaze. After that, you ask who started it. But there is a more fundamental question to ask: How did it start? How could it have been prevented?

Much has already been said about putting out the fire that started on Wall Street and that now threatens to engulf Main Street. We must realize that the fates of Wall Street and Main Street are inextricably linked. You cannot watch one collapse and expect the other to stand strong.

That is the point that some have not grasped with their condemnations of corporate greed. Yes, many financial executives exercised poor judgment, making reckless decisions. And these knuckleheads ought not to be rewarded for their failures and mismanagement.

Accountability is key. Bankers who made irresponsible loans must be held to account, as should investment managers who chose to peddle instruments that included those loans. So should federal regulators who were asleep at the switch, as well as congressional leaders who chose to not crack down on Fannie Mae and Freddie Mac be held accountable?

But we must look to the root cause. It is not the loosening of regulations from the Clinton years, or the push for home ownership by the administration and certain congressional leaders, or the corrupt practices at Fannie and Freddie, or the greed of financiers. All of those played a role. But those factors could not cause a collapse by themselves.

We have become a culture addicted to instant gratification and a fixation on the material. Increasingly, concepts such as duty, self-denial, hard work, delayed gratification, and patience have been swept away.

We have a twenty-four hour news cycle that provides us with immediate news. We no longer wait for the evening news, to say nothing of tomorrow's newspaper.

Nowhere is this more apparent than in our finances. We have become a culture addicted to debt. It starts with 18-year-olds, where everyone getting a job is offered a credit card and everyone going to college is offered several, with the expectation of profits from interest accruing on balances.

The economic expansion of the past fifteen years has been built on a mountain of debt. Millions spend today with no thought of how they can pay tomorrow. Whereas you used to save and invest and wait for big purchases such as a new car, now you get it today and pay massive sums in interest as you finance it.

That is what happened with housing. This gets tricky, because unless you are wealthy, few can buy a decent home without debt. Therefore the rule of "no debt" cannot apply. Instead, the need is for responsible debt, gauging what an appropriate amount of debt is, given your paycheck and your obligations.

But it takes two to tango. For years, people have sought more house than they could afford. But the banks would say no. Until now.

The instant-gratification culture that has run rampant at the consumer end of the equation has now seeped into the lending end. Suddenly, when people apply for a loan for twice as much house as they could afford, the bank says yes.

Over a million people have found themselves unable to make those mortgage payments. And so the banks find themselves overextended. And the investment houses using those mortgage notes as investment assets found their asset values plummeting, resulting in the massive wave of losses that has caused the damage we have seen thus far. And the worst may well be yet to come.

There is much blame to go around. The president and Congress are trying to put out the fire. But once they do, we should not allow the house to catch fire again. It may not be exciting to talk about teaching and following sound principles regarding debt management and prudent planning. It is even less exciting to talk about finding contentment and happiness in ways other than always needing to lunge after something newer, better - and more expensive.

But we must, in our schools and in our homes, and by our actions.

This financial crisis is the result of the culture we have created. And it will happen again and again if we don't address the root cause. We must do better.

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