Livinglies’s Weblog

Gambling establishments know it, amusement parks know it, retailers know it — anything that separates your perception of spending your own money from the reality results in your spending more. And in the case of the American consumer, we are spending consistently more than we earn and more than we could ever pay back. 

We are all participating in a Ponzi scheme, relying on the next influx of credit from our home, credit card, auto loan or other lending scheme to pay the minimum payment on past debts. Meanwhile when we use chips at the gambling casino, we are not spending “money” so we spend more of it. When we use credit cards, we are not spending “money” so we spend more of it. When we use debit cards, we are not spending money so we spend more of it.

The result is that we walk out of the casino either broke or possibly in financial ruin. We get the credit card bill at the end of the month and we didn’t realize how much we spent. We see “over-limit” fees, late fees, and all kinds of interest and fee items that result in a “minimum payment” that is guaranteed to keep us in debt for life. We get our bank statement at the end of the month and for the 20% of us who even look at it, we get the same surprise — we spent more than we realized using our debit card, in stores and on the internet. We borrow on our home equity credit lines and increase our monthly payments to a level that is out of reach, or in the case of most Americans, to a level that is simply more out of reach that before (what’s the difference, I can’t pay it anyway).

For those of you who revel in conspiracy theory, here is one that is true. The deck is stacked against everyone by a tacit agreement between government and business. They want us stupid and ignorant. The Government, the retailers, the gaming establishments, the banks, the banking networks, non-bank credit card issuers and others on the receiving side of the dollars you spend all want you to avoid paying actual cash. Because they know that if you have cash in your hand you will regard it as yours, as you will be less inclined to part with it. They know that at the end of the month, if you are spending actual currency, you will be the one with money in your pocket and not them. 

Millions of Americans are steadily increasing their spending on credit cards, because they have no other place to go for the money to pay for their normal monthly bills — groceries, utilities, etc. Many are taking down the full amount of their home equity lines of credit for fear that these sources of credit will be frozen — a trend that is growing in the industry. People are taking this money and socking it away in investment accounts, which I hope are in Euro’s because the dollar is going to continue taking a major hit and inflation, while it is a global problem, is headed for far worse territory than most other places on the planet. 

The United States is a place of negative savings (i.e., debt) from top (Federal government) to bottom (you). And nobody is going to help you or your children or grandchildren because all the players have a vested interest in lying to you, misleading you and encouraging you to look at your finances as something other than your future wealth and security. If you are looking for help, look only to yourself and your family members. Get yourselves together and decide on how you are going to navigate the this mess. 

Here are some tips that will help:

1. If you must use credit cards to “make the month” then you are headed for a disaster. So plan for the disaster instead of burying your head in the sand. Get one card that you bring the balance down to zero and use it sparingly, making payments exactly on time and allowing the revolving credit option to be used. So you don’t want to pay the card in full each month, you want to pay it in two or three months. Get a new telephone line and give out the number to your friends. Put the old line on voice mail and unplug it, because the creditors are going to be calling. If you don’t hear the call, it will be less stress. Most card companies do not sue, they hound you through collection agencies. So don’t enter into payment  arrangements with them, and don’t use bankruptcy just because you piled up credit card debt. 
2. For Debt that you already have incurred and will incur in the near future, keep this in mind. You can game the system just like they have gamed you.  Inflation normally is not a  major factor in long term debt. But it is now. If you put off paying the debt, whether it is fixed or revolving, as long as possible, it is VERY possible that inflation will outpace the interest charges. There is no guarantee on this, but at this moment it looks highly probable. So if you pay these debts in 3-5 years it might cost you a fraction of the VALUE of what you owe now. 
3. Pay in cash for the things you are buying if at all possible. It will keep you focussed on what you are spending and if you put the known expenses in envelopes at the beginning of the month, you will still have money at the end of the month.
4. Your mortgage or rent payment takes priority. if that means not paying a credit card, so be it. Keep your house. It is the one non-dollar denominated asset you have. It is your inflation hedge.
5. If you can’t pay the minimum on the credit card, don’t pay it at all. It doesn’t make any difference.
6. Credit card payments should be the last thing on your list to pay after food, housing, medical etc. 
7. If you think you are headed for bankruptcy try to hold out until the next congress gets to work. It is highly probable that the Republican changes will be reversed and that the old rules will return along with higher exemptions. 
8. If you can’t get to an ATM to withdraw the cash and spend cash, then  use the debit card and your PIN, knowing that this is coming out of your bank account. But remember that each time you use that plastic card, you are one step removed from the financial decision as to whether to spend. The one who ends up holding the bag is you.
9. Take advantage of credit card balance transfers with zero interest wherever you can. Play the game. 
10.  If you owe taxes, make some minimum payment that you choose arbitrarily. Don’t enter into an agreement or make contact with the IRS unless they contact you.
11.  If you are falling behind in your mortgage or under stress, don’t wait until the breaking point. Call your mortgage company NOW and tell them you need an accommodation. Get a moratorium on part or all of the payments. Even skipping one payment might make all the difference in the world.
12.  Do NOT overdraft your account and do NOT go for a payday loan. There is NO benefit for you to do either. Both put you in the hole deeper. Work out something with your utility, borrow from a relative (AND PAY IT BACK!), but don’t go for these short-term options. All they do is take more money out of your pocket. 
13.  If your credit score is very high, but YOU know you are headed for disaster, then get as many cards as you can and use them judiciously, keeping in mind the above. If you are screwed anyway, the amount does not make any difference. 
14.  GAME THE SYSTEM: Think of your own ways to “Create” money or money supply in your life. Have Plan B for when you lose that job — what business could you get into on your own that takes very little money to start and which will give you SOME income. Look around and see what people need. You’d be surprised at what people are willing to pay for if it involves making their life easier, or making something convenient — like shopping for seniors etc.
15.  Eat Healthy and exercise: It will reduce your stress level and bring more oxygen and nutrients to your brain. You are going to need your brain for everything it is worth to game the system and escape from the trap that was paid for you and the rest of us. 

These tips are contrary to what you will hear from Suze Orman and other people. They are controversial. While I believe this is the best advice, I could be wrong. Use your own brain and when you consult with others remember the 80-20 rule. 80% of the people you ask, don’t know much and will give you stock answers. Those are the people that will end up broke when this is all over. But by all means seek out the smartest people you know and talk about these things. 

Trouble for American Consumer is building and the perfect storm threatens our tenuous economy. 

DEEP RECESSION LOOMS WITHOUT FUNDAMENTAL CHANGE IN OUR POLITICS AND ECONOMIC POLICIES

The inevitable outcome was always the same: eventually we would hit the the top, like in any Ponzi scheme. 

Consumers, who maxed out their credit cards, and maxed out their borrowing on their homes, and maxed out on their purchasing power which has declined significantly over the same 25 year period, and who are vastly unemployed or underemployed (further decreasing their wages and purchasing power), and maxed out their borrowing from consumer finance, and even maxed out their short-term borrowing through pay day lending and overdraft privileges and eliminated their savings plans, have reached the point where (1) they can’t buy anymore “stuff” and (2) they don’t want to. 

The end result is that we have spent ourselves and our country into a hole, diminished our standing in the world, and we continue to insult the world by asserting a dominance that was once real, but isn’t anymore. And the world is telling us as politely as possible to shove it. 

The strength of the Euro, the movement amongst the oil producing countries to create a unitary currency for the Gulf countries and other trends around the globe all spell the same thing: everyone is looking for an alternative to the U.S. dollar and an alternative to the U.S. altogether. We have brought ourselves and the world to neither peace nor prosperity, and neither security nor safety. 

Asian inflation which is gearing up to be as bad as we have seen in any emerging economy is starting to hit wholesale prices. Rising costs due to rampant and growing inflation in countries that had before been “cheap” producers is hitting hard on products purchased here in the U.S. 

Add to that the more or less daily devaluation of the dollar and the effect is multiplied. Add to that mixture the further devaluation of the dollar caused by the mortgage meltdown where central bankers are converting their dollar reserves to Euros and the effect is further increased.

The headlines in most papers is the end of the free ride we had for a long time where the dollar was king and we could purchase imports more cheaply because dollars were in great demand. 

Our headline here is that we are headed for the deepest recession since the greatest depression. 

The reasons are many but all fairly simple. The United States converted from being a nation of production to a nation of consumption. The final nail in the coffin of this unfortunate conversion was the advent of credit cards — not at their inception — and the high interest rates that were institutionalized during the double digit prime rate days 25 years ago. The theory was that the credit card companies were under hardship because it cost them more to get capital to lend than they could get under usury laws, once you factored in defaults and the extremely high interest rates that the issuers had to pay. But when rates went back down to modest figures of around 7% prime rate from highs of 22% credit card companies were allowed to keep their rates at 21-22% and eventually raised those rates to as high as 35%. Adding insult, the issuers now have fee schedules that add to the absurd payments. 

This “free money” craze coupled with stupendous profits earned by credit card issuers caused a huge but temporary surge in consumer sending encouraged by government, business and lenders. Everyone liked it because for consumers they were getting more “stuff”, for government they could claim better economic performance, and for credit card companies, they had a stranglehold on an economy that was now addicted to credit card and home equity loan consumer spending. As with the mortgage meltdown, nobody thought it through. 

Our economy became addicted to, dependent on and under the control of consumer spending, which up till now has accounted for around 70% of our entire economy.

The inevitable outcome was always the same: eventually we would hit the the top, like in any Ponzi scheme. Consumers, who maxed out their credit cards, and maxed out their borrowing on their homes, and maxed out on their purchasing power which has declined significantly over the same 25 year period, and who are vastly unemployed or underemployed further decreasing their wages and purchasing power, and maxed out their borrowing from consumer finance, and even maxed out their short-term borrowing through pay day lending and overdraft privileges and eliminated their savings plans, have reached the point where (1) they can’t buy anymore “stuff” and (2) they don’t want to.

Alan Greenspan is now defending his record of relying on the marketplace to work things out. Free market ideologies, like the one Greenspan relied on, are like all other theories in economics. They seem to work for a while and then they don’t. Ideology does not govern how people act. People act as they choose to and the way they choose is based upon mostly subjective factors at the time of their decision. That is a lot messier than the neat and clean theories and policies, indexes and measurements that have been used in determining economic policy, foreign policy, and domestic agendas for decades. 

The underlying flaw in all currently used economic theory is that people are not theoretical. They are real and they are complex. 

This is not a new observation. Plenty of brilliant analysts and thinkers have known this for thousands of years. Just look at some of the most recent contributions from Rothbard and von Mises and you’ll see that the idea that human motivation and human thought process as the real issue has been around for a very long time, well understood, and pointing toward policy mechanisms that were based in reality rather than the mythical world where everyone behaves according to the “plan.” 

The problem is that economics and politics are inseparable — like time and space. You cannot define one without reference to the other. And in politics, the goal is to get elected and stay in power. You are playing to an audience with precious little time to get the finer points of economics, personal finance and monetary policy. 

People are too busy trying to make ends meet, getting the kids off to school and after-school activities, and working a two-income family schedule with increasingly longer working hours. Up until now, buying “stuff” has been a recreational outlet and they had the “free money” to do it. Now they can’t even pay the “minimum payment” without borrowing more and they can’t borrow more.

You don’t get elected giving people bad news — especially the news that things will get worse before they get better. So politicians create agencies to give them reports, indexes, median incomes, and unemployment data that provides them a reference point from which to pontificate about things these “leaders” actually know nothing about. They create slogans and “programs” that will never happen to give the potential voter a reason for putting them or keeping them in office. 

The end result is that we have spent ourselves and our country into a hole, diminished our standing in the world, and we continue to insult the world by asserting a dominance that was once real, but isn’t anymore. And the world is telling us as politely as possible to shove it. The strength of the Euro, the movement amongst the oil producing countries to create a unitary currency for the Gulf countries and other trends around the globe all spell the same thing: everyone is looking for an alternative to the U.S. dollar and an alternative to the U.S. altogether. We have brought ourselves and the world to neither peace nor prosperity, and neither security nor safety. 

WHAT DO WE DO? BITE THE BULLET, GIVE UP IDEOLOGY AND GET REAL

If you want to stop the mortgage and credit crisis, go with Barney Frank’s plan which takes blame out of the equation and simply stops the worst from happening. It gives everyone an opportunity to recover and it is the only way to do it — taking everyone’s interest into account rather than one group over another. 

If you want to stop foreclosures and evictions, change the rules of civil procedure in each state and in federal bankruptcy court that enables cram-down procedures and mediated results that allow for the same outcome as Barney Frank’s plan. Home values were inflated far beyond fair market value. Everyone should share in the loss and everyone should share in the potential recovery. 

If you want to stop the health care crisis and the economic nightmare created for our citizens, take insurance out of the equation, wind down the current system and move relentlessly toward a single payer system that pays medical service providers well, does not subject them to liability for bad results, and gives them incentives to get their patients healthier. That is what other countries do and what we should do here. 

Eliminate the restrictions on so-called “alternative care.” Those protocols have been around a lot longer than allopathic medicine. End the hegemony of allopathic medicine, provide incentives for preventative lifestyles and care, and the costs of health care will drop like a stone while the prospects for a longer, productive, happier life will rise. Reinstate the basic pledge “First do no harm.”

If you want to create a country with solid economic foundation, we need savings. To create savings, people must have the financial resources to cover their expenses and set aside money for the future. Take credit card debt and other forms of predatory lending off the table. Change the “no end in sight” vision to a light at the end of the tunnel. Stop telling people to spend money when you know they don’t have it. All you are doing is making things worse when you could be leading them out of the darkness.

If you want an economy that has solid prospects and good earnings potential for its citizens and the country as a whole, change the direction of innovation from getting our own people to part with their money to buy “Stuff” and make innovation work to produce things the rest of the world values. In other words shift back from the consumer driven economy to production. The products might be the same, similar or entirely different as before. 

BRING BACK UNIONS: Stop trying to minimize costs and start working to maximize revenues. Anyone can eliminate their costs by simply going out of business. A business is worthless without growth and strength in the marketplace. By eliminating our production capacity, we have effectively relinquished our sovereignty. Have government intervene wherever necessary to prevent dominance that results in imbalance — encourage the start-up of new small businesses and create a level playing field for them to compete. 

If you want to reassert America’s place in the world give the world a reason to respect and honor us besides our military power. Raw power is a transient commodity. Eventually it ends. If you want to retain sovereignty over our economic affairs and avoid becoming a satellite of China or a junior member of the European Union then demonstrate the power of the American worker and the attractiveness of living and working here. 

If you want communities to prosper allow community banks and credit unions the same access to providing financial services as the megabanks, where centralization has shifted local deposits into faraway investments of dubious value to anyone. State and Federal programs should be deposited into local banks rather than national or international combines. The infrastructure already exists without any changes required to enable this to happen. What is necessary is for State regulatory authority to become more active and more focussed on their own State’s economy.

As the song goes, these are a few of my favorite things. What are yours?

Mortgage Meltdown Remedial Legislation

Barney Frank has a good idea that will work. Mortgage notes must be reduced without penalty to borrowers, and of course continue the tax exemption for short sale. 

Cooperation will be needed by FDIC, Federal Reserve, SEC, FASB, IRS, Controller of Currency and Treasury Department. 

I would add the following AFTER reducing the mortgage by a flat percentage (because it will take too long to figure out 10 million mortgages on a case by case basis):

1. Contingent reverse amortization (betting that housing prices will recover particularly in the event that this plan is put into effect). 75-25 in favor of homeowner up to recovering value of home at time of purchase. Then 75-25 in favor of Lender over purchase price until full value of mortgage is covered. Encourages homeowners to stay in their homes instead of abandoning them. Covers 8.8 million homes instead of 1 million.
2. Allow contingent equity to reported as actual capital for lenders. Allows capital requirements and reserves to be met and allows further lending, increasing market liquidity in the credit and money markets.
3. Allow contingent equity to be reported as footnote capital for investment banking. Allow financial institutions to recover write-downs and avoid additional write-downs.
4. Allow contingent equity to be capital for CDO holders, including where used as collateral.
5. Use flat relief percentage unless hardship is demonstrated. HUD has hearings. Suggested decrease in mortgage debt 20%.
6. Use Fed Funds rate plus 1% as interest rate, 30 year amortization fixed. 3 point service fee that can be paid up front or 5 points if added to note. This applies to all mortgages. Opt-out provisions can apply for those homeowners who wish to opt out. Many will do so rather than go through the hassle of adjustment, even though most of the work will be done by lender.
7. 1 year moratorium on all foreclosures on primary residential dwellings, giving time for mortgages to be converted.
8. 2 month moratorium on payments of principal and interest on primary residential dwellings. Insurance and Taxes must still be paid. Borrowers given up to an additional 6 months to bring their escrow accounts for insurance and taxes up to date.
9. After 1 year moratorium, foreclosures resume only on those homes where the mortgage note has been reset, as above, and borrower has defaulted. 
10.  After 10 years original mortgage and note reinstated, adjusted for payments as above.
11.  On second homes provide relief, by half of the above, and after 5 years original terms reinstated. 
12.  Credit cards: Remedial cap on interest at 15%
13.  Credit Cards: If interest rate is already 15% or under, reduce the rate by 25%.
14.  Cap overdraft, bank fees etc. at 60% of current industry rates. 
15.  Payday advance: cap fees, costs and interest at 10% per month. Require payroll deduction for repayment over maximum of 10 weeks.
16.  Establish aggressive regulatory environment wherein the ultimate holders of risk (CDO owners) are educated as to actual quality of the mortgage-backed securities. This would include indexes identifying subprime loans, subprime borrowers, and various levels of prime borrowers statistically, so that ratings agencies, insurers, investors, fund managers, CFO’s and Treasurers can properly evaluate the risk of the investment. 
17. This uses full information to allow market forces to dictate the credit liquidity offered to home buyers and other consumer debt. In other words, if the buyers of CDOs had been told the truth about these mortgage backed securities, and other aggregate derivative investments, neither the ratings  nor the demand for them would have been nearly as robust. 
18. The meltdown would never have occurred. instead the incentive was to put out as many mortgage loans as possible, artificially inflated prices, because the lenders, closing agents, appraisers etc., were all incentivized to appease the confusion and worriers of the borrower and get the borrower to sign papers.