Magic Measuring Stick

In a theoretical sense...

What if there was a magic measuring stick that could tell us the percentage of people in the US who were financially irresponsible? The stick could differentiate between people who work hard at low paying jobs who struggle with moderate expenses and those who are at medium paying jobs who entertain with high expenses they cannot sustain. The stick could measure the amount of abuse of credit an individual is incurring for by being generally irresponsible or just generally gullible. The stick could categorize people into groups, like: (1) Responsible, (2) Struggling (3) Irresponsible and (4) Wildly Irresponsible.

….then, what if the stick measured that 50% of the people in the US were Irresponsible and another 20% were Wildly Irresponsible, in terms of their use of credit and living within their means? What if the stick measured another 20% of people who were struggling? What kind of reform would you legislate to deal with the struggling and not overly boost the wildly irresponsible? What percentage of the irresponsible do you help? How do you make new rules or enforce old rules when the majority of the people in the nation will neither understand nor follow them? Even if the above percentages are way off of the mark, the problem remains and the numbers are still staggering. The reality is that there is no stick, but we probably don’t actually need one to measure the size of our financial ineptitude.

What constitutes irresponsibility? In my opinion, the following could be considered financially irresponsible:

1) Maintaining a balance on a credit card month to month for no good reason. Zero is the only correct balance to maintain on a credit card.

2) Cashing out equity in a home to purchase unessential items or making unessential home improvements. In the event you must sell the home or make room for an additional relative, that is another story. This isn’t a piece on being a responsible family member.

3) Going to college or university with no financial backing, i.e. no cash and no scholarship. College is NOT for everyone. There should be no shame in becoming a tradesman or performing a job that does not require college.

4) Buying an expensive car because you think you deserve it, i.e. ignoring what you have “earned”. We may never break the unfortunate egos that exist in the world to correct this one.

5) Juggling multiple loans that require consolidation due to high interest rates. How do people get into these messes?

6) Not knowing, at least at a glance, monthly household income and monthly household expenses. Guessing doesn’t count. Your income plus your spouses income plus interest on savings minus everything else that requires your involvement with money.

7) Over drawing a checking account by accident. You have to make an effort to not pay attention to this.

8) Not knowing the cheapest way of accessing/using your savings or checking account monies, i.e. ATM, writing a check, wire transfer, VISA, etc. If it costs you 2 dollars to get money from an ATM, get cash from the teller. Convenience equals laziness equals wasted money.

9) Spending more than you take in on a regular unchecked basis. This is probably the most common fog people are in.

10) Not planning for purchases. Planning to purchase items seems an irrelevant concept to most people. People seem either flush with money and can buy at their whim, or are strapped and buying nothing. How about a plan, people?

How about wild irresponsibility?

1) Paying a credit card or other debt with additional credit. You should have your credit cards taken away and never get another one.

2) Engaging in a mortgage with no money down or in terms that are affected by the changing value of the supporting asset, i.e. equity increase through property value increase. This is so absurd, that anyone in the room when the deal was signed should be checked for a pulse.

3) Not saving money as a part of normal life. No one is talking about this. Why not?

4) Purchasing something large that you cannot afford to buy. Do these people even care whether or not they understand or can spell the word “afford”? Probably not.

5) Not understanding that credit is not your money. I was thinking of making this a trait of the irresponsible. However, the simple knowledge of this concept could be the back stop that the wildly irresponsible truly need. Thou shall not kill and thou shall not spend money that doesn’t belong to you. Just because it isn’t considered stealing in the short term…

People, who are struggling due to an unfortunate circumstance not caused by any of the above, sometimes have to engage in unwanted credit or poor credit use to sustain their lives. I would put these people in the struggling category. Around the office, these people are considered “credit worthy” people who are struggling. This seems to me like a ridiculous way of describing someone who is responsible but struggling. Credit worthy is a worthless designation in my opinion. “Down on their luck”, the old adage, also leaves something to be desired. How about calling these people “victims of economic misfortune”? The economics could be their own or that of the place they live in.

So…the magic stick divides the types of fools up. What next? How about a rap across the knuckles of the irresponsible?

There could be a ship...

Written by my father, on Sept 12th 2001.

“There could be a ship 'manned' by the liberal hearted on a sunny day and calm waters, but if the storm breaks and heavy swells rock the vessel, they have to give the rudder helm over to the males that may be despised now but will be sorely needed without interference when the waves break over bow. The proponents of that society do not now know, nor will they understand that the time will come when, in the interest of survival, brute male force will shunt them from the controls. If that does not happen, the alien groups will annihilate and the unit for nature surely does not favour the weak and fearful. So reads the sermon from the mount today.”

Cool to Be Frugal

The “cool to be frugal” concept

When I think about being frugal, there are some childhood memories that are probably pretty common to most Americans. These are the memories of our mothers or fathers explaining to us that if we wanted something, we needed to “save up” for it. This lessen is not a simple one any more as the world seems filled with addicts who need a fix.

Think of all the advertising we have been exposed to in our lives that takes this childhood lessen into account. How many commercials or ads have you been exposed to that indicated that, if you buy their product, you would “save” a bunch of money? The idea that one saves money in a purchase of needless items is backwards to say the least. Put that ridiculous concept aside for moment and examine the idea of simply making a purchase of an item you actually need.

Look at the eHow steps to saving: http://www.ehow.com/how_2808_save-money-major.html

It is shocking, but some people need to read those steps and determine whether or not they understand what is being offered as good advice. Step 6 doesn’t exist any longer.

Parental convention tells us to save money by putting away money as it becomes available (via our paper route or our monthly allowance). As we get older, the paper route develops into income from a job. Our relative increased wealth and affluence exposes us to more opportunities and creates new needs and new wants. Amongst the many responsibilities of adult life a grey area between need and want is created by answering this question, “What do I need to be happy?” We don’t even know what we need any more?!?! Mom and Dad tried to help with this one when I was a kid, but lately, Moms and Dads are not setting a good example and have ballooned this grey of wants versus needs.

Worse yet, we have adopted speed in our lives and think it is mandatory and all encompassing. Many can speculate on this topic and its relation to the internet, the TV and new technology. No one can argue that there certainly is sentiment in the world that do things faster and must have things sooner. I simply want to point out how our perception of the speed of modern life makes us foolishly believe that we need to enjoy now, not tomorrow. Forgetting that the miracle of enjoying the journey of life, we have made an excuse for ourselves to foolishly purchase now what we could have later responsibly. There seems no reason to wait to enjoy something you can have right now. Mom and Dad are not amused.

So…save money on the new home entertainment system the commercial says? Wrong. You don’t save because you don’t need it. You don’t save because you didn’t save up to buy it. You lose because you put yourself in debt and pay additional money for the right to borrow someone else’s money for something you didn’t need. There is no saving in the equation, only losing.

Mom and Dad weren’t perfect. My parents taught me about the importance of my credit rating. I was advised to pay my bills on time, establish credit, keep a zero balance, etc… What they failed to tell me is that maintaining a good credit rating was only important if I understood what we should use credit for. I figured it by watching others. I can’t stop thinking about the FreeCreditReport.com people when trying to understand our strange reliance on the world of personal credit development. Their commercials infer that if one had only paid attention to their credit rating, they would not need to work at the fish place or drive a crappy car. Really? Isn’t this story being told to us in reverse? Shouldn’t we work at the fish place, apply for a loan to buy a car, and then finally, after paying off our first loan, actually have a reasonable credit score to check on? People that don’t work at the fish place probably have a higher paying job and should have put money away with which to make purchases. The people that don’t work at the fish place probably did at one time in their lives, so to speak. These people think that their credit score is important, but certainly not life changing….

I wish Mom and Dad would put together a couple of commercials to show the folks out there how to save again. I wish people would be willing to work a normal job and lvie within their means. The economy’s dependence on extraordinary consumer spending is moot if the consumers are upside down. People need to get back to the basics for a while. People need to walk to work at the fish place and put their time in again. People need to learn to save again.

Some of my thoughts from April 2008

Who is responsible?

There are many unknowns with respect to who is ultimately responsible for the current economic housing bubble bursting, or bubble forming/inflating for that matter. As a result, it will be difficult to focus a moral debate toward a specific party without endorsing an uncertain argument. Are Americans becoming too credit reliant and have they lost the fundamental ability to understand solvency? Probably, but people should have the right to sink their own ship (they should be taught to do otherwise and media should assist in this effort by stopping the promotion of credit). Did financial institutions in the US and the rest of the world go too far with respect to improper lending? Probably, but their position is defendable from a legal perspective and from the market condition at the time (most of them anyway). Are monetary policy and the Fed going to solve this with interest rate reductions and bailouts? No, because the rate manipulations were mostly likely the source of the bubble and the bailouts do not serve to have financial institutions correct themselves. There is, however, a common thread between the financial market victims (banks or otherwise) and individual home owners that should be on everyone’s agenda, especially the Fed. The commonality of the two parties pertains to the financial stability and risk in an individual’s credit future. I will explain.

Should an individual person with a decent credit rating decide on their own that it is in their family interest to pursue the purchase of home now by borrowing money, in lieu of saving and purchasing home later (at a higher level of initial equity and lower personal risk), then that is their undeniable right. A financial institution has a right calculate the risk of lending to this person based on the person’s credit rating, history and most of all, current market conditions, albeit interest rates, rise and fall of home prices, down payment or initial equity, etc. In this small instance the bank has the right to determine whether an individual person can undertake this additional risk and financial responsibility. That should be where it ends for the bank in terms of profiting from an individual’s right to expose themselves to risk. It needs to be understood from a moral and lawful stand point that the individual is taking the risk on his own future and that the bank is not purchasing the rights to the successes of this individual by entering into a substantive mortgage agreement. If an individual wishes to agree to terms wherein the loan payments reset, that are of a high percentage of their annual income and that the loan is to be for a long period, the bank has the right to deny the loan. The bank’s failure to do this, in recent years is not the immoral issue in of itself, yet this is a good reason for the banks to fail or radically adjust their way of doing business. However, the bank leveraging this personal mortgage risk is an immoral one.

If a company that sells bread needs a new bread facility and borrows money from the bank. The bank has the same rights to make judgments about the bread market and the company’s ability to do business and pay back the loan as indicated above in a personal mortgage. In addition, and in stark moral contrast to a mortgage of an individual, the bank should be able to leverage the success of the bread market and the bread company. This is the risk of doing business in a free market.

A financial institution should not have the right to bundle loans and resell the risk, bundle the loans and place the loans on the free market, engage in credit default swaps based on mortgages, or perform any other action where the bank serves to profit from individual mortgages in any way other than being paid interest against the actual loan itself. A bank cannot totally abstain from fractional reserve lending or leveraging their position in order to make money. A bank should be able to leverage their investments and create illiquid capital from their future gains against current investments. This is the bank’s risk and the bank’s reward or failure from the taking on such an investment. However, these investments, morally, must not include personal mortgages. If a bank or financial institution forecasts gains from personal mortgages, it should be done on a dollar for dollar basis and the bank should not be allowed to increase its leverage in other markets or make a market from the perceived gains. Financial institutions should not have the right put people’s individual futures on the open market for gain. Only that person has that right. Our society and successful free market allows for enough opportunity to earn money from speculation without this on the table.

The industry is rampant with bundled mortgages that are all leveraged on the books. Most of the banks and financial institutions exposed to this immoral market are overleveraged and have solvency problems. Some banks have this in their business plan and are able to continue doing business. All financial institutions need to begin a de-leveraging cycle or program which they need to have in place by the end of a determined period. This program needs to be monitored and measured by FDIC or whichever entity that the Fed deems to have the responsibility. Furthermore, new programs of bundling mortgages or putting mortgages on the free market need to be deemed illegal and should not be permitted. The Fed and FDIC need to protect people from failing banks by adjusting the coverages of the FDIC from the antiquated poster board $100,000 maximum to a set of new rules that instills confidence through protection. The current $200 billion in Fed backing should protect people from failing banks, not protect the banks from failing people. The money came from the people to begin with and the banks can protect themselves from failing people by changing policy and taking less risk. The above, of course, needs to be needled by the economists and federal bankers of the world who will provide the numerical metering, standards and measure of such actions and plans. On the other hand, a moral and fundamental stance and explanation of the above can be implemented immediately without much calculation.

Some will argue that the above does not solve the current burst of the bubble. My response would be that there is little use in defusing a bomb after it has gone off, but there is a need to stop the bomber at the same time as treating the injured. Others will argue that the Fed needs to take stronger action and more stringently regulate lending practices of banks and continue bailouts of those affected or even monitor investment firms. These people will argue that credit and confidence need to be repaired first. I argue that confidence and stability comes from agreeing on the principle of corrective action and wrong doing, not from nationalization of our lives and our banks. I contend that banks will not experience runs on them when investors have a broader personal protection from agencies like the FDIC in times of trouble. Let’s face it, it is the run that brings down the bank, albeit on the market or in withdrawals. The market needs to remain free along with all the people living and using it. Those that have failed in it will need to fail of their own accord. We can soften their fall by protecting individuals, but they must be responsible, in some way, for the actions taken and self correction must occur. People speculating disaster from these bank failures, like members of the Fed, should be reminded that new principles should be created to stop bubbles from inflating and bursting and that they should learn from these failures, not attempt to pretend they do not really exist or that they could be fixed through monetary policy or some other confidence defending measure. Make the numbers plain, open, available and understandable. People will do more with the truth in a crisis than a sedative half truth.