Monday Open Thread
Pete talked about SO MUCH on the show today, I had trouble picking out anything to blog about in particular. So let’s hear from you, the listeners/readers, on the topics covered today, including the war (of course), the mortgage crisis, gas prices, the stimulus package, and the prospect of Blogcasters Joe and Alex arm-wrestling on the air.
Okay, all things finance is my area of expertise. Pete, if you actually read this, be glad I didn’t call in.
We, as a society, are to blame for the current crises in the finance industry. Stop right now before you point the finger at finance companies. The mortgage issue is just the tip of the iceberg.
Starting in the late 1970s to today, we have become a people completely dependent on having things now that we can’t pay cash for. For the first time in 2006, the average savings rate in the United States was a NEGATIVE number. This means that people actually spent more than they made on average. Essentially, people are swiping plastic when they should pass on that 59″ plasma.
Now, over the past 30 years, people have tapped literally every resource to continually feed their buying habits. You people are just as bad as our government. Buy now, pay later… great mentality. You see how good that is working for the U.S.
A major issue with the mortgage world is that people were using appreciation in their home as a second source of income. These people would rack up debt, re-finance, and then be debt free…. for about an hour. I know people that left a closing and then hit the mall to start shopping all over again. Now, these people got inflated appraisals to re-fi and are all wondering why they have a negative net worth and negative equity in their home.
HERE ARE THE OPTIONS FOR THE PEOPLE WITH THESE ADJUSTIBLE RATE MORTGAGES (ARMs):
1. Refi (well you can’t if you have no equity or cash to pay the closing… also, good luck finding a bank that will do a negative equity loan
2. Sell the home (same problem, you still owe the difference)
3. Foreclose (well, this is about what is left… people left and right are surrendering their homes to the bank. See Deed in Lieu).
Now, some companies are making it WAY too convenient for people to borrow from their 401ks. Okay, people, please look at the penalties for withdrawing your retirement early. Its upwards of 30%! PLEASE DONT DO THIS EVER. Seriously, file bankruptcy before you do this. This is why the 40-55 bracket is eyeing my generation to take care of them. Seriously, we don’t have the money to pay your debts and ours. But, this is a whole other conversation.
Let’s talk about cars for a second. When I graduated college in 2000, I had good but not great credit (680 score). I was buying a new car (on an employee discount) plus rebates, and an additional $2000 cash down. The longest loan that I could get was 60 months and it was a special to get a 7.9% interest rate. In addition, I needed a cosigner to get approved. Now, people are buying USED cars with $5000 negative equity, poor credit, and getting terms upwards of 75 months (Ask any dealership about Wells Fargo & Wachovia’s 145% program). HERE IS THE KICKER. With the average new loan term on a car loan increasing rapidly, people are STILL trading in cars every two years. Now, banks are saying “no more.” The auto industry is the next to deal with a meltdown. It is already starting to happen now.
While it is nice and convenient to blame someone else for your issues, look in the mirror. Because someone let you do something doesn’t mean you should. STOP SPENDING MONEY THAT YOU DON’T HAVE! LIVE WITHIN YOUR MEANS!
(NOTE: I am an outside sales rep for a major bank dealing with auto financing. I have many years of sales, credit, fraud detection… I am not bullshitting you with what I say)
Great points John and good advice.
I’ve always kinda looked at the idea of credit as suspect. If you don’t have the money to spend, save it till you do. I’d agree that as a society we have been drawn into this negative loop of spending on credit and simply getting deeper and deeper in debt.
But the major problem is that most kids who approach the age where they can get a credit card don’t understand how credit works and wind up getting way over their heads before they know what’s happening.
If we’re going to operate this way, we need to educate our teens about how credit works.
I propose a putting the following class into the national high school curriculum: Credit 101
The purpose of this class would be to start by educating kids how to use credit cards to build good credit and what to do and not do to maintain good credit.
John, I’d love to hear any ideas you might have on other points a class like this should encompass. You’re obviously the expert on the subject.
Travis, I actually had a dream you hinted upon. I want to quit my job and go from high school to high school giving seniors a one day Personal Finance seminar.
Don’t just cover credit. You also need to ensure that these people understand the need for timely payment of their bills. What would shock the pants of these students is the amount they would pay on a mortgage at 6% versus 8%.
This is how I would do it. Tell the story of two people. Have them both enter college at the same time. One lives it up using credit while the other shys away. Have both people exit school and then carry out their lives. Show over time how much more the careless person pays and has paid for. It could and would easily be in the hundreds of thousands.
I could go on, but I don’t want to bore Pete’s brother to death.
Other thoughts:
KEEP IN MIND, EMPLOYERS LOOK AT CREDIT REPORTS BEFORE THEY HIRE PEOPLE! Many people can’t get jobs because they seem completely unable to be reliable.
I have seen many people ages 22-26 that have already filed bankruptcy. Sure, their credit slate was wiped clean but so too was their ability to get a good home loan for the next decade.
John, I too found your assessment to be really poignant, but I don’t understand your conclusions. You say: “While it is nice and convenient to blame someone else for your issues, look in the mirror. Because someone let you do something doesn’t mean you should.”
Okay, we could blame the people who participate in the system, and we can certainly blame greed or the inability to say enough is enough. As someone who has always lived within his means, I can sympathize with that, and I could read what you write as a vindication of my own lifestyle and spending habits.
However, it seems to me any economic system that permits, let alone fosters and pushes, this kind of economic behavior is inherently flawed. Market capitalism is set up to favor the wealthy, and it inherently encourages overconsumption (just look at the advertising industry).
So while I could do what you’re doing and point a finger at people who fall victim to the system, wouldn’t changing the system be a far better avenue? I mean, the system is sure as hell not going to reform itself, since those who control it thrive on the misfortune of those victims. In order for some to be super-wealthy, many more have to work and consume the way Americans do today. So why not abandon that system and create one that, instead of praying on the ignorance of the people at the bottom actually thrives on their empowerment and seeks moderation and classlessness as inherent goals?
I must have not finished my thought… This is a subject that is upsetting to me…
I have heard from people that are way upside-down in their car loan (tons of negative equity. They tell me that they can’t afford their payments. I ask them why they bought the biggest baddest truck on the street and accepted such a large payment. His response, “because they let me.” He never felt any responsibility for his actions.
While changing the system dynamically would be a good way to deal with these, it would be impossible. Therefore, I have to agree with Travis that we need major education into personal finance.
I guess my point is that it would be easier to shitcan the system and replace it than it would be to reform it to encourage us to behave in a way that hurts elite interests in the long run. It’s designed to screw us (or to get us to screw ourselves), so our only hope is to screw it.
The dilemma is that you’d have to create a society that isnt hellbent on consumerism.
How about one like this.
Oh lord, please… We have all seen Socialism fail utterly in every nation. It destroys human ingenuity and free will. The problem with any of the communistic-like governments is that it depends on an entire society of people never demanding to get ahead in any way at all and to accept what the government decides for you.
Yes, Plato said communism is the best form of government and a republic is about the worst.
You obviously did not read the article, John. Your response demonstrates that you didn’t give it so much as a minute, since there’s nothing about government deciding anything in the whole piece. Please do me the respect of actually reading the thing before trashing it. And it doesn’t sound like you even understand political or economic theory when you call communism “a form of government” — it’s a form of economy, and it is not mutually exclusive of a “republic”, and it isn’t what the article was about anyway.
I apologize. You are 100% correct… I am working from home and as soon as I see Socialism, I run in terror.
One thing I failed to mention about socialism. It works best in tribes and smaller utopian communities. On a national level, it is impossible to force every person to do his/her share.
I understand why you run in terror, the title is bad. But it’s 100% different from anything you’ve ever heard under that title, I promise you. Please, when you get a chance, check it out. You might not buy it, but I’d love to hear if you think it’s “impossible”. Most conservative and liberal economists just say they don’t like it, even though they think it’s feasible (far more so than authoritarian communism).
Stepping in here from Canada, (considered like many other countries to be socialist) I think you guys are confusing the term socialism with communism. They are not the same; anymore than capitalism is the same as democracy.
I would agree Mitch. Far too often I see the idea of Socialism get pasted with the stigma of Communism and I’m not sure why that happens…they’re two very different political systems. Is that unique to the US?
And really, Communism isn’t without it’s merits to be honest…