I heard two practical numbers that are easier to wrap ones head around than 700B. Apparently, it breaks down to about $10000 per family or, put another way, $2000 per person. We USians already owe $32000 each in future revenue. Do we really want to pile on another $2000?
I believe debt is indentured servitude. When you go in to debt, you are promising away part of your future earnings which means you are also promising away future freedoms. Just work through a few compound interest scenarios. For example, compare a 15 year mortgage with %20 down against a 30 year mortgage with nothing down. Then compare saving up including interest on those saving for 20 years to buy a house with cash even after figuring in a modest rent. Do it for any price house. It's amazingly sad how people, organizations, and governments are willing to voluntarily surrender their financial liberty for years to come simply for a quick financial fix today. Suze Orman's personality annoys me a little but, in my view, her financial message is pretty good. Dave Ramsey's is even better.
Joe Heller is so good at his job. Here's his excellent commentary on the president's speech pushing for the $700B bailout. I don't know much about this Paulson guy except that he is Secretary of the Treasury, a Scientologist, and used he used to run Goldman Sachs which Warren Buffet just bailed out. Even if Secretary Paulson is the right guy to fix the current situation, I don't particularly like handing him a blank check for $700B with next to no guidelines and oversight. On the other hand, I don't want to see financial disaster any more than anyone else. So what can we do?
Mark Cuban is a guy who struck it big in tech. He has an idea too. I gather he's saying we should repackage this housing debt and it's revenues for individual investors to buy chunks of at a part of something called an exchange-traded fund. He's willing to buy $50M worth. Interesting idea.
I have a few thoughts too:
* ARMs and balloon mortgages are STILL driving people out of their homes. We need to cap interest rate increases on loans on a primary residence at 1% a year. Don't let the lenders replace them with fees. Make it retroactive for anyone still in their home-- retroactive for, say, three years-- and discount future payments by half until the retroactive portion is paid off. Many more details would have to be worked out, but you can't go wrong with ruthlessly supporting folks trying to stay in their homes. These loans were irresponsibly made and the investors who purchased them did not do their due diligence. I'm OK with them losing out on profits. Let's remember, they're still looking for the principal back too and no one pays on a home they give back.
* Loan the fat cats enough cash to tide them over temporarily but do it in such a way that the taxpayers will almost certainly get their money back. These business who dug themselves in to a hole deserve to dig their own way out or go under. Isn't this situation exactly why we have laws covering companies reorganizing and restructuring and/or being disassembled and sold off through bankruptcy?
* Mitigate the harm of anyone who does go under by giving local banks and credit unions access to this money to lend. They actually get to KNOW their clients and have relationships with them. Give these local establishments a commission on loans as they are repaid and a penalty (against that commission) on loans that aren't. The local establishment services the loan and no reselling because Uncle Sam holds the note. The upsides to families, neighborhoods and local economies of this system seem obvious to me. I wonder if this is what Fannie and Freddie were supposed to be?
This whole mess occurred because the risk of lending was totally detached from the rewards of lending. When you put multiple layers of financial devices between the folks loaning and the folks borrowing, you are going to make more bad loans. When you add ratings companies giving bogus ratings to win business in to the mix, the investor has absolutely no idea what risk they are taking on. The people working for S&P and Moody are as responsible for this mess as anyone. Heads should roll there, big time.
Speaking of consequences, I'm a big fan of feedback loops in organizations. For example, when an insurance agent writes a policy on a house and that house that later burns down, that agent loses some or all of their quarterly or monthly bonus. If I were running an insurance agency, the goal would never be to write the most coverage. The goal would be to write good coverage. Personally, I don't want my insurance company insuring some dude with a box of rags next to the hot water heater when the agent walks through because that agent can earn a commission today. I want to incentivize (I hate buzzwords, but there you go) agents to skip writing that policy because it will cost all stakeholders over the long term.
Sorry this turned in to an essay instead of just one link. That seems to be occurring more and more. This current mess, the lack of grown up behavior that caused it, just kept rattling around in my head and I had some time between working with a customer. Forgive the bad writing and thanks for reading if you made it this far. We must legislate responsible behavior when gross irresponsibility hurts other people trying to do the right thing.
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