While I was posting Deficit Unplugged, our President was compromising with Republican Leadership to create Deficit Ignored.  Should we have a payroll tax holiday?…yes we should.  Those tax cuts?  They should have gone the way of the DoDo.

Here is, honestly, why I am concerned about the deficit.  As a Nation we have promises to keep.  We have the promise to our citizenry that if you work hard and use your mind, you can have a better life than your parents, in other words, we have a promise of upward mobility, yet our middle class is shrinking.  For the last 75 years we have promised everyone who works that they, and in some cases their dependents, will have a safety net in old age and for the last 35 years we have promised elders some semblance of health care.

There is a risk now that all the promises will be as ashes.  In truth the giveaways that I talked about in Adult Conversation are part of the problem.  In order to make Social Security more appealing benefits increased and the retirement age was lowered even as the population began to see increases in  longevity.  In order to avoid fiscal responsibility, Social Security receipts were spent as part of the general budget.  When borrowing from ourselves wasn’t enough, we borrowed from other nations.

Engineering short term budget deficits will never allow us to attack the long term budgetary issues that affect our fiscal health.  We had a chance to let the tax cuts expire but now that ultimate decision has been kicked two years down the road.  Our tax code is a mess, to be sure: it is over 67,000 pages of nonsense and exceptions to nonsense. TAX prep is a 65 Billion dollar industry and roughly 61% of filers use a tax prep service.  Refund Anticipation Loans are a huge business in low income areas.  I have lost count of the number of articles I’ve read by economists over the past few weeks who advocate reforming the tax code, collapsing to two brackets, the top of which would be lower than the top bracket under the beloved Bush cuts, and adding a value added tax.  Taxing both production and consumption rather than production as we solely do now.  Some of the logic for not doing these things boggles the mind:  A value added tax would cause the poor to save rather than spend so we shouldn’t do it…huh???  We should preferentially tax the rich because the rich would save rather than spend….huh???  We should extend unemployment benefits because the unemployed will spend them….huh???

Since the 1970s the roots of our economy changed from a manufacturing base to a consumer base, an economy driven by spending.  What did George W. Bush urge us to do after 911? He urged us to remember our patriotic duty and shop.  But there is a problem with jobs based on retail and consumer spending and that problem was summed up by Lee Scott, CEO of Wal Mart:  “Some well-meaning critics believe that Wal-Mart stores today, because of our size, should, in fact, play the role that it is believed  General Motors played after  World War II.  And this is to establish this post-world war middle class that the country is so proud of.  The facts are that retail does not perform that role in this economy.”

Our economy has become dependent on people spending and when they run out of their own money to spend, borrowing to spend more.  No wonder we are in the mess we are in.  We have become a nation of “business as usual” trying to hang on to what it has rather than pave the way forward  with programs and incentives that will restore our middle class.  I actually believed that there would be a push for updated infrastructure and a new power grid.  It kills me that a chunk of my money every month is recycled back to the very extremist groups responsible for 911.

What do I think the President should have done?  How about lock everyone in a room with the camera’s rolling rather than hammer out an agreement after hours behind closed doors?  Make people responsible for their positions in public, not when surrounded by the safety of the herd as most politicians are when they make statements about the economy.  He should be in my face all day every day articulating his views.  That 70 minute internet only version of Mr. Obama’s 60 Minute interview was a revelation.  He has sound positions but is not doing a great job of communicating them.

I am not someone that my mother would call liberal; my mother occasionally calls me Neal (for Neal Bortz and she has even called me a selfish capitalist on my own blog)…I don’t believe in using the tax code to redistribute wealth, and I believe that everyone must pay.  I believe in term limits to certain safety nets like unemployment insurance coupled with sound public policy like a jobs bank and retraining.  By jobs bank, I don’t mean a jobs bank that the automakers had in which laid off workers were paid substantial incomes while at home waiting to be called back to automotive jobs.  No, what I mean is a database of jobs and industry trends so that people don’t have to guess what industries are fading and which ones are emerging, they don’t have to guess what the qualifications for any given job are, opening and closing dates for applications are posted and adhered to, resources for retraining are promulgated and there is funding for retraining. I believe in a national infrastructure bank with national priorities that are updated and funded and I don’t believe that public works projects should be awarded to  certain companies without the benefit of competitive bidding.

What we have now is a mess.  And political will only to posture rather than fix our problems.

I am afraid that the scenario that I outlined in Adult Conversation will take place.  I believe that Americans will ultimately have to forgive the intra-governmental debt Social Security now holds and Americans will have to accept less.  You avoid the iceberg when the tip is just a speck on the horizon, not when the berg is looming  off the bow.

By kicking the can down the road as our leaders just did this week we are surely headed for tougher choices down the road.

Please comment.

I started this blog because of my interest in personal finance and financial freedom.  Gosh, that phrase financial freedom is sooooo trite.  I started blogging just before it became clear there was going to be a financial meltdown.  I’ve been wondering exactly what my role in the overall economy is.  I make money, I save money, I invest money and I spend it.  But lately, it seems as though we are in a free-for all economy.  Everyone is worried and out to get theirs.

It seems to be okay that some thrive while others suffer.  Some intimate that the thriving of one group causes the suffering of another.  (Certainly the financial meltdown has shown that a few thrivers have caused many to suffer) but are we really going to fall into a society so polarized that we argue that the thrivers must pay their fair share to ameliorate the suffering of others?

We live in a civil society…everyone must pay.  To extend the tax cuts for everyone will cost roughly 4 trillion dollars.  Extending them for the wealthiest 2% of Americans will make up $700 billion of that total.  That means that the lion’s share of the tax cuts belong to the middle class.  The grand total being roughly 3.7 trillion dollars.  It seems silly therefore that we talk about budget deficits without considering the totality of tax cuts.  We cannot target one group against the other and appear to be an intelligent nation.

I’ve been looking at the US budget since 2004.  The US income statement is so easy to find.  I discussed the budget in 3 previous posts : IOU America, IOU America Part 2 and Robin Hood.

In my previous posts I used a hypothetical college student as a micro example of the US Budget.  Now I am going to use something more personal, me.

It is not a state secret I had major debt troubles; 30 years ago I got my first credit card, my debt increased gradually through the years until I had 16K a month revolving credit card debt.  I had a house, a car, expenses and deferred student loan debt.  My expense situation could be divided into immediate needs + short term debt.  Lurking down the pike was the Ghost of Christmas future:  long term debt + immediate needs + short term debt.

My short-term debt payments + immediate expenses were about 90% of income. I made up any short falls by borrowing, i.e., using credit cards.  I knew that I had long term debt obligations that I would have to begin paying, but I was so busy being a rat on a wheel, I didn’t know how I was going to make that happen.  Something snapped…I saw the light.

I adopted an austerity program.  But I adopted a program that made sense.  First I eliminated every expenditure that I didn’t absolutely need, that meant canceling credit cards, pre-paid calling cards, meals out.  I only spent a dollar if it put food in my belly, kept clothes on my back, or put a roof over my head.  I prioritized purchases, everything that didn’t fit the above categories went on a list.  I needed some major help in the financial literacy department so I allowed myself to buy books on that topic…4 per month.  One thing that I did do was develop a spending plan.  I had to get to and from work and take call so I maintained my car.  I also continued routine maintenance on my home to make sure the roof was okay and the cooling and heating systems worked.  The spending plan helped me save and take care of the priorities around my home while I paid off my debts.  It is important to mention that my total debt was 123% of my annual take home pay. Ouch!

It is important to understand that even while I was digging myself out of my hole, I had to continue to spend. I had to spend on housing, I had to spend on food, I had to spend on clothing, I had to spend on maintenance.   When our lawmakers talk about all spending as a bad thing they are  really blowing smoke. What they really should be saying is that we know we are going to continue to spend during this recession, but we only want to spend on the things we want to spend on.  And there is the ideological rub.

There are the billions spent on unemployment insurance on the one hand or the trillions spent  to make tax cuts permanent.  The expenditure for unemployment insurance will stop at some point as the economy improves and the unemployment rate falls.  The 4 trillion dollars in lost revenue through a permanent tax cut extension is, well, permanent.  This debate is not about the budget it is about ideology.  We have two 800 pound gorillas in the wings, the dual apes of Social Security and Medicare.  The economy has forced us to talk about them at least a decade sooner than we’d like. We can’t kick the can down the road and everyone must be prepared to give something up.

I am tired of hearing that earmarks amount to a rounding error in the budget.  At one end of an earmark is a Congressman or Senator who lobbied for their district, at the other end is a consituency who benefited.  Everyone must pay, earmarks must stop.

It was wrong for Krugman to rail against the freeze in Federal pay.  Federal employees have the most generous benefits packages around and have been receiving COLAs when others have been receiving pay cuts.  Federal employee pay may be a rounding error in the budget but everyone must pay.  By the way, VA and Federal employee retirement benefits were a 4 trillion unmet obligation in the Federal budget.  A two-year COLA freeze will save money because it will affect retirement pay.  The freeze should be extended to the military not on active duty.

I realized long before Mr. Obama was elected that my taxes were going to go up.  Honestly, I’m really surprised they haven’t yet.  My taxes should go up, but living in a civil society isn’t free. They should go up for everybody.  We shouldn’t be discussing saving 700 billion, we should be discussing saving 4 trillion.  Everyone should pay.  To take the sting out of the tax increase, there should be a payroll tax holiday and reform of the tax code as Bowles and Simpson have proposed.  Everyone will benefit from that.

We are in a recession, but there are still necessary expenditures.   Just as I had to maintain my car and home when I was in my personal recession, we have to maintain our infrastructure and doing that requires spending money, a jobs bank requires spending money.  Just as my mechanic and my plumber benefited from my maintenance plan, our citizenry will benefit from a jobs bank and infrastructure projects.

Please comment.

I finally got one! An iPad. As I write this, I am sitting in a Starbucks in San Francisco. This town should be called iTown. The woman sitting next to me on my right is typing into her Macbook Pro while listening to music on her iPad. The woman on my immediate left is using a Windows-based PC. On her lap is an iPhone.

What inspired this blog post? A Washington Post article of a few weeks ago called The Republicans Prepare Their Agenda of Less. In the article, a member of the Tea Party spoke of the need to address the looming issues of Social Security and Medicare and have an “adult conversation” with the American People.

Several months ago, I wrote a series of articles about why Medicare sucks. I am still getting comments about those articles. I wrote about the budget in those articles and that Medicare, in all its many parts, and Social Security represent represent tens of trillions of unmet obligations in the Federal budget. I also said that any attempts to address long term deficits would have to take into account those two programs and restructure them significantly if they are to remain solvent and if the American people are to continue to be able to afford them.

There are three things to remember about what I wrote:
1) Social Security and Medicare are paid for through payroll taxes. Every working individual, from the very old to the very young both rich and poor, pays into these programs. This is something that appeals to my sense of social justice, that is that everyone should pay for programs that everyone benefits from.
2) for the past 30 years the government has used receipts in excess of pay outs to fund general government operations. The excess receipts have been traded for government bonds. the interest payments alone are crippling. When people, ie, officials, talk about a trust fund, they are talking about money held in trust, except there isn’t money held in trust. There is money held in bonds, bonds that we don’t have the ability to repay, not at current income levels.
3) all discussions about Social Security are discussions about current income or current receipts, as example by the year 2037 to 2041 we will only take in enough income to pay out 75% of obligations. On the bright side this means that the government will stop misappropriating the people’s retirement funds to fund general government operations on the down side we will all wake up to the reality that that is what has been going on and there will likely be a significant public outcry.

The history of Social Security is outline well at http://www.ssa.gov/history It is worth a read fascinating, really. These documents hold the key to why we are in such trouble. Truthfully, everyone is to blame for the Social Security and Medicare mess. When the money was flowing and it wasn’t being borrowed against, it was too big a pile of cash not to spend. By 1950 cost of living adjustments and disability payments and survivor benefits were added. Health care was originally envisioned to be part of Social Security. It was not part of the original law, but along came Medicare in 1965. Politicians voted for the expansion of Social Security and Medicare at the urging of their constituents and no one thought about the long term consequences. Well, those consequences are here.

It is important to understand what Social Security was meant to do. It was originally called Social Insurance and it was intended to provide economic security against abject poverty. It was intended to keep people out of Alms or Poor Houses. The Great Depression was the third great economic dislocation this country experienced in about a century. It brought with it 25% unemployment and extreme poverty for many, savings were decimated and pensions were rare. Alms houses were funded by state governments to care for people in poverty, but state implementation of these programs was spotty, there was a significant stigma associated with accepting assistance from Alms houses, there was means testing and people were reluctant to receive help from what amounted to state-run welfare programs. When Social Security was enacted, it was not a popular program. The benefits, set at roughly 30 dollars, the amount intended to keep someone from becoming destitute, did not change for the first decade or so of the program. People felt that they could and would get more benefits from the state-run welfare programs. Social Security provided direct payments to states to bolster those programs. In the beginning, Social Security was simply another tax people paid that they perceived little benefit from. In order to increase the popularity of the program, payments began to increase and the retirement age was lowered from 65 in 1935 to 62 in 1950. Thirty dollars in 1935 has the same purchasing power of 470 dollars today, yet a recipient retiring at age 62 who has enough credits to qualify for full benefits will receive 1750 dollars, an amount more than 3 times greater than what Social Security was ever intended to pay our per individual. The machinations that took place in the 1950’s were successful; for a program that was intended to keep its eldest citizens from becoming destitute has become one of our largest entitlements. It is a program that has not kept pace with the realities of demography. In 1935 the life expectancy was 59 years today it is roughly 78. In 1935 people were only expected to spend a handful of years collecting Social Security. Today a recipient, retiring at age 62, may collect Social Security for 20 years or more.  The truth about the payroll tax is that it  has become a stealth income tax because income in excess of payments has been rolled into the general budget. Given that almost half of our citizenry pays no income taxes, yet everyone pays payroll tax, this is a form of tax justice I can live with.

What is the adult conversation our government needs to have with us? First we have to understand that it won’t be a conversation. This is what our government will have to say:
1) The party’s over
2) There is no trust fund and the trillions of dollars in IOUs the government has promised to pay Social Security will have to be forgiven.  What is a trust fund?  You can find the definition here.  I am sure you will agree when you read this that what is going on with Social Security does not meet the definition of “trust fund.” When I first wrote this, I went back to the Social Security site and went to the program solvency link FAQ’s.  When I read the FAQ section I was genuinely shocked.  See the solvency issue is really about what to do with stretching the current income being paid into Social Security.  No one wants to have the program redeem its bonds in large quantity to meet obligations because no one knows what would happen if Federal Bonds were redeemed.  Our government is already printing money at historic numbers to prop up the economy, how would it fare if investors showed up to say redeem 1 trillion dollars in bonds to fund Social Security obligations?  Where would the money come from to pay those bonds?  Right now the money that comes in is sufficient to allow the US government to roll over its debt as it relates to Social Security.
3) The retirement age will have to be between 70 and 72
4) Benefits will have to be reduced

I wonder if Americans are ready?

Please comment.

Okay that is such a clumsy title for a post,  but there it is.  I am still reading Ellen Ruppel Shell’s Cheap:  The High Cost of Discount Culture.  Ms.  Ruppel Shell’s premise is simple, our quest for low prices is anything but harmless.  We pay for it in damage to the environment and the ultimate loss of craftsmanship and quality.  Cheap goods allow us to move toward a throw-away society.  Charles Fishman argues in The Walmart Effect that Walmart makes sells cheaply-made lawnmowers so cheaply that you’d never think of repairing one, you’d simply replace it when it breaks which it is likely to do each and every year.

The abundance of cheap goods has masked the very real problems of inflation and wage stagnation.

I love getting a good deal, but I love getting a good deal for a quality item.  The problem is that much of what we buy is low on quality.  The most enlightening chapter of Ruppel Schell’s book is the chapter entitled, “The Outlet Gambit.”  Premium outlets are designed to  get you to part with your money while connoting value.  The problem is that the reference prices on which the discounts are based are fiction and many brand leaders manufacture lower quality products specifically to sell in “premium outlet” malls.  Ruppel Schell and Dr. Gillian Naylor, marketing professor at the University of Nevada, Las Vegas College of Business, travel Las Vegas malls with Dr. Naylor distinguishing between quality and garbage merchandise and, more importantly, whether or not suggested retail price is truly reflective of a product’s quality.  More often than not the answer was no.  Rupel Schell writes, “Given this assiduous attention to value, Naylor’s opinion of outlets is worth noting:  She uses them, but sparingly. She prefers department stores which she said generally carry better quality merchandise at prices that are frequently lower than outlet levels.”

This book has merely confirmed something that I began to suspect long ago:  That manufacturers use the allure of outlets to unload inferior merchandise that they make specifically for the outlet. The Coach belt that I bought at the Premium Outlets mall outside Santa Fe, pulled apart within months of purchase and the Coach leather coat, that I paid a pretty penny for has loose stitching and the beautiful rich brown color that I found so attractive on the day of purchase is coming off after only one season of use.  I have vowed to never return.  Coach Premium Outlets is selling junk and if they are doing it in Santa Fe, they are doing it in your neck of the woods.  The implication in Cheap is chilling:  by shopping at an outlet store, you could end up paying $300 dollars for a suit that is really only worth $200 dollars at full retail.

Even online super discounter Amazon.com practices the reference price shell game to lead you to believe you are getting a deal.  I began to suspect something was up when product reviewers suggested in very direct language that Amazon was outright lying about the suggested retail prices on some of its products.  A few months ago I was in the market for a new coffee maker.  Amazon lists the suggested retail price on the Cuisinart DCC-1200 as $145 dollars and they offer it on sale for $69.95 a savings of 52%.  But what does Cuisinart sell it for? $79.95 and there is no suggested MSRP.  Macy’s has the same item listed for $79.95 with an MSRP of $99.95.  We have to conclude that the Amazon MSRP is simply a fantasy used to bolster the value of the perceived deal.  Amazon is really selling the item at $10 dollars off, a savings of 8.7%.  A pretty thorough Internet search has lead me to believe that this item’s retail price is $79.95 and that even the Macy’s MSRP is made up.  This item is easy to compare because Cuisinart only makes one model of the DCC-1200, but what if there are different models of the same item? Take the Buck 110 folding hunting knife.  The Amazon price is $41.36 with a suggested retail price of $66 dollars.  The implied discount is 38%.  Would that it were true.  LLBean sells the same knife for $34.95 and there is no suggested retail price.  Bass Pro sells the same knife for $44.95 and does not list a MSRP on their site.  Hunting Blades does list the MSRP as $66 dollars while selling the knife for $47.95.  What does Buck sell this knife for?  $45 dollars.  Buck actually sells two versions of this knife.  The knife with brass fasteners is $66 dollars and the one with nickle fasteners is $45 dollars. The image on each site appears to be of the higher-end knife, but none of the sites uses the Buck model number so it is virtually impossible to make direct price comparisons.

Provided that all 4 sites are actually selling the same knife, this exercise illustrates several things:

1) Whether the MSRP is real or not retailers use that number to provide context for the deal you think you are getting.

2) Without accurate model numbers, it is impossible to truly compare prices from store to store

3) It pays,  literally,  to shop around.  Provided we are talking about the same item, LLBean clearly offers the best deal on this knife.

4) It makes sense to go directly to the manufacturer to verify the MSRP.

5) Price is clearly relative.  Clearly all for sites want to sell this knife yet only one site offers substantial savings over the other three.

Amazon’s pre-order price guarantee is a zero-sum game.  The  guaranty only applies to prices in effect on the day an item ships.  The guaranty does not apply to rock-bottom price fluctuations that may have occurred before the item shipped.  Price fluctuations that some buyers will be able to take advantage of, but not you if you pre-ordered the item and expected Amazon to monitor the price for you.  The best thing to do is not participate in the pre-order program and watch prices yourself.   The other thing to do is place the item in your cart then remove it to buy later.  If you do that Amazon will watch the price for you.

I am reminded of the Donna Summer song, “she works hard for the money”.  The fact is that we all do, yet I do believe that we want quality and value not junk as we plop down our hard-earned cash for the products we desire.

Please comment.

Recently I was sitting with two friends at dinner.  Both women are over age 60 and both found jobs in this economy.  The jobs are high-paying. One of my friends said that she thought the reason she had been able to find a job was her work ethic.  “We may be 60,” she chuckled, “but at least folks know we will show up.

At the time of the Great Depression, the number of self employed individuals was significantly higher than it is today. Since 1948 the percentage of self-employed individuals has declined steadily. Since the 1970’s the self-employment rate has ranged between 6 and 8 percent of total employment.  Has the work ethic in America changed as the rate of self-employment has fallen?

I thought about what she said and filed it.  Back in the roaring 1990’s the labor market was so tight that all kinds of bad employee behavior was tolerated. Monday/Friday absenteeism was high and folks figured they could just get other jobs if they got fired.

I recently Tweeted an article that appeared on CNN Money about the success of Amish businesses.  Their long term survival rate  is over 90%.  By comparison, the 5-year business success rate is 65% for the general population.  They attribute their success to humility and extremely hard work.

The other day we got a call from a colleague.  Her car had broken down and she was calling to cancel her clinic scheduled for the next day.  She was told to rent a car if she had to but she needed to be present as scheduled.  She showed up.  A couple of years ago, I got a call from another colleague.  She was about to leave on vacation in a few days and noticed a spasm in her back.  She wanted to see a massage therapist to work the spasm out.   Trouble was, the only appointment she could get prior to the start of her vacation was right in the middle of one of her clinics.  She called and, explaining to me that she did not want to head off to her vacation with a spasm in her back, asked if I would excuse her from her scheduled clinic.  My answer was, as Madea would say, “hell to the no.”

Many years ago, I wasn’t much better.  I was chronically 10-15 minutes late for work.  My dogs were sick, my car was sick, I had a hot date the night before.  Silly, silly stuff.  My mama told me that as long as I needed the income, I had better prioritize the job.  My mother raised 2 kids alone and rarely missed a day of work. The truth is that as long as someone needs their income, they had better prioritize their job or business.

Is this behavior a function of age?  Meaning the younger you are the more likely you are to see the need to earn an income in conflict with other activities like getting the car fixed.  I don’t know. I do believe, however, that something has happened.  In the name of family values people shirk work.  Even in households where a parent is home full time, I have watched adult health care professionals walk off the job to take care of something at home.  “Family first” being the last words they utter as they walk out the door. How about “without an income, there is no family, so I’ll just stay on the job.”  It is a foregone conclusion that work comes second.

We might just find ourselves in a position in which we lose our competitive edge to nations in which their citizens are happy for work and for whom the job or the business comes first.

Please comment.  What are you seeing at work?

Yesterday I Tweeted an article that I found on the NY Times site:  Placing the Blame as Students are Buried in Debt the article is shocking.  A couple of weeks ago I asked, should parents pay for their child’s education? The post generated a number of comments.  The NY Times article has generated over 400 comments mostly laying blame on the student and her family for amassing $100K in debt so that the student, Courtney Munna, could get an undergraduate degree in women’s studies and religion.  She now works as a photographer’s assistant in San Francisco.

I believe we miss the point when we blame the Munna’s and people like them who accrue debts they cannot repay.  Blame does not help and it certainly does not get the debts re-payed.  It is scary that the Munna’s are in the position they are in.  It is scarier that they are not alone and it scarier still that unsecured student loan debt is being securitized and sold as bonds similar to subprime mortgage loans.  I have spoken to people who bought homes during the last boom.  Mortgage payments are 40 and 50% of gross income.  When I share that the age old rule in mortgage finance, that mortgage debt should not be more than 28% of gross income and total debt no more than 33% of gross income, I usually get incredulous looks back.

The problem is the lack of financial education and financial literacy.  Back in 2001 my mother gave a series of lectures for the Georgia Consortium of Financial Literacy.  Her topic, the growing debt burden of undergraduate students.

In the mid 1990s Robert Kiyosaki self-published Rich Dad, Poor Dad.  He made three bold claims that have gotten him labeled as a heretic or a lunatic:

1)  that the nature of the economy has changed from a manufacturing base with old age pension ideas to an information base with workers responsible for their retirements.

2) that because of the lack of financial education that many average Americans were destined to lose fortunes in the stock market.

3) that a home is not an asset.

Financial literacy refers to an individual’s ability to make informed judgements and effective decisions about the use and management of their money (from Wikipedia).  The United States is one of four nations who have nation wide, government- sponsored financial literacy programs and offers a free 162 page financial literacy document: Taking Ownership of the Future. The national website dedicated to financial literacy is mymoney.gov.  April is financial literacy month.

With all of these efforts what happened?  Subprime lending accelerated in the 1990s.  The US government put in place financial literacy programs in 2003 and you can’t swing a dead cat in a bookstore without hitting a personal finance book. So what has happened?  I suppose I could launch into the fact that wages have actually decreased for middle income Americans over the past decade.  I could decry the availability of easy credit.  I could decry the apparent widening gulf between rich and poor in America or that CEO incomes, traditionally about 50 times median household income are now about 500 times median household income.  But that is not it either.  I got my first credit card when I was 22 and had no job, that was over 20 years ago.  Unsecured credit has been easy to come by.  No, somewhere in the last 30 years we seem to have lost the ability to say to ourselves that we don’t have the funds to pay for that trip.  Or that item X is something we should save for.  It has become unfashionable to save and this has occurred at every level from our government on down.  I cannot tell you the number of books published in the last two years that discuss ways to trick people into saving.  Our national consciousness has simply shifted away from saving and toward spending and now it needs to shift back.  Recognizing that it is important to start somewhere, Bank of America has a keep the change program in which they round your debit purchases to the nearest dollar and transfer the change to a no-fee savings account.  Considering that I began saving as an adult by saving the resultant change whenever I broke a dollar into my home piggy bank, Bank of America’s program is probably a good idea.  The B of A program is based on a two simple premises, that people in general don’t value their change which is why it ends up under the cushions on the couch or under the floor mats in the car and that saving must be easy in order for people to do it.  There is a whole school of thought that saving has to be automatic in order for people to do it.  I don’t know that I believe that.  My savings plans are automatic now, but they did not start out that way. Once I got into the habit of saving, I took pleasure in manually moving the money from my checking into my savings account.  For me, I got into the saving habit because I could no longer tolerate the crushing burden of debt.  Surely more Americans feel that way.  So what will it take for us to return to a culture of saving.?

Please comment.

Boy, I never thought I ‘d be writing this one!  This is the story behind the one I thought I was revealing when I wrote the property tax shuffle.  Turns out I wasn’t even close.  Several times this year I have read accounts of banks foreclosing on homes they do not own. With all of the crazy paperwork flying around I now have a pretty good idea of a possible scenario.

First of all, before I go any further, I want to tell you that I am okay and my investment properties are intact.  First the background I bought two neighboring properties via a short sale in 2008.  I didn’t escrow and I explained in Property Tax Shuffle why I avoid escrows when ever possible.

I paid property taxes as per usual in May and followed up with the county treasurer’s office to make sure my tax payments had been received.  It was then that I learned that Chase was also making payments on my property and the account was in surplus.  Thinking that I was being a good doobie and helping someone else, meaning a homeowner whose escrow payments were being misapplied, I called Chase to inform them to stop making payments on a property they do not own.  The customer service rep was incredulous as she took the information.  I thought that was the end of it.  Until today.  Chase called me back to tell me that according to their records they still owned the property and that the owner was Bobbie Tucker (name changed, obviously). I told them that Bobbie Tucker was the person that I purchased the property from and told them the closing date.  I also offered to FAX the HUD statement to them.  I have FAXed the HUD statement and the warranty deed to Chase.  I have also notified my realtor and asked the closer to locate all documents, especially disbursement information, related to the sale of the property.

I seems that Chase never booked the sale. Plain and simple.   Financial institutions got too big during the last boom.  One guy doesn’t let anyone know he approved a short-sale and another guy doesn’t book the sale after it happens and the bank receives the proceeds.  In this case the bank received $107,000 that they didn’t book. Do banks need to be broken up?  Yes, so that people start talking to each other and stop relying on computer screens thinking that what is on the screen is correct simply by virtue of being on the screen.  It never ceases to amaze me that when a large financial institution fouls up, the consumer has to provide the documentation 1) of the mistake and 2) that it wasn’t the consumer’s fault. That is just plain stupid.  I have had a few frustrating financial situations come up.  Good record keeping has helped to sort most of these out.  But shouldn’t being an honest consumer count for something?  I guess not, because the banks are too big and move about too clumsily in the marketplace to care about honest consumers.

So tomorrow I will follow up with Chase to make sure they got my paperwork.  I will also follow up with my realtor and the closer so that hopefully Chase will let go of something they haven’t owned in almost 2 years and we can put this puppy to rest.

Tell me what you think.  Please comment.

My mother gave me a copy of Michael Lewis’ The Big Short: Inside the Doomsday Machine This book is about the financial devilry on Wall Street. 100 pages in and the only thing going through my mind is OMG! I have already written about Goldman Sachs and Magnetar and I have also read the articles by Fareed Zakaria and others urging us to leave Goldman Sachs and other investment banks alone. After all these are the big boys, the most sophisticated investors in the world and, in theory, they shouldn’t need regulation and their precious derivatives certainly shouldn’t. Reading The Big Short and listening to the Planet Money and This American Life broadcasts I keep raving about I cannot help but come to the conclusion that these banks were not terribly sophisticated. Individuals within these banks saw the opportunity to rake in millions in fees and, because derivatives and secondary markets decoupled risk from reward, certain individuals were happy to reap the rewards while redistributing the risk to others. AIG who had developed a solid business insuring the credit worthiness of publicly-traded businesses, simply assumed that insuring the credit worthiness of pools of mortgages made under circumstances they did not control was the same business model. None of the big boys, it seemed, bothered to look under the hood of the jalopy they were all taking a joy ride in. There was a group of investors who did look under the hood, they never got in the jalopy in the first place. They chose to short the market…they bet that the jalopy would run off the road and boy did it. Meredith Whitney of Oppenheimer asserts correctly that these bankers were incompetent failing to understand the implications of their own derivatives and the exposure on their balance sheets.

The bond market is larger than the stock market and is largely unregulated. Views on the stock market from The Big Short:
“Steve Eisman knew enough about the bond market to be wary, and Vincent Daniel knew enough to have decided that no one in it could ever be trusted. An investor who went from the stock market to the bond market was like a small, furry creature raised on an island without predators removed to a pit full of pythons. It was possible to get ripped off by the big Wall Street firms in the stock market, but you really had to work at it. The entire market traded on screens, so you always had a clear view of the price of the stock of any given company. The stock market was not only transparent but heavily policed. You couldn’t expect a Wall Street trader to share with you his every negative thought about public companies, but you could expect he wouldn’t work very hard to sucker you with outright lies, or blatantly use inside information to trade against you, mainly because there was at least a chance he’d be caught if he did. The presence of millions of small investors had politicized the stock market. It had been legislated and regulated to at least seem fair.”

The bond market is much larger than the stock market and the description of it and how it works defies an easy quote and is frightening to say the least. Add this quote about the bond and derivatives market to the mix, “The CDO was, in effect, a credit laundering service for the residents of Lower Middle Class America. For Wall Street it was a machine that turned lead into gold”, and we find a disturbing trend in America that goes well beyond this book. America as a nation is ill.

The Big Short, is connected conceptually to another book I am also reading called Cheap: The High Cost of Discount Culture and two other books I read several years ago: Nickel and Dimed: On (Not) Getting By in America and Credit Card Nation: The Consequences of America’s Addiction to Credit. Credit Card Nation was published almost a decade ago. It is a treatise on credit, but more than that, it delves into the world of sub prime lending. Bank of America and Citi Group were specifically named as big players in the sub prime game. These 4 books published over the last decade chronicle an economic trend in America that culminated in the financial meltdown of 2008.

After WW II it was possible for a youth to graduate from high school, land a factory job and be set, literally for life. Retire with a pension, supplemented by Social Security and you were guaranteed a level of economic well-being for your entire life. Robert Kiyosaki is fond of saying that that way of living and thinking represented the Industrial Age. When the wall came down in 1989 and with the advent of the Internet the rules changed. We entered a global economy and the citizenry was the last to realize it. Our schools have failed to keep up with the realities competition in a global economy and wages have not only stagnated at home they have declined. 2/3 of our health care dollars will be spent chasing 2 diseases we shouldn’t even have in large numbers, obesity and diabetes. PE has been eliminated from public schools but are our kids better able to compete on the global stage because if it? No.

We fostered industries who produced consumer goods, the manufacture of which could be outsourced, yet failed to make investments at home that cannot be. I remember being enthralled as a kid watching a PBS special about recycling. I collected cans for a year, then my parents drove me all over town looking for a place to recycle them. No such place existed in 1970’s Nashville and the cans ended up in the dump. Today over 30 years later, it still takes extreme dedication for most Americans to recycle. Over 20 years ago we drove through the Sacramento Valley. I saw wind farms for the first time in my life. I thought for sure that I was looking at the future of electricity. A decade later as I drove cross country to begin my career, I saw the plains states devoid of wind farms. Now there is a wind farm in Central Arizona and it is BIG news. When I was a kid, I debated in high school. Consumer product safety was the national topic. My partner and I developed an airtight case around dam safety, no kidding. Dam safety. They were in shoddy shape then. Passive restraints are now standard in automobiles. Laws support seat belts and child seats but our nation’s dams and bridges are in worse shape than they were in 1979 when we ran our case.

It is like we spent our money and good will digging for oil rather than develop an alternative to it and the last 5 to 10 years of our economy were based on extending cheap and ultimately unaffordable goods and services to middle class and lower middle class America. Just as high fructose corn syrup is the answer to cane sugar, credit rather than real economic growth became the answer to stagnant wages.

America is ill because we didn’t address our problems when there was both foreknowledge and opportunity and now, I am afraid, we may be too hobbled to do so no matter how high our taxes go. Amid all this, discussion about whether or not we should regulate financial markets is puerile. Of course we should. In so far as a few guys and gals in suits (or sweats) can target the most vulnerable segment of our society and take the our economy, trillions of dollars of wealth, and several sovereign nations with them. Of course we should.

Please comment.

I am working on a post, “Why Medicare Sucks.”  I am having difficulty writing it.  Not because Medicare is perfect.  It isn’t.  But because so many users of Medicare believe it is a great program.  Great insurance.  It isn’t.  I have written about the perils of the stock market and home ownership as wealth-creation vehicles.  Both are lousy wealth-creation vehicles, but most of the people who were told to invest in the markets for retirement or that a home was an investment have learned the bitter truth.  The same with Medicare.  As I put the post together, I will take you from my cousin’s practice in Atlanta, to a conversation that I and 2 other doctors had almost a decade ago on the beach in Santa Monica, to a conversation I had with a retired doc who told me that the happiest day in his practice was the day he closed his doors to both Medicare and Medicaid.  The post is coming.  Watch out for it.

Now for a rather abrupt change of topic.  Something rather interesting happened the other day that I just have to share.  As I mentioned before, when I was getting my financial life together, I read beaucoup books on personal finance.  Still do.  But I came across some advice from Suze that I should manage my property tax and insurance payments myself.  At the time I was paying a certain amount each month to my mortgage company so that they could escrow the funds for me and make the property tax and insurance payments on my behalf.  Millions of American homeowners do this:  pay additional money to the bank each month that the bank then sets aside, so I was not special in this regard.  You can understand why the bank might want to do this.  When a bank loans money for a home, they actually own the home and they just let the mortgagee live in it.  The insurance is there to protect the bank’s collateral, the home.  Property taxes actually trump a mortgage.  A home owner or mortgagee can fall so far behind in property tax payments that a county can order a home sold for the unpaid taxes leaving the mortgage company stuck with a loss on the mortgage.  It is in the mortgage company’s best interest to collect the property tax payments from the mortgagee and pay the taxes.

The reason I don’t escrow is simple I want to control my cashflow and banks are allowed to keep a cushion in the account as stipulated by the mortgage contract.  As an example, that cushion may be equal to 90 days of property taxes and 60 days of insurance premiums.  The bank is not required to pay interest on that cushion.  So for a home with a $720 dollar insurance premium and a $2400 dollar tax bill the monthly escrow amount would be $720+$120+$2400+$600 = $3840/12 = $380.  The balance in the escrow account must never drop below 60 days of insurance premiums plus 90 days of property taxes or, in this case, $720 dollars.  If it does, the mortgage company will increase the mortgagee’s payments to escrow to make sure they can make the property tax and insurance disbursements and maintain their target cushion.  If you are a home owner, you know that that cushion represents a new washer, dryer, water heater and it is just silly having that money literally locked in a bank just to make the bank feel better about lending you the money in the first place.

But what happens if the bank doesn’t actually do with the money what they were supposed to.  What if they don’t make the payments or make them on the right property. This is a rare occurrence, but something that happened yesterday put me right in the middle of such an event.  I made property tax payments on the properties that I hold before I went on vacation.  When I returned, I ran the checks to make sure they had cleared.  Two of the properties I hold are right next door to each other.  I placed the property tax checks for those properties with coupons in the same envelope and sent it in.  When I ran the checks I realized that the county treasurer had only cashed one of the two checks I placed in the envelope.  When I called the county treasurer they told me that they had received so many property tax checks they were behind in data entry, the fact that they hadn’t cashed my check didn’t mean they had lost the check and asked me to check back with them in a week.  They ran the account for the property and pronounced that the tax account had a surplus on it and that Chase Financial had been making payments as well as lil’ole me.  That’s all well and good except that Chase wasn’t the lien holder on the property.  B of A was.  In other words Chase was mistakenly making tax payments on a property they had NO financial interest in.  How could this happen?  I asked and a mistake of this type can happen pretty easily.  See a financial institution like Chase sends over a portfolio of parcel numbers to county tax assessors across the country.  These parcel numbers are data entered in to a company like Chase’s system a simple key error could produce an incorrect parcel number. The parcel numbers are not sent with a corresponding property address which would allow crosschecking to occur at the county tax assessor’s office.  The tax assessor sends the bill to Chase or any other requesting financial institution and the institution pays the bill. No questions asked.

By this point I had the supervisory treasurer on the phone and she gave me the contact for Chase Financial.  Her contact information was not valid and it took me several tries to get a live body on the phone which, at least for Chase, is virtually impossible if you don’t have a Chase account.  The rather stunned Chase property tax representative said, “Now, let me get this straight.  Chase is making property tax payments on a property we have no financial interest in?”  When I told her yes, she made a move to get off the phone to confer with her supervisor.  The problem with conferring with her supervisor was that she had no information, she was so flabbergasted that all she could do was think to confer with her supervisor.  I pointed out that she had no way of researching the property without a parcel number and situs address.  I provided both.  Now the information I provided was the correct information for MY property (okay the one I co-own with B of A), but the parcel number should allow Chase to back track and find an associated loan number and correct property address.  I also gave the Chase representative the name of the supervisor in the county treasurer’s office so that they could request their money back.

Why did I even bother to phone Chase?  I wasn’t worried about myself because I don’t have Chase’s money, the county treasurer’s office does. I phoned because somewhere out there a home owner or investor is paying into escrow believing that their lender is correctly making payments on their behalf.  At this point that home owner or investor is now one year behind in their property taxes and it is not their fault.

This odd situation is a reminder to me that the homeowner or investor is ultimately responsible for all expenses on their property even if they escrow and it behooves the homeowner or investor to follow up with their property tax office and insurance company to make sure those payments are made.  If your accounts are delinquent and you escrow, be sure to obtain documentation of your delinquency from the tax office then contact your lender’s property tax division.  Make sure they have the correct address and parcel number for your property.  If they don’t correcting the information will require you to provide that information to your lender in writing.

Please comment.