Tuesday, September 16, 2008

The Warts'n'all School Of Business

After listening to the news of the collapse of Lehman Bros., the assimilation of Merrill Lynch and the dire forecasts re: AIG, I listened to several "experts" whose hindsight is unbelievably postscient. They can all explain how clear it was that this would happen, but none offer explanations as to why they didn't sound the alarm before or while it happened. I have heard, many times, in the past several days that the structural failures which led to the ruin of the U.S. and world economies in the the Great Depression were the impetus behind much legislation that erected firewalls between speculative investment and traditional banking institutions; and, that because of those firewalls it was much less likely that the sort of things that brought about the run on banks and subsequent. It appears, however, that the U.S. congress has, in the past several decades, undermined or simply removed those firewalls so that they are no longer effective or no longer exist. It occurs to me (not) for the first time that the difference between investing on Wall Street and shooting craps in Vegas is that at least in Vegas they comp the drinks for the marks. The new "conventional wisdom" is that the "housing bubble" and it's reliance on sub-prime mortgages are to blame for the demise of numerous financial institutions. The people who are saying this are, in many cases, the same folks who had been telling us, until fairly recently, that it was the housing market that would draw us out of the recession. It seems that the financial experts and the economists were not blowing hard enough on the dice before they threw them. Much of the blame for the sub-prime mess, of course, can be laid at the feet of people who bought homes during a period of "irrational exuberance". I have heard that many people just wanted to have a home of their own. Count me in that number. I have a lovely little hovel which I bought for $25K because it was pretty much gutted and it sits on a small, crowded lot, in a city, in the upper end of NY; a city whose economy has been in the shitter since about 1975. Purchasing the house took about 1/2 of what was in my small 401K. Then I took a lump sum check for my retirement in order to finance the renovations. So, now I have about 30K in an IRA and this house (which needs about 1000 hours work and $15K in materials to make it livable) what I don't have, at the moment, is any debt--of course I don't have an income either. Now, then; I'm going to be 59 in a few weeks and I'm probably never going to have anything like a good paying job again (I blame a lack of talent and ambition--I am so unfair to my life!). There are lots of people my age who have nice homes, decent amounts of savings, nice cars, kids in college and all of the other accoutrements of the middle class. They also have boatloads of debt. A large portion of their indebtedness stems from reliance on traditional financial instruments, mortgages in the main, to finance homes. However much of the indebtedness is the result of high interest borrowings on credit cards, to finance those things which they were told they needed to be seen as successful. They were convinced, by the lenders that debt was good, regardless that the cost of servicing the debt was usurious. Debt is good, especially if you're not the debtor--AND if, when your position as the debt collector becomes unprofitable, you can ask the government to spare you from the repercussions of the "free market" that you created! Here's the thing that really bothers me about all of this: that dream of constant acquisition, each successive generation having more of everything than its predecessor, is rooted in Ponzinomics. There is a finite amount (and it's quite large, I won't deny that) of wealth that is available at any single point in time. When there is not enough to go around, debt is created--wealth anti-matter, so to speak--some of which is fine. But, when debt becomes the driving force of the economy, it becomes an 800 pound gorilla. Debt dictates how we spend and save. Too much debt means that, first--we can no longer save, and second--that we can't buy more stuff. If it's only for a week or two, no biggie. Otoh, if it's for a few quarters the party in power calls it a period of stagnation (the party out of power calls it what it is--a recession). Ya know what? This is all just my opinion, cuz I never finished college, never mind the Wharton School or Chicago U. But I don't think the homeless (and those who are going to be joining them in the next few years) need degrees in economics to know that they're screwed. Tommorow, class, we will look at how the necessity to be part of Mr. Bush's "ownership society" left us all holding one thing--the bag.


Sharon said...

I'll be 58 (!!how could this happen to ME??) in a few months. I had a small nest-egg in the form of 401Ks from the few companies I worked for long enough to accrue anything with. I cashed in about half of it to be able to stay in graduate school. I also took equity out of my house. It's a race to the finish line now to see if I can complete the degree and get a full-time library job with health insurance before my money runs out. I don't ever expect to be able to retire. I'll be working until I drop, or until they kick me out. Not really complaining--I made my choices and now I have to live with the consequences. I'm better off than a lot of people, but I too sometimes envy my contemporaries who are ready for retirement or at least thinking about it. Nice country America!

SeattleDan said...

Good analysis, demo. SeattleTammy and I found ourselves in that debt cycle, alas. The good news was that we could see the writing on the wall about the economy, or at least the housing market, and we were blessed by 'owning' a home in one of the few areas in the country where Real Estate hadn't tanked. We also realized, again, alas, that we just weren't going to make the store work, at least not where it was located.

We were able to sell the house (to a developer...the house was worth nothing, but the property a great deal), buy the Hoquiam house outright, and pay off our debt.

I'd already cashed in half my TIAA-CREF in the vain effort to save the store. But I still have about $40K still in it that I can cash out when I'm 59 and a half, or about a year and a half from now. So I think we're ok for the time being.

Oh, and at 62, might as well start collecting SS. If you wait till 66, you're placing the bet that you will live well into your 80's. While I hope that's true, I'm going to start collecting early.

Anonymous said...

Gee, who do you think was in favor of tearing down those firewalls back in the go-go 1990's? Why John Aravosis at AmericaBlog has an idea:

You'll never see the punch line coming!

democommie said...


It would suck to be me, if I gave a fuck what the neighbors think about my "social position".

I was out moving junk from one pile to another in my "yard" today and a neighbor asked if I was going to remove a tree that overhangs his property. I told him I didn't know, partly because it's a black walnut. But, I also told him that it was an "attractive nuisance" for the local squirrel population. He said that he saw them eating the nuts. I told him that was true, then they want to come into my house to sleep. He asked how I got rid of them. I told him (I trap them and then euthanize them, seriously; in the house, they are rats). He said, "Oh, I hope you don't do that to the neighbors you don't like!". We both had a laugh.

Joe Visionary said...

I just cleared 50... I still marvel at that.

I've been grinding my ass at a crown corporation for over 2 decades, and so I'll have a pension in addition to what the gummint coughs up.

Save over an above that? Not a chance: having a family is a luxury by Canadian standards, and middle income couples can comfortably budget for one, not 3 kids like I have. My kids will all need student loans and to work summer or partime to get through college.

The huge increase in real estate values in Toronto over my lifetime had turned the modest prospect of housing a family of 2+ kids into a hardship that while loving parents will endure, prospective parents shy away from. And so we NEED huge immigration to maintain the tax base to keep it all working. What a plan...

Here's a funny cartoon explanation on the meltdown.

democommie said...

Joe Visionary:

Congratulations on becoming an old bastard! My plan is to defer responsibility as long as possible--a strategy that has served me well, thus far.

Anonymous said...

Demo, Sharon, Joe V., Dan …

Well, you kids have a coupla years on me, but I’m on the bad side of 45 so I’m not too far behind. Running my own business (imagine me making those air-quotation-marks with my fingers when you read the word “business” … there, like that!) and having 3 kids, I know of which you speak. Retirement is not an option. They’ll just drag my carcass out on the freight elevator when I keel over at my desk.

Actually, I’m on the first floor and we don’t have a freight elevator; but I like the image of being hauled out on a freight elevator. Call it poetic license, if you will. Undoubtedly, they’ll find some less dignified way to dispose of my remains, someday.

Gotta love the American dream.

Sharon said...

Thanks for the tip about starting collecting SS early, SeattleDan. I've been coming to the same conclusion for a while, but needed corroboration.