Garvey's Ghost: Black Talk

economic girlie-men

That's what Arnold "The Governator" Schwarzenegger called those of us who have serious issues with how the economy is being run. 2 months ago I gave a presentation on personal finance to some college students. I gave this presentation after a "certified" financial planner with connections to JP Morgan who told them that houses are assets. In my presentation to the students I told them that houses are only assets if you have someone else living in it and paying you to do so. If you own the house you live in you are living in a liabilty. Let's remember that Assets are things that put money in your pocket or generate income while liabilities are things that take money out of your pocket. When you live in a house you pay mortgage, insurance, electricity,etc. SO all the while you live there you are putting money out. But the banking industry struck up a new way for Americans to get into debt. Rather than sell your home, you can take out a "home equity loan." a Home equity loan is simply money given to you against the value of your property ( which is assumed to rise). In otherwords you go right back into debt that you were paying on your home. What is worse is that some companies will give up to 10% over the mortgage or appraised value of the home. Anyway the only time the home becomes an asset is when you sell it. Of course once you sell it you need to find somewhere else to live, which means of course that you'll end up using that money to buy something else. This means that property values will increase far more rapidly in the past as people turn over thier homes in order to "get rich quick." The result being that a great many people will eventually be priced out of homes that aren't really even worth the money they are going for but have been artifically inflated due to turn over. I reminded the students that in the book "Millionaire next door" the millionaire status of those people did not include the value of their homes.

Over at The Motley Fool Bill Mann underscored my point:

quote:
I'm pessimistic about the economy. I'm afraid that the Federal Reserve has backed itself into a corner. I'm afraid that lending discipline among mortgage companies has completely collapsed. I am concerned that low interest rates have been used to entice the American consumer to clean up a recession borne by an irresponsible corporate spending binge by going on one of his own. I'm afraid that the $200 billion-plus that Americans have cashed out of their houses has been spent, and the next drop in interest rates won't be concomitant with a rise in prices; rather, it will be because of a full-fledged financial emergency.


So fine, I'm an economic girlie-man. Here's another thing: I'm not someone rooting for things to be worse. I'm a four-alarm, full-fledged laissez-faire capitalist South Park Republican fiscal conservative. I don't think people can get rich by buying houses from one another for ever more money. I don't think that the path to ultimate financial success is to borrow more; it doesn't work on an individual level, and it sure as heck doesn't work on a national level. I think that the most exceptional thing about America's economic performance is its historical willingness to allow the successful to succeed and the failures to fail. The failures, of course, can jump back up, try again, and THEN succeed. But the talk of how many jobs some president has created or lost (as if) turns what is great about America right on its ear, because if I know one thing about economics, it is this: There aren't a few smart folks in a room somewhere controlling things. In fact, the more smart folks try to control the economy, the more things tend to get screwed up.

and..
The OCC points at the aggressive marketing for home equity loans by banks as one such result. And these loans are increasingly being taken on not for capital projects such as home additions or education, but for regular spending needs.
.. And with mortgage debt now taking up a full 77% of total consumer debt, in an economic slowdown, that last source of cash for many will not be available.


Now that's the hard truth there. That's what is being hidden from the population. And they just might vote against thier interests... again.

Links:
http://www.fool.com/news/commentary/2003/commentary031029bm.htm

http://www.fool.com/News/mft/2004/mft04090118.htm