Financial Mess

     When my mother was 80-years-old, suffering from senile dementia, and had a credit card debt greater than her annual income, she kept getting solicited to open new credit card accounts and to increase the credit levels on her existing accounts. When she died, a few of her cards carried insurance and were covered that way. The rest of her creditors had to eat their losses.

     I haven't had a reliable income in about a quarter of a century, yet, until quite recently, I was bombarded by invitations to apply for "pre-approved" credit cards. I still get some solications, but not as many as previously.

     I'll tell you; if I was in the credit or lending business, I wouldn't extend credit or make loans to someone with my income history.

     I've been saying for years, unfortunately privately rather than publicly, that housing prices were totally out of whack, the stock market was too high, and credit was way too easy.

     Looks like I was right. The housing market went bust, the stock market lost half its value, and banks and other credit institutions are going bust.

     So what made me so smart?

     The way the housing market was going, there were fewer and fewer people who could afford the rising prices. At least that's what I thought; I wasn't paying close enough attention. I didn't know about mortgage interest rates that started deceptively low and then shot up to unaffordable levels after two or five years. I didn't know about mortgages no longer being held by the banks and mortgage companies that originally made the loans, that mortgages had been "securitized."

     The "securitized" (don't you just love those gobbledgook words?) mortages are what are called "derivatives." During the 1990s, I did some freelance work for a financial advisor. He explained derivatives to me. I already knew about the futures market. The futures market seemed to me to be like a lottery in which the tickets cost $10,000.00. If you win, you win big. But most likely you'll lose everything you invested in the futures market. Derivatives made the futures market look like sound, conservative investments.

     During that time I knew somebody who had a mortgage at a very high interest rate. He wanted to refinance. Nope. His mortgage had been securitized; he was stuck with a monthly payment that was getting harder and harder to meet. He eventually lost his home because he couldn't keep up with the mortgage and tax payments. His house was sold for back taxes, and the security that owned his mortgage took a loss.

     I chalk it all up to short-sightedness and greed. The banks saw ways to make quick money off more and more mortgages. The investors in securitized mortgages saw lots of money to be made in the jumped-up interest rates. For the banks, defaults weren't going to be their problem—or so they thought at the time. I guess they invested in those securitzed mortgages. Other investors in the mortgage-backed securities didn't give a thought to what would happen when people couldn't make the increased payments when their interest rates shot up. Maybe they saw that housing prices kept going up and up and up and thought they could sell foreclosed homes at a massive profit. Uh huh. And who was going to spend $500,000 on a house that went for $200,000 just a couple of years ago? Who could afford to?

Wall Street:
     It used to be that a well balanced investment portfolio had a mix of growth stocks, income stocks, corporate bonds, tax free bonds, and money market funds. Somewhere along the line (tech bubble anybody?) people forgot about balance and went in big for growth. Even to the point where income stocks had to grow, grow, grow-baby-grow! And growth was measured against yesterday, not the original purchase price.

     I've had conversations that went like this:

Friend: "Damn, I took a big hit yesterday, I lost $500.00 dollars."
Me: "What do you mean?"
F: "This stock, it was $1,700.00 two days ago. It's only $1,200.00 today."
Me: "When did you buy it?"
F: "Last year."
Me: "What did you pay for it?"
F: "$1,000.00."
Me: "What do you mean, you lost $500.00? You're up 20% in a year!"
F: *silence*

     There's something called a "price-earnings ratio," the rate of return. Pure growth stocks don't pay dividends, they're supposed to increase in value. Income stocks pay dividends, generally much higher than what bank interest used to be, say 7% or more. Of late, income stocks have often paid fractional percents. Why? Because the grow-baby-grow mentality drove the prices up too high. Entirely too many people were ignoring what their stocks earned, and only thought about how much they'd be able to sell them for later—if the price kept going up.

     But, as we all learned in grade school, "What goes up must come down."

     Too bad people forgot about that. Can you say "Short-sighted greed?"

     Back in the day, you had to be an adult with a steady job, an income of a certain level, and a proven record of financial responsibility before you could get a credit card. I was thirty, had a reasonable employment history, and a lower middle class income when I got my first credit card. But before anybody would trust me with one, I had to prove my responsibility. A major department store extended me a limited line of credit: I had to make regular payments for a period of time before they'd trust me with an actual revolving credit account. It was easier to get a mortgage than a credit card—the mortgage lender used the house as collateral, a credit card issuer didn't have any collateral that good.

     Today they give credit cards to high school students. Or at least they did until the credit business did its swoon. Come on now, are you really going to trust a teen-ager with a credit card without imposing strict adult supervision over its use? You say you are? I say you're a damn fool. Having a credit card is no way to learn financial responsibility. I've seen too many kids get in trouble because they didn't know how to manage their money and racked up credit bills they couldn't pay.

     When I got my first card, Pennsylvania, where I lived at the time, had an usury law; interest rates over 9% were illegal. Then came the double-digit inflation of the Nixon years, and the law was repealed. Today, credit card issuers can charge as much as 30%. If you've got trouble making payments (and sometimes even if you're a sterling payment-maker) they jack your interest rate up.

     Say what? Shakespeare's Shylock never charged that much, and he was vilified for the interest he did charge. And if somebody's having trouble making payments, what kind of sense does it make to jack their interest rate up and make it harder for them to pay off the debt? And why penalize somebody who always makes their payments on time?

     High Interest Rates = Big Bucks, that's why. No thought to what easy credit and high interest rates do to people, that's their problem. Until they default.

     Once more, with feeling; "Short-sighted greed!"

     There's been a news item recently; most of the growth in the US Gross Domestic Product has been in financial services. The things I've been complaining about here. I don't think it's defamation to call the financial services people "paper-pushers."

     Somewhere, back in the early or mid-nineties, probably in something that never got published, I made a comparison between the paper-pushers of today and the Robber Barons of the Nineteenth Century. After admitting to the rapaciousness, greed, and sometimes evil of the Robber Barons, I said that they left something to show for what they did. They built factories, trains, shipping lines. John D. Rockefeller became the richest man in the world by first refining the highest quality kerosene, and then gasoline. Today's AIG, Lehman Brothers, and mortgage securitizers leave nothing but broken lives.


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