Retirement Part One

The core of Exechobo is explaining my iconoclastic nature to the world (or the few who read it), and therefore, myself.

When I was in 4th grade, my best friends were chatting about what we REALLY wanted to be. I said "Writer". I wrote a lot then, and got rewarded with good grades. How nice. Later, it was suggested that your humble blogger NOT consider making a living writing. Fair enough. But...thanks to the internet, I can do as I damn well please! Ha!

What's the "So what?"? This- I can write this blog because I have the time, and the priorities of life permit this to be among them. It is a side benefit of retirement. There is an abundance of time when one retires, and in some cases, a feeling that one has something to say. And a hope that the saying will be of benefit. So why write Part One of this retirement saga 4 years after the fact? Perspective, of course.

The story of my sojourn into the latter phases of Baby Boomer life begins with work.  It is fitting that a Boomer should begin to define a life transition with the pursuit of money.  I will go into some detail about working, motivation, and mistakes.  Then money redemption.  Then planning, one of my favorite passtimes.  Then come up to date with how its goin'.

Finally, my take on this financial crisis

To my thinking, it all began back in 1977, with the Community Reinvestment Act that began requiring banks to make bad loans. It continued with government bugling disguised as regulation, and as non-regulation.

This opinion piece from Forbes is a very brief explanation of how this "good intentioned" act created the by now predictable unintended consequences that legislation of markets is prone to. Also in this article, is information about how securitizing bad loans has absolved the lender from responsibility for the loan, by allowing loans to be bundled in to Securities that are sold, the beginning of the Derivatives problem, and the beginning of Freddie Mac and Fannie Mae's downfall- when the government put strong pressure on them to buy the securities backed by these questionable mortgages.

Then of course, to make sure there was more official support for these loans, the Government stepped in to emphasize its direction via Freddie and Fannie. We now know the unintended consequences of that action. From the NY Times of Sept 30, 1999 is an explanation of how Fannie Mae and Freddie Mac were compelled, in an act of "good intentions" to underwrite loans that had no business being made.

This issue was compounded by subsequent regulatory acts that next absolved those banks of the risk of loans by allowing them to be bundled into securities to be sold to investors "upstream". Those bundles became Derivatives, the financial instrument that made big banks around the world investors in our mortgages, providing more and more money and incentive to lend, which Warren Buffet and George Soros, the SEC and a Congressional Committee that reviewed them all condemned. Warren Buffet was warning about them in 2002, as you can read here, excerpted from his annual report. The column is long, but is the words of Mr. Buffet himself, and not too technical. Seems commons sense now, but his and other voices of concern were overruled by Robert Reich and Alan Greenspan, allowing the Derivative Market to go unregulated, thus leveraging bad loans on homes into bad investments of multiple times greater value in banks around the world. What other voices were warning against derivatives? George Soros, the man who hate Republicans, the SEC in the form a mere female regulator, and the report that congress commissioned to look into derivatives. But in 2002, Greenspan was considered to be a water-walker. I doubt history will continue to revere him as much as Bill Clinton and George Bush did.

From a blog by Professor Perry, and economist and the University of Michigan, a series of writing on the mortgage mess. This is more authoritative, wide ranging and expert thinking than mine, and is why I link to the Professor's blog on Exechobos.

My Editorial Opinion: My experience is that money will always find a way to grow, profits will always be made, whether the system is highly regulated like in China, or less regulated like in the US. Government regulations are like obstacles in the road, put there with the intent to manage traffic, but money flows around them, finding a way to go where it can best make more money.

In the case of the requirement to loan money to people who couldn't afford a home, whether in Detroit during the 80's or LA in 2006, banks figured out how to meet the requirements of these acts, and offset the added risk with balloon loans, etc., then sell these loans to other banks in the form of derivatives.

It leaves me thinking that the price of homes was driven up by the increased number of people who were able and wanting to buy homes, due to the ability to finance homes, even as prices went higher. The demand was unleashed by the ability to finance home ownership, and the prices went up as result. The spiral had to end, as they always do. Prices will come down, as they always do. Money has been made and will be lost.

Unfortunately, I think the derivative investments that were based on mortgages were eagerly shared by financial institutions all over the world, because the returns were good, and there was a perception that the US Government would always support Frannie and Freddie. Until they didn't, and panic set in. Then banks dried up credit, and companies as powerful as GE couldn't use the credit they depend on for everyday operations, so we have the start of a panic and meltdown, that governments around the world could not permit. The damage could not be confined to the housing market or mortgage lending business, it has been spread and leveraged too far. So, while I hate government bailing out banks, I can see it is a necessary evil.

An Interesting Look at Our Economy

I found another blog with some interesting posts. This one is a comparison of US to Euro economies and illustrates very well how well off we in the USA are. The writer does a lot of good research to get his data, and since he is a college professor, he must be smart, right? So, unless you are one of those whose guilt about being an American interferes with common sense, you can be proud of living in a society that has created more wealth and lifted more people out of poverty in a shorter period of time than any society in history. Relish it, be grateful, and do something with the privilege.

Even a Liberal Columnist can get it right, when it's so obvious

For some reason, Froma Harrop, writing for the Providence Journal, put 2+2 together properly. If you read her column here, you will see what I mean. She manages to paint a good rendering of what our material standard of living (SOL) has done within one generation.

The human side of the story, and why Americans made such strides in our SOL escapes this column. But to stop and read it, consider the reality of our parents just 50 years ago, and to see what makes us whiny now, really makes one ill. It is no wonder the Greatest Generation just shook their head as we built bigger houses, bought more expensive toys on a line of credit based on the collateral of...our bigger houses. Not quite a house of cards, but a good representation.

How to ride out a "recession"

A column by Steve Chapman got me to thinking about how the economy impacts me. Read it.

No American feels the impact of an international economic crisis. But the reality that does touch people is having to sell a home at a loss to avoid having it foreclosed. That seems to be the person "on the tip of the spear" of our woes. Fortunately, that person represents 0.58% of mortgage holders. Yes, thats right, a small number. But it is a bigger number than the usual 0.28%, so that's where the giant numbers you see come from. Fun with numbers. If I had a business that generated $0.28 per year in sales, then I was able to get to $0.58 in sales the next year, I could report that sales were up 107%! It is so easy to succeed.

In the US, there are over 119 million homes. Of those, 40% are owned free and clear, not mortgaged, according to the Census. So doing the math, 4 million homes are somewhere in the process of foreclosure, including being more than 30 days late with a payment. We have all been in foreclosure, technically.

The situation of foreclosure, like most bad things, is a result of accumulated problems, that when taken alone, are not disastrous.

1) No personal safety net of savings, or one too small is the poor foundation that leads to economic collapse.

2) Job loss is part of the issue in 38% of foreclosure. The jobless rate going above 5% is indicative of a real problem, for anything below that is considered full employment, so the trend is disturbing as are the actual numbers.

3) A health crisis is part of the problem in 25% of the cases. That people living on the edge of financial ruin own a house but not health insurance is puzzling, seeming to add more weight onto a weak financial foundation.

ADVICE NUGGET TO THE KIDS: When you lose a job, get another, regardless of how fulfilling it is; and maintain health insurance first, it is a basic, and it is affordable; and maintain 6 months of living expenses in a savings account. This is how you avoid financial ruin.

Editorial comments follow.

The fever to get more Americans into their own home has been a political goal that has spawned profits and risky decision making by banks and individuals since the mid eighties. Billions in profits have been made on the decisions to lend money to people who can't afford to pay it back. But with a booming economy, everyone "won". The trillions more that was "going" to be made on the interest for these loans in the thirty years of their life was too tempting for bankers and financial geniuses who then packaged these potential income streams into leveraged instruments they could sell. And more of the financial geniuses snapped them up.

Now, the piper is to be paid. Ooops! A rise in foreclosures means no money comes in to service the loans, and confidence, the key ingredient in the scheme, fails, as do those foundations of the leveraged notes. And when a leveraged note fails, the repercussions are, well, LEVERAGED! Owwieee!

But what I want to know is, why is the government using my money and your money to "fix" all this for those who profited and are now suffering? Why did I act responsibly and miss this gravy train? I want my share of your money too, after all, isn't that my right? See how easy it

is to go down the road from compassion and concern, past no accountability, and arrive at socialism? Oh, and if you wonder why that is bad, bone up on the countless and continuing failures of socialist systems.

But really, is the human face of our poor economy as bad as we are led to believe? If the statistics aren't talkin to ya, look at this map:

The red is bad. These are the areas that are feeling the problem, and causing the problem. Keep this in mind, the creative financing that allowed people to buy homes they couldn't afford became popular because the cost of the homes was too much for them to afford. There is a pattern there. Get rid of Phoenix (why the HELL do homes there get so expensive), LA and Vegas, well throw in Detroit too, just because it is a good idea, and guess what, nationally the foreclosure rate is lower than it historically is. Makes you think, eh?

BIG ADVICE NUGGET FOR THE KIDS: If you can't afford something, do not buy it.

OK, so reality time:

1) House prices went up,

2) lenders figured out how to exploit the laws congress passed in the eighties to allow those who were not able to qualify for loans to do so (now this is a great case of unintended consequences to legislating social programs at the expense of economic reality!),

3) people were able to buy homes they couldn't afford when they signed loan contracts with ridiculously escalating interest rates, HOPING that the future would not occur,

4) real estate prices continues an upward spiral in response to a new, falsely created mass market of buyers,

5) more people signed loan contracts to get on the real estate market ride in spite of being stretched beyond their economic means to make the silly low payments of the first two years of the ARMs,

6) and a loss or reduction of one income, or an onset of a medical problem occurs, gas prices and food (thank you Iowa Corn Growers for the bio fuel madness lobby) prices go up,

7) the shit hits the fan (SHTF)!

But what of the rest of us? We are suffering too, or so the news tells me. Well, we can always tighten our budgetary belts, rethink our spending needs and wants, and keep on drivin' (well figuratively). It has worked every time, and will work now. And the price of homes nationally is down about 6%, a start, so save your money, and buy a house with 20% down.

UPDATE: new data compiled and reported this week shows that the only states with housing prices down more than 4% are CA, FL, NV and AZ. All the places that have experienced the incredible escalation of prices and have been experiencing the worst of the foreclosures. It is so logical, it is silly. The issue- the most quoted report on housing, Standard and Poor's Case/Schiller report, fails to cover the entire market of homes equally. Here is an article on how that is done.

Exxon posts record...taxes?

Reported in his blog Carpe Diem, Professor Mark Perry shows the relationship of Exxon's latest quarterly profit to the taxes they generate. Profits- $11.68 Billion. Taxes- $32.36 Billion.

This includes the taxes they collect at the pump, which congress is trying to increase. And keep in mind, there is a growing concern by states governments that we are conserving too much fuel, and they are losing out on the tax bonanza we pay at the pump. It is sad for them. Boo Hoo.

Who pays over 70% of Federal taxes?

And in a post from another political website, Jeff Emanuel's blog, yet another bit of economic news that is worth repeating:
" According to the IRS data, the top 1 percent of taxpayers paid 40 percent of all income taxes in 2006, the highest share in at least 40 years.

Further, the top 10 percent of income-earners paid 71 percent, and the top 50 percent in income paid 97.1 percent.

On the other end of the spectrum, Americans with an income below the median paid a record-low 2.9 percent of all income taxes. So much for the fabled unbearable tax burden on the lower-middle and lower classes, from whom the "rich," who refuse to "pay their fair share," are so wantonly stealing."

Now if we continue to "make the rich pay their fair share", at what point do the rich decide to stop working, relocate, move assets, and just reduce the amount of money they contribute to running a government that seems to loathe them?

I can tell you that we don't regret the amount of taxes we don't pay anymore. We now live on 75% of what we used to pay in Federal income tax. Hard to imagine, but in fact when we were fortunate enough to be one of the filthy rich people, we lived on half of what we paid in all taxes. Astounding.

Government promises can lead to economic problems

Thomas Sowell is a conservative economist, who writes often to enlighten readers about the governments actions in the economy. His books are worth reading. Today's column is a good one that cautions us about government promises of action during election years that may turn into action at our expense. Here is a quote if you don't want to follow this link to the column:

"Markets were also blamed for the Great Depression of the 1930s and New Deal politicians were credited with getting us out of it. But increasing numbers of economists and historians have concluded that it was government intervention which prolonged the Great Depression beyond that of other depressions where the government did nothing.

The stock market crash of 1987 was at least as big as the stock market crash in 1929. But, instead of being followed by a Great Depression, the 1987 crash was followed by 20 years of economic growth, with low inflation and low unemployment.

The Reagan administration did nothing in 1987, despite outrage in the media at the government's failure to live up to its responsibility, as seen in liberal quarters. But nothing was apparently what needed to be done, so that markets could adjust.

The last thing politicians can do in an election year is nothing. So we can look for all sorts of "solutions" by politicians of both parties. Like most political solutions, these are likely to make matters worse."

Putting the Mortgage Meltdown in Perspective

There is a link to Carpe Diem on the left, but today's blog is especially worth looking at.

While there, check out the facts about the decreasing trade deficit, you will never hear about that piece of good news anywhere else. The weak dollar is making US exports a bargain, and with this, conservation of costly oil imports is working to bring the trade deficit to a level not seen since 2002. These exports have contributed about 0.5% to the GDP, making our economy GROW at at rate of 3.0%. While this is good news to the US, it is bad news to the rest of the world.

Trading into a High Mileage Vehicle Calls for Analysis

Should we join the herd and sell our beloved Trooper to get a high mileage vehicle? As we always do, the numbers are worth looking at. Simply.

Sell 2002 Isuzu Trooper, pay tax- $7,550
Buy 2008 Toyota Prius, pay tax- -$29,800
out of pocket -$22,250
Mileage differential between the two- 13
Price per gallon of gas $5
Miles driven per year 15,000
Gallons of gas saved per year 1154
Gross savings per year $6346
Cost of money out of bank per years @ 4.5% -$1,058
Net savings per year- $5,388
Years to pay off trade 4 years 1 month

Of course this is simple, not taking depreciation (favors keeping the old one), or technological obsolescence of the Prius' technology, but it illustrates a point. Rushing to buy a car to replace one for mileage benefits is dubious. Moral of the story: Use a calculator to make financial decisions.