The Blog of Maxim Porges

Posts Tagged ‘Politics’

  • Debt To America

    I just finished watching the documentary Maxed Out on NetFlix Streaming this evening. Considering that I spent most of the morning reconciling a year’s worth of monthly statements for my 401k and brokerage accounts, I’ve had money matters on the brain all day, and this blog post is the result.

    Maxed Out
    Maxed Out looks at the credit industry from a number of different angles, interviewing debt collectors, consumers from various walks of life, and a few Harvard professors. They also throw in a smattering of clips from congressional hearings, and sound bites of president G.W. Bush making an ass out of himself and signing in laws that only help big businesses. The whole point of the film is to expose our debt culture, and how the poor stay poorer by being saddled with debt they can never pay off while the government gives legislative hand-outs to big lenders.

    In my opinion, the movie tried a little too hard to present a damning perspective of the creditors and our government officials. Far be it from me to defend the credit vampires or the influential lapdogs in public office, but credit takes two to tango. When things go south with an irresponsible consumer that drank too much from the credit firehose, they are as much to blame as the credit card company who gave them the credit they should never have had.

    Well, that’s not very satisfying; this is America, so somebody must be to blame for all this debt… but who?

    Is it the government’s fault?
    It’s hard to discuss our government without sounding jaded, but please know that I’m not. I’ve come to understand that our capitalist society, like most things in life, is a two-sided coin with a number of cons that I must be willing to accept in order to enjoy the pros.

    Because of the way this country operates, I can live a lifestyle that would be considered fabulous in some parts of the world, but in order to do so I have to accept that our government is largely controlled by the flow of money. Along with this, I have to accept that (regardless of any utopian ideals) the people in our government have a primary purpose to protect the interests of the businesses who will keep their campaigns well-funded; my personal interests and protection are mostly secondary concerns. So long as our government acts favorably to business, businesses can be successful, and I’ll be able to earn a decent wage as an employee and continue to enjoy the life I left England for.

    This is simply the way of the USA. There’s not much any of us can, ever will, or necessarily should do to change that.

    So, is it the credit card company’s fault?
    If government protects the interest of businesses first, we can’t expect the government to protect us as consumers. We also shouldn’t be surprised that lending companies, like all companies, want to make as much money as they can. We should be equally unsurprised at the choice of people creditors want to lend to, i.e. those who are most likely to make minimum payments from the day they make their first credit card purchase until the day they die (leaving the creditors with massive profits).

    Personally, I think it’s somewhat hypocritical for us as a nation to criticize these companies for doing what they do. I may not find it ethical, but I understand the motivation for a business to make as much money as it can from the best possible consumer of their product.

    It’s our fault.
    We’re the ones that sign the credit card agreements. We’re the ones who charge all the crap that we can’t afford. We’re the ones who don’t educate our children about how to save money and live within their means. We have nobody to blame but ourselves. There isn’t a credit card company on the planet that can force any of us in to debt without us playing our part.

    If there is anything to be angry about, it’s our collective apathy.

    I took a life skills class in high school. They taught me about baking and condoms, but they never touched on how to balance a checkbook or what compound interest looks like. Nobody showed me a sample of monthly expenses for running a household, paying a mortgage, or owning a car. My guidance counselors showed me a big binder full of careers and the starting salaries for each, but I had no idea what kind of lifestyle I could lead with a $20,000 starting salary versus a $40,000 one. There was no mention of how to save money, let alone of how I should invest it for the future.

    And so, the only good financial habit I picked up as a teenager was a stoic motivation to pay my credit card off every month – the result of being given a credit card at age 16 by my parents along with a white lie that my account couldn’t carry a balance beyond the grace period. If you’re wondering, I intend to play the same trick on my kids.

    While I left high school with a solid education in all things academic, I lacked the life skills to be effective as a financially responsible human being. I spent six post-graduation months working a single job and constantly owing money. Finally, my step-mom sat me down for about an hour and worked me through my budget. Looking back, that one hour has had more impact on my life than almost anything I learned in all my years of school.

    The result was that I couldn’t afford to support myself on a single job; I either needed to make more money or work two jobs. I ended up doing the latter. I took the foundation that my step-mom gave me and put together a two-year plan to save up enough money to pay off my car loan and go to college. The plan involved the abandonment of every luxury (no matter how small), and left me with about $20 a month in discretionary spending money. It was a hard two years of brown-bag lunches and lackluster Friday nights, but in turn, I learned both the crushing financial constraints that a loan could put on me and the discipline to save money to meet a future goal. Barring interest-free promos and necessities like auto and housing loans, I’ve been debt-free ever since – all because somebody who knew the potential perils cared enough to take responsibility for me.

    Let’s Take Ownership.
    And thus, we arrive at the point of my rant: as a country, we need to take ownership of our finances. We need to make sure that our kids understand the money minefields awaiting them in life. No kid should leave high school without knowing what kind of lifestyle the salary associated with their chosen career will let them lead, or just how important it is for them to pay themselves in savings before they pay their bills. Every school should cover this stuff in home economics; it’s maybe two class’s worth of material along with some basic reading as homework. And since that’s unlikely to happen, I urge you to talk to your kids (or nieces and nephews) and set them straight.

    If you yourself are confused, don’t be embarrassed; seek some help. There’s loads of it in the library and on the web. I recommend The Millionaire Next Door as a starting point, along with a saying whose origin I have long since forgotten: “The secret to happiness is to live beneath your means.”

    In closing
    I think it’s likely that the reason our government is racking up trillions in debt is because many of the people running our country grew up in a debt culture. I also think our collective apathy toward our government’s financial irresponsibility stems from how many of our citizens owe money and can’t imagine a debt-free existence.

    Perhaps if we can raise a generation of fiscally responsible kids, they’ll form the next generation of fiscally responsible adults, and we’ll see an end to irresponsible borrowing in both our government offices and our personal lives. It’s worth a try.

    2010.01.03 / 4 responses / Category: Uncategorized

  • Lamenting the Loss of 100% Mortgage Financing

    While I totally get that 100% financing is seen as a big contributor to the Great Mortgage Meltdown of 2008, I don’t believe this is entirely true, and I’m pretty surprised that they have gone away for good. Allow me to explain.

    As a young professional, gainfully employed on a decent salary, I decided in 2003 that I wanted to buy a home. I started saving up for a down payment. However, the housing market was starting to pick up its pace, and I quickly realized that the values were going up faster than I could afford to save a down payment that would make any difference at all to the price of the kind of house I wanted. This being the case, I went out and found a property that I liked, and my step mom (who was brokering mortgages at the time) found me 100% financing with no down payment, a decent interest rate, and no PMI. In this manner, I ended up buying my first (and current) house in June of 2004.

    Since then, I’ve never missed a payment, my mortgage was (and still is) affordable within my means, and my credit has always been excellent. Thanks to a solid financial education from my parents, I’ve been debt free (barring an occasional car payment and a mortgage) for as long as I can remember. I’ve also steadily amassed a tidy sum in a money market account over the last decade with the purpose of covering me in case I should lose my job or fall on similar hardship. My wife and I have also routinely tucked away savings for retirement in our 401Ks and IRAs. So, when Jessica and I started looking around recently for a bigger house, I expected that people of our credit standing, financial stability, and obvious fiscal responsibility would still be able to get a 100% mortgage.

    As it turns out, this is not the case. 100% loans are gone for good, and the system is back to requiring at least a 5% down payment (unless you go FHA at 3.5% and subject yourself to the loan limits for your locale). Also, PMI is standard once again on loans until the house reaches an 80% debt-to-value ratio, where the “value” portion is equal to the sale price and not the appraised price. And no matter how good your credit is or how much cash you have on hand, those are the rules.

    So, let’s explore why these rules are stupid.

    It goes without saying that 100% financing (or, indeed, any financing) should only be offered to people who qualify for the loan, and not to people who can’t afford a mortgage in the first place. I’d like to think I fall in to the “qualified” category. Currently, my wife and I have access to enough assets in liquid and retirement savings that if we both lost our jobs, we’d have funds to draw on so that we can keep paying the mortgage and other bills for quite some time. So, with 100% financing and no cash out of pocket, we’re in great shape in even the worst-case scenario.

    Now let’s look at the 80% loan scenario. If we take some of the cash we have as our safety net and put it in to the house as a 20% down payment, the safety net is diminished. Even though our mortgage payment is smaller in this scenario due to the lower value of the mortgage loan, we’ve got less access to cash to cover us if one (or both) of us loses our jobs. Thus, the likelihood of us defaulting on the loan becomes higher than it was before. In other words, we become riskier people to lend money to. How this can make any sense to the lending institution boggles my mind.

    To boot, if we were to default, we’d lose the cash from our down payment when we lost the house leaving us in an even worse financial position than the default alone. In this way, it just makes no sense to put any cash in to a property: the only cash I’d ever want to invest would be earned equity from the sale of our existing house, but with the market the way it is we’ll probably only earn about 10% profit of our house’s original value if we sold it tomorrow, which is hardly 20% of a more expensive house.

    Let’s say we put in 5%. Now we’re paying PMI, which would be somewhere between $200 and $350 extra each month, giving us a larger monthly payment to make. Again, should we lose our jobs, this means that we’ll run out of savings faster paying for something that’s supposed to protect the lender. Once again, we’re in a worse position than we would be with cash in hand and a 100% loan. The same is true for “creative” financing with two mortgages (such as one at a low interest rate for 80% of the house, another at 10% at a higher interest rate, and a 10% cash down payment).

    With that all said and done, let’s look at the impact on the housing market. Here you have my wife and I looking to invest in a slightly more expensive house that we can readily afford. But due to the down payment requirement, we’re probably going to avoid it altogether. That means no home sale. Assuming that we’re not the only ones following this thought process, the likelihood for the housing market to stabilize and for qualified people to start investing in it again is slim – other than the investors who summed up fat stacks of cash from the boom and are coming back in to pick over the spoils, of course.

    It just doesn’t make any sense. I say bring back the 100% loans – only this time, actually qualify the people looking to secure them instead of just handing them out to anybody who can fog up a mirror.

    2009.12.08 / 3 responses / Category: Uncategorized

  • What to do about Healthcare?

    My buddy Sean Tierney recently posted on taxation for fast food. The topic touched on the health insurance debate presently taking place. I posted a wall of text to his comments section, but I thought I would repost it here since I’m interested in what people have to say about the future of American healthcare.

    First, let me give you my political perspective. I’m an Independent, but I’m also a big believer in free-market principles and smaller government, which my educated friends tell me are Republican ideals. I’m the kind of person who doesn’t mind paying taxes and seeing them put to use for the greater good, but I don’t trust government institutions to make these decisions very well. In my experience, government is great at slowing things down and making them harder, which is why I believe they should continue to be in charge of regulating the free market, but doing so at arm’s length. I also think the government is a necessary evil where there is no viable business model for a service needed by the public.

    So with that in mind, let me present my healthcare proposal.

    Max’s Healthcare Proposal
    I’d like to see healthcare insurance go the route of car insurance, using the same free-market principles but putting the responsibility on the people and not the government.

    Start by reducing medical costs by making it possible for doctors to charge less for their services. Obvious solutions include malpractice tort reform; that bit will probably require the government to get engaged, but perhaps not at the federal level.

    Once doctors can charge less and operating costs are lower, insurance companies can charge less for their health insurance policies. At this point, my employer should increase my salary by some portion of the amount they used to pay for my health insurance. I’ll then take this money and will go shopping for health insurance on my own, just like I buy my car insurance.

    Insurance carriers will be forced to offer competitive pricing and innovative methods for cost reduction to win my business. This will include removing bureaucracy, simplifying billing practices, and implementing efficiencies in their own organizations (probably with technology). Likewise, doctors can innovate to offer affordable care, allowing them to better compete for my business and be innovators in cost reduction also using similar means. Dinosaurs who don’t want to change will go out of business; good riddance.

    With those changes in place, it’s now up to me to take care of myself. If I eat crappy food, smoke, and don’t exercise, my medical and health insurance costs will be higher, financially motivating me to change my behavior. If my behavior doesn’t change, eventually economic forces will leave me no choice but to change, or I will die and remove myself as a problem. If my behavior does change, the tobacco and unhealthy fast food companies will suffer as they lose my business; they will also either change their products or die. Once again, good riddance.

    This leaves open the issue of the uninsured. This is where the government would be involved once again, offering some solution that would probably need to be paid for by taxation or reduction in costs elsewhere. I think these are reasonable solutions to this problem.

    Obviously, I’m drastically oversimplifying what would be a long and difficult process, and a lot of things would have to happen in sequence with proper effect to make this work. To be honest, I don’t know of another solution that would enable the free market to solve our healthcare crisis, and I’m pretty sure based upon past experience that the government won’t be able to come up with a solution that doesn’t suck.

    2009.09.13 / 8 responses / Category: Uncategorized