A Broader Perspective than Talking Heads?

chisueSeptember 30, 2008

I've evidently been living in some remote dream world. Are so many Americans dependent on credit in their personal, day-to-day lives? (I understand the need for credit/liquidity in markets, between banks, for businesses -- and for home mortgages.) How long has this been the case, and for how many people IS it the case?

It's reported that over 50% of Americans own stock. Who does? Who doesn't? (demographics) How heavily invested?

Does it matter that a third of American homeowners have no mortgages? And that about 60% of Americans *are* homeowners?

Are we fortunate that the Bush plan to tie Social Security to the stock market failed? Would that have accomplished the same thing as the proposed bailout and 'spared' us this panic?

Guess I should change my forum name to "TooManyQuestions". It's a life-long problem! LOL

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Sue, we sure do live in interesting timesÂ, donÂt we? LOL!

>>Are so many Americans dependent on credit in their personal, day-to-day lives? How long has this been the case, and for how many people IS it the case? Anytime you obtain a car or student loan, use your credit card to "float" expenses until the bill comes in, or get paid on time by a large company  all of this is done on credit. Trust is necessary for commerce to work. Anyone whoÂs employed is dependent upon corporate credit.

GE today got charged an extra 0.4% on $90 billion of commercial paper balance  a direct hit of $360 million to the bottom line. GE immediately called off any increase to their dividend and lowered their earnings forecast. Any retirees hoping for some dividend relief in their budgets from the 5.1% CPI-U inflation index, are going to have tighten their belts even further.

As the WSJournal reported today, "The scary part is that few companies have the same financial cushion as GE. And as their borrowing costs increase, they will have to scramble to cut their fixed costs. And what is the No.1 cost of business? People."

As someone who has experienced personal bankruptcy and several layoffs, I can say that not having access to credit really straitens your life. You pay more to buy a car  that didnÂt matter much when I lived in San Francisco with its Muni system, but it would be a killer here in the Oakland hills, with its greater distances and much more limited transit, where I drive everywhere. Remember, without a credit card you canÂt even rent a car, nor reserve a hotel or buy an air ticket! So forget any vacations for a long time ahead.

You donÂt go out to eat, you eliminate all the extras  all of which directly affects and hurts local businesses. We worked our way out of Chapter 7 and have done well since, but bankruptcy was easier in 1993 than it is now. It is dismaying to see more and more empty storefronts in our neighborhood, which once again, forces us back in our car.

Many young people I know have student loan debt, which is permanent debt that canÂt be discharged even in bankruptcy. They are trying hard, but without access to credit they would be skating perilously close to the edge. Some young friends of ours need a second car, for instance. But even for a used car, they are struggling to accumulate enough cash so they can avoid paying interest on a loan. This despite being a double-income household and being extremely careful with their money.

As has been shown by the health insurance crisis, when a large percentage of citizens are hurting, itÂs a cost for everyone. We know it does none of us any good when the unemployment rates keep rising. Municipalities in our state are cutting way back on services due to the state deficit, so there are fewer fallbacks there, too. Having endured two years of he$$ before filing for bankruptcy, I know exactly how it feels to be living on credit and struggling to try to get back to even  but failing. It was terrifying, and I wouldnÂt wish it on my worst enemy. But I think many more Americans are going to find out what itÂs like, unfortunately.

>>It's reported that over 50% of Americans own stock. Who does? Who doesn't? (demographics) How heavily invested? CNBC ran a stat this morning which said 40% of the stock owned by the US public was held in 401k accounts.

Almost 90% of what we hold in our retirement accounts is in equities. WeÂre aggressive investors in our 50Âs so weÂre comfortable with this, although we may eventually shift into a 75/25% mix further down the road. ItÂs currently about 40% of our net worth (less if you include our life insurance, though). When my DH retires in either 2009 or 2010, because he has one of those rare defined benefit pensions with retirement health insurance and survivor assignee, the asset portfolio essentially drops to less than 18% of net worth.

The pension comes from the State of CA/PERS, which holds a mixed portfolio of 40% stocks and 36% bonds, with the remainder in other sectors. They are 93% funded for retirement outlays so although no guarantees, weÂre as secure as is possible (but heck, who knows what may happen?).

My three small pensions come from annuity contracts, which (surprise!) depend on the insurer remaining in business and the performance of the stock market. If the carrier goes under, IÂll get the PVFP (present value of future profits) lump sum to roll into my IRA.

>>Does it matter that a third of American homeowners have no mortgages? And that about 60% of Americans *are* homeowners? US tax laws are geared to home ownership. And your stats are one of the reasons I believe the Merrill price of 22 cents on the dollar for their CDO swaps is on the low side  and no doubt Ken Lewis, CEO of BofA, thinks the same.

If those holding distressed securities can manage to hold on for another 12-18 months, they will book some very nice "cookies" when those assets are eventually revalued at a more sensible price. The US GovernmentÂs bailout would have allowed the taxpayers to participate in these potential future profits. No surprise that Buffett and PimcoÂs Bill Gross are champing at the bit to buy these off the governmentÂs hands. They know thereÂs gold in there once the dross is discarded.

I wonder if all the folks dancing in the streets over the legislation failure realize where the Fed is getting all the money they are having to pour into the system? I was under the impression when the Fed prints money, itÂs OUR money  one way or another, we are already on the hook.

>>Are we fortunate that the Bush plan to tie Social Security to the stock market failed? Would that have accomplished the same thing as the proposed bailout and 'spared' us this panic? I canÂt imagine how private accounts would have spared us this catastrophe. Chris Cox has been a terrible SEC chairman and could have avoided most if not all of the entire crisis had he refused to release the Big 5 investment banks from the standard leverage ratio of 12:1, back in 2004(?-not sure of exact date, might have been 2005).

I disagree with the House Republicans who voted against the bailout bill, but they do have a point that Cox could repeal the mark-to-market requirement without any need for Congress to act. It should have been done earlier, in my opinion, but still hasnÂt.

Panic headlines are what "sell" in media. I think it spooks people, both pros and amateurs, and creates the dreaded Âdeath spiralÂ. Business works on leverage, which is basic economics. The panic has created a witchhunt of "whoÂs the next weakest company  letÂs speculate about their survival!" thereby creating the very situation we were in, two weeks ago.

ItÂs interesting that Main St. feels so divorced from Wall St. It seems the average US citizen has little idea that Wall St. and Main St. are inexorably intertwined, and have been even closer since DBPs went bye-bye and 401k/403b plans took their place.

Wall St. is no longer pre-eminent on the global scene, however. Corporations may be global players nowadays but the Main St. mindset is becoming increasingly parochial. Which unfortunately, leads to short-sighted decision making as Wash DC has so lamentably displayed recently.

I think weÂre fortunate privatization failed because since the average person is a terrible investor even in the good times, the losses might have been even more disastrous. It was mind-boggling when short-term Treasury rates went NEGATIVE for a while! Although since the Fed is now lending at a rate of $88+ Billion per day, it was a nice little Âbonus for the GAO to book a 2% profit on the outflow.

    Bookmark   September 30, 2008 at 2:32PM
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Although mortage defaults are occurring more frequently, they are still relatively rare, and often due to high risk speculation that depended on the housing boom continuing indefinitely. The defaults are also concentrated for the most part in certain regions of the country where the price of housing during the bubble increased to much higher levels than the rest of the country -- places like south Florida, certain areas in Texax, California, some large urban centers in the midwest and northeast. The rest of the country has been much less affected by mortgage defaults.

The problem with the subprime mess is due to how these risky mortgages were handled -- they were bundled and sliced into so-called CMO, collateralized mortgage obligations, and then put on the market -- but nobody knows what they are worth or how much they are "contaminated" by these "toxic" subprime mortgages. It's sort of like sausage that has good and bad meat mixed in. Unfortunately, nobody knows how many of these questionable instruments are around and who has them. But they have been used by banks to boost their balance sheets, which means they are included as "assets" that the bank owns. So, since banks may actually be a lot poorer than they say they are, they don't trust each other when it come time to lend to each other.

That's the short story, as I understand it.

    Bookmark   September 30, 2008 at 3:01PM
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Thanks, jkom51 and haus_proud.

I should have spelled out what I was thinking about Bush's failed plan to link Soc Sec and stocks. I wondered if Main Street would be so irate about a 'bailout' if more Americans felt THEY were going to be bailed out because THEIR investments were at risk. The half who are not directly invested in the market feel put upon.

    Bookmark   September 30, 2008 at 3:28PM
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The BBC did a nice little piece on the difference between Britain and France with regard to credit.
Apparently in France there is very little credit available, people have to save 20% of the price of a house before they can buy one. Home ownership rates are far lower and people can't spend money they don't have. France has had little of the current volatility.
Britain is much like North America with high levels of debt and worries that many are not putting away enough for their retirement.

The price that France pays for financial stability is low rates of economic growth. About 1% a year if I remember correctly.
There is a trade off between economic growth and instability and periodic crisis. The English speaking countries in recent decades have opted for higher growth and greater instability.

I must admit that I am old school and have no appetite for running up debt or leverage. I have never bought a a car on credit.
I got a taste of poverty when I moved out of my parents home in the 1960s and have since chosen not to be poor.

    Bookmark   September 30, 2008 at 3:41PM
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AH!! Talking Heads and the Economy. I believe I'd play more of the water pistol games at carnivals if they had the Talking Heads instead of clowns under the balloons.

Easy credit is a problem. Way back in the dark ages ('64), I wasn't approached by many credit card companies as I entered College. Mostly they just handed out samples of things that would make life easier.

I hear that nowadays credit card companies offer credit to students (with no credit history, no job, no nothing), but the folks handing out the applications get a commission. What's up with that?

Yeah, you probably have TIVO that enables you to run thru the commercials... a lot of them are for 'credit repair'... saw one tonight that said 'turn debt into wealth'. What's up with that?

I own stocks, but I'm more invested in Tax Free Munis and trying to get the courage to hit the 'sell' button on the stocks. I've done a lot, but it's hard since I was brought up with folks that were in stocks. It's a sentimental thing. HOWEVER... my brain as well as my accountant are telling me that stocks suck. Taxable dividends, the ups and downs of the market.. not a good thing.

I pay off my credit cards every month. I own six properties with no mortgages on any. I'm not even thinking about Social Security benefits.. they would be a drop in the bucket to what I get with the Munis.

Easy and cheap online trading in the stock market probably lead to a lot of the volatility. Folks get up, read the Yahoo Headlines and panic. If the media would stay the hell out of it, lots of companies wouldn't be so volatile. The media uses "panic headlines". Every damn thing is a crisis! Used to be you had to get a broker, go to his office (or call him) in order to do a stock trade. I traded in my broker for online ease after he gave me a tour of his new house (with an indoor pool) and he had regularly lost my money!!!

Gimme a break.

Credit is too easy to come by, too many people think that they can get instant gratification and never think about paying for anything.

When are the credit givers going to wise up and make sure that folks might actually be able to pay up eventually???

Banks and stupid people got themselves into trouble lately with the 'interest only' loans.

Banks thought they were getting over by making lower payments available to 'main street'.. yeah, on a 30 year mortgage, your principle payment starts at about 20 bucks a month. Jackass consumers thought they were getting a deal... same math as above.

The current "Credit Crisis" is a real thing. I think banks need to tighten up their requirements for giving anyone credit. I think that bankruptcy should involve losing "everything" and that budgeting should be a requirement for first through 12th graders.

Just MHO


    Bookmark   September 30, 2008 at 11:59PM
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One percent national growth sounds familiar. Isn't that the case in the USA now, along with huge national debt? The stability part seems to be missing lately.

Downpayments on real estate in many European countries are hefty -- as much as 50% down (Germany?). That seems as extreme and unwise as our recent zero-down undocumented mortgages.

DH and I both entered college wanting to be journalists; his degree is MSJ. The current 24/7 'entertainment as news' isn't what either of us had in mind. Monday gave us a newly redesigned Chicago Tribune with dumbed-down makeup and content.

There's always been yellow journalism and some publishers have always tried to slant the news. (My parents cancelled their Tribune in protest of its anti-FDR coverage.) Now even thoughtful reports get lost within the babble produced solely to generate advertising dollars.

In my dream world charge cards are a convenience in lieu of carrying cash. Nobody is running up debt and paying huge percentages in interest on everyday expenses. People buy what they can afford to pay for right now, including passenger vehicles or tickets for public transportation.

Residents of my dream world resent paying more for everything when banks write off the bad debts of others, including credit card debt.

In my dream world not *everyone* needs to go to college to get a decent job, much less be burdened with huge debt to do so. ('Higher' Education is really raking it in!) Public schools graduate 18-year-olds, and older in community collleges, with real skills for the real world. Look at the jobs out there; how many utilize advanced education skills? Why do employers require college degrees for mundane jobs? Are they hoping to find better employees than the young people merely aging out of the average HS, meaningless degrees in hand?

My dream world would *like* to include what every other Western nation has: Better health care via nationalized health care.

    Bookmark   October 1, 2008 at 11:25AM
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"Are so many Americans dependent on credit in their personal, day-to-day lives?"

In general, most people don't rely on credit in their day-to-day lives. But, most people's jobs depend on companies ability to get credit. Without credit, building projects don't go forward, bulldozers don't get bought, movies don't get made, factories don't get updated, etc. All these things then trickle through the economy and people lose their jobs. Take out all the big ticket purchases out of the economy and the economy screechs to a halt. A good example is the auto industry, sales are down 30-40% from last year. Consumers are spooked and not buying. Manufacturers can't borrow money to change the factories to make new kinds of cars (hybrids, electrics, etc) that may spark demand. Workers get laid off, others worry about getting laid off and don't make major purchases. The cycle keeps repeating.

    Bookmark   October 1, 2008 at 4:47PM
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chris8796 -- Yes, as I said eariler, I know 'the big picture'. I'm questioning the direct use (over dependence upon?) credit by individuals in their daily lives. Why do so many Americans carry huge credit card debt at ridiculous interest rates?

    Bookmark   October 2, 2008 at 10:18AM
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Don't know if there is a perfect answer. But flushing more money down the toilet is not the big fix for sure.

Lets see...the little guy has created too much debt, has lived beyond his or her means and can't pay their bills. So we need the bailout, so the little guy can borrow more money, continue to live beyond their means and create more debt that they can't pay?

Sounds like the bailout, is more of a Ponzi scheme not meant to bailout the taxpayer, but instead reamout the taxpayer as it makes the rich...richer.

Would an alcoholic be fixed if he inherited a whiskey factory? Would a limitless supply of free alcohol cure what ails him? Or would it just increase the sickness?

We have learned nothing from our bailout mess. We can see this from the debate on how to water down the 'mark to market' accounting standards.

Instead of restoring high financial and accounting standards, we are further relaxing them, in effect increasing the sickness that got us here. I would add that any accounting standard that discards mark to market accounting would be off my screen for investments.

Even with mark to market, we have all these accounting lies. Can you imagine how it will be when asset values can be assigned by the holders of those assets with no reckoning with what the 'actual market value' of those assists are?

One of CNBC's commentators chewed out Rick Santelli a while back telling him there is 'no time' for discussion of ideology in the bailout crisis. We must have the $700 billion NOW!

At CNBC they seem to think that if money is just thrown at the problem all will be fine.

If there is no time to change the underlying sickness in our broken capitalist system, how will more alcohol fix the alcoholic...or in this case more money fix the dishonest, greedy thrives of Wall Street CNBC?

Every once in a while CNBC offers some words of wisdom other than the poker playing, crap shooting, compulsive gambler mentality of trading that you promote.

Rick Santelli offered one such pearl of wisdom when he said the powers that be in America need to 'take their medicine like men' and stop trying to avoid the penalties of their financial shenanigans at all cost. To avoid taking their medicine is just making matters worse.

Fix the underlying sickness before you loan out a dime. Take your medicine like men CNBC as well as thieves of Wall Street.

Don't give taxpayer money out, not a dime - loan with high grade collateral and interest. But only loan if absolutely necessary. But don't force the taxpayer to buy toxic waste that no one in their right mind would buy. Put the rich, greedy, lying bastards of Wall Street on the line and not the taxpayer that can hardly make ends meet.

Paulson had over 30 years on Wall Street. Paulson is said to be worth half a billion dollars and we never heard a peep of warning out of him until the crisis was full blown.

This seems to be a case of honor dies where the interest lies.

    Bookmark   October 2, 2008 at 11:20AM
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I don't know how broad my perspective is - or maybe I just have an uncanny grasp of the obvious. When times are good and the market is up and your house is increasing in value every day and it doesn't look like your job is in jeopardy and credit for anything desired under the sun is available for the taking, absolutely no one cries "foul".

Did any of us really believe this unbridled high rolling could sustain itself? Fortunately, I'm well diversified, invest for the long term, carry zero debt. I'll take a hit, but feel quite confident I can weather the storm.

    Bookmark   October 2, 2008 at 12:34PM
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"Why do so many Americans carry huge credit card debt at ridiculous interest rates?"

The simple answer is those who understand compound interest earn it, those who don't pay it.

My first job out of the military was as a bill collector for a local loan shark company (no usury laws in SC). They had collatoralized loans at 125% APR, kind of like the title loan companies. While thumbing through the accounts one day, I noticed the highest ranking civilian (GS-15) at the local military base had a $4000 loan at 49% APR (almost 20 yrs ago). I lasted about a week in that job, because of the morality of the company. If a customer made 2 payments on time, they would send an offer to refinance the loan with cash out. The average loan that made it to collections had been refinanced 7-8 times. In the end, I concluded some people are stupid or shortsighted and just don't get it.

    Bookmark   October 3, 2008 at 2:28PM
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