Today was another publication day for me. My letter to the editor of the Star Tribune was published as "Political Discourse: You want compromise? Are you sure about that?"
Ross Douthat also wrote a blog about politicians jockeying for position rather than trying to solve problems: "The Roots of Overheated Rhetoric".
He does take a good look at bigger issues than just who believes what on some "little" issue. However, I take issue with one of his statements: "a protective government ready to save us from our foolishness when the economy goes bad".
Who is this "we" in "our foolishness"? Granted, many of "us" overextended ourselves with inducements from many sellers of this and that; a little reflection could have kept our credit card bills small. On the other hand, credit was extended by "trusted advisors" who few had any reason not to trust. When the mortgage officer at "Neighborhood Bank and Trust" tells us we can afford the mortgage, few of us have the expertise to ask the right questions. And when "Oversize Bank and Trust" of Wall Street tells Neighborhood Bank and Trust that it will buy Neighborhood's mortgages, Neighborhood feels it can and should sell as many mortgages as it possible. The whole problem was out of "our" hands.
Well, maybe not completely. Enough of us believed the rhetoric about "getting the government out of the way", not realizing less government oversight meant less corporate oversight of the long-term effects of its short-term thinking.
Showing posts with label credit. Show all posts
Showing posts with label credit. Show all posts
Tuesday, January 18, 2011
Tuesday, September 29, 2009
The problem with "financial products"
Back in the mid 1960s, a member of our church invited us to breakfast with one of his business associates. His sole purpose was to sell us a "financial product" that they were selling. Just the name "product" raised red flags for me. A product is something you can touch.
Maybe the term "financial product" was created to give substance to services or financial documents that could be bought and sold.
Now it appears my caution of over forty years ago has shown itself to be extremely prudent. "Financial products" became more and more complicated, cut apart, resold in other arrangements, becoming more and more removed from the reality of the agreements that created them in the first place.
Bob's Bank knew Harry Homeowner and could vouch for him. Bob knew better than to lend money to Dan Deadbeat. However, Fred Fast didn't care about Dan's credit because he could sell the loan to Super Bank who would sell it to Mega Bank who would sell it to … None of these knew anything about Dan Deadbeat or that he had already missed four payments. They only had the word of the person or institution further down the sales chain.
And like the tulip bulbs with grossly inflated prices finally had no buyers, these "financial products" with grossly minimized risk suddenly had no buyers. Those who had sold their tulip bulbs and bought no more probably had their proceeds in golden guilders. I wonder where those who sold their "financial products" and bought no more have their proceeds.
I was going to write that at least one could touch the tulip bulbs, but I wouldn't be surprised that the only thing bought and sold was promise of delivery of certain kinds of tulip bulbs.
So, if someone offers to sell you a "financial product", thank them for the breakfast and go your own way.
Maybe the term "financial product" was created to give substance to services or financial documents that could be bought and sold.
Now it appears my caution of over forty years ago has shown itself to be extremely prudent. "Financial products" became more and more complicated, cut apart, resold in other arrangements, becoming more and more removed from the reality of the agreements that created them in the first place.
Bob's Bank knew Harry Homeowner and could vouch for him. Bob knew better than to lend money to Dan Deadbeat. However, Fred Fast didn't care about Dan's credit because he could sell the loan to Super Bank who would sell it to Mega Bank who would sell it to … None of these knew anything about Dan Deadbeat or that he had already missed four payments. They only had the word of the person or institution further down the sales chain.
And like the tulip bulbs with grossly inflated prices finally had no buyers, these "financial products" with grossly minimized risk suddenly had no buyers. Those who had sold their tulip bulbs and bought no more probably had their proceeds in golden guilders. I wonder where those who sold their "financial products" and bought no more have their proceeds.
I was going to write that at least one could touch the tulip bulbs, but I wouldn't be surprised that the only thing bought and sold was promise of delivery of certain kinds of tulip bulbs.
So, if someone offers to sell you a "financial product", thank them for the breakfast and go your own way.
Tuesday, March 17, 2009
The House of Cards came tumbling down
The newspapers and the blogosphere are filled with commentary pointing blame for the credit crunch all over the place - Federal government forcing banks to loan to high-risk people, greedy investment bankers who gave themselves big bonuses for just moving money around, house buyers signing for loans they couldn't pay in the end, the media, the conservatives, the liberals, and...
I think that, yes, blame can be spread far and wide, but all of these malefactors had the same basic premise: loaned money can be bought and sold.
The beginning premise sounds simple. A local bank lends money to someone for some purpose. At a certain point, the bank has no more money to lend except for what dribbles back in as loan payments. To raise more money, the bank sells its loans to a larger entity. But the larger entity can only do this far so long. In order to buy more loans, it has to raise more money. So it sells its loan to a larger entity. Where does it end?
If house prices keep going up, it never ends. But prices will not keep going up. Either everyone who wants a house has one, or prices go so high that fewer people are willing to buy houses. So, prices go down, sometimes very rapidly.
Sometimes prices drop so rapidly that people would rather stop paying their loans than pay more than their house is worth. Of course, if they walk away from one house, they will have a hard time buying a house of much less worth. That further reduces the number of qualified buyers further reducing the prices of houses.
Tulips, Florida real estate, houses, when will they ever learn?
I think that, yes, blame can be spread far and wide, but all of these malefactors had the same basic premise: loaned money can be bought and sold.
The beginning premise sounds simple. A local bank lends money to someone for some purpose. At a certain point, the bank has no more money to lend except for what dribbles back in as loan payments. To raise more money, the bank sells its loans to a larger entity. But the larger entity can only do this far so long. In order to buy more loans, it has to raise more money. So it sells its loan to a larger entity. Where does it end?
If house prices keep going up, it never ends. But prices will not keep going up. Either everyone who wants a house has one, or prices go so high that fewer people are willing to buy houses. So, prices go down, sometimes very rapidly.
Sometimes prices drop so rapidly that people would rather stop paying their loans than pay more than their house is worth. Of course, if they walk away from one house, they will have a hard time buying a house of much less worth. That further reduces the number of qualified buyers further reducing the prices of houses.
Tulips, Florida real estate, houses, when will they ever learn?
Tuesday, February 12, 2008
Borrowing from our grandchildren or ...
Many seem to have a misconception of borrowing, especially government borrowing, calling it borrowing from our grandchildren. The latest was "Road to ruin could be a high-speed rail track" (Star Tribune, Jan. 24). "Borrowing from our grandchildren" could be a good thing or a bad thing, depending on circumstances.
There are two kinds of borrowing - short term and long term. Short term is to help smooth bumps in income or is for convenience. Long term is to pay for something that you need now but will not have sufficient cash for a long time. We all use both kinds: individuals, businesses, and governments. Each can be abused, but credit is something that makes modern society work more smoothly.
We put purchases on credit cards rather than walk around with a pile of cash. Many hotels and car rental agencies will only accept credit cards. Businesses take inventory loans to have sufficient stock. Why do you think there are sales? To raise the money to pay off the inventory loans. Governments borrow to smooth the cash flow for payrolls and other day-to-day costs because tax payments come in spurts.
We buy our cars and houses with loans. Some think we should save sufficient money rather than borrow, but where is our money going? To a bank who will lend it to somebody else. Meanwhile we're paying rent for housing. Businesses take out loans to buy new equipment or build new facilities. If they waited until they had sufficient cash, they may lose many business opportunities. Likewise, governments borrow to purchase equipment and build roads and bridges. If they waited until they had saved enough cash, people would complain about the cash hoard and the lack of roads and other infrastructure.
The abuse of borrowing comes when short-term borrowing becomes long-term borrowing. If we spend more on credit this month than we can pay next month, we are pushing our borrowing to long-term. Sometime this is unavoidable. We may be laid off unexpectedly. Businesses might not have the expected sales. Tax revenue could be less than predictions. But if spending more for short-term goals gets out of control, interest alone can make matters even worse. In the case of government, this truly becomes taxing our grandchildren for our own benefit.
But we aren't necessarily taxing our grandchildren for our own benefit to build and maintain infrastructure. The infrastructure may well last long past the lifetime of many current taxpayers and be available to their grandchildren. Are any of us today paying the taxes for all the county courthouses, fire and police stations, the sewers, schools, and many other government facilities? Shouldn't we pay for them? We are benefiting from them.
We are if they have been built recently and were built with borrowed money, money that may have been borrowed before we even started paying taxes. Similarly, by borrowing today for infrastructure that our children and grandchildren will benefit from, we are asking them to foot some of the bill. If we don't, neither we nor they will have a modern society.
There are two kinds of borrowing - short term and long term. Short term is to help smooth bumps in income or is for convenience. Long term is to pay for something that you need now but will not have sufficient cash for a long time. We all use both kinds: individuals, businesses, and governments. Each can be abused, but credit is something that makes modern society work more smoothly.
We put purchases on credit cards rather than walk around with a pile of cash. Many hotels and car rental agencies will only accept credit cards. Businesses take inventory loans to have sufficient stock. Why do you think there are sales? To raise the money to pay off the inventory loans. Governments borrow to smooth the cash flow for payrolls and other day-to-day costs because tax payments come in spurts.
We buy our cars and houses with loans. Some think we should save sufficient money rather than borrow, but where is our money going? To a bank who will lend it to somebody else. Meanwhile we're paying rent for housing. Businesses take out loans to buy new equipment or build new facilities. If they waited until they had sufficient cash, they may lose many business opportunities. Likewise, governments borrow to purchase equipment and build roads and bridges. If they waited until they had saved enough cash, people would complain about the cash hoard and the lack of roads and other infrastructure.
The abuse of borrowing comes when short-term borrowing becomes long-term borrowing. If we spend more on credit this month than we can pay next month, we are pushing our borrowing to long-term. Sometime this is unavoidable. We may be laid off unexpectedly. Businesses might not have the expected sales. Tax revenue could be less than predictions. But if spending more for short-term goals gets out of control, interest alone can make matters even worse. In the case of government, this truly becomes taxing our grandchildren for our own benefit.
But we aren't necessarily taxing our grandchildren for our own benefit to build and maintain infrastructure. The infrastructure may well last long past the lifetime of many current taxpayers and be available to their grandchildren. Are any of us today paying the taxes for all the county courthouses, fire and police stations, the sewers, schools, and many other government facilities? Shouldn't we pay for them? We are benefiting from them.
We are if they have been built recently and were built with borrowed money, money that may have been borrowed before we even started paying taxes. Similarly, by borrowing today for infrastructure that our children and grandchildren will benefit from, we are asking them to foot some of the bill. If we don't, neither we nor they will have a modern society.
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