Why do emergency rooms have to provide free care to injured people, but grocery stores don't have to provide free vegetables to starving people? How much would groceries cost if stores had to take care of the indigent? Why do we, as a society, say that emergency health care is such an essential need that it must be given away sometimes, while food and shelter remain commercial products that are only given away voluntarily?
Should a person who is bleeding to death wait for care while the hospital confirms insurance coverage? Certainly not. But why does the government put the burden of care on hospitals without providing a mechanism for funding that mandatory care?
Thursday, December 27, 2007
The crux of the problem with health insurance
Bloomberg.com: Exclusive: A woman who carried private health insurance (her employer didn't offer insurance) "She had bought medical coverage through a subsidiary of Assurant Inc. for consecutive six-month terms without interruption since December 2003.
Her insurance company, John Alden Life Insurance, rejected her claim for lymphoma treatment, saying she had the cancer symptoms before signing her then current six-month policy and should have sought diagnosis or treatment earlier."
The insurance company was arguing that the insured's good health at the time she first bought insurance from them, in 2003, was not at issue. At issue was the state of her health at the time she renewed the policy most recently. They claimed she should have known then, at renewal that she had cancer. The fact that she was healthy all the years she paid them premiums was irrelevant - all that mattered was that she might have been unhealthy when she renewed the policy.
This is why American voters are ticked off about health insurance. High costs stink, employers not offering insurance stinks, but living in fear that a properly purchased insurance policy won't pay is terrifying. If legislators and insurers want to stop the train wreck of socialized medicine, this is the problem they need to solve now. There is no excuse for allowing insurers to pull this kind of B.S. stunt on honest citizens.
The story has a sort of happy ending. The hospital appealed to the insurance commissioner, and the insurance commissioner refused to help. The hospital then involved the state's attorney general, who did intervene. The insurance commissioner was sacked, the patient's care was covered, and the insurance company is now being investigated by the new, apparently more honest, insurance commissioner. The patient survived, although the cancer has recurred twice. Hard to heal when you're fighting your insurance company.
Her insurance company, John Alden Life Insurance, rejected her claim for lymphoma treatment, saying she had the cancer symptoms before signing her then current six-month policy and should have sought diagnosis or treatment earlier."
The insurance company was arguing that the insured's good health at the time she first bought insurance from them, in 2003, was not at issue. At issue was the state of her health at the time she renewed the policy most recently. They claimed she should have known then, at renewal that she had cancer. The fact that she was healthy all the years she paid them premiums was irrelevant - all that mattered was that she might have been unhealthy when she renewed the policy.
This is why American voters are ticked off about health insurance. High costs stink, employers not offering insurance stinks, but living in fear that a properly purchased insurance policy won't pay is terrifying. If legislators and insurers want to stop the train wreck of socialized medicine, this is the problem they need to solve now. There is no excuse for allowing insurers to pull this kind of B.S. stunt on honest citizens.
The story has a sort of happy ending. The hospital appealed to the insurance commissioner, and the insurance commissioner refused to help. The hospital then involved the state's attorney general, who did intervene. The insurance commissioner was sacked, the patient's care was covered, and the insurance company is now being investigated by the new, apparently more honest, insurance commissioner. The patient survived, although the cancer has recurred twice. Hard to heal when you're fighting your insurance company.
Cigna Corp. in liver-transplant-coverage controversy - MarketWatch
Cigna Corp. in liver-transplant-coverage controversy - MarketWatch: "Cigna stands by liver-transplant-coverage decision
Insurer initially denied funding, then reversed itself, but patient, 17, died"
This being a MarketWatch article, the reader comments are a bit more pertinent than you typically get on a story of this type.
One interesting comment notes that we pay routine car maintenance out of our regular budget, and car insurance is used only for catstrophic damages. This is how insurance normally works - maintenance is an operating cost to be borne by the user, and unexpected major expenses are covered by the insurance companies. We have perverted the idea of "insurance" in health insurance by putting routine maintenance costs into the bucket, then expecting to have enough left for catastrophic costs.
Insurer initially denied funding, then reversed itself, but patient, 17, died"
This being a MarketWatch article, the reader comments are a bit more pertinent than you typically get on a story of this type.
One interesting comment notes that we pay routine car maintenance out of our regular budget, and car insurance is used only for catstrophic damages. This is how insurance normally works - maintenance is an operating cost to be borne by the user, and unexpected major expenses are covered by the insurance companies. We have perverted the idea of "insurance" in health insurance by putting routine maintenance costs into the bucket, then expecting to have enough left for catastrophic costs.
Thursday, December 20, 2007
The scope of defaults
Ben Stein says in Feeling the Crunch on Yahoo Finance: "No one, and I mean no one, knows how large the losses have been as the buyers of the mortgage pools have seen their investment dry up and blow away. By my rough calculation, with help from the president's Council of Economic Advisers, about 6 trillion dollars of new mortgages were issued between 2005 and mid-2007. Of this, about 20 percent might have been subprime. That makes $1.2 trillion.
Of that, about a third might default (many more from the last period of the lending binge, when standards simply vanished), which would indicate losses of about $380 billion. Of that, about 60 percent will be recovered when the houses are seized in foreclosure and, after the legal fees are paid, sold to shrewd buyers. That leads to a net loss to pension funds, municipalities, labor unions, hedge funds, and wealthy foreigners of about $150 billion, as a very rough number.
That number may be even greater when upwards of $40 billion in losses on mortgages call Alt-A's -- where the borrowers didn't have poor credit, but the interest rates reset too high for them to afford -- are added. "
I don't agree with his conclusions - subprime and ALT-As aren't the only problems, and I don't think he's fully accounting for the new variables - but it's a starting point. The new variables include a different cultural perspective on foreclosure - after a major housing boom where flipping houses for profit became big business, foreclosure is less of a stigma and more of a business failure - and the new credit reality where people pay their credit cards instead of their mortgages. People are more willing to walk away from their mortgage than I ever expected. People see their homes lose value, and they wonder why they are paying far, far more than rent to hold onto a depreciating asset. It is foolish in this environment to assume that the foreclosures will be neatly confined to subprime and Alt-A.
Of that, about a third might default (many more from the last period of the lending binge, when standards simply vanished), which would indicate losses of about $380 billion. Of that, about 60 percent will be recovered when the houses are seized in foreclosure and, after the legal fees are paid, sold to shrewd buyers. That leads to a net loss to pension funds, municipalities, labor unions, hedge funds, and wealthy foreigners of about $150 billion, as a very rough number.
That number may be even greater when upwards of $40 billion in losses on mortgages call Alt-A's -- where the borrowers didn't have poor credit, but the interest rates reset too high for them to afford -- are added. "
I don't agree with his conclusions - subprime and ALT-As aren't the only problems, and I don't think he's fully accounting for the new variables - but it's a starting point. The new variables include a different cultural perspective on foreclosure - after a major housing boom where flipping houses for profit became big business, foreclosure is less of a stigma and more of a business failure - and the new credit reality where people pay their credit cards instead of their mortgages. People are more willing to walk away from their mortgage than I ever expected. People see their homes lose value, and they wonder why they are paying far, far more than rent to hold onto a depreciating asset. It is foolish in this environment to assume that the foreclosures will be neatly confined to subprime and Alt-A.
Wednesday, December 19, 2007
Retirement Planning: Taxes
Some data sources for taxes by state.
Retirement Living Center lists Taxes by State: "A total of 41 states impose income taxes. New Hampshire and Tennessee apply it only to income from interest and dividends. Seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) do not tax personal income."
Which states give retirees the best deal? - MSN Money: "We discovered that when you look at the big picture, it might be cheaper to stay put in New York or Illinois than to move to one of the no-tax 'havens.' For retirees who are really retired -- that is, who haven't taken on jobs in retirement -- income taxes are often the least of their worries." This is an article from Kiplinger.com, and it's a good survey but it's out of date. I don't see a date stamp on the article, but the last time you could buy a house in Sacramento for $165k was several years ago.
Bankrate.com weighs in with State retirement income tax breaks: "When you're searching for a place to retire, a location's taxes are certainly an important consideration, because they could take a big bite out of your retirement resources. To varying degrees, many states offer breaks for older or retired residents."
Bankrate has another article: Finding the perfect U.S. retirement tax haven: "It seems like it would be easy to find a tax-friendly place to while away your golden years. Nine states don't have an income tax. Five don't levy any sales tax. By this measure, a perfect state to retire to is Alaska, since it falls into both groups. There's just that minor issue of the weather."
The Tax Foundation Provides State-by-State comparisons of taxes in general: Tax Research Areas > State Tax Policy and Data: "The goal of the Tax Foundation's State Tax Policy and Data section is to provide a comprehensive resource for information on tax and spending policy in the 50 U.S. states. For information on your state, click on the map below or select from the drop-down menu."
Retirement Living Center lists Taxes by State: "A total of 41 states impose income taxes. New Hampshire and Tennessee apply it only to income from interest and dividends. Seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) do not tax personal income."
Which states give retirees the best deal? - MSN Money: "We discovered that when you look at the big picture, it might be cheaper to stay put in New York or Illinois than to move to one of the no-tax 'havens.' For retirees who are really retired -- that is, who haven't taken on jobs in retirement -- income taxes are often the least of their worries." This is an article from Kiplinger.com, and it's a good survey but it's out of date. I don't see a date stamp on the article, but the last time you could buy a house in Sacramento for $165k was several years ago.
Bankrate.com weighs in with State retirement income tax breaks: "When you're searching for a place to retire, a location's taxes are certainly an important consideration, because they could take a big bite out of your retirement resources. To varying degrees, many states offer breaks for older or retired residents."
Bankrate has another article: Finding the perfect U.S. retirement tax haven: "It seems like it would be easy to find a tax-friendly place to while away your golden years. Nine states don't have an income tax. Five don't levy any sales tax. By this measure, a perfect state to retire to is Alaska, since it falls into both groups. There's just that minor issue of the weather."
The Tax Foundation Provides State-by-State comparisons of taxes in general: Tax Research Areas > State Tax Policy and Data: "The goal of the Tax Foundation's State Tax Policy and Data section is to provide a comprehensive resource for information on tax and spending policy in the 50 U.S. states. For information on your state, click on the map below or select from the drop-down menu."
Saturday, December 15, 2007
Philiadelphia prosecutes business owner for signs "This is AMERICA: WHEN ORDERING PLEASE 'SPEAK ENGLISH"
The Associated Press: Pa. Shop Owner Backs English-Only Policy: "A small sign that asked customers to order in English at a famous cheesesteak shop was never meant to be offensive, the shop's owner testified Friday at a hearing to decide whether the policy was discriminatory.
Joe Vento, the owner of Geno's Steaks, defended his policy before the Philadelphia Commission on Human Relations, which filed the discrimination complaint."
Added in another article, Vento was trying to keep the lines moving in his busy store. For the record, when ordering a cheesesteak in Little Italy, if you cannot clearly communicate your order in 30 seconds or less, they'll shuffle you aside to keep the line moving. Think Soup Nazi.
If you believe that a private shop owner has a right to express a preference for using the English language in America, perhaps you would take a moment to drop the Human Relations folks a note in regards to Joe Vento, Geno's Steaks, at:
The Philadelphia Fair Housing Commission
The Curtis Center
601 Walnut Street, Suite 300 South
Philadelphia, PA 19106
Tel: 215-686-4670
TTY: 215-686-3238
Fax: 215-686-4684
E-mail: faqpchr@phila.gov
Joe Vento, the owner of Geno's Steaks, defended his policy before the Philadelphia Commission on Human Relations, which filed the discrimination complaint."
Added in another article, Vento was trying to keep the lines moving in his busy store. For the record, when ordering a cheesesteak in Little Italy, if you cannot clearly communicate your order in 30 seconds or less, they'll shuffle you aside to keep the line moving. Think Soup Nazi.
If you believe that a private shop owner has a right to express a preference for using the English language in America, perhaps you would take a moment to drop the Human Relations folks a note in regards to Joe Vento, Geno's Steaks, at:
The Philadelphia Fair Housing Commission
The Curtis Center
601 Walnut Street, Suite 300 South
Philadelphia, PA 19106
Tel: 215-686-4670
TTY: 215-686-3238
Fax: 215-686-4684
E-mail: faqpchr@phila.gov
Wednesday, December 12, 2007
Retirement savings: Hedge against poverty today AND in retirement
Large IRA's not fully protected from bankruptcy or lawsuit seizure?: "Under federal ERISA law, assets held in most employer-based retirement plans such as 401(k)s, pension plans, 403(b)s, and profit-sharing plans have generally been beyond the reach of creditors. " (The IRS, however, can seize pretty much anything they want.)
The linked article goes on to explain that IRAs don't enjoy quite the same protections, but they are also protected.
Think about this - if someone sued you, they could potentially seize your house, car, and savings to satisfy a judgement, but they couldn't touch your 401k. If someone did seize all of your assets and you were broke as a result, however, you could withdraw from your 401kto pay some bills.
There are limits to how much you can put into a retirement account each year. If you are young and dumb and can barely pay your student loans, it can be really tempting to skip the 401k for now. When you're eventually rich and famous, you won't be able to make up those missed contributions, and you'll probably hit the contribution ceiling when you're old enough and successful enough to really start planning for retirement. So make whatever contributions you can, and avoid withdrawing retirement funds. If you have to tap your retirement account, try to take a loan against it instead of a withdrawal. You'll not only bulk up your retirement accounts, but you'll build assets that can survive bankruptcy, foreclosure, or losing a lawsuit.
Note: This is not intended as legal, tax, or financial advice, but merely a topic of interest to spark further investigation. Please speak with your tax, legal, and/or financial advisor to determine the full details of the law and how/whether it can apply to your personal situation.
The linked article goes on to explain that IRAs don't enjoy quite the same protections, but they are also protected.
Think about this - if someone sued you, they could potentially seize your house, car, and savings to satisfy a judgement, but they couldn't touch your 401k. If someone did seize all of your assets and you were broke as a result, however, you could withdraw from your 401kto pay some bills.
There are limits to how much you can put into a retirement account each year. If you are young and dumb and can barely pay your student loans, it can be really tempting to skip the 401k for now. When you're eventually rich and famous, you won't be able to make up those missed contributions, and you'll probably hit the contribution ceiling when you're old enough and successful enough to really start planning for retirement. So make whatever contributions you can, and avoid withdrawing retirement funds. If you have to tap your retirement account, try to take a loan against it instead of a withdrawal. You'll not only bulk up your retirement accounts, but you'll build assets that can survive bankruptcy, foreclosure, or losing a lawsuit.
Note: This is not intended as legal, tax, or financial advice, but merely a topic of interest to spark further investigation. Please speak with your tax, legal, and/or financial advisor to determine the full details of the law and how/whether it can apply to your personal situation.
Tuesday, December 11, 2007
Calculating net worth realistically
Usually, when you calculate your net worth, you add up your stocks, house, and maybe newer cars, subtract mortgage and debt, and say "this is my net worth." That's great if you're trying to impress someone or qualify for a loan, but it doesn't really tell you what you could spend or invest with no other cash input. Why? Taxes and transaction costs.
Here's the traditional method:
Assets: $300k+100k+100k+20k+5k = $525k
Liabilities: $100k-5k-10k = $115k
Net worth: $410k
But there's more to it than that.
It looks like the house is worth $500,000 free and clear, right? Not quite. If you sold that house for $600k and paid off the $100k mortgage, you won't walk away from the closing with a check for half a million dollars. The real estate agent will expect a check for 6%, or $18k. Other little garbage fees traditionally paid by the seller (which varies in different locales) can add another 2% or more. And that doesn't count the other little costs of selling a house - buyer concessions, a fresh paint job, bringing in a handyman for a day of minor repairs, cleaning carpets, putting half your "stuff" in storage, etc.
The stock and retirement account look healthy, too, right? Well, if you needed to tap the retirement account in a crisis, you'll pay regular income taxes plus a penalty (if you're under 59 1/2 years old). Even if you're in a state with no income tax and have such low income that you don't pay Federal taxes, the most you can spend from that retirement account is $90k ($100k balance minus 10% early withdrawal penalty). A California taxpayer earning enough to afford the median house would pay 53% in taxes and penalties on that retirement withdrawal.
The traditional method of calculating net worth really gives you "gross worth". It's quick and easy, but it excludes too many of the expenses that whittle away at the net.
Here's a more realistic assessment:
Liabilities: -$24k-12k-12k-45k-100k-5k-10k = -$208k
Net net worth: $317k
If we're tracking our progress, superficial net worth calculations can mislead us. Which is better? 10 half million dollar houses with $100k equity each, or a million dollars in stocks? The superficial net worth calculation says they're both equal. A liquidated or net net worth calculation reminds us that we'll pay ~8% transaction costs to sell those houses, leaving them worth $60k free and clear (each) if we sold them. In fact, housing can be the least profitable investment because you pay sales costs on the entire value, not just your equity and appreciation.
Here's the traditional method:
- House: $600k
- Stocks: $100k
- 401k: $100k
- Newer car: $20k
- Cash: $5k
- Mortgage (no prepayment penalty): - $100k
- Credit card: - $5k
- Student loan: - $10k
Assets: $300k+100k+100k+20k+5k = $525k
Liabilities: $100k-5k-10k = $115k
Net worth: $410k
But there's more to it than that.
It looks like the house is worth $500,000 free and clear, right? Not quite. If you sold that house for $600k and paid off the $100k mortgage, you won't walk away from the closing with a check for half a million dollars. The real estate agent will expect a check for 6%, or $18k. Other little garbage fees traditionally paid by the seller (which varies in different locales) can add another 2% or more. And that doesn't count the other little costs of selling a house - buyer concessions, a fresh paint job, bringing in a handyman for a day of minor repairs, cleaning carpets, putting half your "stuff" in storage, etc.
The stock and retirement account look healthy, too, right? Well, if you needed to tap the retirement account in a crisis, you'll pay regular income taxes plus a penalty (if you're under 59 1/2 years old). Even if you're in a state with no income tax and have such low income that you don't pay Federal taxes, the most you can spend from that retirement account is $90k ($100k balance minus 10% early withdrawal penalty). A California taxpayer earning enough to afford the median house would pay 53% in taxes and penalties on that retirement withdrawal.
The traditional method of calculating net worth really gives you "gross worth". It's quick and easy, but it excludes too many of the expenses that whittle away at the net.
Here's a more realistic assessment:
- House: $300k
- Transaction costs to sell house (8%): - $24k
- Tax on capital gains on house* ($300k-$250k exclusion= $50k taxable, 15% Fed, 10% state): $12k
- Stocks: $100k (Basis: $50k)
- Tax on Capital gains (15% Fed, 10% state): - $12k
- 401k: $100k
- Taxes on 401k withdrawals (25% Fed, 10% state, + 10% penalty): - $45k
- Newer car: $20k
- Cash: $5k
- Mortgage: - $100k
- Credit card: - $5k
- Student loan: - $10k
---------------------
Liabilities: -$24k-12k-12k-45k-100k-5k-10k = -$208k
Net net worth: $317k
That's a difference of $93,000 in net worth. The first scenario overstates net assets by nearly 30%.
Tracking Net worth can help us track our progress towards financial independence. It can also help us figure out how much we can invest in a new business or a home. And it can give us peace of mind, knowing that we have sufficient assets to weather a crisis. Calculating it inaccurately, however, can lead to mistakes.If we're tracking our progress, superficial net worth calculations can mislead us. Which is better? 10 half million dollar houses with $100k equity each, or a million dollars in stocks? The superficial net worth calculation says they're both equal. A liquidated or net net worth calculation reminds us that we'll pay ~8% transaction costs to sell those houses, leaving them worth $60k free and clear (each) if we sold them. In fact, housing can be the least profitable investment because you pay sales costs on the entire value, not just your equity and appreciation.
If we fund our retirement account without building a liquid asset account, the traditional net worth calculation will say that we're doing great. We think to ourselves "well, worse comes to worst, I have a hundred thousand in retirement." The truth is, withdrawing $100k from a retirement account can push you into the top tax brackets and Alternative Minimum Tax range, so more than half of the withdrawal would be lost to taxes and penalties. Perhaps thinking of it as a $100k balance worth $47k after expenses will help us keep an equal emphasis on funding a more liquid savings program, too.
Recognizing the liquidated or spendable value of investments can help us plan for retirement. A big, buff 401k balance is a beautiful sight to behold. But in retirement, it will be taxed as regular income. On the other hand, we could liquidate up to about $60k in capital gains every year (with no other income) and pay $0 in federal income taxes. Since you have a cost basis in stocks, $60k in gains could represent hundreds of thousands of dollars in actual sale proceeds. What a nice way to supplement your retirement without a big tax hit or losing social security benefits. Personally, I prefer a blend of tax-deferred retirement accounts and taxable savings and investments. This gives greater flexibility, hedges against rising taxes, and allows you to withdraw some savings penalty-free in a pinch. (Tomorrow I'll touch on legal protections for tax-deferred retirement accounts - you definitely want a blend of both.)
* Capital gains exclusion for single taxpayer is $250k on their primary residence. For a married taxpayer, the entire gain in this scenario would be tax-free. Still, taxes are only about half as much as the transaction costs.
Tis the season for charity
One of the most joyous traditions I celebrate this time of year is shopping for charity. I fill a shopping cart with things my local shelter needs and haul a trunk full of goodies to them. It is the most meaningful trek of my holiday season. But it's tax inefficient, which means I have less to give; this year, I am reconsidering whether donating goods is the best way to support my local shelter.
If you are donating money this year, and you own appreciated stock, remember that you can donate stock instead of cash, and save on your taxes.
If you sold stock to free up cash for giving, you would pay taxes on any capital gains. But if you donate the stock directly, you don't have to pay tax on the capital gains - and you get to write off the full value of the stock.
Consider: You want to donate $1,000 to your local foodbank. You sell $1,000 in stocks to free up the cash. In April, you'll owe 15-20% of your gains to the IRS, plus whatever your state charges. In California, that's another 10%. For me, I'd owe 30%. Then you write off the donation, which would save you your regular tax rate (35% Fed, 10% state).
Donation: $1,000 cash
Tax on sale of stock: $300
Tax savings on donation: $450
Net cost: $850
Donation: $1,000 in stock, all capital gains
No Tax on sale of stock
Tax savings on donation: $450
Net cost: $550
Now, what if you like the stocks you own? Or, what if you were not going to liquidate stock to donate? Donate stock anyway - and then replace it with the same number of shares. This will allow you to do something you were going to do anyway (donate to charity), but to reset the cost basis on your stock holdings.
To get the most bang for the buck, donate the stock with the highest taxable gains.
Note: This is not financial advice. Please speak with your tax advisor to obtain details of the tax rule and determine how it applies to your situation.
If you are donating money this year, and you own appreciated stock, remember that you can donate stock instead of cash, and save on your taxes.
If you sold stock to free up cash for giving, you would pay taxes on any capital gains. But if you donate the stock directly, you don't have to pay tax on the capital gains - and you get to write off the full value of the stock.
Consider: You want to donate $1,000 to your local foodbank. You sell $1,000 in stocks to free up the cash. In April, you'll owe 15-20% of your gains to the IRS, plus whatever your state charges. In California, that's another 10%. For me, I'd owe 30%. Then you write off the donation, which would save you your regular tax rate (35% Fed, 10% state).
Donation: $1,000 cash
Tax on sale of stock: $300
Tax savings on donation: $450
Net cost: $850
Donation: $1,000 in stock, all capital gains
No Tax on sale of stock
Tax savings on donation: $450
Net cost: $550
Now, what if you like the stocks you own? Or, what if you were not going to liquidate stock to donate? Donate stock anyway - and then replace it with the same number of shares. This will allow you to do something you were going to do anyway (donate to charity), but to reset the cost basis on your stock holdings.
To get the most bang for the buck, donate the stock with the highest taxable gains.
Note: This is not financial advice. Please speak with your tax advisor to obtain details of the tax rule and determine how it applies to your situation.
Monday, December 10, 2007
Herb Greenberg » Blog Archive » Straight Talk on the Mortgage Mess from an Insider
If you're reading housing/financial blogs, you've probably already seen this one. If not, it's well worth a read. I found two of the reader comments especially interesting:
Herb Greenberg » Blog Archive » Straight Talk on the Mortgage Mess from an Insider: Josh says "As a debtor on a 30 year fixed rate mortgage on a home that my income can support (25% income to payment), I’d like to thank all the mortgage industry participants for the 20%-40% haircut on my home’s value that I will probably realize over the next 2-3 years. The toxic waste that these corporate schills marketed to an uninformed (and at times intentionally misled public) should have been criminalized from the beginning. As the author admitted (having shorted mortgage industry stocks), at least a few people on the lending side understood the consequences of marketing this Ponzi scheme. It is especially thrilling that they are making money not once but twice on the financial destruction of the middle class of this country.
This is only one aspect of the Corporate Socialism running rampant in this country where profits are privatized and losses are socialized, but this one directly effects me (even though I have made relatively sound financial decisions). Thanks to the author for blowing the whistle after the train of sweeping middle class net worth destruction has left the station. As a voter, I would support any politician (regardless of party affiliation) that would pass crushing regulation on these corporate criminals. It is hard to fathom that the author has the audacity to crow about profiting twice in this fiasco and be seen as the readers of this blog (at least based on the comments) as glimmer of light in the darkness."
And Jim David said: "I own a small mortgage company in Wyoming and agree with you 100%. Fortunately, my company does not expect any losses because of our tight lending standards but it has been frustrating to compete with all the teaser rate programs etc. over the last few years, especially Countrywide’s aggressive marketing. Question: I do not believe Mozillo has properly written down his loan portfolio and the bail out plans won’t help in the end. What do you think will happen to Countrywide? What are the chances of bankruptcy? Thanks JIM"
Jim says he did the right thing, but when everyone else is doing the popular thing, it's hard to make an honest buck. David says the guys who did wrong should be punished. Anytime the public and the powers-that-be let the bad guys get away with being bad guys, the good guys have to go along with the bad guys or yield the profits to the bad guys.
A side note on Josh's comment - his house value is not dropping 20-40% from where it should have been, it is dropping that much from where it should not have been, but was. The bubble that is crushing home values today blew them to the stratosphere in recent years, far beyond where they should have been. Dropping home values are the least of our worries.
Herb Greenberg » Blog Archive » Straight Talk on the Mortgage Mess from an Insider: Josh says "As a debtor on a 30 year fixed rate mortgage on a home that my income can support (25% income to payment), I’d like to thank all the mortgage industry participants for the 20%-40% haircut on my home’s value that I will probably realize over the next 2-3 years. The toxic waste that these corporate schills marketed to an uninformed (and at times intentionally misled public) should have been criminalized from the beginning. As the author admitted (having shorted mortgage industry stocks), at least a few people on the lending side understood the consequences of marketing this Ponzi scheme. It is especially thrilling that they are making money not once but twice on the financial destruction of the middle class of this country.
This is only one aspect of the Corporate Socialism running rampant in this country where profits are privatized and losses are socialized, but this one directly effects me (even though I have made relatively sound financial decisions). Thanks to the author for blowing the whistle after the train of sweeping middle class net worth destruction has left the station. As a voter, I would support any politician (regardless of party affiliation) that would pass crushing regulation on these corporate criminals. It is hard to fathom that the author has the audacity to crow about profiting twice in this fiasco and be seen as the readers of this blog (at least based on the comments) as glimmer of light in the darkness."
And Jim David said: "I own a small mortgage company in Wyoming and agree with you 100%. Fortunately, my company does not expect any losses because of our tight lending standards but it has been frustrating to compete with all the teaser rate programs etc. over the last few years, especially Countrywide’s aggressive marketing. Question: I do not believe Mozillo has properly written down his loan portfolio and the bail out plans won’t help in the end. What do you think will happen to Countrywide? What are the chances of bankruptcy? Thanks JIM"
Jim says he did the right thing, but when everyone else is doing the popular thing, it's hard to make an honest buck. David says the guys who did wrong should be punished. Anytime the public and the powers-that-be let the bad guys get away with being bad guys, the good guys have to go along with the bad guys or yield the profits to the bad guys.
A side note on Josh's comment - his house value is not dropping 20-40% from where it should have been, it is dropping that much from where it should not have been, but was. The bubble that is crushing home values today blew them to the stratosphere in recent years, far beyond where they should have been. Dropping home values are the least of our worries.
Saturday, December 08, 2007
Subprime Fiasco Fed by Mortgage Fraud
Okay, so I saw the headline and thought "wow, are these guys behind on the news," but there is some new info in the article - the fraud we knew about, but some hard numbers and studies confirming it.
Subprime Fiasco Fed by Mortgage Fraud: "Fraud committed both by shady loan brokers and by devious borrowers, combined with poor underwriting, may account for up to 25 percent of subprime mortgage defaults made last year, reports Fitch Ratings, which analyzed a sampling of defaults."
Is this why we need a bailout? Because the banks have so many loans that cannot possibly be saved on the books?
Subprime Fiasco Fed by Mortgage Fraud: "Fraud committed both by shady loan brokers and by devious borrowers, combined with poor underwriting, may account for up to 25 percent of subprime mortgage defaults made last year, reports Fitch Ratings, which analyzed a sampling of defaults."
Is this why we need a bailout? Because the banks have so many loans that cannot possibly be saved on the books?
Tuesday, December 04, 2007
Spendable dollars, taxes, and borrowing
In a roundup of candidate's positions on fixing Social Security, CNNMoney via Yahoo reports "Huckabee: In conjunction with his desire to move toward a consumption tax system in which you would pay taxes on your purchases but not on your income or investments, Huckabee would favor eliminating Social Security taxes. And it's been reported that he supports the idea of workers using individual investment accounts, although no details are offered about how they would be funded."
This is an interesting thought, and it raises the issue of how spendable dollars affect borrowing.
In California, for instance, taxpayers can pay as much as 62%*, ** of income in income taxes alone. That means that one dollar of income equals 28 cents of spendable money. Put another way, $1 of property tax, sales tax, vehicle registration tax or the like, or $1 of general spending will require a taxpayer to earn almost $4 in income.
(* 74% if one of the universal healthcare proposals pass, ** 11% state + 35% federal + 16% social security/medicare/self-employment tax=62%)
A lower-wage taxpayer might pay 5% state, 25% federal, and 8% Social Security income taxes, for a total of 38% off the top. That would leave the taxpayer with 62 spendable cents per dollar earned, requiring roughly $1.60 in income per dollar of rent, sales tax, or whatever the taxpayer wants or needs to pay.
To update the old saying, a penny saved is anywhere from 1 1/2 cents to 4 cents earned.
Now, if a taxpayer borrows $1 from a credit card, he gets one full spendable dollar. He'll have to earn at least $1.60 to pay that dollar back, more if he owes interest charges. This is a big part of the reason that people get into trouble with credit cards. They are easier to spend than wage income, because they go so much further, but they are much, much harder to repay than we realize, because earned income doesn't go very far at all. And when a borrower erases debts under bankruptcy, the earned equivalent value is often more than twice the actual dollar value.
Taxes do have an impact on behavior. One of the very large and very ignored factors contributing to the real estate runup was the change in tax law regarding capital gains on housing. If a house could earn you $40k in a year, that is more money than most people could earn in a full year of full-time employment, but it also provided $26k spendable dollars after 10% state income tax and 15% federal long-term capital gains tax (after holding the property for a year). A middle-class employee in California would have paid 10% state, 35% federal, and 8% Social Security tax on equivalent wage income, or 28% more taxes than the house flipper owed. $40k in housing appreciation would replace the equivalent net spendable dollars as $55k in wage income. Two houses at $80k profits would replace $110k in wage income - suddenly the risks look less, well, risky. If the flipper holds the house for two years to qualify for 0% Federal taxes, he reduces his tax burden by 38% compared to earning wages - and note that it rarely takes 52 weeks of 40 hour days to flip a house. I haven't sold a house since the tax law change, but I am under the impression that the appreciation is excluded from income - so it would not affect the tax rate on other earnings. You can't do that with a second job, investment income, or any other income stream available to the average taxpayer.
The net result of all that house-flipping is just now hitting front-page news, and we all know it's ugly. Many of us have been reading the financial news and realize that Americans are spending more than they earn - a negative savings rate. The result of that particular tidbit is increasing American debt (both personal and government debt) and devestation to the value of the dollar (from $1.35 Euros in 2002, to .67 Euros today, almost half its value of 5 years ago). The same way that capital gains exclusions from real estate wrought havoc on the housing market, high income tax rates incentivize increased borrowing.
So if Huckabee's plan passed, the tax burden would hit at the point of consumption, rather than when the money is earned. This may sound strange, because it is so far outside our current experience. But ignore, for a moment, whether his proposal is a good idea or not. Just think about what behavior it rewards and what behavior it penalizes - the polar opposite of today's situation.
Under a consumption tax, earning, investing, and saving would be tax neutral. These are all activities that contribute to the long-term well-being of our nation. Spending would be penalized - and borrowing would be penalized as a result. While consumer spending has fueled recent economic growth, we are begining to see that it was a house of cards that could destroy our economy. Consumer spending has resulted in an enormous trade imbalance with China and other foreign nations, enormous mountains of trash from buying poorly-made products as well as from impulse purchases that ended up being unwanted. Our savings rate has gone from positive to negative, leaving the majority of individual consumers - as well as the government - without adequate reserves to weather a crisis. Jobs have been created, but those jobs are now being terminated as the spending machine slows.
Spending without consideration creates unstable growth. When every dollar is dear, consumers spend more thoughtfully, more slowly. We have a crime situation where middle-class and poor teenagers steal to keep up with their peers - many of whom are enjoying the fruits of their parents' slow descent into bankruptcy. Savers have been penalized over the past 5 years by an erosion of the value of their savings ($1 saved 5 years ago would buy $1.35 Euros worth of gasoline, but today that dollar has earned 28 cents in interest, for a total of $1.28 which will buy .87 Euros worth of gasoline). Workers are being penalized as their jobs are outsourced and terminated. Companies are being penalized for investing in additional capacity, because tightening in the credit markets is bringing consumption to a crawl. Surging bankruptcies can't be far behind, as surging foreclosures are already swooning the economy.
Slow, thoughtful spending creates sustainable growth. Savings provides a cushion for continued consumption in an economic downturn, fueling a recovery. Buying as much house, or car, or stuff, as one can afford means less displacement in individual lives and less displacement in the overall economy. Living within one's means is the opposite of having a spending orgy for 5 years and then cutting back drastically just to pay the mortgage.
Since taxes incentivize behavior, high income taxes contribute to the problem. They will not contribute to the solution.
This is an interesting thought, and it raises the issue of how spendable dollars affect borrowing.
In California, for instance, taxpayers can pay as much as 62%*, ** of income in income taxes alone. That means that one dollar of income equals 28 cents of spendable money. Put another way, $1 of property tax, sales tax, vehicle registration tax or the like, or $1 of general spending will require a taxpayer to earn almost $4 in income.
(* 74% if one of the universal healthcare proposals pass, ** 11% state + 35% federal + 16% social security/medicare/self-employment tax=62%)
A lower-wage taxpayer might pay 5% state, 25% federal, and 8% Social Security income taxes, for a total of 38% off the top. That would leave the taxpayer with 62 spendable cents per dollar earned, requiring roughly $1.60 in income per dollar of rent, sales tax, or whatever the taxpayer wants or needs to pay.
To update the old saying, a penny saved is anywhere from 1 1/2 cents to 4 cents earned.
Now, if a taxpayer borrows $1 from a credit card, he gets one full spendable dollar. He'll have to earn at least $1.60 to pay that dollar back, more if he owes interest charges. This is a big part of the reason that people get into trouble with credit cards. They are easier to spend than wage income, because they go so much further, but they are much, much harder to repay than we realize, because earned income doesn't go very far at all. And when a borrower erases debts under bankruptcy, the earned equivalent value is often more than twice the actual dollar value.
Taxes do have an impact on behavior. One of the very large and very ignored factors contributing to the real estate runup was the change in tax law regarding capital gains on housing. If a house could earn you $40k in a year, that is more money than most people could earn in a full year of full-time employment, but it also provided $26k spendable dollars after 10% state income tax and 15% federal long-term capital gains tax (after holding the property for a year). A middle-class employee in California would have paid 10% state, 35% federal, and 8% Social Security tax on equivalent wage income, or 28% more taxes than the house flipper owed. $40k in housing appreciation would replace the equivalent net spendable dollars as $55k in wage income. Two houses at $80k profits would replace $110k in wage income - suddenly the risks look less, well, risky. If the flipper holds the house for two years to qualify for 0% Federal taxes, he reduces his tax burden by 38% compared to earning wages - and note that it rarely takes 52 weeks of 40 hour days to flip a house. I haven't sold a house since the tax law change, but I am under the impression that the appreciation is excluded from income - so it would not affect the tax rate on other earnings. You can't do that with a second job, investment income, or any other income stream available to the average taxpayer.
The net result of all that house-flipping is just now hitting front-page news, and we all know it's ugly. Many of us have been reading the financial news and realize that Americans are spending more than they earn - a negative savings rate. The result of that particular tidbit is increasing American debt (both personal and government debt) and devestation to the value of the dollar (from $1.35 Euros in 2002, to .67 Euros today, almost half its value of 5 years ago). The same way that capital gains exclusions from real estate wrought havoc on the housing market, high income tax rates incentivize increased borrowing.
So if Huckabee's plan passed, the tax burden would hit at the point of consumption, rather than when the money is earned. This may sound strange, because it is so far outside our current experience. But ignore, for a moment, whether his proposal is a good idea or not. Just think about what behavior it rewards and what behavior it penalizes - the polar opposite of today's situation.
Under a consumption tax, earning, investing, and saving would be tax neutral. These are all activities that contribute to the long-term well-being of our nation. Spending would be penalized - and borrowing would be penalized as a result. While consumer spending has fueled recent economic growth, we are begining to see that it was a house of cards that could destroy our economy. Consumer spending has resulted in an enormous trade imbalance with China and other foreign nations, enormous mountains of trash from buying poorly-made products as well as from impulse purchases that ended up being unwanted. Our savings rate has gone from positive to negative, leaving the majority of individual consumers - as well as the government - without adequate reserves to weather a crisis. Jobs have been created, but those jobs are now being terminated as the spending machine slows.
Spending without consideration creates unstable growth. When every dollar is dear, consumers spend more thoughtfully, more slowly. We have a crime situation where middle-class and poor teenagers steal to keep up with their peers - many of whom are enjoying the fruits of their parents' slow descent into bankruptcy. Savers have been penalized over the past 5 years by an erosion of the value of their savings ($1 saved 5 years ago would buy $1.35 Euros worth of gasoline, but today that dollar has earned 28 cents in interest, for a total of $1.28 which will buy .87 Euros worth of gasoline). Workers are being penalized as their jobs are outsourced and terminated. Companies are being penalized for investing in additional capacity, because tightening in the credit markets is bringing consumption to a crawl. Surging bankruptcies can't be far behind, as surging foreclosures are already swooning the economy.
Slow, thoughtful spending creates sustainable growth. Savings provides a cushion for continued consumption in an economic downturn, fueling a recovery. Buying as much house, or car, or stuff, as one can afford means less displacement in individual lives and less displacement in the overall economy. Living within one's means is the opposite of having a spending orgy for 5 years and then cutting back drastically just to pay the mortgage.
Since taxes incentivize behavior, high income taxes contribute to the problem. They will not contribute to the solution.
Subscribe to:
Posts (Atom)