Robbing banks is illegal?

"'As it stands now, they've turned [banks] into virtual cash machines,' New York
Police Commissioner Raymond Kelly said."

Golly, who's he talking about? Real estate agents? Mortgage brokers? Cash-back-at-close, zero-doc, no down borrowers? Naw, plain old bank robbers.

"In fact, bank robbers have simply handed tellers a note in a vast majority of
hold-ups in New York."

So, remember kids, its better to rob a bank with a mortgage (note) than with a hand-scrawled note. If you rob a bank with a real estate license, that's okay. If you rob a bank with a hood over your head, that's illegal. If you rob a bank by promising (via a "promissory note") to pay back money you have no intention or capability of repaying, you get a bailout. If you rob a bank by authorizing garbage loans that have slim chances of repayment, you get a fat bonus check and stock options. Confusing, ain't it?

Quotes are from: Is recession behind spike in bank robberies? - CNN.com

Happy New Year!

Health Care Flex Spending Account: Use it or lose it

If you have a balance remaining in a use-it-or-lose-it flex spending account, there is less than one week left in 2008. With over-the-counter drugs and first aid supplies now flex-spending eligible, there's no need to "lose it." Depending on how much you have left, you can clean out your medicine cabinet (replacing old, expired cold medicines and the like), pick up a first aid kit, even get a home defibrillator. Personally, I have been browsing drugstore.com's FSA store, seeing what is FSA eligible and gathering up receipts for things we bought earlier without realizing they were eligible. I've whittled our balance down to $26, which I'll use to restock the first aid kit before Dec. 1.

We've made a point of submitting receipts before year-end, allowing sufficient time for the administrator to process them and hopefully notify us of any non-approved claims while there's still time for us to use up our funds.

Hope you're all enjoying the holidays in good health and good cheer.

My Property IQ is 68: Zip Realty's new feature

Zip Realty has rolled out a new feature called Property IQ. This feature allows zip users to enter their best guess about what a property will ultimately sell for. In the absence of any other guesses, the list price is used as the "Community" prediction. Thus, if I guesstimate that an overpriced property will sell for less than asking - and there is not a community of other users agreeing with my guesstimate - then the algorithm deems me a nit wit. Even if I just entered the price that the agent told me the house actually went into contract for. The only "accurate" guess right now is the asking price.


The goal here seems to be to encourage, persuade, and peer-pressure buyers into the practice of thinking that homes will sell close to asking price, even when asking price is a pie-in-the-sky pipe dream. In our competitive society, we are well socialized to strive for high performance - high score, high net worth, low lap times, high status, rich networks. Games have power - pro racers play video games of unfamiliar tracks to gain familiarity, and even small-craft pilots have been known to fly three states over to pick up a good flight simulator. In striving for a win, an A, a certificate, an Attaboy, we learn over multiple attempts to perform to the grading scale rather than strive for real knowledge. Here, the grading scale is set-up out of the box to gently nudge users towards asking-price-is-the-real-value, despite launching the game in the midst of the worst real estate crisis since the Great Depression. Considering how many properties in Sacramento MSA are languishing on the market for a year and longer, the asking price is rarely ever the real value. But answering anything other than asking price, right now, is gently reprimanded through the insulting "Your Property IQ is 0!"


Yes, that's right, my property IQ was zero, because I guessed well-below-asking on a seriously overpriced property. But I was able to salvage my Property IQ by guessing well-above-asking on another property. So now I have a system - if a house sells, I bet at or above asking; otherwise, I only enter a Guess where the guess is well below asking price. I hate lazy programming and lazy algorithms as much as I hate the pervasive manipulation and bull$#!7 of the real estate industrial complex.

The End of Wall Street's Boom - What REALLY Happened?

The End of Wall Street's Boom - National Business News - Portfolio.com: "The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong."

This is a lengthy article, but quite an interesting read. If you don't know Michael Lewis, he wrote Liar's Poker, about his experience working on Wall Street in the 1980s. Liar's Poker is also the game the fellows at Long Term Capital Management played - the founder of LTCM worked at Salomon Bros. in the 1980s, too. Lewis also wrote a book about baseball, and one about the dot-com era before it became the dot-bomb era, and he writes an amusing column for Slate called Dad Again.

The article reaches some very interesting conclusions, which I won't spoil here. But one of them seems to be the same one I keep coming back to - Wall Street is run by idiots. Traders don't know anything about economics, and economists regularly admit that they're terrible traders.

I suspect that the art/science of economics is something of a crystal ball on Wall Street - yet, like all mystical sciences, the economic tarot can tell you what will happen, but not when. Trading is all about the when. If you get out too early, you'll never make enough gains to retire; if you get in too early, you'll drive yourself to an early stress-related death and won't get to retire, anyway (hey, maybe that's a good retirement plan - cheaper than the $200k they recommend you put away for retirement health costs alone!). Traders use the technicals (charts and pure market data) to try to get ahead of a curve - but charts, alone, don't warn you when an enormous wrecking ball like the housing implosion is heading your way. Which is why my broker laughed at me when I said I didn't want to touch anything housing related - not even funds holding Fannie/Freddie bonds. My theory is that good traders are neither traders nor economists - they are sufficiently detached to take the signals of both disciplines with a boulder-sized grain of salt. Throw in a healthy dose of market historian and psychologist, and you might actually have a trader who can turn the odds in his own favor.

Short of that (plus a lot of luck), Mr. John Q. Public is facing some looonnnggg odds. The SEC lets banks and brokerages hold off-balance sheet risks that an average investor doesn't know about until it sinks his share price. Even the on-balance-sheet holdings are sometimes sliced and diced and innovated to a point that finance professionals can't understand what they really are, let alone what they're worth, or how quickly they can sink the company. Index funds came about specifically because fund managers aren't superior traders - managed funds and index funds have roughly equal odds of outperforming various benchmarks. The market moves on rumors that can create the sorts of problems that were rumored to be a risk. And when Mr. John Q. Public throws his hands in the air, says the heck with it, and plows his money into the age-old safe haven - banks and big, stable Blue Chips, he finds out later that the banks aren't safe and the Blue Chips are dallying in risk loans. Even Money Market funds were "breaking the buck" and losing principal value, because the professional financiers invested in bonds that - despite being triple-A rated short-term bonds - went poof. Oh, yeah, that's because the ratings agencies are either inept, corrupt, or both. But what choice does a fellow have - Social Security is bankrupt, pensions are a privilege only the government-employee class can count on, and his 401k has to make up the difference. Good luck, Mr. Public. You'll need it.

Where's the Money?

jaycee commented on an earlier post:

"I am trying to understand what is going on and I found your post really interesting. But I still have a question: we are not making bets with Martians, so surely the money is staying in the system? If I make a bet with a sucker who says: Sorry, I don't have the means to pay you, it will not make me bankrupt, just a bit peeved."



It's an excellent question, and one I've been trying to figure out. I don't have an authoritative answer to jaycee's question, but I humbly offer an educated guess....

Winners and Losers, The Money's still there

For most trades, there's a winner for every loser, so the money is still in the system somewhere. If I buy Citibank at $45, the seller gets $45. When Citibank drops to $6, the $45 I gave the seller still exists. Ditto for a house - if I buy a house for $200k and it drops to $100k, the money still exists in the seller's bank account. Unless the money never existed - with fractional reserve banking, banks can lend more money than they have - basically "printing" vapor dollars. If the bank lends me money to buy a house or a stock, and I don't pay them back, the bank has to eat the loss. They lose real dollars.

Defaults suck the Vapor Dollars Out of Grandma's savings

The net losses are primarily in defaults. Suppose I'm a hedge fund trader, leveraged at 10-to-1, when I make a bad bet. I either have to eat the losses out of other gains/equity, or I'll default on the margin loan. The brokerage has to eat the defaults, and they can only eat so much. Banks are losing in mortgage defaults, and we're seeing increasing bankruptcy filings. Those are net dollars lost. As much as possible, the banks and brokerages dump the losses on shareholders.

Paper Losses Become Real Losses

Houses, stocks, and even business inventories are showing paper losses. To the extent that people have to pull cash, they are converting paper losses into real losses. That's why there's so much griping about 401k withdrawal requirements this year. Businesses have to sell inventories, even at a loss (due to tax rules, cash flow, inventory staleness/freshness, and cost of commercial real estate for storing inventory). Those losses take money out of the system permanently.
The risk is that leverage let us inflate asset values quite rapidly - doubling home values, for instance. As credit dries up and net losses on defaults accumulate, it creates a leveraged pop - that's why the government has pumped some $7 Trillion in liquidity into a $13 Trillion economy this year, and yet we're still in a recession.

Google Long Term Capital Management (LTCM) - they blew up in 1998 because they were highly leveraged and they were betting on derivatives. The government bailout in that situation was just persuading other brokerages to save LTCM, but it should have raised a red flag about the risk of leverage and derivatives.

Not Lost, Just Wandered Off

There's also the issue of money still in the system, but removed from investment assets. This is a little out there, but it does impact valuations. The money available to invest is not static. Every day, each consumer/investor decides whether to save/invest current income, or whether to withdraw/spend invested income.

Generally, a consumer invests the dollars that he or she perceives are "excess", above their basic needs. An investment dollar typically flows from investment to investment to investment; a consumption dollar flows from consumer to producer to employee/consumer to producer many times before possibly making its way back to investment markets. We are seeing net outflows from asset investments (stocks, bonds, real estate). Some of that outflow is from consumers just trying to pay the bills - some, for instance, flows to oil-producing nations, and much of that outflow won't come back. It's still in the system, but it's in the global system, essentially unavailable for domestic use. Other asset withdrawals are going to domestic producers, but as people lose their jobs, face income stagnation and cost inflation, fewer dollars are perceived as "excess" dollars to be saved/invested. Although that money is still in the system, it's a long way away from the investment assets whose valuations were based on how many dollars were invested.

Fast Money: Whoosh! It's Gone

Then there's the issue of the "velocity" of money. Middle class money is the best for stimulating economies, because middle class earners typically spend, spend, and spend some more, often spending a disproportionate amount on services. Services are almost entirely wages, which provides a second producer/consumer with money to spend - largely, on services, which provides a 3rd producer/consumer with money to spend. And so on. The exact same dollar changes hands many, many times - and each time, it counts as taxable income, it counts as GDP, it counts as someone employed, and it counts as another employee/consumer feeling a little more confident about the economy. I think of middle class money as slutty money - it gets around - well, that's velocity - the more a dollar gets around, the greater "velocity" it has. Poor folk don't have much money and rich folk keep a larger portion of their money than middle class folks do (that's why they're rich, and why an awful lot of rich folk got rich saving and investing off mere middle class income).

So if we go back to that Citibank transaction - if I buy a share for $45, the seller has the $45; it's still in the system. But I started with $45 of spendable money, $45 worth of earnings, $45 worth of wealth effect, $45 worth of net worth. If the share price drops to $7, well, there goes my spendable asset, my net worth, my wealth effect. There's a very, very good chance that my "velocity" of spending will decrease by the $38 the share dropped in value. If I was investing for a down payment on a house, that's $38 less house I can buy. If I was investing for a wedding, there goes the open bar. If I was investing for peace of mind and the satisfaction of securing my future - zoiks. Chances are, I'll pull $90 of spending velocity out of my budget to make up for the loss, and it still may not replace the lost peace of mind.

That's my best guess - we aren't suffering a mere shifting of assets, but a genuine implosion in some assets. Other assets are lost on the wrong side of the tracks, while others are dragging themselves sickly across the floor crying piteously, "help me, I'm hung over."

EcoWorld - Guest Commentary » Blog Archive » Sundown for California

EcoWorld - Guest Commentary » Blog Archive » Sundown for California: "The educational system, closely aligned with the Democrats in the legislature, accelerated its secular decline. Once full of highly skilled workers, California has become increasingly less so. For example, California ranks second in the percentage of its 65-year-olds holding an associate degree or higher and fifth in those with a bachelor’s degree. But when you look at the 25-to-34 age group, those rankings fade to 30th and 24th."

Rather lengthy, but interesting reading. I'm not sure why it's on EcoWorld, as the article isn't really about ecology at all.

Universal Default: Credit's Grim Reaper

Years ago, I was in the middle of a major project when AT&T Cingular shut off my cell phone. They had changed my account number when I upgraded service, never mentioning the change in account number OR the credit balance building up under the old account number as the new account became delinquent. Eventually, we straightened it out. They got the credit balance transferred to the new account, and AT&T Cingular even "generously" agreed to waive the $25 re-connect fee and all of the late fees.

For that project I mentioned, I charged many thousands of dollars of equipment to my personal credit card. I had worked with my particular client long enough to know, without a doubt, that they would pay on time once the project was complete.

Around the same time, Chase, the company that owned my credit card, notified me that I was in Universal Default and my interest rate would now be 29%. I called to ask why, and they said I had made a late payment to someone. They would not tell me who was reporting the late payment. They would not reconsider their decision, and no one at the company would tell me, specifically, why I was in Universal Default. Now, many years later, I realize that the AT&T Cingular snafu was right around the same time - but, back then, I didn't know what Chase was talking about. So I had no choice but to pay the usurious interest rate until I could pay off the account. If Chase had simply raised my interest rate (absent the declaration of Universal Default), I could refuse to accept the higher rate, close my account, and pay the balance at the prior interest rate. In Universal Default, I had no such right of refusal. My interest rate climbed 19% immediately, retroactively (on balances charged at the lower rate), and with no recourse.

Meanwhile, Universal Default can be invoked by other creditors (that's why it's Universal - if one company says you're in default, any other company with Universal Default can apply Universal Default terms to your account). So my backup line of credit was pulled. I ended up selling my second car to get through the pinch, and, of course, I cancelled my Chase account. I will never do business with them again. Ever.

I was very, very fortunate that my Universal Default nightmare only lasted a few months before I was able to tell Chase to shove my full and final payment up their, um, closed accounts file. In the meantime, I got an ugly glimpse of Universal Default. I learned one of the unanticipated risks of carrying a balance on credit cards, and I changed how I manage money.

If you carry a balance on your credit cards, it might benefit you to become positively paranoid about avoiding Universal Default. Make sure that every bill is paid on time. Check your credit limit online in between billing periods. And pay off that balance as quick as you can, because banks are looking for new sources of revenue right now.

I should have fought back.

In retrospect, I accepted Chase's actions far too easily. I should have combed through the original contract terms to find out what rights I had to protest Universal Default. I should have gotten a copy of my credit report, so I could fight the Universal Default designation with hard evidence. I should have contacted the local legal clinic for advice and a strongly worded letter. But, at the time, I had no clue how I could prove that I hadn't missed payments on anything. (Running a new business, I didn't have a lot of money to hire a lawyer).

If I had gone into Universal Default because of an unknown credit line reduction, I would fight it with every resource available to me. It's one thing to invoke Universal Default for an action the consumer should have known about (a late payment); it's quite a different and dirty and sleazy and most-likely-illegal thing to invoke Universal Default for an action the bank took, which the consumer wouldn't have known about until after exceeding a lowered credit limit.

If I went into Universal Default for exceeding a lowered credit line before receiving notice that the credit line was lowered, I would become the squeakiest wheel the bank ever heard. I would make a complaint with http://www.consumer-action.org/ and http://www.consumersunion.org/. I would be willing to testify to Congress and/or tell my story to the media. And you bet your buttons I would contact every one of my elected representatives, state and federal, asking for help. Now that we taxpayers are direct investors in the credit card companies, our government reps are sort of like the banks' unofficial, unwanted Board of Inept Directors. I think that's a bad thing, but if some good can come of that bad thing, then I'd use it. Banks want continuing help from the government, so they are probably a little more responsive to Congresspeoples' inquiries right now - and it wouldn't hurt for our reps to better understand how these banks really do business.

Interesting reading: http://www.consumer-action.org/news/articles/2008_credit_card_survey/ Note that these are survey responses by banks. I can tell you right now that some of the answers - from my own card issuer(s) and those I've read junk mail from recently - are flat-out wrong. Citibank's response to "Would you ever reduce my credit limit?" was No. But it's interesting what the banks will admit (like charging a late fee if the due date is a weekend or holiday when they are closed).

Reduced credit limits; Big Deal

After Citibank lowered my credit limit, I got to thinking. Citibank claims they mailed (the undated) notification on November 5th, but I received it on Nov. 26th, the day before Thanksgiving. Citibank e-mails me balance transfer offers, but they didn't e-mail me about changing my account terms. If I were a different consumer, this could have been disastrous. I had 3 weeks to unknowingly exceed my new, lower credit limit - racking up over-the-limit fees and falling into Universal Default. Most of my mail arrives within 3 days - why Citibank's notice took 21 days is sheer mystery. But that 21 day delay in notification effectively made the credit limit reduction retroactive - I found out about it on Nov. 26th, but it took effect 3 weeks before I knew anything about it.

Consider a consumer carrying a moderate $2,000 balance out of a $6,000 credit limit. If Citibank lowered his limit to $4,000 on November 5th and he bought 4 plane tickets on November 10th for a Thanksgiving trip, he could easily max out his card long before coming home to notification of the credit line decrease. Buying $2,000 plane tickets at 10% interest - suddenly becomes a major offense. By exceeding the new and unknown lower credit limit, he gets hit with $30 fees every month he's over his new credit line, and 29% interest rates eating up $100 a month before he can pay the balance down.

For some consumers, especially ones carrying a lot more than a $2,000 balance, going into Universal Default can push them over the edge, from struggling-but-making-it to "f- it, why bother paying my credit card when I cannot possibly get ahead of it at 30% interest?" A credit card holder who didn't buy a McMansion, who is trying to do the right thing, trying to pay down debt and build up savings and work up to a better spot in life, reads every day about homebuyers and bankers and brokers and insurance companies getting bailed out. No bailout for the credit card debtor, but she keeps making her payments, trying to whittle it down, and then WHOMP! Out of nowhere, the bank changes the rules and she's suddenly over her head without doing a damned thing to fall into the abyss. Why should she keep making payments anymore? Her share of the financial bailout - counting all the cash the Fed is pumping into liquidity along with the direct bailouts of financial institutions - is over $20k++ and suddenly the bank needs to cheat her out of an extra $100 a month by telling her extra slowly that her credit line has been cut right before the holidays.

Maybe our imaginary consumers shouldn't carry a balance at all. It would be good for our economy, in the long run, if people consumed a little less than they produce. We should all carry a balance - in our savings accounts. But we don't, and the path from here to that economic utopia will be painful for everyone. And if the banks' greed and stupidity pushes people into Universal Default and that causes some of them to go into genuine, not-making-payments default, well, gosh darn it, those bastards will be back for more bailout money next year. I don't object to lowering credit limits, and I only object to tightening credit in the sense that "hey, that's not why the government is giving you bailout money!" I object to the sleazy way the banks are doing this, trying to wrest a couple more nickels out of people through downright unethical behavior.

The government is trying to loosen credit and persuade consumers to go out and stimulate the economy. The banks receiving bailout money are doing the exact opposite - they're restricting credit availability to everyone, even great credit risks, and then they're whomping innocent consumers with changes that can push them over the edge. Are the credit card companies trying to push default rates up, to justify yet another round of bailout payments? What other justification could they possibly have for virtually retroactive account changes?

Will this reduce my credit score?

A couple of things that go into our credit scores include how much of our credit lines we have ever used. The credit report details our current balance, high balance, and credit limit. If a consumer runs their credit card up to the limit and then goes over the limit, it looks - to the facile programming logic of a credit-scoring computer - like that person is financially irresponsible. It's not good to exceed your credit limit. But if your credit limit gets lowered to less than your highest balance, it can look like you have been irresponsible in keeping track of your spending.

When Citibank cut my credit limit, it may have reduced my credit score. I don't remember if I've ever used the full credit line. But, in any event, the proportion of my high balance to my new credit limit will be less favorable. Closing my oldest charge account won't help, either - FICO takes into account the age of accounts, with older accounts showing a longer history of responsible payment. Since I don't have other revolving debt, the proportional hit will be bigger.

If this lowers my credit score - especially since I still live in Sacramento metro, one of the areas hardest hit by the housing downturn - my other credit cards could potentially reduce my credit limits or close my account. No big deal; if all of my credit cards were terminated, I could still use my rewards ATM/visa card, but it wouldn't give me the consumer protections that credit cards provide.

Citibank: The Grinch Who Stole my Credit Limit

I'm in a real-estate-meltdown zip code. I've read about credit card companies terminating and reducing credit lines for folks in declining industries, folks who charge at rent-to-own stores, and even folks in the wrong zip code. But I continue to receive credit card solicitations. I thought my over-800 credit score made me immune to credit cutbacks. I was wrong.



Wednesday's mail contained a note from Citibank (and another pre-approved Gold card from American Express). I almost shredded Wednesday's letter, unread, since it looked just like all the balance transfer offers they send me every couple of months. I've been a Citibank customer for more than 15 years, and I've never missed a payment. I don't carry any debt outside of a small mortgage, but I do use my rewards cards for everything from purchases to monthly utility bills. I get hundreds of dollars in rewards checks this way.



My Citibank card doesn't offer rewards, and the interest rate is several points higher than my other cards (except AmEx). So I rarely use it. They do offer have a Virtual account number tool that lets me create one-time-use virtual credit cards for online transactions, so I do use my Citibank card a couple times a month. For a while there, they gave me a rebate on hardware store purchases, and I used the card a LOT more until the offer expired.



Now Citibank has cut my credit line - because I don't use their card enough. I know I'm not a super-profitable customer, since I don't carry a balance at 10%. But then, too, they'll never have to write off a penny on me. A couple percent in (ATM) transaction fees makes my bank plenty happy - wouldn't Citibank benefit from transaction fees on low-risk transactions, too?



If you ran a credit card company, wouldn't you try to keep long-term, never-missed-a-payment, no-debt customers happy? If they weren't using my card anywhere near as much as they used other cards, I would try to make my card more valuable to them. But Citibank decided to punish me for not charging a lot to their card nor carrying a balance with them. So I closed my account.



Perhaps I overreacted, since the reduction was minimal. They still left me with enough credit to buy a small car, but 1) I'm tired of the junk mail asking me to transfer my (non-existent) loans to my Citibank card, every flipping month; 2) I'm still a little burned on my Citibank stock losses (brilliant recommendation from Morgan Stanley, eh?); and 3) that's just bad business and I don't like to do business with companies that don't get it. So that's one less stack of unsolicited balance transfer checks to shred every month. Yippee!

Happy Thanksgiving!

I hope you and yours enjoyed a safe and happy Thanksgiving!

Treasury Draws Fire for Shift in Rescue - WSJ.com

Treasury Draws Fire for Shift in Rescue - WSJ.com: "Another problem: If the government purchased securities from banks, they [the banks] would likely have to record further losses on the markdown price, which many could ill afford."

You have gotta be kidding. I know I'm just a podunk hicktown Sacramento county nobody, but this was obvious from day one. The brain trust leading us throught the greatest financial crisis of our generation didn't realize that you can 1) buy securities from the banks at a price that is fair to the taxpayer; 2) buy securities from banks at a price that shores up their net assets (pick one). In the midst of a financial crisis, it might be nice and generous to pay banks the highest justifiable price for the securities, but, if the securities were really worth that price, the banks could sell them for that price on the open market.

What's next, inflation or deflation?

What's next? If deflation is coming, I'm staying in cash. If inflation is coming, I'm buying all the rental properties I can afford. There's an argument for both.

The government can't afford deflation. Deflation would reduce their tax income while the government debt remains the same. The debt as a percentage of GDP or as a multiple of tax revenues would become even more enormous than it is now. So I would expect the government to do everything they can to avoid deflation - even at the risk of creating rampant inflation.

Although we're all breathing a huge sigh of relief over falling oil prices, gas is still over $2 a gallon at my corner station. In 2003, gas was $1.68 a gallon, and, in 2001, it was closer to $1.35. Opec wants to keep gas prices high, and who can blame them? We all want to keep our incomes as high as we can. Consumers have shown their price elasticity for gas, and, the bottom line is, we'll pay $3 a gallon and complain about it but keep buying it. Now that oil producers know we'll pay that much, they would be bad business people for accepting less. That's inflationary, because oil goes into everything - we burn it for heat, we produce electricity with it, we make everything from plastic grocery bags to medical implants from it, and we use it to transport every product we make from source to sale. Gas prices have a huge influence on consumer prices, because everything has to be trucked, shipped, flown, railroaded, or some combination thereof.

The declining value of the dollar - thanks, in large part, to our government and consumer debt - is inflationary. Everything we import is costs more when paid in deflating dollars.

On the other hand, we could be facing deflation.

As Americans worry about the future, they save more and spend less. People with products and services to sell, have to lower their prices to induce consumers to spend. Every newspaper has ads with massive rebates, incentives, and discounts on American cars. If you've been on the fence about remodeling, try getting some fresh quotes. Contractors are on sale. Lowes' price tags all say "new low price." And the Going-Out-Of-Business sales start at least 20% off. That's deflationary.

Unemployed Americans now number over a million. New layoffs are counted in the hundreds of thousands. Unemployed people don't tend to spend a lot, and they don't earn a lot. That's deflationary. Retail - the old "well, if I don't find anything else, I can go work at the mall" backstop for the unemployed, is struggling. People scraping by on savings is a deflationary force.

The Visa/Mastercard/HELOC printing press has virtually shut down. People are afraid to borrow, and that's okay, because banks are afraid to lend. Given the exponential effect lending and borrowing have on money supply, a reduction in borrowing is extremely deflationary. But, don't worry, the government is still borrowing.

An anonymous Internet user commented several years ago that we were heading for inflation in necessities and deflation in luxuries. Maybe, but a latte still costs $4.

A currency printing press in your wallet: Fractional Reserve banking

Bank regulations require banks to keep enough money "in reserve" to meet customers' withdrawal needs and generally remain in business. Fractional reserve banking allows a bank to keep only a fraction of its deposits in reserve. That fraction varies, but howstuffworks reports that it is currently 3% to 10%. Wikipedia does a nice job of illustrating how a $100 deposit, through loans that are then deposited at other banks, can become $457 in currency. (Note that they are using a 20% reserve requirement in their scenario - actual reserve requirements are much lower.)

If I sell my house for a $100,000 profit and then deposit that money with my bank, the bank only has to keep a portion of the cash in reserve, say, $10,000. They can then lend my neighbor $90,000. If he uses it to buy an RV from the lady down the street, and she deposits the money in the bank, then the bank credits $90,000 to her account, puts $9,000 in reserve, and looks for someone to borrow the remaining $81,000. From that original $100k, we have my $100,000 checking balance and the RV seller's $90k in the bank. We just printed money, without bothering the government's mint. The "created" money expands exponentially.

So, if you wondered where all that money was coming from to fund home purchases at double 2001 prices, now you know. The banks, essentially, printed it out of thin air. Yippee, we're all rich, everyone can afford a Mercedes and a Humvee and a pair of jet skis. My Visa card is a pocket-sized mint.

So what happens if somebody defaults after borrowing money the bank never had? Hopefully, the bank can make up the difference out of profits. If a lot of people default on their loans, the bank can still hope to make the money back by the time I withdraw my $100k. But with stock income gone, prices climbing, and job losses mounting, more people are withdrawing from their savings.

Leverage=risk. So banks prefer to make their money originating loans, and then sell the loan to investors who can afford the risk. But investors left a clause in there that the banks have to buy back certain types of bad loans - early default, fraudulent loans, etc. Banks didn't plan to have to buy those loans back. Banks planned to keep making money.

A $10,000 cash loss is a $100,000 loss in lending ability. If Ocrenter kept a tally of losses, just on the houses he features, how much would you guesstimate that would be? A couple hundred million in losses? A couple hundred million in losses is a couple hundred billion in loans the bank can't afford to make anymore. Fractional reserve requirements create exponential growth in money supply - but when the pendulum swings the other way, it's an exponential contraction in money supply.

Ruh-roh.

365 Days on Market, and then an Above-Market sale

Here's a recent example:

6848 MELLODORA DR, Orangevale, CA 95662


List Date: 05/31/07

List Price: $245,000



MLS status is now "inactive"; zillow shows a sale for $255,000.



I am hard-pressed to believe that the market value was anything near $245k. Yet now it has sold for more than asking price; surely there was some cash, renovation money, or exceptional closing cost assistance kicked back.



With a price in the mid-200s, the buyer could take out an FHA 203k loan for remodeling. Most closing costs in this market are typically paid by the seller. Nehemiah type down payment "assistance" are supposed to be gifts - if the selling price is raised by the amount of the downpayment assistance, it is not a gift. And the property tax in California is determined by the selling price - a buyer saves money by minimizing the selling price, thus minimizing property taxes for as long as they own the property. So a reasonably intelligent buyer would roll closing costs into the loan rather than the purchase price. In other words, there aren't many reasonable explanations for paying more than asking price on a home, except cash-back-at-close or horrible credit.



Buyer beware. Ask your agent to specify exactly what concessions are included in the selling price of comparables.

How big is $600 Trillion? Scary big.

The derivatives market is complex and largely fairy-tale finance. The vast supra-majority of people (presidents, presidential candidates, and Congress included) do not understand the derivatives market, and most barely even know the market exists. If you are unfamiliar with derivatives, please refer to my first post yesterday, which attempts to explain derivatives in layman's terms (and I am a layperson, I have not even traded in puts and calls on stocks).

The derivatives market has a face value of $600 Trillion. While the entire $600 Trillion is not at risk (see "What the heck is a derivative"), I have an enormous problem with the notional value of the derivatives market. The world's GDP is $65 Trillion - outstanding derivatives have a face value ~10 x the entire World's annual income. Warren Buffet is the world's wealthiest person, with a net worth of $62 Billion - about 1/10,000th. In fact, the net worth of the 25 wealthiest people, worldwide, combined, is just over $750 Billion - about 1/1,000th of the face value of the derivatives market. The net worth figures do not necessarily reflect the 30%+ decline in the stock market. The world's 100 richest people have a combined net worth of about $1.7 Trillion.

The 25 wealthiest people's net worth represents the value of everything they own - derivatives, real estate, stocks, bonds, businesses, precious metals, everything. Generally, the wealthiest 1% of people own about 1/3rd of all financial assets. The world's 100 richest people have a combined net worth of about $1.7 Trillion. The derivatives market has a notional value of about $600 Trillion.

There are approximately 1,000 Billionaires in the world - the "poorest" person out of the 100 richest was George Soros, with an estimated net worth of $9 Billion. If we assume that the other 900 Billionaires have an average net worth of $5 Billion, their combined net worth is about $4.5 Trillion. The derivatives market has a notional value of about $600 Trillion.

The world's population is about 7 Billion people. The derivatives market has a notional value of about $600 Trillion. That is about $100,000 for every man, woman, and child in every city, village, prison, slum, and palace in the world.

There are about 10 Million millionaires. From Market Watch: "The high-net-worth population swelled 6% last year to more than 10.1 million people who own assets totaling an eye-popping $40.7 trillion, according to the CapGemini/Merrill Lynch World Wealth Report." The derivatives market has a notional value of about $600 Trillion.

From Slate: "By contrast, the value of the world's financial assets—including all stock, bonds, and bank deposits—was pegged at $167 trillion last year by McKinsey. "

Most financial assets are held long-term. $167 Trillion in net worth of financial assets does not equal anywhere near $167 Trillion in transactions. And derivatives are a very narrow slice of markets. The relatively enormous size of the derivatives market in comparison to the world's assets is enervating.

Okay, but it's not $600 Trillion at risk. First off, we can assume that about half of the derivatives contracts are, say, betting that the market will go up, while the other half are betting that the market will go down. The market can only go up or down, so assume that roughly half of the derivatives bets cancel each other out. Furthermore, derivatives contracts tend to be time sensitive, so many will expire without paying out a dime. The purchase price is the dollar amount that actually trades hands when a contract is created - the purchase prices are a relatively sane $17 Trillion or so. But going back to my insurance policy analogy - if you pay $800 to buy a one-year homeowner's insurance policy worth $100k, only $800 changes hands until something happens to the house. Then, the insurance company could pay out up to $100k. So the money in play in derivatives is somewhere between the $17 Trillion purchase price and the $600 Trillion notional value.

Worse, the other side of the derivative trade may not have any money at all to back up his promises.

Remember, a stock option contract is a type of derivative. If I bought a put contract for $2 that guarantees me the right to sell Intel stock at $20 a share, I would be exercising that contract now that Intel is down around $14. The person who sold me the contract - the counter party - would be out $4 (the $20 face value minus the $2 contract minus the $14 share price today). The loss, in that case, would be twice the contract purchase price and 1/5th of the notional value. If I had been trading in financial stocks, the loss could be nearly the entire notional value; even Exxon is down 29%.

One of the early links in this post is to an article that says that only about $3 Trillion dollars is actually at risk, because most derivatives contracts will cancel each other out. I take issue with that claim - prove it. Because most traders are rational. If I bet you $5 that the sky is blue, would you find someone else to bet $5, with the same odds, that the sky is not blue? Probably not. Even if you found someone willing to bet that the sky is not blue, because they want to hedge a bet they made with me that the sky is blue, you wouldn't give them the same terms - you would charge a lot more to make a bet you are likely to lose, and you would charge very little to make a bet you're certain you'll win. But then a storm comes along, the sky turns purple, and you're out your lunch money because you never thought you'd lose that bet.

As financial markets go crazy, a lot more contracts are paying out than usual. Because there are essentially no reserve requirements for derivatives issuers, this is somewhat akin to Hurricanes Katrina, Andrew, and Iniki all hitting at the same time as major Midwestern flooding, tornadoes throughout the Southeast, and earthquakes up and down the West coast. The "insurance" companies can't pay out on massive and unexpected losses - they are designed to pay out on reasonably expected losses. You can reasonably expect 1 Cat 5 hurricane in a year; 2 would be bad but not shocking, three would probably bankrupt some insurance companies. I'll take any bet if I'm certain I won't pay out - and I bet a lot of Wall Street types, especially the ones betting with someone else's money, felt the same way. Only a very few people expected the Dow to drop from 14,000 to 8,400. Few people expected oil to rise to $140, and fewer still expected it to rise to $140 and then fall to $64. Unprecedented circumstances give rise to unprecedented profits and losses, and it's easy to be on the wrong side of a bet.

"3. Unregulated, over-the-counter derivatives. There are scary numbers floated
out there (in the hundreds of trillions of dollars or more) of “notional value” outstanding. The problem with these numbers is that they don’t represent
actual amount-at-risk, and in fact nobody seems to know what that figure actually is. The lack of a regulated exchange and central clearing means that there is no margin supervision of any sort; ergo, you have no way to know if your contract is in fact good (that is, the other guy has the money.) AIG, as an example, had $500 billion dollars of exposure outstanding in these contracts, and while this sounds somewhat reasonable when one considers they have a $1 trillion dollar balance sheet in fact
it is not because most of AIG’s balance sheet assets are committed to cover liabilities
(e.g. insurance policies, annuities and the like.) The lack of margin and regulatory supervision is directly responsible for this. These derivatives have become nothing more than a fancy game of “pick pocket”, where Broker “A” sells protection to Client “A” for $X, and then tries to find someone to buy that same protection from for “$X – something.” While speculation in the marketplace is fine, speculation without being able to prove capital adequacy to back up your bets is not." ... from http://www.denninger.net/letters/paulson-bernanke-senate.pdf

Bottom line: Who can afford a $17 Trillion loss? How about $4 Trillion? $50 Trillion? In a global economy where the value of everything produced and sold in the entire world is just $65 Trillion a year, I don't think anyone can afford to back $600 Trillion bets, even if the losses are mere tens of Trillions.

Notes: Trade in derivatives data comes from the Bureau of International Settlements. $600 Trillion is rounded. World GDP is likely understated somewhat, because there is no official tracking of grey market, black market, contraband, and under-the-table income. All figures in U.S. dollars are subject to exchange rate fluctuations.

How Big is the Derivatives Crisis?

My last post discussed the general concept of Derivatives. Now, let me give you some wild conjecture about the scope of the derivatives crisis.

The Bureau of International Settlements (BIS) estimates the derivatives market at about $600 Trillion. But that's the notional value - the face value. That's like saying that the face value of insurance policies is $600 Trillion - the actual amount paid out by insurance companies is a fraction of the total of all the face values of all the policies in the world combined.

So what's the real risk level?

Well, derivatives can be mere side bets - and, like the Super Bowl, the bets for and against any particular outcome should roughly even out. The BIS tries to estimate

But how much money is really going to be lost? Here's some guesses.

The derivatives market "insures" the value of assets, typically financial assets like stocks, bonds, and real estate. Financial assets are under pressure right now. The majority of real estate loans issued in the last few years borrowed against property in Florida, California, and Nevada. The once-hottest markets are now the icy-est, with property-value declines of 40% in the Sacramento market, and, conservatively, 20% in the majority of really-hot (and widely invested-in) markets. The stock market is down from a Dow of 14,000 to less than 9,000 (about a 35% decline). Oil is down from a high around $140 to today's value around $70 - a 50% decline.

So the assets that underlie the derivatives contracts have declined by about 30% (a very, very rough average of the declines in major asset categories). A homeowners' insurance contract doesn't pay out unless the house is damaged - an awful lot of our financial houses are on fire right now. This is an economic Hurricane Katrina, 1906 Earthquake, and Midwestern flood all in one.

If an insured car is totalled, the insurance company will try to sell the car for scrap and parts, while paying the car's owner to replace the car. The insurance company is out the difference between the market value of the car and the scrap value of the car. Well, with an options contract, you don't actually lose the full notional value of the contract, you merely lose (or win) the difference between today's market value and the notional value. If I buy a put contract on Corning stock at $20, the counter party doesn't lose $20 - they lose the difference between today's stock price (~$11) and the $20 contract price. So instead of losing $20, they lose $9.

So BIS says the total derivatives market is about $600 Trillion in notional value. That's like saying the Corning derivatives market is $20 - it doesn't mean anyone is losing $20 (or $600 Trillion). What they'll lose is the difference between today's value and the contract value.

Let's try a wild guess. If the major assets (real estate, stocks, oil) are down, that's the economic equivalent of a house fire. The "insurance companies" (derivatives counter parties) will have to pay out. The house isn't a total loss. Suppose that 10% of the derivatives market has to pay out - 10% of a $600 Trillion market is $60 Trillion. Now, stocks, bonds, real estate, and oil aren't total losses - they're just down.

So suppose the payout on the insurance policies (derivatives market) is the difference between face value and current value - that's about a 20% decline, on average, conservatively. That's $60 Trillion of derivatives (10% of the total derivatives market) paying out a 20% loss. That's $12 Trillion. That is, roughly, the equivalent of a full year's income for the United States as a whole. That is about 1/6th of the entire world's annual income.

Let's put this in perspective. Would you be okay with a salary reduction of 1/6th of your income? Would you be okay with your taxes increasing by 1/6th of your income? Would you lose weight if you ate 1/6th less than you eat today? 1/6th of the entire world's GDP is a lot.

I really think that assuming only 10% of the derivatives market will have to pay out, and that their losses will only be 20% of the total notional value at risk, is incredibly conservative. But, at least, having a reasonable floor gives us a basis for guesstimating the ceiling.

What the Heck is a Derivative?

A derivative is a contract that derives its value from something else. The notional value of a derivative is its face value. It might be simpler to think of it like your homeowners' insurance policy; the policy can pay out up to the stated replacement cost of your house - that is the face value (or notional value) of the insurance policy. If it costs $100,000 to rebuild your house, then the market in homeowners' insurance on your house is $100,000 in notional value. The insurance company doesn't pay $100k, they're simply at risk for up to $100k. The premium you pay to the insurance company each year is the part that gets added to GDP, the part the insurance company can save, spend, or invest, the part that matters in any year that you don't have losses.

But, Hurricane Katrinas can happen. So the insurance company has to set aside enough money to pay out the claims it can reasonably expect. Insurance companies are heavily regulated by State and Federal government agencies, and they are required to use reasonable assumptions to decide how many claims to reasonably expect, and they are required to keep enough money on hand to cover those claims.

Derivatives, on the other hand, are not heavily regulated. In many ways, a derivative is like an insurance policy. If I am worried that my Corning stock might decline in value right when I want to cash it in for a down payment on a house, I can buy a put option contract (one of many types of derivatives) that gives me a right to sell the stock at an agreed-upon price within a specific time period. Effectively, I am insuring against a decline in the value of an important asset (much like you insure against a fire destroying the value of your home).

There are many other types of derivatives contracts, and they cover a wide variety of possible losses. One type of loss they cover is "credit default" - if I lend money to my brother-in-law, I know the odds aren't very good that he'll pay me back. A credit-default "swap" lets me pay somebody else to take on the risk (the other guy pays me if my BIL flakes) - we "swap" a little money in exchange for trading who bears the risk.

You'll note that my Brother-in-Law isn't very likely to pay me back, and I knew that when I lent him money. That's one of the problems with credit-default swaps. Banks made crazy mortgages, and they didn't have any good reason to believe that, say, the Target cashier buying a half-million-dollar house would actually pay the mortgage back. Since the derivatives market is essentially unregulated, you can actually buy the equivalent of a credit-default swap on your deadbeat Brother-in-Law. In real insurance, you can't do that - you can only insure against a risk that neither side could reasonably predict. Letting someone buy insurance after, say, the house burns down, would mean that the only people buying insurance are people whose houses are on fire.

Given the loosey-goosey rules around derivatives contracts, people can use options contracts responsibly and irresponsibly. The only limit is whether you can find someone to trade risk with you. And, mostly, you can - it's like having a group of dumb, fun-loving friends who will actually sell you fire insurance even after finding out you store kerosene next to your woodstove, and you're fixin' to build a fire.

And derivatives traders have something else in common with dumb frat boys. They'll bet on pretty much anything. If you've ever looked at a friend across a bar table and said "I'll bet you $10 she shoots him down," you're qualified to be a derivatives trader. Because derivatives contracts don't require that either side be directly involved in the transaction that the contract derives its value from. I don't have to own Corning stock to buy a put option on Corning, and you don't have to own Corning stock to sell me a put contract. So derivatives contracts can work as side bets - just like that bar bet about whether some guy you don't even know gets a date with some woman you don't even know.

So, that's a very rough description of these derivatives things people are talking about. My next post will provide some wild conjecture about how big the risk is in derivatives trading.

One of The Joys of Living in Northern California

I found a juvenile black widow spider in the house. It is now dead. The adult black widow is black with a red hourglass marking on her belly. The juvenile is brown and black. Although the picture here isn't as clear as I'd like, it does show the beginnings of the hourglass shape on the juvenile's belly.

A debtor government cannot afford deflation

Our government owes trillions of dollars (or, in smaller numbers, Thousands of billions of dollars). What's more, our government has committed to fund tens of Trillions of dollars in government and military pensions, Social Security, Medicare, and similar programs. Although there is no promissory note on these additional liabilities, they are owed just as sure as the cash your children are expecting for their next birthday. And our debt grows every year now.

Well, heck, we all know there's a lot of government debt, but what do we really care?

We care a lot - because the debt ties the government's hands. We pay a huge amount of money in interest on $10 Trillion dollars (figure $400 Billion in interest at 4%). In order to maintain that kind of debt, long-term, we need somebody to keep lending to us. Right now, there are a lot of foreign individuals and governments that are happy to fund our debt addiction. But we have to be careful to keep them happy, to keep them lending. Could part of our bailout/rescue plan be a "Keep the Chinese confident in American bonds so they keep lending us money" plan? I don't know, but there is certainly a risk that, when we hit $20 Trillion in debt to pay some of those pension obligations, lenders cut us off. That's a mighty scary scenario.

In the meantime, the debt ties the government's hands in dealing with the current crisis. If the government lets the market tank, we risk a deflationary spiral. If we have a deflationary spiral, corporate, personal and investment incomes could decline. If incomes decline, the government's tax revenues on that income will decline, too. If government revenues decline, the government's debt will not decline. Less income to pay the same debt = major pain. Either the government has to cut back (a lot) or the government has to try to keep the debt afloat until incomes rise again.

Now, we're back to the Chinese (and other foreign nations) again. Think about this - the government, in a deflationary situation, is like a CEO with a mortgage. He gets laid off, manages to find an embarassing job doing business development for a much smaller company for a much smaller salary (but he's got a job, thank goodness) - and his mortgage is suddenly huge in comparison to his income. Our CEO is suddenly a bad credit risk - he whips out his AmEx Gold card to buy a tank of gas, and it's denied. He charges the gas to his visa card, and finds out they've jacked his interest rate to 29%. Government borrowing is a bit more complex, but it's still the same basic idea - high debt-to-income rations equal higher interest rates, and some lenders just won't lend to you anymore.

The government currently spends a bit shy of $3 Trillion, with almost a $1 Trillion shortfall every year (and that shortfall gets borrowed, and added to our total debt). The government is taking in, roughly, $2 Trillion a year in an economy where the total GDP (total of everyone's income) is about $13 Trillion. Suppose GDP fell by 10%. Government revenues would probably fall about 10%, too. If a lot of people are laid off, the government could take a bigger hit (individual income taxes are a higher percent than corporate or investment income taxes) - AND more people would ask for government services (food stamps, welfare, etc.) because they can't find jobs. The government gets hit with a double whammy - lower income, higher expenses. The government's "credit rating" drops instantly.

The government is stuck between a rock and a hard place.

If they cut expenses to balance the budget, the economy will slow even more. If the economy slows more, incomes drop more, and income tax revenues drop more. The relative value of the debt becomes larger in comparison to tax revenues. Interest rates rise to reflect our declining credit-worthiness, raising expenses, requiring further cuts, further slowing the economy. Social security and pension payouts become more attractive compared to private sector employment income, and people retire earlier.

If they keep borrowing and spending, inflation will rise and their credit rating will fall and the value of the dollar will fall even more than it already has. If the value of the dollar falls, the price of oil rises, and the American public gets squeezed even harder between falling wealth and rising prices. And the government, paying to fuel everything from government vehicles to military tankers, gets squeezed, too. But, the silver lining is that the debt begins to look smaller in comparison to the inflation-swollen tax revenues. The downside, however, is that the falling dollar decimates the value of foreign investment in American debt. If a foreign investor is losing money on the exchange rate, lending us money becomes a bad investment.

When this is all said and done, I hope that the lesson future generations take away is "never, ever, ever let government debt get so high." But, for current generations, we are in an ugly, ugly place. Bottom line: I expect much higher taxes in the future, and probably for the rest of my lifetime. Priority 1 needs to be: Get things situated so we can pay down debt. Priority 2: Pay down debt. We will pay for this, one way or another. I would rather pay a little more tax today (to reduce the debt) than pay the interest over and over and over again.

(Many voters are confused about the fact the the Clinton administration left the Bush administration with a surplus. The Clinton administration left behind a mountain of debt, but with a budget that allowed surplus funds to begin whittling the debt down. Bush didn't run up the whole $10 Trillion in debt by himself. That's not to say that Bush is innocent, nor that Bush is to blame - we began borrowing from the Social Security trust fund during the Johnson administration, and every President since has continued us along this financially irresponsible path. Every Congress along the way - with ultimate power over the budget - has contributed to the mess. It is a bipartisan effort of the worst kind, and we voters should not tolerate any more partisan finger pointing.)

A tale of two doctor's visits

One of the major problems with health care costs in America is that the insured consumer is insulated from the real cost of care. Health care providers take great offense when consumers ask how much care costs - and doctors choose not to know, even when the doctor himself/herself set the prices. Doctors act as if their work is too holy to be muddled with financial realities - but, the truth is, finances are a major part of health care. Finances are the reason many doctors become doctors (if doctors were not motivated by money, why are soooo many doctors going into the higher-paying specialty fields today, rather than going into primary care medicine? Why aren't more doctors taking advantage of government-sponsored debt forgiveness programs for primary-care doctors serving under served populations?). Finances are the reason many people "can't afford" * health care. Let's face it - in a money-based economy, finances are both currency and culture, a way of measuring things and a way of communicating the value we apply to things.

In a free market, consumers are free to choose how to spend limited finances. The "invisible hand" of the market is what happens when many peoples' choices aggregate - if lots of people value, say, a house very highly, the price of the house will rise to reflect all those consumers' choices. But the invisible hand relies on people making rational choices, and rational choices rely on clear and accurate information. Health care price information is not clear and accurate, and it is not readily available. If a consumer does not know that doctor A charges twice as much as doctor B, the consumer cannot make a rational choice to compare the relative value of the two options and choose the best value. We need to increase the clarity and availability of medical price information.

I changed insurance plans this year. Last year, I paid a flat co-pay for any service, and the insurance company paid the rest. No paperwork, no fuss - I thought it was more efficient. However, with no paperwork, I had no idea how much services cost. This year, I changed to a plan where my co-pay is a percent of total cost. It is actually cheaper than the flat-rate plan, and I finally know how much health care costs.

We had two doctor's visits this year - one to an Urgent Care clinic, and one to our regular doctor. Both doctors pay to rent an office, both pay malpractice, both pay a receptionist, a billing clerk, and an assistant or nurse. Both negotiate fees with insurance companies, and both participate in multiple insurance networks. Both doctors deal with uninsured patients and unpaid bills (although the Urgent Care clinic has more uninsured patients and deals with more unpaid bills). The only real difference in overhead is that the Urgent Care clinic is open 24 hours a day, 7 days a week - requiring 4 times as many staff hours as the doctor's practice, and more electricity, too.

My better half sliced open a finger a few months ago. It was an evening incident, and our doctor's office was closed. A doctor at the urgent care clinic looked at the finger, performed a quick exam, and directed a medical tech to clean and dress the wound. The bill was $80.

I pulled a shoulder muscle a couple months ago. I went to my regular doctor, who spent less than five minutes listening to my symptoms, diagnosed a pulled muscle, ignored all the symptoms of a pinched nerve, and wrote a prescription. My regular doctor is completely computerized, so she was able to pull up my chart, read it, and enter the visit notes right there in the exam room - she actually spent just minutes interacting with me. The bill was $120.

Last year, we visited the primary doctor and the Urgent Care clinic for two different situations. Honestly, the Urgent Care clinic provides better care. I simply assumed that the Urgent Care clinic was more expensive than my primary doctor. Now that I know better - and now that I know how unreasonably expensive my primary doctor is - I can make an economically rational decision about my health care spending. Oh, sure, the insurance company is paying the bulk of the cost, but they are, in effect, paying the bills with my money - if total expenses exceed what the insurance company has set aside to pay expenses, my insurance costs will rise next year.

* Some people truly can't afford health care. Some people "can't afford" health care - they have sufficient cash after paying basic expenses, but they value other things more highly. As an example, my SIL who died of something that is easily detectable and easily treatable - she "couldn't afford" health insurance because she "had" to pay for private school for her child, she "had" to pay for cigarettes, she "had" to go shopping for knick-knacks (and buy some) every week, she "had" to have supplies for her hobbies, she "had" to go out with her friends, she "had" to take her kid out to eat....

When I was 18, I couldn't afford health care. While living and working in Hawaii (yes, Hawaii - the state that Hillary Clinton held up as the model for universal health care, the Hawaii that requires employers to provide health care to their employees), I became ill. I had "aged out" of foster care, with no family to fall back on. My college went bankrupt, and I took the first job I could find to keep a roof over my head. I was poor. I had no health insurance. Without health care, I couldn't work to make money to save to pay for health care. In order to pay my health care expenses, I moved out of my apartment and became homeless for a while, as I saved money for health care. My employer, though required to provide health care to employees, did not offer me health insurance. As an 18 year-old, I didn't know any better. I could not afford health care.

So when I put quotes around "can't afford" health care, it is meant to reflect the full range of people claiming that health care is unaffordable - from the people who must choose between food, shelter, and health care, to people who choose to drive a BMW because it is a necessity, while foregoing health insurance because it is "too expensive." And you would do well to keep that distinction in mind when the inevitable Universal health care debates arise again. If health care is a necessity, then it should be paid along with other necessities (food, clothing, shelter) and before luxuries like cell phones, car payments, cable TV, etc. Before we give a family government help to pay for health care, we should make sure that health insurance is truly unaffordable for them, and not merely "unaffordable" in the face of life's many temptations.

55% Off Amazon Grocery Clearance

This was worth sharing, and bookmarking for later:

Save an additional 55% instantly when you purchase select September Clearance products offered by Amazon.com. Enter code CLRNCFTY at checkout. Here's how (restrictions apply). Offer valid through September 30, 2008.

I found pages upon pages of coffees and teas included in the clearance items, as well as more standard grocery fare like soup mixes and nuts. They still qualify for free shipping if the order totals more than $25.

And while we're sharing money savers, here's a free shipping promo code for Lands End (their quality is very good and their overstocks are quite fairly priced):
Code: AUTUMN, Pin: 9432

Sorry about the hiatus

I lost my four-legged best friend on Tuesday, after many months of illness. It was both a hassle to deal with the new medical protocols and an unmitigated blessing to be able to make my buddy feel better and get some more living in, for the final months of her life.

A quick update on the house we made an offer on - according to the property tax assessor, the home is still delinquent on taxes, which means it hasn't sold/closed (an escrow company would pay off delinquent taxes at close of escrow). It's not back on the market, it's not sold, and nobody's paying the taxes. Hmm.

The housing bill: First Time Home Buyers' Credit recapture

All about the housing bill: "Here's how the tax credit will work. You buy a
$200,000 house. The next year, when you file your income tax return, you have a
$7,500 credit. Not a deduction -- a credit. Essentially, you get to reduce your
income taxes by $7,500. That ought to make for some big refund checks.

But. Yeah, you know there's a 'but.' But you have to pay the money back
over 15 years. Say you buy the house this October. You get the $7,500 tax credit
for the 2008 tax year. That's the one with the filing deadline of April 15,
2009. Then you have to start repaying one-fifteenth of that amount, or $500,
every year for 15 years, starting with the 2010 tax year."

That's right - the first-time home buyer tax credit isn't a reduction in taxes, it's basically an interest-free loan. For the next 15 years (or until the home is sold/made into a rental), the taxpayer will pay a tax of 6 2/3% of the amount of the credit ($500/year on a $7500 tax credit). But, hey, an interest-free loan is an interest-free loan. If you haven't owned a home in the last 3 years, and your modified adjusted gross income is $70k or less (single), or $140k (married), it's a nice little bonus for buying a house. Provided you meet all the restrictions.

And, if first-time home buyers can't be expected to read a mortgage contract, it might amuse you to imagine them reading the text of the mortgage bailout law to discover that the "free" money has to be paid back:

`(f) Recapture of Credit-
`(1) IN GENERAL- Except as otherwise provided in this subsection, if a credit under subsection (a) is allowed to a taxpayer, the tax imposed by this chapter shall be increased by 6 2/3 percent of the amount of such credit for each taxable year in the recapture period.
`(2) ACCELERATION OF RECAPTURE- If a taxpayer disposes of the principal residence with respect to which a credit was allowed under subsection (a) (or such residence ceases to be the principal residence of the taxpayer (and, if married, the taxpayer's spouse)) before the end of the recapture period--
`(A) the tax imposed by this chapter for the taxable year of such disposition or cessation, shall be increased by the excess of the amount of the credit allowed over the amounts of tax imposed by paragraph (1) for preceding taxable years, and
`(B) paragraph (1) shall not apply with respect to such credit for such taxable year or any subsequent taxable year.
`(3) LIMITATION BASED ON GAIN- In the case of the sale of the principal residence to a person who is not related to the taxpayer, the increase in tax determined under paragraph (2) shall not exceed the amount of gain (if any) on such sale. Solely for purposes of the preceding sentence, the adjusted basis of such residence shall be reduced by the amount of the credit allowed under subsection (a) to the extent not previously recaptured under paragraph (1).
`(4) EXCEPTIONS-
`(A) DEATH OF TAXPAYER- Paragraphs (1) and (2) shall not apply to any taxable year ending after the date of the taxpayer's death.
`(B) INVOLUNTARY CONVERSION- Paragraph (2) shall not apply in the case of a residence which is compulsorily or involuntarily converted (within the meaning of section 1033(a)) if the taxpayer acquires a new principal residence during the 2-year period beginning on the date of the disposition or cessation referred to in paragraph (2). Paragraph (2) shall apply to such new principal residence during the recapture period in the same manner as if such new principal residence were the converted residence.
`(C) TRANSFERS BETWEEN SPOUSES OR INCIDENT TO DIVORCE- In the case of a transfer of a residence to which section 1041(a) applies--
`(i) paragraph (2) shall not apply to such transfer, and
`(ii) in the case of taxable years ending after such transfer, paragraphs (1) and (2) shall apply to the transferee in the same manner as if such transferee were the transferor (and shall not apply to the transferor).
`(5) JOINT RETURNS- In the case of a credit allowed under subsection (a) with respect to a joint return, half of such credit shall be treated as having been allowed to each individual filing such return for purposes of this subsection.
`(6) RECAPTURE PERIOD- For purposes of this subsection, the term `recapture period' means the 15 taxable years beginning with the second taxable year following the taxable year in which the purchase of the principal residence for which a credit is allowed under subsection (a) was made.

7 bank failures so far this year

In 2007, the FDIC closed 3 failed banks. None in 2006 and 2005. 4 in 2004, 3 in 2003, 12 in 2002, 4 in 2001. So far this century, 2008 is on track to be the second worst year for bank failures.

FDIC: Failed Bank List
2007 Bank closures:
Bank Name, City, State, Closing Date
First Heritage Bank, NA, Newport Beach, CA July 25, 2008
First National Bank of Nevada, Reno, NV July 25, 2008
IndyMac Bank, Pasadena, CA July 11, 2008
First Integrity Bank, NA, Staples, MN May 30, 2008
ANB Financial, NA, Bentonville, AR May 9, 2008
Hume Bank, Hume, MO March 7, 2008
Douglass National Bank, Kansas City, MO January 25, 2008

http://www.fdic.gov/bank/individual/failed/ Includes links to Is My Account Fully Insured? and When a Bank Fails - Facts for Depositors, Creditors, and Borrowers.

A nifty little tool: The bank rater

TheStreet.com has a ratings lookup tool where users can look up thestreet.com's opinion of various entities. You can check their opinion of a stock, or get their idea of the financial stability of your life insurance provider. You can also look up your bank. I discovered this tool a year ago, when the bank failures began (just a trickle at first) - the bank that failed at that time was rated an E- before they failed.

To use the ratings screener, you go to the Banks tab on the Ratings Screener, type in your bank, and hit "Go." Pretty straightforward, except that some banks don't come up by exact name - if your bank doesn't come up, type in the first part of the bank's name and then sift manually through the results. Banks are rated from A to E-, just like academic grades. Personally, I'm wary about keeping my accounts below FDIC limits, but I'd be moving my checking account if I found my bank on the C- or worse list.

If you feel like whiling away a pleasant weekday afternoon, try this:

• Don't enter anything, and hit search (find out how many banks are in the database). I got 12,326.
• Set the rating option to "E" - the worst available rating. I got 332. Not bad - 332 "very weak" banks out of 12,326. Less than 3%.
• Set the rating option to "D" ("weak") and grab the drop-down box next to the rating drop-down - set that one to "or lower". That gets you all the D's and E's in one shot. I get 2,479 banks rated by the street.com as "weak" or worse. Yikes - That's 20% of all the banks they track.

You can play with the ratings screener, sorting by state or bank type, or see which states have the most banks named "Cowboy".

Call me paranoid, but, since I discovered the rater, I've made a point to check my bank's rating every couple of months. They're a B-rated bank, and, so far, they've maintained a solid B average.

And, please - PLEASE, pretty please with sugar on top, please keep your money FDIC insured. Consumers can keep more than $100k covered in a single bank, provided the accounts are titled in multiple names (for example, Mr. and Mrs. John Q. Public could be insured for $100k each, allowing a joint account to reach $200k before exceeding coverage limits). Payable on Death accounts can be covered for $100k per beneficiary - Mr. and Mrs. John Q. could get $400k FDIC coverage by setting up a POD account as "Payable on Death" to their 4 children.

Can the GAO get a mortgage bailout?

Why some conservatives are backing Obama: "Susan Eisenhower, granddaughter of Republican President Dwight Eisenhower: 'Deep in America's heart, I believe, is the nagging fear that our best years as a nation are over. We are disliked overseas and feel insecure at home. We watch as our federal budget hemorrhages red ink and our civil liberties are eroded. Crises in energy, health care and education threaten our way of life and our ability to compete internationally. ..."

I have not made up my mind about my Presidential vote, and linking to this article is not an endorsement of Obama - nor an indictment of him. But saving, investing, buying a house, pursuing an education, even having children - all these undertakings require a certain optimism, a trust that the future will bear them out, and a lot of Americans - especially investors, savers - you know, the kind of folk who sat out the housing bubble and are now prepared to swoop in and buy up houses - aren't feeling so optimistic. Politically, I believe that our government - under any candidate - needs to shore up those American "promises" - life, liberty, the pursuit of happiness, and freedom from the over-arching fear of Federal Government bankruptcy (or government spending hitting 50% of GDP, which the GAO projects will be necessary by 2070 - I don't know about you, but I do expect to be around in 2070, a mere 62 years from now; I hope to be a spry, active nonagenarian).

During the primaries, I read a candidate's treatise on his intended policies, and I found some of the ideas quite promising, but the overall takeaway was "That adds up to a lot of new expenses. Gosh, doesn't he know how bad the government debt is?" Whether you're leaning towards Obama, McCain, Nader, or "None of The Above," here's a stark reminder:

The government only has two ways out of their economic mess - man up and start solving the problem.... (I'll wait while the laughter subsides)... or go ahead and let inflation run wild (no need to default when you own the currency printing presses). Will consumers allow inflation to run? There's an interesting test. But if inflation goes wild, home ownership is a decent bet - as long as inflation inflates your salary faster than your expenses. Rising taxes are virtually a given, under any president, because our government obligation has reached the point where it's an exploding option-ARM itself. Pay less now, pay lots more later; pay more now, pay less more later (yes, I said less more - it's gonna be more later no matter how we dice it). The housing market has given us a brilliant illustration of what happens when folks pay less than the interest on enormous long-term debts - lots of folks are overdue on their property taxes, lots of folks couldn't afford basic maintenance, and, now, lots of folks lost their homes. If America couldn't afford to have Bear Stearns implode, we certainly can't afford to have the Federal Government implode.

Data on the Government financial status:
Complete FY 2007 Financial Report (PDF, 186 pages)
The Nation by the Numbers (PDF, 10 pages)
Notes to the Financial Statements (PDF, 62 pages)

Vulture real estate investors swoop in - Jul. 2, 2008

Vulture real estate investors swoop in - Jul. 2, 2008: "Jack McCabe says he still sees 'a large disconnect between what buyers are willing to pay and what lenders are willing to sell for.'
That's even more true in California, according to David Michelson, a partner in California-based developer Three Arch Investors - despite the fact that home prices there are already down 35% in the last 12 months. The company is putting together a $250 million vulture investing fund in anticipation of even further declines, and will buy foreclosed homes in California, Nevada and Arizona.

'The transactions are not happening yet,' he said. 'There are plenty of people looking, but the lenders are carrying the cash value [of these distressed homes] at two or three times the actual value,' said Michelson.

Until banks reduce these prices - and take the write downs that will come with them - buyers like Michelson won't budge.

He figures that the banks will have to start liquidating these properties by the end of the year to get them off their books. And then, he says, the floodgates will open."

This is in contrast to the cases earlier in the article, where investers are scooping up property in other areas where banks and sellers are getting real. But in California, it's different. Could it be that - in a state where half a million dollars wouldn't buy much more than a condo or an inland starter home - the banks are too heavily burdened by California defaults to dare admit just how badly they've been burned?

Centex, Pulte dump land in Rancho - Sacramento Business Journal:

Centex, Pulte dump land in Rancho - Sacramento Business Journal:: "At the height of the local housing boom, $8 million would have fetched less than 20 acres of land approved for new homes as prices had escalated to $600,000 an acre in some areas. Builders and developers are still waiting for a new benchmark on what land is worth in today's economy. The buyers in this deal, Alvarado and Somers, paid $32,000 an acre."

The weird thing about this story is that - Centex, at least - had already begun building, had models up, even had some homes completed and, apparently, sold. And then - poof - Centex's web site doesn't show anything in Rancho Cordova anymore. So what happens to the fine folks who bought new homes in the midst of the graded fields of mud that Centex no longer plans to build upon?

And, yowza - Centex and Pulte, as partners together, paid $50 Million, plus they spent another $30 Million in improvements - and then sold the land for $8 Million. I'll be very curious to see who survives - the Centexes or the Lennars? Centex recognized the downturn and the falling prices ahead, and they cut prices before anyone else - so they sold out before anyone else. Lennar is still dreaming of 2005 prices. Is it smarter to cut the losses and run, or to squeeze the last no-money-down, gotta-have-granite, easy financing nickel out of what history will surely remember as a crazy, self-indulgent market.

(C) 2008 All rights reserved

June: The month from heck, and what happened to our offer?

I am booked solid 16 hours a day, and get the other 8 hours a day to sleep, eat, bathe, grocery shop, cook, clean, and take care of my elderly and ailing dog. So I'll just give a quick update on our offer. Nothing. Nada. Zip, zilch, no reply, no counter, no rejection, and no, the house has not appeared on the "sold" lists in the paper. It's been about 2 months.

We made an offer on a house

We found a house that met our requirements, and the asking price made sense. It's a short sale - with two Cadillacs in the garage. Indy Mac bank owns the first and second mortgages. The house generated multiple offers, but, being a short sale, any offer had to be accepted by the seller AND the bank.

We made an all-cash offer. Our only contingencies were basic things like: we could do an inspection (only on the house) and we could back out or renegotiate if necessary repairs exceed $40k. We offered a large deposit, increasing the deposit to 30% upon acceptance of our offer. We offered a fast close - less than a month. I thought our offer was as good as a cashier's check. And we offered a tiny bit above asking price.

Well, that was three weeks ago. Last we heard, the bank was still thinking about it. Our offer has technically expired, although we would still proceed with the sale if we hear from the bank, say, tomorrow. I have to admit, I am surprised that the bank would drag their feet when they have a solid offer on the table for a property in Sacramento county, one of the nation's worst housing markets right now. The house, like many Sacramento-area homes purchased in the last several years, is suffering from deferred maintenance. If we buy it, I expect to replace the air conditioner this year - and I hope that it doesn't fail before we get it replaced.

We recently looked at another house, a REO. The house has water damage and mold because the water heater failed, dumping 40 gallons right in the center of the house. It has been vacant so long that rats and birds, at a minimum, are nesting in the attic. I am open to a lot of things, but rats and snakes cross my line. Another house - another REO - is barely salvageable because it sat vacant for so long that scavengers and children have picked it clean. The banks are playing a dangerous game when they repossess a house - hoping that the house will be livable and sellable by the time the bank gets an agent assigned to sell the house. From most of what I have seen on the market, banks are getting hosed on repossessing houses. But, I guess there's something I'm missing, because, at least for Indy Mac, it's worth losing a cash offer at a fair price while they play "don't call us, we'll call you if/when we get around to it."

John Lennon rolls over in his grave

Is It Time to Invade Burma? - TIME: "But we still haven't figured out when to give war a chance."

The Burmese people's only crime is being born in Burma, and, for that, many will die of starvation and preventable diseases while the world waits with food, shelter, and medicine earmarked for the Burmese. But what gives another nation the right to invade another nation? Isn't that a slippery slope that could be used against us - the Swedish could invade America for humanitarian reasons - we have the death penalty and we don't provide universal health care and daycare. The Chinese could invade - we are torturing our people with excessive opportunity and choices. Chavez could invade to deliver heating fuel to our poor. The French could invade on the humanitarian grounds that we cruelly induce our American women to shave their legs and armpits, instead of allowing them to revel in their natural, God-given beauty.

Fact is, lots of countries disagree with each others' values and methods. If we want our independence as a nation, don't we have to honor other nations' independence, too? Even when it really sucks?