Monday, April 7, 2008

This entry is going to sound more political than I prefer, but there's no help for it.

I'm starting to get a sense of what I think is happening in the financial worlds.

The rich, the corporate, are circling the wagons, protecting each other's interests, changing the rules if need be. The less well off, are simply going to be allowed to fail. If I want to be really downhearted about it, I guess I believe that the middle class assets, not much for each person, but cumulatively enough to matter, are simply going to be transferred to the rich. In the midst of a vast credit meltdown, it looks to me like the bigger entities are using the opportunity to swallow what's left of the middle class.

Oh, woe is the poor banks and mortgages, that they have to take back all these houses in foreclosure! But that sort of misses the point -- they own the damn houses again. And if, or when, the economy turns around they'll be able to profit.

Oh, woe is the poor banks that the consumer has so much credit card debt. Who's ass will be covered, in a meltdown? Somehow, I don't think it will be the consumer. They've even prepared for it, by making bankruptcy harder. You'll be working for the man.

I don't see this as a conspiracy, simply the mechanism of money protecting money. Unless the middle class is ever informed and vigilante. We've been too busy working two jobs and overtime and convinced that we need to buy more and bigger, to be paying attention.

So what else is new, my wife asks?

Too true, but I don't know that I've ever seen it be quite so blatant before. All the government programs meant to help the average citizen, which seem to be legislative in nature, are going to be too little, too late. Except a quick cash payout -- which smacks of bread and circuses.

Meanwhile,all the executive and regulatory changes, which are effective immediately, appear to only benefit the corporate entities.

And the real kicker? The middle class would also be the ones to suffer if there was a meltdown of the corporate world. It appears that trickle down theory is really true when it comes to losses -- if not so much when it comes to profits.

The question you have to ask yourself. Are you big enough to be protected, or small enough to let fail?

9 comments:

Duncan McGeary said...

I'm finding out, that the suspension of the HELOC is happening everywhere, and to people who have more money and better credit than me.

And their reaction, as is mine, is to pay off the credit cards in full, cut back on spending, and start building savings.

Unintended consequences?

By the end of this month, my finances will be where they were at the beginning of the month, minus an entire credit card, and minus access to a Heloc. I also will have my lowest balance in several years on my other credit card, which I intend to pay off by July 1.

So this situation is just forcing me to do what I should've done anyway.

But at the end of it, these corporate bastards won't be getting anything else out of me.

Anonymous said...

Duncan,

It sounds like at root what you're really talking about is inequality ... America has a much higher tolerance for income inequality than other countries -- such as Japan.

We've always had our poor, the huge middle class, and then the very, very rich.

Americans don't mind the very, very rich as long as they feel the ability to get ahead. Look at the tremendous improvement in living standards over the past 80 years. My father was born in the depression and used an outhouse -- no indoor plumbing. Now they are quite comfortable -- they scrimped and saved and have assets to live off of in retirement.

As for the rich -- recall that Alexis de Tocqueville noted that "the rich are constantly becoming poor" and "it is clear that very few great fortunes last more than two generations".

I think that is still true today. It might be healthy for everyone to go through some poverty in their life to appreciate what matters the most.

Duncan McGeary said...

Yeah, but Jeff.

They took my HELOC away!

My house was last appraised at 60% higher than my total owed, both mortgage and Heloc.

So why did they do it?

Because they could.

I also believe the middle class has been shrinking, or only holding their own by having two incomes and working harder.

RDC said...

Lets see they are "corporate bastards" because they make money off of loaning money to you, then they are "corporate bastards" because they stop loaning money to you.

They wouldn't be making money from making loans if people were not drunk on free credit.

As far as your comments about the too big to fail. Bear Sterns apparently wasn't because in the end they will nolonger exist as a separate entity. Who exactly was helped by the Fed action on Bear Sterns and who exactly was hurt. It certainly wasn't the shareholders (who lost 2/3's of their investment over night), it certainly wasn't the employees of which half are now unemployeed, those that remain get most of their salary in bonuses (in Wall Street it is not unusual for 75% of your income to be in bonuses), most of them were also shareholders. So who exactly got helped out. The only group is those that were customers of Bear Sterns. Who exactly was hurt. Certainly wasn't the taxpayer. The Fed expects to make a profit on the transaction. So what exactly is behind your too big to fail comment.


You also talk about the banks taking the houses bank like someone is making them whole on their losses. Which is baloney. They have and are continuing to write off billions. In the end the CDO's and the other paper that has been devalued so much, is actually worth more then current value for someone that is able to buy and hold. The problem is that banks are dependent upon the velocity of money passing through their hands.

If you really want to start seeing the wheels come of then start passing laws that freeze forclosures or allow the loan terms to be changed in bankruptcy. Then you will start seeing home credit rates in the same range as credit card rates where such actions can occur. In those circumstances secured debt basically becomes unsecured debt.

RDC said...

Duncan,

And how exactly does they taking your Heloc away turn into a

"I also believe the middle class has been shrinking, or only holding their own by having two incomes and working harder."

arguement. Are you trying to say that them loaning money to you somehow makes to better off?

If anything locking down and making credit harder to get might just make more people better off. Borrowing costs you money, it makes the things you buy more expensive. If anything the middle calse is in the fix it is in because it has stopped saving and is trying to support a lifestyle, by borrowing that it just plane can not, and never in the past could afford.

You have people that are middle class feeling that they must live a lifestyle, and are failing if they don't, that consists of things that were never "middle class". Borrow to go to the expensive college, borrow to buy a new care, borrow because we have to get the things in our twneties that our parents took much of their lives to get. The difference is that they saved and purchased when they could afford it, today it is gotten on credit.

You talk about them shutting down your Heloc because they could, we get up to our eyeballs in debt because we can borrow, and we would be if far better shape if we had to justify the value of what we were borrowing for.

Go find another Heloc. join a credit union and get one from there. You are probably better off if you don't.

Duncan McGeary said...

You're right, they're bastards either way....

They're corporate bastards for changing the rules in the middle of the game.

I borrowed from WaMu at 1.99 for six months, only to be informed that they could translate that into 37% if....in the fine print....I'm a day late on the garbage bill. That seems awfully predatory to me.

If I'm paying that card on time, why should the 1.99 change?

Or I borrowed money good faith on my Heloc. I have paid on time. The equity in my house -- an appraisal only 2 years ago by the same Countrywide, came in at 325k, and I currently owe 165k, and can you tell me that my house has dropped -- even in Bend -- by 50%?
(And by the way, most of that money was spent on home improvements -- decking and new stairs and such.)

Allowing investment banks, who usually leverage twice as much, to borrow funds the same as banks....

Changing back from marked to market.

Those are mid-stream rule changes that favor bigger entities.

Very little of the eased credit is trickling down to the consumer, it appears to me. Looks to me like the mortgages and banks are pocketing the difference, and not passing it along.

Are you seeing something different?

And the banks take a paper loss, but possession is nine/tenths the law and they own the house (plus whatever the foreclosed paid in interest and principle.)

RDC said...

A bank loses on average 40-50k on a foreclusre even during normal times. In this market the numbers are probably more like 100-200k.

They are not real estate investment companies, they are lenders.

As far as what you are calling paper losses. It is only a paper loss if the value returns to the original amount by the time they sell. The value on the books is probably the best value they will receive, because they have to keep money flowing.

As far as your Heloc, they did not call any outstanding amount immediately due did they? All they did was not being willing to allow new withdrawals. That is not fine print that is a standard provision of any Heloc. The reason why they are stopping Helocs is becuase they are second to the primary mortgage. As such if a house goes into foreclosure the Heloc holder is generally left with nothing, because the primary mortgage holder is in general not getting full amount owed. As a result, that coupled with the credit crunch means that helocs are among the first to go.

Don't like the terms then don't use the product. Things are just that simple. Don't use a card that has that as its business practices and if you do because you like the 1.99% (i.e. you are getting value for the very low interest rates), then stick by the terms. It seems like you want the benefits, the below market value interest rate, but don't like the terms that accompany it.

Now I am in favor of putting the old usuary laws back on the books which basically caps interest rates and fees to around 12%. Under those rules you only got credit if you had a good credit history and if you lost it you lost the ability to borrow. Those used to be in place in many states. Guess what people wanted them removed because when they were in place the credit card companies were much tighter about their credit.

Duncan McGeary said...

"Now I am in favor of putting the old usuary laws back on the books which basically caps interest rates and fees to around 12%. Under those rules you only got credit if you had a good credit history and if you lost it you lost the ability to borrow."

Agreed.

Jason said...

Nah, it doesn't snow here in Bend does it?