Divided We Fall

Anyone who has read any of my writing knows that I did not vote for Barack Obama. In fact, I have probably dedicated a fair amount of writing to why I oppose him. Most of that writing focused on the policies and plans that he has for our country for the next four years. His big government spending proposals are either a lot of hot air because he won’t be able to implement them or if he does manage to implement them he will end up bankrupting our country. As has been stated numerous times, we can’t expect that spending more money to fix things is going to solve the problem. That is a large part of Barack Obama’s plan. The problem is that we don’t have any money to spend. Even today, after the election, I stand by every word that I wrote. I still don’t believe that big government is the answer. I am of the mind that if we really want change in this country, the baby steps that we are taking are not the way to go. Let’s jump right in and make some real, drastic changes. I cast my vote for this kind of real policy change. Barack Obama does not support drastic policy changes in Washington and that is the reason that I could not vote for him.

I was, however, as proud as any American when I watched his acceptance speech. I knew that I was witnessing change of a different variety. It wasn’t the policy change that I wanted, but it was a change in tone. It was a change in our attitude about the country and of the attitudes of both our allies and those that oppose us around the world. In his capacity to be an inspiration to the world, Barack Obama is the right man for the job. In his acceptance speech, he set the tone that divisiveness was a thing of the past and that we would finally have a leader that listened to the people. This is something that we need right now. Our elected officials have forgotten that this is not their government. This is OUR government and we give them to privilege to represent us in the halls of Congress. Obama echoed this when he stated that this election “proved that more than two centuries later, a government of the people, by the people and for the people has not perished from this Earth. This victory is yours.” Whether the tone of unity will turn into anything concrete, I admit, I’m still a skeptic. Only time will tell. I was, however, struck by the conviction in Obama’s voice I knew when he said it, that he meant it.

Obama also changed the tone of our country during his speech from one of sheltered absurdity of Bush to an open minded realism. He acknowledged that “the challenges that tomorrow will bring are the greatest of our lifetime – two wars, a planet in peril, the worst financial crisis in a century” but veiled the harsh reality of our current situation with what we really need right now above all else: hope.

The overarching message of Obama’s speech was one of unification. He spoke about working with McCain, ending the divisiveness of Washington, working together to fix the problems of the country, and working with our allies around the world to once again regain their trust. The most important part of Obama’s speech for me personally was one that, I admit, made me a bit emotional. In fact, it has made me emotional every time that I’ve heard or read it since last night. Obama spoke to me: “And to those Americans whose support I have yet to earn – I may not have won your vote, but I hear your voices, I need your help, and I will be your President too.” This quote, above all others in his entire speech convinced me that I should support Barack Obama because, even though I disagree with him vehemently on policy matters, I agree with his direction on the tone of our country and I am ecstatic that he cares about listening to people like me who disagree with him. That is the mark of a real leader.

Even though I did not vote for Barack Obama, I support him. Obama said it best: “We proved once more that the true strength of our nation comes not from our the might of our arms or the scale of our wealth, but from the enduring power of our ideals: democracy, liberty, opportunity, and unyielding hope.” In that, I finally agree with Barack Obama and he has my trust to lead our nation.

A Dream Fulfilled?

“I have a dream that one day my four little children will live in a nation where they will not be judged by the color of their skin but by the content of their character. I have a dream today.”

These are some of the most powerful and well known words from Dr. Martin Luther King Jr.’s “I Have a Dream” speech . I’ve seen a lot of T-shirts and pins that have MLK’s picture on them next to the phrase “I have a dream…” and Barack Obama’s picture next to a phrase that says “…that change is gonna come” or “a dream fulfilled” or some other phrase that connects these two prominent individuals. The implication is that Barack Obama’s inevitable ascension to the presidency represents Dr. King’s dream fulfilled. In some ways, I’m compelled to agree with this notion. The fact that United States is 13% Black but Obama is polling around 55-60% of the population shows that there are many non-black voters that are judging Obama on the content of his character. Many voters see Obama like they see any other candidate and there is polling to back up the fact that many Americans are more concerned about the economy or the war then the color of the candidate’s skin. Obviously, it will be a historic election when (not if) he is elected tomorrow. After 43 white Christian presidents, Obama will definitely embody change.

(Disclaimer: I know that the statements that follow will ruffle some feathers. Race is still a touchy subject in this country. It’s been about 150 years since the end of the Civil War and I’d agree with anyone that said that we are still a divided country. Race still matters. I’m sure that the fact that I’m white makes me one of the least qualified individuals to be making any statements about race, however, I feel compelled to do so anyway. I was born and raised in diverse places, have an ethnically diverse group of friends and teach in a a school that is about 95 % black. I leave it to you, the reader, to make your own judgments about my credibility and credentials as commentator on this subject. )

I’ve been a bit disheartened by the blind support that many black voters have towards Obama. What makes me question whether Barack Obama is a “dream fulfilled” is that polling has shown that black voters have consistently polled around 90% in favor of Obama. (A recent Gallup poll from Oct 27-Nov 2 had non-Hispanic black voters favoring Obama 91% to 3% for McCain with the rest split between undecided and third party candidates.). To me, this is proof positive that many black voters are voting for Obama based on the color of his skin, not the content of his character and this is contrary to Dr. King’s dream. I’m sure that black voters are much more diverse in their political preferences then these polls are indicating. Is this really Dr. King’s dream fulfilled? I would argue that, while electing a black man to the presidency is a step in the right direction, we’re not there yet.

I’m not naive. I understand the importance of Obama’s election towards truly unifying our country. I understand how important it is for black Americans, who have been fighting oppression 50 years after the law officially stated that all things should be equal, to have one of their own ascend to highest office in the nation. I’ve seen my 14 year old students get all riled up when someone even implies that anybody by Obama is an option. It’s an important milestone for our country. It just feels like such an empty victory because of this blind support. I can’t read Dr. King’s famous words “they will not be judged by the color of their skin but by the content of their character.” and say that tomorrow his dream will be fulfilled.

The Fair Tax

It’s been a while, hasn’t it? I actually half wrote a bunch of stuff but then I got distracted by shiny objects and never got back to them. Most of them are slightly out of date now so I just moved on. I have a smidgen of time right now so I figured I’d give this a shot again. I guess this really shows how a 30 day challenge can really push you to excel. I might have to reissue my challenge so I can get back to writing more frequently.

What I wanted to talk about today has to do with our current economic situation. Anyone with a house or an IRA can tell you that things aren’t going so well. Credit is still scarce and investors are taking their money out of corporate investments. The jobless rate is climbing as companies cut costs to stay afloat through these times. Heck, even Arnold Schwarzenegger had to ask for money because California is doing so bad. Not to sound all Barack Obama-y on you, but it’s obvious that we need change. Not just throwing money at the problem like we’ve seen in these “bailouts” (I think it’s funny that they use the word bailout. That’s what people do to try to save a sinking ship.), but real, drastic change to the way we do things. These kinds of changes should be well thought out and have the goal of not just helping us tread water for a few years, but bring our economy back to productivity. If only someone locked the country’s top economists in a room and told them to come up with a great new plan to expand our economy.   Oh, that’s right, they did.

The Fair Tax is a plan to completely revamp how the government collects taxes from its citizens. The current tax code is wasteful and complicated. As of 2006, the tax code contains more then 16,000 pages and is nearly 7 times larger then the Bible. You can actually order all 20 volumes for a mere $974. The tax code was “simplified” in the mid 1980s and there have since been thousands upon thousands of revisions and addendums.  The Fair Tax takes all of that tax code and uses it as a paper weight.

Right now, each person who has a job pays taxes on their income. You pay 3 main taxes at the federal level. There is the Federal income tax, the Social Security tax, and the Medicare tax. The government takes all of this from you before you ever get your check. You don’t PAY taxes. You have them taken from you. This makes no sense because we are taxing productivity. We are, as a nation, saying that if you are successful and productive (and thus make more money) that you should pay more taxes. What’s the incentive to push yourself further if the government is going to take more of your money?  The Fair Tax will remove all taxes on your income and you will receive 100% of the money that you earn each week in your paycheck. I’ll bet that since the government takes your money before you get it, you probably don’t even know how much you make a week. You just know what the government lets you take home (that sounds absurd, doesn’t it?) A nice side effect of removing this income tax is that you will not have to file an income tax return and there will be no need for the IRS, so you can never get audited and you won’t need your accountant to figure out your taxes for you. April 15^th will just be another beautiful Spring day. Sounds like a perfect world right?

I’m sure you’re wondering how the government will be collecting money from you. First of all, let’s point out that the Fair Tax will NOT change the amount of government takes in in revenue, it will simply change the method of collecting it. The tax will be placed on the goods you purchase instead of the money you make. (This is referred to as a consumption tax) Why is this more fair? Simple. You now have the CHOICE of paying the tax. If you don’t want to pay the tax, don’t buy the merchandise. The tax rate will be 23% and will be a tax on all new goods and services. (Don’t have a heart attack. I’ll explain in a bit why the 23% isn’t going to change anything) This means that you will not be taxed on any goods that are sold used (like stuff on Ebay or even a house that isn’t brand new.) You will also be taxed on services like going to the doctor. The Fair tax doesn’t give anyone, even doctors, special treatment or exemption. Even the government itself has to pay the tax on new goods or services that it purchases.

It must be noted that there are two figures floating around.  Some people use 23% while others use 30%, but these are really different measures of the same thing.  The 23% that we’re using is called the inclusive method where we say that a $1 purchase has 23 cents of tax and 77 cents of production charges.  The 30% is an exclusive charge which means that they’re saying that we start with 77 cents and to get to a dollar, we have to add a 30% tax onto that (which is about 23 cents).  Either way, it’s a dollar.

Let’s look at an example of how a consumption tax would work and why it’s better then what we’re doing now:

Tomorrow, we decide to move to the Fair Tax. This means right away that at the end of my work week, instead of getting about $625, I’ll now be receiving about $1000. That’s an additional $375 per week that I can use to purchase goods and services. Also, the cost of most goods will go DOWN. Yes, I said that right.  DOWN. How are costs going DOWN if we’re adding this huge tax to them? Well, you don’t know it, but about 20% to 25% of the cost of all the goods you already buy are actually taxes because corporations have to pay taxes as well (which will be removed under a Fair Tax) and they pass along those taxes to you in the cost of their goods. As we remove the taxes on corporations (currently the second highest in the world) their costs will go down and they will pass that along to you. I’m sure you’re now thinking “Those greedy corporations will just pocket the extra money as profit and the cost won’t come down.” What will end up happening is that one corporation will see the tax removal as a chance to gain a market edge over the competition and they will lower their prices slightly. Everyone else will follow suit and this will continue until it would not make sense to continue because there would be too little profit left on the product.

So you now have all of this extra money and costs will go down by about 23 cents for every dollar you spend. The government will then tack the consumption tax of 23% onto your purchase will bring it right back to where it is today. So you have extra money and you still pay what you’re paying today for goods and services. Let me be quite clear about this. There will be a 23% tax on all new goods and services but you will NOT PAY ANY MORE then you are paying now because the embedded corporate taxes and the new consumption tax will virtually cancel each other out.  As a couple of quick notes, you will probably end up paying more for services like the doctor, but we’ll get to how that will be taken care of.

Here’s what it looks like:

Today: You buy a pack of gum for $1 = $.77 of actual corporate charges and profits + $.23 of embedded corporate taxes that you don’t realize you’re spending

After the Fair Tax: You buy a pack of gum $1 = $.77 of actual corporate charges and profits + $.23 of consumption (aka Fair) tax that will be written right on your receipt.

So where will all the extra money come from?

Think about all the rich people that have tax havens for all of their money. Think of all of the gangs that don’t pay taxes on all of their illegal drug sales. Think of all of the off the books illegal immigrants in the country that don’t pay a dime of taxes. All of these people will be paying their fair share. All of these people need to buy goods and services, so there’s no way around it.  The Fair Tax is fair because it makes EVERYONE pay their taxes.  When these people dodge their tax burden, it doesn’t just not get paid, YOU pay for it in your taxes.

The Fair tax is, as its name implies, pretty fair. It’s authors believe that you should not be taxed on any goods or services that are essential to your survival. Thus, you will also get a check every month called a prebate that will be equal to 23% of the current income level that is designated as the poverty line for your family. It will be as low as a few hundred dollars for a single person to a few thousand dollars for a large family. I’ll state this again. You’ll get this check EVERY MONTH. This is basically a government refund for all of the goods that you purchased that were essential for your survival. Why don’t they just remove these taxes on “essential” goods? Again, the idea is to treat everyone equally. It gets around the need to deem certain goods or services as “essential” and give them special tags. I mean, what really is essential?  This is the fairest way so that no particular industry gets special treatment.

So quick summary: Under the Fair Tax, you’ll get your entire pay check, you pay the same amount you are now for goods and services, and you get a check at the beginning of every month. How else can it help?

Corporations currently pay a 35% tax in this country. It’s way higher then other places around the world, which is why all of our corporations are moving their base of operation overseas. Why pay 35% tax when you could be paying 10%. If we remove the corporate tax completely, the big corporations that have fled for lower taxes will come back and set up operations in this country because we’ll have 0% tax and that’s a significant savings. This means more jobs for our economy, which means more wealth in this country, which means people will purchase more goods and the government can collect even more taxes. The Fair Tax can get us out of this slump and back towards growth and expansion. Many economists believe that the impact will be significant.

So why hasn’t a system as good as this been enacted? Two words: Lies and Lobbyists. There are literally thousands of poweful lobbyists in Washington whose sole job is to represent companies and large interest groups in order to get them special privileged status under our current tax system. All of these highly influential people will be out of a job. They like their jobs, so they are trying to keep the status quo. They are telling both politicians and their constituents that the consumption tax is IN ADDITION to the current cost of goods, which we’ve already seen is untrue. They also argue that the tax is an unfair burden on the poor because they will be paying taxes when they are not receiving much income. (Under the current system they pay no income tax). These lobbyists fail to mention the prebate which will give EVERYONE (not just the poor) back the taxes that they paid on goods and services up to the poverty line.

Politicians also like their jobs. They don’t like to make waves because anything radical like this can upset people. This is where you and I come in. There is currently a bill in the US Congress called HR25, the Fair Tax bill, that will do just what I’ve described here. It has never made it to a vote because right now it won’t pass. These lies about prices rising and the poor losing out are making politicians hesitant about voting for it, even as hoards of top economists are touting it’s benefit to our economy. If there was ever a time to do this, it’s now, when our economy is in need of a jolt.

Call your congressional representatives and tell them that you support the Fair Tax. The more people that let them know, the more likely they will be to support it. Also, visit www.fairtax.org which helps to educate the masses about the bill’s progress and the concept itself. Finally, pick up a copy of the book The Fair Tax by Neil Boortz. It was a very educational read about this kind of tax system and explains it in much more detail. It’s also a short read at about 130 pages.

You want change? Don’t rely on the next president to do it for you. Make a quick call or write a short email and take that change into your own hands.

VP debate moderator did NOT write a book about Obama; Sean Hannity is a partisan hack

A story broke earlier today about the moderator of the VP debate tomorrow. Here’s excerpt over the supposed controversy from Politico.com via Yahoo! News:

“Michelle Malkin and World Net Daily have made a lot of noise today about the fact the Gwen Ifill, the moderator of Thursday’s VP debate, has a new book coming on Inauguration day about Barack Obama and the politics of race –  it’s now leading on the front of Drudge.

Fox’s Greta Van Susteren reports that the McCain campaign didn’t know about it.
“I am stunned….the campaign (actually both) should have been told before the campaign agreed to have her moderate. It simply is not fair — in law, this would create a mistrial.”

On my way to the bank today, I was listening to right wing pundit Sean Hannity. I don’t necessarily always agree with the man, but I like to hear as many perspectives on an issue as I can. He was harping on this story for no less than a half an hour. He eventually started taking calls from listeners. One listener called in and stated that the media reports were incorrect. The book was NOT about Obama. Hannity did not let the man get in a complete sentence to explain why he believed that the book wasn’t about Obama. Anytime the caller was about to explain what the book was about, Hannity cut him off and kept repeating the subtitle of the book “Politics and Race in the Age of Obama.” He then read part of the description from Amazon.com:

In THE BREAKTHROUGH, veteran journalist Gwen Ifill surveys the American political landscape, shedding new light on the impact of Barack Obama’s stunning presidential campaign…

The caller asked Hannity to finish the sentence at which time Hannity cut him off three or four more times and then hung up on him. I was disgusted at this blatantly one sided attack on the truth. Hannity claims to be “Fair and Balanced” and part of the alternative media that seeks only the truth. Here’s the truth via the ENTIRE book description that Hannity so conveniently left out:

In THE BREAKTHROUGH, veteran journalist Gwen Ifill surveys the American political landscape, shedding new light on the impact of Barack Obama’s stunning presidential campaign and introducing the emerging young African American politicians forging a bold new path to political power.

Ifill argues that the Black political structure formed during the Civil Rights movement is giving way to a generation of men and women who are the direct beneficiaries of the struggles of the 1960s. She offers incisive, detailed profiles of such prominent leaders as Newark Mayor Cory Booker, Massachusetts Governor Deval Patrick, and U.S. Congressman Artur Davis of Alabama, and also covers up-and-coming figures from across the nation. Drawing on interviews with power brokers like Senator Obama, former Secretary of State Colin Powell, Vernon Jordan, the Reverend Jesse Jackson, and many others, as well as her own razor-sharp observations and analysis of such issues as generational conflict and the “black enough” conundrum, Ifill shows why this is a pivotal moment in American history.

The book is about the shifting political scene and the rise of black politicians.  Just because Barrack Obama is the most prominent of these politicians does not mean that Gwen Ifill is not qualified or dignified enough to moderate a VP debate fairly

The bailout: A band-aid, not a cure

Here is a short excerpt from an article that I read recently entitled Seeking Relief from a Massive Migraine:

“The U.S. is afflicted by a massive economic migraine, and more than 200 million Americans know too well just how much it hurts. Their incomes, savings and life-styles are being assailed by a whole group of aches and pains… The stock market has scarcely been so shaky since 1929. Just about everybody who buys, sells, borrows or invests has that overall feeling of unease. And there is no fast, fast relief in sight.”

Sounds familiar, right? I’m sure we’ve all read about a hundred articles like this in recent days and weeks. Here’s another from an article entitled “I Feel a Lot Poorer Today”

“Bernice Garelick, 60, had felt sure that her husband Elias, a dentist, could retire in a few years and spend more time with her. But the crash shook her confidence. The Lindenhurst, N.Y., couple watched helplessly last week as their $300,000 portfolio of stocks sank in value by 20%. Said Bernice: “We have been investing in the market for 22 years. Now this happens, and it threatens what you have worked for over a lifetime.””

These are really great snapshots of our horrible financial situation. The problem is, they’re not from our current financial situation at all. The first article is from a Time Magazine article dated September 09, 1974. The second article is from Time as well, dated November 02, 1987. It took me about 4 minutes of searching to find these scenarios and I found them from a list of about 10 pages of them.

I know what you’re thinking. “Dave, the economy is cyclical and these things happen. It’s just the nature of the beast.” I agree with this. I just wonder, does it have to be? I’ve been following the god-sent bailout package and I’m not impressed at all by it. It’s a band-aid that’s covering the real problem. We’re combating symptoms of a bad economy instead of looking for the cause of the illness. Clearing out the clogged up credit market and then not doing anything to change the gorging that’s going on in our economy is just going to lead to this all over again and once again cost taxpayers money and purchasing power to fix it. Why are we not trying to fix the problem instead of playing the reactionary game that we keep playing every ten years when the economy goes under?

This bailout is a perfect example of the problem that we face. The federal government wields tremendous influence over the “free” market. A big part of the problem comes from this government meddling. So what’s the answer? More government meddling, of course. If this crisis did not a month before the election of about 40 members of the house who voted no to save themselves politically, this bill would have passed and everyone would have hailed it as a savior. Maybe the markets would have gotten better and we’d forget about all this fear. The problem would have never gotten addressed. It keeps happening and we should use this rejection of the bailout bill to slow ourselves down and try to attack the cause of our economic issues instead of just reacting to a crisis by throwing money at it.

The Senate is set to vote tonight on a revision of the House bailout plan that will be basically the same thing but with a few adjustments to get the votes that they think they need. The bill will contain renewable energy tax incentives, relief from the Alternate Minimum Tax, a provision that would require health insurance companies to cover mental illness at parity with physical illness, and an increase in the FDIC insurance on bank accounts from $100,000 to $250,000. In essence, nothing that has anything to do with fixing the economy. It’s just throwing a bunch of stuff in to make people who voted no vote yes because a provision that they like is in there. How many average Americans do you think have over $100,000 in a savings account right now? Raising the insurance payout limit doesn’t help anyone. It’s all smoke an mirrors to make us think that Washington has any idea what they’re doing.

Call your representative in the Senate and tell them to vote NO on the bailout bill and to come up with a REAL solution to our economic problems.

The government is stealing your beer!

I heard that the House voted against the bailout package and I was pretty shocked, as I think everyone was. Congressional leaders were hyping this up to be a done deal over the weekend and it seemed all but inevitable that it was going to pass. Wall Street was definitely caught off guard because the rescue that they thought they were going to get didn’t happen. That caused the Dow Jones to plunge almost 800 points. It’s fun time to like economics and a bad time for pretty much anything else.

After the initial shock wore off (having to teach 30 14 year olds Algebra will make you move on pretty quickly) I started thinking about whether or not this was a bad thing or a good thing. The bailout plan was created to clear out the illiquid securities that were clogging up the arteries of the financial sector (figuratively speaking of course, it’s just plain diner hamburger cholesterol if we’re speaking literally). By removing these assets, it was thought that banks would once again be willing to offer credit and thus help out “Main Street” (aka you and I). There was a possibility that maybe we’d break even or make a little money if we can resell these assets in a few years. Maybe it won’t be that bad, right?

Then I got to thinking. Would a recession really be such a bad thing? I know what you’re thinking. I’ve had one too many sniffs of those sweet smelling scented markers. I’m serious. I wrote earlier today about how we’ve all been living well beyond our means. We’ve been spending on credit for years both at the federal level and the personal level. Eventually, those bills always come due. Now is that eventually. So any way we look at it, we’re going to have a rough few years recovering from this. The way I see it, if we bailout all of these banks with tax payer dollars, it’s setting us up to repeat this cycle down the road. The financial institutions will be more likely to do this again if they knew that the government would be there to help them out when it all melts down. As long as these investors have their big bonuses and the government is going to help out, there’s no reason for this to stop. So let’s let them fail. Let’s suffer through slightly harder economic times right now and save the next generation the pain later. Let’s teach ourselves how to live within our means and stop relying on credit to purchase beyond our means. Ron Paul uses the metaphor in interviews that these bailouts are like another hit for an addict. The hit is going to make the addict feel good for a little while, but it doesn’t address the problem that he’s an addict. It’s a long and painful process for an addict to clean up.

If we let the government bail out these financial corporations, it’s going to be the middle class and the poor that suffer. Not only is $700 billion dollars (a conservative estimate) going to inflate the debt and cost us interest charges for years down the road, but it’s going to cause inflation in the short term. I don’t think that a lot of people have a firm grasp on exactly what inflation is or what it does in terms of the money you have. In essence, inflation is an accidental (or maybe not) tax on all the money you have. When we speak about inflation, what’s inflating is the amount of money in the system. It happens when we print money.

Let me give you a simplified example of how this, in essence, transfers wealth from you and I and into the hands of the corporations.

Let’s say for simplicity’s sake that there is $1 in all the world and you own it and that there are 5 of the exact same good, let’s say pints of beer (mmm, beer). Simple math would dictate that each of these beers (mmm, beer) has a value of 20 cents (that $1 divided into 5 parts) and you’d be able to buy all 5 beers (mmm, 5 beers). If I were to then inflate the money supply and create 4 new one dollar bills out of thin air and give them to other people, then the market is going to adjust to this increase in money supply by increasing the price for their beer (sometimes referred to as the end of happy hour). So now we have $5 in money and 5 beers in the world (a crisis all its own), so each beer has a value $1. You didn’t get any of that new money, so while your actual dollar holdings hasn’t changed, your purchasing power has. Instead of being able to buy all 5 beers, you can now only purchase one (insert sad face here). You kept the same amount of money, but now it buys less, which makes you poorer. The government has taken some of your purchasing power and handed it over to someone else. The government has taken your beer! I’m sure you hate inflation now.

Back to more serious, less beer related talk, inflation is a tax any way you look at it. The reason that this hurts the poor and middle class is because prices go up before salaries do. This means that you and I are going to pay for inflation adjusted prices for goods without inflation adjusted salaries.

So I say, let the banks fail. Let’s all suffer together and learn to adjust our spending habits for a few hard years. We’ll be better in the long term for letting it happen.

“Banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” Thomas Jefferson

Living within our means

(Note: I started writing this before I heard about the economic bailout failing the House vote, I’ll write about that separately shortly)

I’m still stuck on the whole economic situation. I watched the debate on Friday and it didn’t impress me enough to bother writing about it. My one sentence response to the debate is this: They said a whole lot without really saying anything. It’s just not worth a whole post to break that down.

I’ve been thinking a lot about how this economic downturn (or if you’re in the media and you want to scare everyone, we can call it a CRISIS or a CRASH!) will effect the way we act as regular, everyday citizens. The way I see it, it’s going to be a major adjustment in lifestyle for a lot of people, especially those that are in my generation (the 20-30 year olds).

Most of the problems that we’ve been running to are due to the illusion of wealth that we’ve created for ourselves. I’m a part of this. I own a 37” LCD Hi-Def TV, an $800 camera, a $1600 laptop, well over a thousand dollars in video game hardware and software, I go on trips that I can’t afford…. I could go on. I’m a teacher so I certainly don’t make the money necessary to make these kinds of purchases like I have. I use my credit and pay it off over time. This is the illusion of wealth.

For the last few decades, we’ve been living backwards. Instead of saving to buy that TV, we’re buying that TV and then paying for it (with interest) over time. Instead of putting 20% down on a home and having good credit, we’re maxing out credit cards and putting nothing down on a home we can’t afford.

The federal government is no different. Prior to the 1930s, our monetary system adhered to the gold standard. What this meant was that, at any time, you could exchange $20.67 in US dollars for one ounce of gold. This was important for a couple of reasons. First, it meant that people had confidence in their money. They knew that they’d be able to use its purchasing power later. That’s because gold is a valuable commodity anywhere, so if the dollar were to be devalued, you could exchange it for something of value and still have purchasing power. The second reason that the gold standard was useful was that it stopped the government from printing new money and running up a deficit. In essence, the bailouts that we’re seeing now and the entire war in Iraq (plus more on top of that) are funded by money that we don’t have. But since the government prints the money, it can just either print new money or just borrow some from a foreign country. On the gold standard, the government could only print money if they acquired enough gold (aka they could print a $20 bill for every 1 oz of gold that they had on hand… no gold, no printing). After we dropped this standard, the government has been running up its credit the same way that a lot of Americans are right now.

This economic downturn is the market (which I really think is a living creature) telling us that we (both the government and its people) need to stop. We need to stop buying on credit except in real emergencies or to buy a house or car that we know we can afford to pay for comfortably over time. If we want something nice like a new TV or a nice trip, we need to plan in advance and save for it. It’s not going to be easy to do this, especially for my generation. We’ve been raised in an era of loose credit where doing this was ok. I liken it to the problems that we see with peoples’ diets. Many people try to lose weight but can’t because it’s so difficult to change the things we eat and drink. We’ve been eating and drink those things are entire lives. I found out that the only way to truly lose weight and keep it off is to change your whole perspective on eating. You have to change your lifestyle. You need to stop fooling yourself into thinking that you can keep eating whatever you want and there aren’t going to be consequences. Only after you are at peace with this idea can you really begin to change your lifestyle and head down the path that you want. Credit addiction is no different.

In addition to the major purchases that I already talked about, I used to use my credit cards for almost everything. It was as much a convenience thing as it was that I wanted stuff, but it created a false sense of wealth for me. I had a $3000 limit and I always thought that I’d just buy now and pay for it out of my next paycheck when my credit card bill game in.  The only problem was that I said that about too many things and I couldn’t cover the whole balance.   I’ve been starting to ween myself off of using credit cards. It’s tough when you have very little in your savings accounts to pay for things instead of relying on credit. You still need to be able to operate on a day to day basis. You still need to be able to buy food, groceries, and happy hour beer (I swear, it’s a necessity), so in the short term, you will have to rely on your credit to stay afloat. The goal is that you use your credit less and transfer the savings into paying down your debt.

The way that I’ve been handling it is to purchase everything on my debit card. I know, roughly, how much money I have in my bank account. (use Quicken or Microsoft Money to track your finances) All the small purchases, like a sandwich or a coffee never end up on my credit card. That really adds up. Also, I have to be a little thriftier with my spending because I don’t want to empty my bank account. It’s caused me to second guess a purchase when I’m in the store. I only rely on my credit cards right before my next paycheck to have that small bridge, if I need it.

I’ve found that I’m saving a little more money each month and my credit cards are going towards zero. It’s definitely not a short process to make this adjustment. You can’t, as they say, quit cold turkey. I’ve been doing this for about 6 weeks and I don’t know if I’m halfway to my goal yet.  The idea is that you will slowly remove your dependence on credit and live a savings and cash life style. You have to plan in advance if you want to go on a trip and save a little extra money each month. You might have to join the Christmas club at your bank, but in the end, you’ll be living a lifestyle that suits your income and your means and you’ll removing the stress that debt can place on a person.

I don’t think that I’ll cut my credit cards in half when I pay them down to zero, but my perspective has definitely changed. I’m much more willing to shun off things that I think I need because I don’t want to use my credit card. I don’t have the cash, it can wait a month.

I’m willing to bet that in 5 to 10 years, this will be the default perspective once again.

This explains a lot

New Site Design

As you can see, the site has been completely redesigned and renamed.  Since I’m no longer using this as my thirty day challenge, the title was no longer appropriate.  I changed the name to “The Butterfly Effect” because I thought it was appropriate for what I’m trying to do.  I don’t really promote this blog, except to let my friends know when it’s been updated via myspace or facebook.  My hope is that the small amount of knowledge that the 20-30 page views that I get per posting conveys will have a ripple effect.  The butterfly effect is actually a mathematical situation.  It basically says that if you make even a minute change in the starting conditions of some scenario, it can have a tremendous impact down the road.   That’s the expectation that I have.  I hope that I can help inform my 20-30 readers, who will then spread that knowedge or act upon it in their own life.  Maybe I’ll change a few perspectives of people who will then change a few perspectives.

So welcome to The Butterfly Effect.  Change you can really believe in.   (Hey, everyone else is using it)

Ignorance is Bliss

I’m sure a lot of people have been reading about the financial crisis that’s hitting Wall Street in the past few weeks. There’s talk about bankruptcies and bailouts and the worst financial meltdown since the Great Depression. I’m typically pretty good at removing the media hype from a situation like this and finding out the real facts. I’ve been quiet for the past week or so because I’ve really be trying to understand what’s going on and if it’s as severe as the media is hyping it up to be. It’s such a complicated matter, looking at all the causes that got us here, their effects on the economy, the reactions from the government and Wall Street, and the effects of the government actions on the economy, the financial sector, and citizens. As far as I’ve been able to discern in my week of reading, I can say this: it is definitely at least as bad as you’re hearing it is. In fact, it may be worse because the media is too short sighted to talk about how this effects us in a year or five years.

Let me see if I can briefly and clearly describe what happened. (I doubt this is going to be brief)

The whole downturn of the system started about 2 years ago when the housing market started going under. Big lenders were giving out loans to people who were hardly qualified to take them on or pay them back. In the lenders’ eyes, if the people defaulted on their loans, they still have the house as collateral and with the long trend of upward housing prices, they’d at least make back their money, if not turn a profit. The assumption was that housing prices would continue to rise. These risky loans are what you hear about when they talk about “subprime” mortgages. Subprime sounds nicer then “risky.” Eventually, prices of homes did start to come down and these subprime borrowers started to default on the loans in large numbers which caused the banks to begin to fail. I believe that so far we’ve seen 9 major consumer banks go under because of this.

So the question is, why was this money being given out so freely? There are a few reasons. First, the government helped to keep interest rates artificially low, which makes it easier for banks to get money and give it away. Also, the government pushed through regulations on banks that basically said that they need to offer loans to a wider group of people under the “everyone should own a home” initiatives of the early part of this decade. Essentially, the banks couldn’t say no to some people that they would have deemed too risky in the past. Third, there was no fear of lending because of the previously stated perpetual upward trend in the housing market.

The decline of these mortgages caused a domino effect in the financial industry because everyone had their hand in the pot of what seemed to be an endless supply of profits. Little known to most people, mortgages are bought and sold all the time. These troublesome subprime mortgages were cut up and repackaged into what are called securities. Investment banks and Wall Street firms purchase these securities all the time as a part of diversifying their investment strategy. These particular securities that they were buying and selling were very exotic in nature, being a complicated mix of a bunch of different parts of different mortgages. Thus, even the smartest of economists don’t really know what they’re worth. When the subprime market started to go under, all the banks shut down their credit, even to other banks (banks exchange cash all the time). The big investment banks, like Bear Sterns, had a problem in that they had no liquid assets. This means that they had plenty of money, but it was tied up in these exotic securities. When the housing market went under, no one wanted to buy them anymore because no one could figure out what they were worth.

Ok, everyone breathe, we’re getting there.

Next question: How does having your money tied up in these housing securities make an investment company go under? There are credit rating agencies that give grades to banks based on their assets. The two major ones are Moody’s and S&P. When these credit rating agencies downgrade a bank’s credit grade, it requires the bank to post a higher collateral on their debt assets. As an example, if you’re rating was an E, you might have to post $1 on a $100 debt, but if I lower your rating to a D+, you might have to post $5 instead. Because these investment banks had all of their money tied up in these securities that no one wanted to buy, the credit agencies lowered their rating and the banks didn’t have the extra collateral to post to cover the lower rating. This is what got Bear Sterns and AIG (more on them in a sec).

Fannie Mae and Freddie Mac are federally backed mortgage companies. This means that if a loan defaults through one of these companies, the government will back them up and make sure that they get paid. During this time of loose spending, these two companies backed up some $5.4 trillion (yes, trillion with a t) in mortgage debt and, when they couldn’t keep up with the defaults, were taken over by the government.

AIG is the world’s largest insurance company. Their situation was a little different. They offered an insurance plan to the people that were buying all of the wacky mortgage securities. (It’s called a credit default swap if you care). In essence, this insurance said that if there was a default on the mortgage, AIG would make sure that the investor didn’t lose money. AIG got a premium every month for this guarantee, kind of like what you do for your car, but in obviously larger payments. When the defaults got crazy, AIG couldn’t keep up with the payments to people who lost money and went under. Think of it like if you were Geico and all of sudden, every one of your customers got into a major accident in the same day. You’d be hard pressed to come up with enough cash to pay out all of those claims. AIG has been given an $85 billion line of credit from the government to keep afloat in exchange for an 80% ownership stake in the company. So, in essence, the government owns the two largest mortgage companies and most of the largest insurance company in the world because of the whole mess. Talk about socialism.

As you can see, it’s a long, complicated mess that took me over a thousand words to briefly write about. I’m sure I’ve oversimplified things a lot to get it down to a thousand.

The big question that I’m sure a lot of people care about is: How does this effect me? The best answer that I’ve been able to gather so far is that it’s impossible to be sure right now. In the short term, it’ll be really hard to get a loan. With the shock to the financial system, banks are a little wary of giving away any money to anyone but the most reliable borrowers. If you want to buy a house, you’ll probably have to go back to the old days of having good credit and 20% down. (Fortunately, with housing prices readjusting down, 20% isn’t near as high as it used to be).

As a taxpayer, it’s a big waiting game right now. The bailout of Fannie Mae and Freddie Mac has the potential to be profitable in the long run since that debt could turn a profit in the same way it does for a mortgage company. The same goes for the money that we used as a bailout for AIG. There is, still, a huge sum of money that no one knows about because the major bailout package still isn’t through Congress. The bad part of this that in order to cover all of these bailouts, the government will need to print money. We didn’t have any money before the bailouts and now we’re looking at a ton of money that we need to come up with that we don’t have. This money printing causes inflation which will probably lead to higher prices for middle America and the poor.

From everything I’ve read, we haven’t seen the bottom of this yet. I guess it’s time for all of us to tighten up our spending and actually get back to saving and waiting for the mess to blow over in a few years. This knowledge definitely makes me fear the next few years. I guess what they say about ignorance is true. Knowing what’s really going on is the opposite of bliss.