Friday, February 6, 2009

Beware of Free Lunch

An e-mail this morning from Dan Hollister of Integrity Financial Resources makes promises for getting out of debt that at first blush sound interesting, interesting enough to perhaps be enticed to read his special report and sign up for his $49 CD that promises to show you how to get out of debt in 5-7 years? Not quite, because I've heard of Dan Hollister before and I long ago learned there is no such thing as a free lunch.

The main pitch of the e-mail says that "armed with the right information, you can be free" of the bonds of your mortgage much faster than previously thought, even with your current income. He tells about back in the 17th and 18th centuries many people who wanted to come to the new world couldn't afford the boat ride, so agreed to be indentured as servants, committing to work for someone for a few years in exchange for their passage. Often, however, they became further indebted and, in effect, became indentured servants for life.

I'm reminded of company store owned by the same people who operated the shingle mill where my Dad worked back in the 30's. The company store in a rural area stocked everything a family might need and offered credit to workers and their family. For many of the workers, by the time payday came around, all of their check might be owed. It became a vicious cycle.

It's not too different now, only we can blame easy credit through credit cards and for many it was the enticement of sub-prime mortgages that created what has become a calamity.

As Mr. Hollister says, if you dissect the word "mortgage", you get 'mort' from the Latin word "death" and 'gage', meaning 'pledge, so effectively a pledge to death. Mortgages typically are for 15 or 30 years, but lenders make it oh so easy to refinance for a new car, the new roof, remodeling, or the cruise you've always dreamed of. And now they've instituted the "reverse mortgage", so that the older person who may have paid off their mortgage or have substantial equity can borrow against their equity in the house, to be paid back with interest from the proceeds if and when the house is sold.

In an effort to understand this global financial crisis, I've been reading George Cooper's The Origin of Financial Crisis - trying to understand at any rate. The Economist says, this is "A must-read on the origins of the crisis." The trouble is you have to have a PhD in economics to really understand - if then.

I've concluded the cause is due to a complex interconnection assocated with rising debt, weakening production, outsourcing, consequent unemployment, stagnant wages, rising costs, growing class inequality with a dwindling middle class, along with global economic instability, and militarism and imperialism of the past eight years, plus exploitive corrupt practices while leaving pressing needs, such as infrastructure and health care of the country, unaddressed
unaddressed. A simpler explanation may have to do with the central banks system.

Over the years I've watched the stock market be greatly influenced every time the Fed would raise or lower interest rates. Fed Chairman Alan Greenspan just had to raise an eyebrow and say a word and the Dow could turn handstands. So when some talking head recently said, "The economy is sound. The downturn is psychological," I didn't doubt there was some truth to his statement. Although if you've just lost your job or your house is in foreclosure, it is far more than psychological, of course. In the past, the Fed would just have dropped the interest rate 1/4 or 1/2% with the promise of more if that didn't work. And the Dow would respond accordingly. The trouble is that the interest rate can't be dropped any more. And therein lies the rub!

Today reports came that another 598,000 jobs were lost last month. Are Republican senators serious when they suggest that instead of the Democratic financial stimulus package each single person be given a tax credit of $5000+ and a couple $10,000+? Hasn't this been tried before? Granted, it was a smaller amount, but did it work? What's that saying about the definition of stupidity, e.g. doing the same failed thing and expecting different results?

We voted for change. We voted for rebuilding infrastructure, improving education, evaluating our trade policies in an effort to level the playing field, health insurance for all, global climate change, reducing our dependence on foreign oil, and changing the way Washington works. I'd like to see President Obama succeed in accomplishing even a fraction of these things. Unfortunately, we're witnessing first hand this week how the sausage is made in Washington. The public may have to have an "I'm mad as hell, and I'm not going to take it any more" moment.