Freezing in NH

I’d been skeptical about people’s claims that they were going to save their rebate or pay off debt with it.  While that might be true for PF bloggers, I suspect it’s not that true for the general public.  Oh sure, it goes in the savings account or off to the credit card company right away, but in the back of your head you’re thinking “it’s a free 600 dollars, I can treat myself to dinner out just this one time”.  And eventually you’ve spent a good chunk of it.  Everyone who pays down credit cards this month is going to spend them up a bit more next month. 

But mostly this was idle speculation and pessimism.  Until I read a Freakonomics blog post today.  They linked to three studies of the 2001 rebate.  The first said basically what you’d expect.  Some people planned to spend it (1/4 of respondents) and the rest were going to pay down debt or save.  They seem surprised that the richest folks were most likely to spend it, but those are the folks who have their savings and debt all planned out and know they have it to spend. 

But the third had the most interesting information.  Here’s the recap from the Freakonomics blog:

This paper begins with one particularly compelling observation: credit card companies know our social security numbers (and hence who got their rebates when), and they also know a lot about our spending and saving patterns.

And so once the authors were able to get a large credit card company to share with them (anonymized) data, their research project was made.

Recall that paper #1 had found that nearly half of all respondents expected to use the rebate to pay down their debt. It turns out that this was the initial response of many, but then over the ensuing nine months, spending rose by enough to account for around two-fifths of the average rebate. And for those who were liquidity constrained, spending rose even further.

Yup, they paid it down and then spend at least 2/5 of it later.  Actually a lower percentage than I thought, so maybe I’m too pessimistic.

I saw an article in the NYTimes that said credit cards have reduced their direct mail.  This is a loss for folks who do a lot of 0% chasing and also I suppose for the Post Office, but a win for the rest of us.  I have opted out of unsolicited credit card offers (directions on how can be found here) but I still get a lot of junk from my existing companies.  A reduction in that will save me the gas I use when my recycling boxes get full.  For people still getting unsolicited offers, a reduction will reduce the chances of someone stealing one and applying in their name.  And for folks who have trouble with willpower, it will reduce the temptation.

Mintel found that fewer pieces had gone out in February, the last month for which figures were available, than in any month since April 2004.

There is day-to-day news that we’re bordering on recession, said Lisa Hronek, an analyst at Mintel. “They may be scaling back in response to their target audience just not being there any more, or not as willing to take on new debt.”

Also, they may just be getting picky, since I suspect that there will be a rise in bankruptcies to follow the rise in foreclosures.  People used to be able to pay off credit card debt with a home equity loan, but those are hard to get now and existing lines of credit are being capped by nervous lenders.

A recent Pew Research survey says that Americans feel like they’re stuck and not moving forward. 

Americans feel stuck in their tracks. A majority of survey respondents say that in the past five years, they either haven’t moved forward in life (25%) or have fallen backwards (31%). This is the most downbeat short-term assessment of personal progress in nearly half a century of polling by the Pew Research Center and the Gallup organization.

I think the housing mess is contributing to this, as is recent inflation.  I suspect if you asked this question two years ago the answer would be different.  People view losses as such a negative thing, for example if your house was valued at 100K when you bought it, rose to 180K and then fell to 120K, you feel much worse than if your house started at 100K, went to 110K and then to 120K.  You end up at the same spot but it feels bad to have something and lose it. 

Personally I feel stuck, but that is due to choices I’ve made, not outside forces.  I chose to drop the hours I work, and stay with my job when my company was sold.  I’m not sure that dropping my hours was a bad thing, but the point of dropping them was to spend the time fixing up the house I bought, and I’m still not done doing that.  Staying with the company was not necessarily a bad choice at the beginning, but it became obvious a while ago that I should be leaving.  So right now I’m stagnant in job duties and wages.  Five years ago I was working full time and making more, though I was in a more expensive area, so net-worth wise I’m ahead now.  But there are changes I need to make, and I’ve been putting them off.   So today I’m getting back in the game, sending out resumes and such.  Hopefully I can find something more interesting than what I’m doing now.

CNN Money’s #1 Issue is America’s Money.  How nice of them.  But it’s an American publication about money, so I guess it’s not that much of a surprise.  A recent article highlights what the declining economy might mean to you.  Personally I love the article mostly for the first picture, but the text is useful too.

The basic outline is that even if your job is safe, raises are smaller to non-exsistent and inflation is outpacing what raises people do get.  The Fed cutting rates to attempt to stave off a recession means that imported goods (and everything is made in China these days) are more expensive.

Some sectors are losing jobs, home prices are falling, Wall Street is going nuts (in a bad way), and everyone is putting off discretionary purchases.  So it looks like it’s going to get worse before it gets better.

So fatten up your emergency fund, work on that side-business or passive income, and hunker down to ride out the storm.

Three airlines have gone out of business, or at least declared bankruptcy and stopped flying which is the same from the customer’s point of view, in the last week or two.  Skybus was the latest on Friday.  But you’d never know it looking at the NYTimes.  If you search, you can find a couple 1-paragraph items from the AP, but nothing written by staff.  I thought maybe that meant they were preparing some big article, maybe for the Sunday magazine, but no.  So what gives?  NYTimes, are these just airlines flown by the little people?  If they had first class sections you would mention them?

Slate has an article comparing the underclass to the overclass, basically saying the super-rich and poor are very similar.  It’s an amusing read, although I think they’re stretching some things to make it fit the story.

In the underclass, unmarried, young fathers don’t take responsibility for their children. In the overclass, twice-married, middle-aged Wall Street daddies don’t own up to the consequences of their insane financial miscues. Wall Street titans are almost incapable of seeing the problem with taking nine-figure payouts in years in which their stocks plummet.

[…]

In his book The Age of Abundance, libertarian author Brink Lindsey boils down the difference between the desperately poor and the blissfully rich to an ability to focus on the long term. “Members of the underclass operate within such narrow time horizons and circles of trust that their lives are plagued by chronic chaos and dysfunction,” he says. By contrast, elites are well-organized long-term thinkers. Riiiiight. “Modern Wall Street is a system,” says Charles Morris—a former Chase banker and author of The Trillion Dollar Meltdown—”that rewards crazy risk-taking in the short term without regard for the long-term consequences.”

Critics point to a pervasive sense of victimhood in the underclass. But listen to what Bear Stearns CEO Alan Schwartz told the troops after his firm succumbed to wounds that were almost entirely self-inflicted. “We here are a collective victim of violence,” he said. Yep, just another case of the Man keeping the Man down.

The NYTimes has an interview with Paul O’Neill, former treasury secretary.  Worth reading just for the tone.  I did have to check that it wasn’t an April Fool’s joke.

Do you think it was appropriate for the Federal Reserve to lend a helping hand to Bear Stearns and save a private investment company from its own bad decisions? I would say they didn’t save Bear Stearns. They saved the financial system from a panic collapse. I reject the notion that they helped Bear Stearns. Bear Stearns was destroyed.

No it wasn’t. It was purchased by JPMorgan, which will keep it alive. They’re going to keep the book alive. But the institution of Bear Stearns has been destroyed. They’ve gone from $158 to $2 of equity. It’s wallpaper. It’s not even good wallpaper. It’s butcher paper.

He has a great analogy explaining why no one can get a mortgage when only a small percentage are defaulting.

If you have 10 bottles of water, and one bottle had poison in it, and you didn’t know which one, you probably wouldn’t drink out of any of the 10 bottles; that’s basically what we’ve got there.  

And that about sums up the whole crisis.

There’s an interesting article in the NYTimes today: For Entrepreneurs, It’s All About Time.  It talks about prioritizing:

It sounds simple, he says, but most people don’t do it, deciding to complete tasks that are easier to do, but not necessarily the most important.

I think that’s one of my big weaknesses, though sometimes starting with one easily finished task gets some momentum going.  Sometimes you have to stop what you’re doing for a second and ask yourself “is this the most important thing I could be doing right now?”

I get easily distracted, and there are tasks I don’t like to do, but making a list, prioritizing it, and doing the items in order does make a big difference on days I can stick with it.

They also recommend several books that might help, assuming you’re not just reading them to procrastinate.

ABC News has an article Small Businesses Feeling the Squeeze.  I think these folks are going to end up somewhere they don’t want to be.  They claim that they’re keeping an eye on the bottom line, but in an economy like this they need to be pretty proactive. 

They have cheaper competitors in China, they are having trouble getting paid by buyers, heating costs are going up, it doesn’t look good.  They’ve got to economize and adapt, or close.  They’re dipping into personal savings right now.

“With the recent pay cut that we both just took at the business, I’m concerned that by now our outgo is more than our income and that means it would only get worse, not better,” Diane says. “If it should come to another round of layoffs, my son is next on the list. And that would break my heart.”

I understand that she feels bad, but maybe your son should take a look at what it’s doing to you and go get a different job.

Diane says she is constantly assessing what she calls “the point of no return” for the company and she says she is determined not to let things get so bad they would face insolvency. But some weeks now — to stay afloat and make payroll — they dip into their personal savings.

While that takes the pressure off at work, it adds to the stress at home. The Dearings are more than $100,000 over budget and wondering how to make a dent in that debt.

“The business is in difficult straits,” Diane says. “We are overextended personally because there is no profit to bring home.”

Sounds like they’ve got some difficult choices to make.

The NYTimes has an Op-Ed Stop Those Checks.  The premise is that economists don’t think the checks will solve the problem, so we shouldn’t give them out.  That’s great, but you can’t tell people they’ll get a check and then not give it to them.  Maybe the checks are a bad idea (I kind of think that myself) but once you announce them you need to follow through. 

The Op-Ed suggests using the money instead to clean up the mortgage mess. 

My gut tells me that the vast majority of Americans would happily give up their rebate if they knew that the money would be used instead to help families in need and start the process of cleaning up the bad debts in the housing sector. Everyone knows that we will have to spend the money eventually and that the sooner the financial sector goes through detox the better it will be for everyone.

If he’s so sure, why doesn’t he just set up a non-profit to do that and ask people to sign their checks over to it?  It should be fully funded pretty quickly, right?  I suspect he’s on crack, most people have already spent their refund in their head.  Now you’d be taking away “their money” and they won’t thank you for it.

Sure the money could be better used shoring up the financial system or creating government jobs (either directly or by starting projects that hire outside contractors) but it’s a little late to make that decision.