Freezing in NH

I happened to read two articles back to back that gave me a new idea.  If you want to boycott Chinese items for any reason (Tibet & Olympics, balance of trade, your ex-inlaws came from there, etc) why not buy used?  Even if it was made in China, the person profiting from this transaction is the person you bought it from.  And that person is probably an American, and that money probably stays here in the US. 

If you are avoiding Chinese-made toys for your kids because of lead, this strategy won’t work, but hand-me-downs will save money anyway.   Yard sales, the local classifieds, freecycle, and secondhand stores can make this much easier.

Buying used is a good way to save money, or get something of higher quality for the same amount you’d pay for the cheap version new.  I like to buy things like cars, books and solid-wood furniture this way.  I’m a little less sure of buying upholstered furniture because it can carry smells and bugs.  That reminds me, I should do a post on books sometime soon, since they were formerly one of my big expenses and I’ve managed to cut the cost way down.

…Damned if they don’t.  I’ve seen a couple articles recently about banks capping home equity lines of credit.  I can see how people might be upset, especially if they have a tuition bill or tax bill they need to pay soon and had planned to use the line.  But banks have been accused of lending too much money, and now they’re reacting to the losses from that.  I suspect they don’t have the time and manpower to go through every HELOC on their books and evaluate each house in a reasonable time frame.  Much simpler to cut off everyone, and then re-evaluate folks when they complain.  If I were a shareholder I would completely approve.  No sense in wasting all that time, just evaluate the ones that want to use the line.

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.

Recently I was reading an article in the NYTimes about the FHA and some of its woes.

The Bush administration and Democratic leaders in Congress are counting on the Federal Housing Administration to rescue hundreds of thousands of homeowners from foreclosure by helping them refinance from risky subprime loans to stable government-backed mortgages.

But the F.H.A., the government agency that insures home loans for many first-time, minority and lower-income buyers, is grappling with financial woes of its own.

The agency faces a deficit next (fiscal) year, due to the “seller financed down payment” program.

Under the program, a home seller arranges to cover the buyer’s down payment — using financial help from a nonprofit company — but typically adds that sum or more to the total cost of the house. The arrangement has been particularly attractive to financially struggling buyers and to owners in depressed housing markets, according to Congressional officials.

In 2000, such mortgages made up less than 2 percent of F.H.A.-insured loans, officials say. By 2007, statistics show, they accounted for 35 percent of F.H.A. loans.

Housing officials say these mortgages have foreclosure rates two to three times those of others, leaving the agency reeling from the losses.

If the program continues without any changes, Congressional officials say, the F.H.A. would face a $1.4 billion shortfall in fiscal 2009. This would mean that Congress — and American taxpayers — would have to subsidize the F.H.A. for the first time.

Sounds like this is not the best time to be dumping a bunch of new loans on the FHA, when it’s facing a 1.4 billion dollar shortfall next year.   The taxpayers are going to end up paying for the housing mess, either directly through taxes for things like the FHA, or indrectly due to letting mortgage businesses fail and the market (holding everyones 401ks) crash.

The current problem mostly seems to be folks getting into mortgages they don’t understand, especially the adjustable part.  The solution?  Make it more financially rewarding for lenders to make sure borrowers understand their mortgage, and less financially rewarding to hide the info.

Note: this is only a solution going forward, it doesn’t really help people who already have a mortgage.

We require schools to test kids to see if they’re learning.  Some states have exams for graduation.  The SATs test your readiness for college.  Now, none of these test are perfect, but they at least point people in the right direction.

So I’m proposing a test for borrowers.  At the closing, some impartial representative (the escrow person?) administers a quiz for the borrowers.  Each person on the loan must pass the test separately.  It will have a set of questions with multiple choice or yes/no answers.  I think multiple choice is better than fill-in since most people won’t know the exact answer but should know within a few dollars.

• What will your monthly payment be next month?
• …next year?
• …two years from now?
• Does your payment include taxes?
• If not, how much are they?
• How many years is your loan?
• What is the interest rate on your loan?
• Is your loan fixed or adjustable?
• If adjustable, when and by how much?
• Is it a balloon?
• If so, when and how much?

If the borrower can’t answer, the lender pays a fine and the house doesn’t close (so they don’t get their loan).  Mortgage brokers would also get penalized.  I think both the individual (the loan officer or mortgage broker) and the company should get fined.  So now it’s in their best interest to teach the borrowers all of these things, and repeat them until the borrowers really will remember them.

BusinessWeek has an interesting interview called the Entrepreneurship Myth.  In it author Scott Shane talks about popular myths about startups. 

Shane’s book reveals a bleak picture of entrepreneurship in the U.S. It shows the average new venture will fail within five years, and even successful founders usually earn 35% less over 10 years than they would working for others.

This is probably true, but there are things you can do to make that number better.  I suggest reading The 4-Hour Workweek for details.  Plus, working for yourself can give you flexibility and that alone could be worth a 35% paycut.  But I suspect the average person is working more hours for less pay.  Remember folks, it’s important to have an exit strategy, whether we’re talking about a dog-walking business or a land war in asia.

At the individual level, the core fact here is the typical, median, right-smack-in-the-middle entrepreneur is a failure. The cost is everything associated with that. So if you start a business and the business dies, you could have been working for somebody else. You could have been making a salary. You could have had the stability—you wouldn’t have had that kind of stress that comes from the up and down of running that business.

So there’s the personal costs. From an individual level, the myth is that somehow if you manage to hit the average or hit the median, you’re going to be fine. The reality is that the distribution is so skewed you have to hit the top for it to matter, and in fact, you have to hit the top 10% to have income as an entrepreneur better than what you would have gotten working for other people.

Here’s a link to his book (amazon, and I get a cut if you buy it through here):  The Illusions of Entrepreneurship

Wouldn’t it be really funny if we found out something major (like the Bear Stearns buyout) was a hoax?  I’d laugh.  And then maybe punch someone.

How bad could economy get? Hold on!

No question the economy is at a crossroad.

So what if I give you a choice? We could have either a short, even steep, recession or a long bout of stagflation, that combination of stagnant growth and high inflation.

I’ll take the recession.  Most people seem to think that’s the worst choice, but I’d rather go through a couple years of pain and be done with it than have it drag on.  Most people can survive a short period of job loss with credit cards and sleeping on friends’ couches, but surviving a long slog of prices rising faster than income is not pretty.

The country had a decade of stagflation in 1970’s. Economic growth was lackluster while inflation skyrocketed at double-digit rates, peaking at a little under 15 percent. Unemployment was also ruinously high and real per capita income actually fell in three of the years of that decade. Not a pretty picture.

Worse, the cure for that bout of stagflation was, as it always is, a nasty recession. When the Fed finally crunched down on money and credit to bring down inflation, the economy tanked. Between 1981 and 1982, unemployment peaked at over 10 percent. And the economy shrank about 3 percent in 16 months.

So recession now or stagflation and recession later?  I’d rather do it now.  Rip that bandaid off and it will feel better soon.

I guess I understand the zillion spam comments I get about things like nudie pics and pharmaceuticals.  Things that people want to buy anonymously on the internet and that have a huge markup after the initial investment.  But why am I getting comment spam for cat beds?  I think I have ten since yesterday.  Do that many people buy cat beds on the internet that you would spam my tiny little blog?

All Financial Matters posted in July that my wife’s company will begin offering the roth 401k next year.

My company starting offering the Roth 401(k) July 1.  For some of the reasons mentioned above (e.g. tax diversity) I decided to split my contributions as well.  Interestingly our plan doesn’t make clear what happens with the employer match, and the call I made to HR July 1 landed me with someone who wasn’t sure either.

I left the 6% contribution required for employer match in the regular 401(k) and moved 4% over (I contribute 10% of my salary in total) to the Roth.  I didn’t know if the employer match stays with the regular 401(k) or gets split 60/40. 

As far as I can tell from the year-end paperwork (delivered “tree-free” online) the employer match all counts as “pre-tax” no matter what I do.  They aren’t going to be paying any taxes for me.  I’m not sure how that would work if I had only the Roth, would they still have a regular 401(k) for the employer contribution?