June 13, 2005

Don’t Work on Maggie’s Farm No More


Good morning suckers. Yes, I am talking to you. Well, at least most of you because it would take most of you to go along for it to work as well as it has.

I'll get around to explaining, but first this.

There’s a chicken processing plant along a highway a few miles from my house. I drive by it regularly. Big triple-decker trucks back into an open garage and the chickens hung, one by one, by their feet on a conveyor.

Every time I drove by the place, there they’d be, a hundred or so, heads down riding the conveyor towards a little hatch covered by a rubber flap. The chickens have no idea what’s on the other side of that flap, but we do.

They are strangely calm during the minute or so it takes to ride the conveyor to the door. And why not? Humans had always fed them, kept them warm and dry and changed their water daily. This was just something different. Right?

One day I was driving by and I saw this large white hen running hell-bent for leather across the highway. In pursuit was burly guy in white apron covered with blood. I rolled down my window and shouted, “Run baby. Run like your life depends on it.”

The butcher scowled, but the hen escaped.

That’s what I meant above when I said not all of you are to blame. Some of you are escapee hens, like me. But too many of you are hanging from your feet with stupid, well fed, satisfied looks on your faces heading straight for that little door.

Okay, time to stop with what has become a tiresomely long metaphor.

America’s consumers are the chickens in this tale of deception and deceit. Americans no longer save money for a rainy day, because they spend it as fast as it comes in and, if they run out before the next time they are fed, they borrow.

Americans no longer have mortgage-burning parties when they pay their homes off. Because Americans don’t pay off their homes like Mom and Dad once did. Instead they have been told by finance companies that any equity that builds up in their homes is wasted money unless they take it out and do something with it. Investment advisors roll their eyes when a person tells them they have built up a quarter of million dollars in equity in their home. They shake their heads looking somber and worried. “That’s just dumb,” they say. “You could be “leveraging” that equity by borrowing it and investing it in – another home, hog bellies, remodeling, a Hummer, a boat, a college education…," whatever.

Investment Tip: Whenever someone starts telling you to leverage you home equity, show them your partially paid for front door and send Mr. Leverage on his smarmy way. Because, what they mean when they say, “leverage your equity,” is “gamble with your home equity.” But, it they put it precisely that way, it would be hard sell – as it should be.

By now there are economists and investment advisors thinking, “Man, is this guy out to lunch. Leveraging existing assets is how you get more assets. It’s a tried and true path to building wealth.

Sure, fine. As a former real estate broker I have done it successfully myself. Just never with my home equity. My house is paid for and will remain so. Because – and this is what Mom and Dad and your grandparents knew as survivors of the Great Depression; when you own your home free and clear, no one can mess with you. Whatever happens your chance of having a place to weather the storm is astronomically increased by paying off your home. (That has to be one of economics great "DUHs!!!")

If you want to leverage something, go ahead. Here’s how you do it.

* Work extra hours
* Save extra money
* Take two-thirds of the money you saved and use it to make a downpayment on something. Put down as little of it as possible and borrow as much as makes sense. BUT... are you listening? BUT... make damn sure the loan only encumbers the investment property or asset. That way if you make a bad investment all you lose is that extra money you worked for. There's an old saying among serial-leveragers.. "If the bank lends you $1000, the bank owns you. But if the bank loans you $1 million you own the bank." I would just add, that when the bank loans you money secured by your home, the bank owns your home.

But that advice appears lost on American homeowners, who have sunk their teeth into their home’s juggler veins and sucked the life blood -- equity -- out of their castles. Instead of chipping away at their home mortgages, they are taking out larger and larger mortgages.

“In the first quarter of 2005, 64 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least five percent higher than the original mortgage balances, according to Freddie Mac’s quarterly refinance review." (Freddie Mac)

There's been much handwringing in the press lately about the "housing bubble," is it, or isn't it? Write this down: Yes, it is. How do I know? Simple -- the appearance of new "interest only" loans for homebuyers. Typically these are five year loans and no principal is paid down during the life of the loan. Clearly this is for people betting on continued appreciation, that their home will be worth a lot more in five years at which time they could sell or refinance it. That's bubble-time behavior if I've ever seen it. And if you can't see it, you're hopeless.

Where does all this borrowing and spending lead? Hiistory tells us. Read about the farmers in the late 1920s who listened to their bankers and tried to borrow their way to prosperity using their farms as collateral. When the shit hit the fan - as it always does eventually -- they lost their farms, and then everything else as well. Those same old bankers hoisted those farmers by their feet and sent them and their families right through that little door.

Here's some more history. Remember “the company store?” Coal mining companies were notorious for this, but plenty of other industries used them as well. Poor working families would be provided the "convenience" of shopping for stuff right there on company property. The company store was born.

"You would look stunning in that gingham dress Mrs. Clucker? And your husband needs a new Sunday suit. You don't have the money right now? Not to worry, we’ll just put it on your tab and you can pay us for it, plus interest, when you can.”

Company stores became combination shopping center/paycheck advance operations. Before they knew it workers who ran up tabs, and most of them did, were working just to pay off their tabs. Many became veritable indentured workers.

We no longer have company stores, not because they were unprofitable, but because they became an embarrassment to the companies that ran them. Now we have credit cards, which are ever so much better for spending more than workers earn. It's like carrying a little money printing press right in our wallets. Now workers can run up, not just a single tab at their company store, but dozens of tabs on different credit cards.

The result will, of course, be the same for companies, minus the bad publicity for companies. Because, when the shit hits the fan it will no longer be about trickle down economics, but "personal responsibility." They are very good doing that.

"Well, it's not our fault they could not exercise spending restraint," the trickle-downers will shamelessly huff. "These are their debts and they have to pay them back. It's all about personal responsibility, you know."

(Unless of course you are a big tobacco company or Halliburton or Pfizer or CitiBank...)

Today’s working families are now imprisoned by nearly $3 trillion in debt. This debt averages out to about $12,000 for each household of which $8,000 is credit card debt. And, like Mrs. Clucker who had to pay off her gingham dress over time, plus usurious interest, paying off an eight grand credit card debt at 18% interest one minimum payment at a time, will cost these families not $8,000 dollars, but three times that much, over $24,000. Oh, and miss a payment and the interest jumps to 21%. John Gotti, eat your heart out.

That is the bill of goods Americans were sold by the trickled-down, flat-earthers on the right.

"Don’t save money. Spend it on the stuff produced by big companies. That will provide jobs for you and yours, which in turn will result in more money in your pockets to spend creating still more jobs."

That was their sales pitch. What they left out was that the jobs created by your profligate borrowing and spending would be in China and India, not here. So, if you like curry or noodles pack and head there where you will be paid 71 cents an hour, if you’re lucky.

At the very center of this lie has been getting Americans to spend instead of save. And to borrow when they ran out of their own money.

With interest rates at record lows investment advisors are loath to advise their clients to settle for a measly 1% or 2% returns in money market funds. But that’s not where the smart investors, the really big ones, put their money either. China is rolling in US dollars, but you not find a cent of it in a money market fund or bank or an S&L. They buy US bonds – by the billions. ]

Are the Chinese stupid? Yes, like foxes. They know they are not going to get rich investing in US bonds at current rates, but that their investments strengthen the US dollar. They like that for sevcral entirely selfish reasons. The own a lot of US dollars, thier currency is pegged to the dollar in ways that keeps their imports to the US artificially cheap, and they know that money they put into US bonds goes right back to work. For whom? Well, for them of course. The more money they lend the US the bigger our trade deficit gets with China. Make the connection? Someone should.

But the same process would work for Americans as it is now for the Chinese. That is iif Americans would just slow down on the borrowing and start saving money again. Pay off your damn home mortgage. There’s NO shame in that. In fact, the day you pay off that mortgage I will park right outside the bank yelling,

“Run you glorious fool! Run and don’t look back.”

But, if you are one of those millions of Americans in hock up to your wallet to credit card companiess, and/or have sucked all the accumulated equity out of your home, and spent it on stuff, and woke up this morning realizing that you're in late 40's and starting all over with a brand new, much larger 30-year mortgage – if that's you -- then you my friend are a chicken -- a big fat, stupid, white chicken.

If the truck hasn’t been around for you yet not to worry, it’s on the way.

Editor's Note: After writing a screed like that readers might assume I am Lenin's great grandson or something. Nothing could be further from the truth. I am a capitalist right down to my toes. I love making money. And, I have made my share. I just believe that unless an economy works for the majority it is destined to fail. Booms are created by this kind of nonsense. Busts are the inevitable result. The trouble is that the wrong people benefit from the booms and then excape all responsibility and most of the pain of the busts. Harry Truman said it best:

"Of course I believe in the free enterprise, but in my system of free enterprise,
the Democratic principle is that there never was, never has been, and never will be room for the ruthless exploitation of the many for the benefit of the few."
President Harry S. Truman

One more thing before I go. Sorry I had to call you a big, fat, stupid chicken. But these are facts of economic life your parents should have taught you. Either they did and you forgot, or they didn't and you never looked into the matter yourself. Either way, you have some catching up to do, and time is short. So if my name calling gets you off the dime, it will be a small price to pay.


Quote of the Day
Regarding the sorry state of the press

"In the classic example, a refugee from Nazi Germany who appears on television saying monstrous things are happening in his homeland must be followed by a Nazi spokesman saying Adolf Hitler is the greatest boon to humanity since pasteurized milk. Real objectivity would require not only hard work by news people to determine which report was accurate, but also a willingness to put up with the abuse certain to follow publication of an objectively formed judgment. To escape the hard work or the abuse, if one too many says Hitler is an ogre, we instantly give you another to say Hitler is a prince. A man says the rockets won't work? We give you another who says they will. The public may not learn much about these fairly sensitive matters, but neither does it get another excuse to denounce the media for unfairness and lack of objectivity. In brief, society is teeming with people who become furious if told what the score is." Russell Baker