It’s called credit, not free stuff.

Some people are pretty upset about the recent rise in credit card rates.  I can understand how this would be a major drain on finances at a time when money is tight.  I understand it as a legitimate worry.  Still, I can’t help feeling that it’s a situation that you bring on yourself.  True, the credit card companies make it really easy to slip into debt with them.  But that’s exactly what it is – debt.  You owe them money.  They have the right to charge you interest.  And they have the right to change those rates, or sell that debt, to someone else.

Personally part of my view of the situation may be driven by the fact that I don’t pay credit card interest.  I don’t let my credit card balance accrue.  I use credit cards, but at the end of the month, I pay what I owe.  No interest charge.  Why do I use credit cards then?  Convenience.  Perks.  Cashback bonuses or airline miles or other things that accrue to my advantage because that credit card company wants you to spend.  They earn money through your debt’s interest.  That’s how it works.

But you don’t have to take part in the system.  Debit cards are now just as easy to use as credit cards.  The money can come directly from your bank account with no interfereing rates in between.  Or, you could actually budget your paycheck.  You know, don’t spend money you don’t have.

I don’t mean to come down hard on anyone.  Many of us have basic needs we are struggling to meet.  Many of us feel that big business and rich concerns have overshadowed our own freedoms.  I know it’s hard, very hard at the moment.  But I look at other places, or at other less fortunate times in this country, and I see plenty of people who made do with less.  And that makes me question exactly what it is we’re complaining about.

Publisher’s Clearinghouse icon? FORECLOSED.

The stock market crash of ’29 was a social leveler specifically because the richies got poorer, too.  Now with the whole subprime slam-bang, we could be seeing the same kind of re-leveling.  Case in point: Ed McMahon, ‘best known as Johnny Carson’s sidekick on “The Tonight Show”‘ but that us young kids know only from his ads for Publisher’s Clearinghouse, is 644 thou in arrears for his Beverly Hills home.  Of course, he’s trying to sell the house and this isn’t really a market for selling, but still.  If old rich guy is belly-up, that doesn’t bode well for those with smaller incomes.

I am a moral person.  I’m also a person who’s worked in a bank and knows just how far she could get snatching a check worth more than I may ever make.  Still, I wonder if Ed, in his little van with balloons and his giant cardboard checks, was ever tempted to just drive away?

More on the crazy credit front.

I’ve written a little bit about the current ‘credit crisis‘, but I came across this blog dedicated to stockpiling information about the whole thing as it happens.  If you’re interested in more gloom and doom, you should check it out.  Some timely advice might be that governmental classic from the Cold War era, ‘Duck and Cover‘.  For myself, I vastly prefer Samuel L. Jackson’s line in Jurassic Park: “Hold on to your butts.”

More Noises about Private Equity and Debt.

So now it’s time for everyone’s favorite time of day again – that time when I try to sound intelligent and well-versed in all things investing. I was ‘reading some interesting information’ (aka doing my job and editing boring investment reports) when I started thinking about some stuff the common man might not know about private equity, and I thought I would share my thoughts with him.

First of all, private equity is all that investment action that you, the common man, can’t get in on. It involves trading of stocks not on the public market, usually involving company takeovers and large-scale investments that even the upper middle class will never be able to afford. So. Why do any of us really care, unless we become billionaires? Debt.

I’ve written a bit before about my own skewed view of the current debt and mortgage system, but private equity is a part of that system in a big big way. Basically, a private equity investment company works to develop existing or start-up companies and corporations.  This doesn’t always involve debt, or buying out an entire company, but it can.  A private equity company usually researches a particular market – say, software – with a specific target in mind. Let’s give an example. Let’s say Geronimo is an investment management company in the home appliance market that is targeting undervalued and underperforming companies. That means they look at all the cheapest private companies that make home appliances and try to figure out why those few companies are doing so badly. Then, if they think they can improve the company and generate some money from it, they buy it out, change it around, and sell it for a profit. Of course, sometimes it doesn’t work out like it’s supposed to. Even in a strong market, there could be so many companies that no amount of improvement in one is going to lead to large profits. Or, the market could take a sudden dip, leaving our sad Geronimo with no profit for all its hard work.

The buyout system usually works because the investment companies like Geronimo make enough in one investment to fund months of research and bargaining for another. Plus, once a company like this gets known for its successful work, it gets easier to make attractive buyout proposals to private companies.

The problems we’re facing right now due to a slumping economy increase pressures for private equity – there’s less of a guarantee that an investment will post significant gains. Research becomes even more important. In addition, since the majority of these takeover involve large infusions of capital, many of these private equity companies use debt to make the initial purchase. Which means, of course, if they don’t make good on their investment, they’re actually short of cash due to interest on those loans. Which means, in times of scarcity, the normal private equity players may be more reluctant to taake on a questionable investment, meaning that more corporations may be run inefficiently, which certainly doesn’t improve market conditions. One great big circle yet again. Yay!

Debt, Mortgages, and How They Affect Your Life

There’s been tons of hoopla in the media recently about mortgages, especially high-risk mortgages that have been defaulting.  If you haven’t heard something in this vein, you’ve probably been living under a rock, deliberately avoiding current events.  Event though that’s what I normally do, I thought I should crawl out for a bit and echo the voice of doom.

Now, I’m sure most people are confused.  So a few poor people defaulted on their home loans.  What’s the big deal?  the banks foreclose, someone new gets the land and pays for it, everyone is happy.
In order to a clearer view, I need you to think back to your days of high school economics.  You know, supply, demand, all that good stuff.  I’m not sure if you recall, but somewhere in that course, you probably talked about how economic growth was judged – what the factors for positive growth were, and what factors were part of an economic downturn.  At that time in my life, the economy was fairly stable, as judged by two key factors – unemployment, and building.  Characteristically in this economy, people stay employed if it is worthwhile to them – if it is more cost effective to go to work for a wage than to stay at home and collect unemployment.  In a healthy economy, 3% should be the rate of unemployment.  It makes sense – if a small number of people are unemployed, more people are making a better wage, and are hence able to buy more things, growing the economy.  The building market works in much the same way – when people have more money, they are more willing to invest in a house, hence more housing is needed, hence more building occurs, creating more jobs and shooting money back into the economy in a widening cycle.

For the past several years, this has largely been the apparent cycle – better wages = stronger economy= more building = stronger economy.  The problem comes with speculation.   It’s almost become a part of the American dream to own a house – a good job, a good family, a home and two cars.  And with the housing market booming, everyone wanted some of the action.  People looking to expand their portfolio invested in real estate and housing instead of more traditional investment.  With the building boom, most property values were expected to increase as a demand for land grew.  In addition, to sate the American dream of those with lower credit ratings and lower incomes, mortgage lenders took on increasingly risky prospects.  Bad idea.

Basically, the rules that were developed to see if a person qualifies for a mortgage were put in place for a reason – to sort out those who could actually pay for a house over the long term.  While it’s true that the rules currently in place may be discriminatory, biased, and unfair,  that does not mean that everyone should be able to buy a house.  It’s not necessary for happiness, and I’m not sure it should be a part of what we see in our future.

But that’s all water under the bridge now.  The point is, how does this affect you?   Remember the high school economics?  Basically, enough big lenders and banks have invested in poor mortgages that it affects everyone.  When these lenders start posting downturns, it affects the market.  building slows – the market slows.  The value of housing and real estate goes down as the demand for it lessens.  Those with mortgages continue to pay the same monthly rate while the overall property value they are invested in decreases.  With jobs in the building industry falling off and banking institutions cutting costs in staffing, unemployment rises.  The market goes into a downturn.

What can you do?   Avoid debt, if possible.  Interest is going to be high, and creditors unsympathetic if you default.  If you have property investments and can afford to hold on to them, do so.  It may be a long ride, but eventually, property values should increase again.  Don’t be afraid to spend, but don’t feel forced to either.  Economists and other market watchers are asking for continued spending to help boost the economy.  There’s nothing wrong with that, and with the deflated spending pattern, you’re likely to get the goods you want at a bargain price.  Still, it’s also a good time to invest, with stocks priced low and interest rates high.  Basically, we could end up with a continued and lengthening downturn, but it shouldn’t get to the point of another Great Depression, or force us to starve.  So I’m pretty content with that.