One of the things I’m deathly afraid of for my kids is they’ll have no idea how money works. I’ve got a friend who works for a large financial institution and he’s come up with bar talk that’s frankly scary. Debt which is compounded daily at 90% interest, for instance. Credit lines which can’t be closed. Charges for simply having the credit line. It’s really amazing stuff.
Possibly worse than not having money is having the illusion of money. Money is by itself an illusory device. You don’t have gold, and dollars don’t line up with gold consistently. We as a society have come up with some neat financial devices to line up with countries which don’t have money but pretend to (most of Africa), don’t use money (communisms, socialisms), or are simply barter economies (most of South America). The worst of this problem being that when we apply them to ourselves, we’re starting to fit in really well. If you’ve ever tried to put in a nail with a screwdriver, you’ll know that the tool won’t work. When the tool does work, we have to ask ourselves which of these economies we’re starting to fit into.
Like most people my age group, I effectively have no money. I am a homeowner and while you’re paying that off from the bank you don’t actually have any money since your debt is larger than your income for the next 30 years or so. In actuality I have money but it counts as period income. In other words even if I have $30k in the bank, if I have a $50k mortgage I am living paycheck to paycheck since I cannot effectively settle my debts at the end of the pay period. The normal margin of a bank’s profit is counting interest against the money they loaned you for property. The Reagan days of 20% on your home loan are over.
No, actually they’re not. Because while the 20% of days bygone might be compounded once as a straight interest loan, nowadays we have complex loan devices which are 5% compounded yearly, which is how we end up paying back three times the amount we borrowed. Nothing has actually changed, we merely put a pretty bow on it by chopping it up into smaller pieces. This is a big problem I have with debt, people get weird about standing debt and argue that a ton of small purchases are less damaging than one big purchase. Therein lies the problem – banks are having problems collecting from people now who have credit cards. The solution, of course, is to actually try to get some of their stuff back. However the bank isn’t in the market for 100 little items, and what people have borrowed for (houses) means that the bank isn’t interested in owning those either.
The banks solution – don’t take away people’s stuff when they’re putting food on credit cards, they’re starting to attack people who don’t carry debt month to month. And this folks, this is a scary thing, because it means that the banks have lent far more money than they can sustain.
Now, as a homeowner, my credit score is absolutely hosed for the next few years since opening up a massive line of credit tends to do that to you. Your credit score is the ratio of credit extended to you and the amount you’re using – your mortgage therefor is the great destroyer since you’re using 100% of your credit line or you have some extremely high limit credit cards. This means that, to the banks at least, I have about the same credit score as some idiot off the street living with his mother who can’t help but buy a high end car and spinning rims. If you’re saying “well the banks should go after the car guy!” No. Both a car (and more recently housing and land) has deprecated, meaning that for any instance of sale it cannot cover the credit extended to the person. Also each of these – a house and a car – is a complex assembly. If I had a dollar for every ad I saw on craigslist showing “everything must go” because the person was parting out the house as much as possible before the bank took it I’d be rich. The same applies for the car, except we call it a chop shop that does the work. In both instances it’s usually the insurance company left holding the bag.
So what’s going to happen to the banks? Well, the banks are insured by the fed, and with the new laws on credit they have to make up the profit margins somewhere else. Here’s my prediction – the banks will continue to be the greedy tools of the New World Order they are now, Nazi moonbases will be discovered by X Prize rockets, and the most important part: People like myself who don’t use their credit cards and already have a house are simply going to close the cards which will generate a run on the banks.
The papers are already in the mail.