So how are we going to pay for college?

I'm 50, and my kids are 2 and 6.

Starting in 2021, assuming that both kids attend 4-year colleges right after graduating from high school, I will need to come up with the cost of a year of college for eight consecutive years.

Assuming $50,000 (typical tuition, room, board, and fees for a private college), that means a total of $400,000. Where is this money going to come from?

Financial Aid? Student Loans? Fuggedaboudit.

Financial aid for college, including government-supported loans, is based on what is known as the EFC (expected family contribution). The short version of this is that the student's family is expected to pay 47% of its qualifying income each year toward the college expenses. The institution will typically provide aid, grants, and loans to cover the remainder of the expenses.

The qualifying income is calculated by taking all family income (including tax-sheltered income like 401(k) contributions) and subtracting an allowance sufficient to cover the basic cost of living and working. For a family with an income of around $100,000, the allowance is around $35,000. In addition, 12% of all family assets except for retirement plans (less an asset protection amount based on the older parent's age) are added to the income figure. For state colleges, home equity is not counted as an asset while for private institutions it is. And my little underachievers are definitely going to a private college.

So, taking the Hedonic Adjustment household, here's what the expected family contribution looks like:

Household income:          $120,000
Income exclusion:          -$37,500
Available income:           $82,500

Savings and other assets:  $100,000
Home equity:               $650,000
Total assets:              $750,000
Asset exclusion:           -$65,000
Available assets:          $685,000
12% of available assets:    $82,200

EFC (47% of assets+income): $77,500
EFC (State Institution):    $40,608

So clearly there will be no financial aid forthcoming. Even if our income is much lower -- as it might well be -- that boat anchor of home equity will continue to prevent us from getting any financial aid.

Pay As You Go

So why not just pay for college out of our current income? The house will be paid for, both Mr. and Mrs. Bluebird will be working, we should be able to cover most of the cost from our income.

The problem with this theory is age, mine specifically. The years from age 62 to 70 (when we need this money) are nobody's peak earning years. There's a good chance that even if I want to be working, I won't be able to find the kind of good-paying work that I have now, or that health issues will prevent me from working full time or at all.

Further, there is only a limited tax deduction ($4,000) for college tuition, so we would need to earn an extra $50,000 post-tax dollars a year.

Borrow Against the House

This is what I would do if my kids were going to college right now. I'd take out a mortgage today for the entire $400,000, then pay it back over the remainder of my working years. It would be tough, but it has some critical advantages, such as the tax-deductability of the interest.

But this strategy isn't going to work in 12 years, because I'm not going to have another 15 years of working life ahead of me; in short, I would have no way to pay that money back. I might consider taking out a lump-sump reverse mortgage, where I strip the equity out of the house with the proviso that the lender doesn't get the house until I die, but that doesn't leave me any home equity if I need to move into a smaller home or a retirement community.

Sell the House

I would like, given the choice, to stay in my house until I die. I like it here a lot. But if it comes down to college for the kids or hanging on to this place...

So I could sell it, and move into a smaller, cheaper place. That's one option. Losing the bulk of my home equity does make life more complicated if I need to move into a continuing care or retirement setting, however.

Roll the Dice on an Inheritance

Collectively, my parents and Mrs. Bluebird's parents probably hold around $2 million in assets. None of them is currently working, and they are all in pretty good health and can expect to live another 15 to 20 years. It's impossible to estimate how much of this money will remain in their estates (and how it might be distributed from the estates).

And it's deeply unseemly to plan on being bailed out by this money.

Use Your Retirement Savings

Even after the recent market mishegas, we still have around $650,000 in retirement savings. Assuming that I can continue to achieve real (post-inflation) returns in the 2% to 3% range, that money should be enough, if annuitized and combined with Social Security, to provide us with a post-retirement income of around $8,000 a month, as long as we don't start drawing on this money until age 67 or so.

Any attempt to extract large chunks of this money to pay college expenses creates two problems:

• A big tax hit.
• A reduction in the annuity income amount

Depending on how things go on the old-age employment and health front, however, it might be possible to use some of that $8,000 post-retirement income to pay of some home equity borrowing, however.

Save Money Now

Right now, we have a total of $70,000 saved for college expenses. About $40,000 in a pair of 529 plans and $30,000 in various Roth IRA and Roth 401(k) accounts. (I prefer using the Roths to the 529 plans because they are more flexible -- 529 plans limit your ability to change your investment choices, because they can be withdrawn tax-free for any purpose once the holder is 59 1/2 years old, and because they do not count toward the EFC. We're currently adding $8,000 per year to a Roth 401(k) through payroll deductions, but we didn't make any Roth IRA contribution in 2008, and haven't yet in 2009.

If we were to save $20,000 per year for the next 12 years and we we're able to achieve a real (after inflation) return of 3.5%, that would get us to to our $400,000 target just as child #1 starts college.

Right now, we're saving $8,000 toward college an an additional $6,000 in a tax-deferred retirement account. If we could figure out a way to save an additional $6,000 to $12,000 per year, we might be able to simultaneously ride out both retirement and college at the same time.

Krugman: More Stimulus Needed Now

I guess this blog is really just about recycling material from the New York Times. Paul Krugman is pleading for more stimulus money now:

Let’s do the math.

Since the recession began, the U.S. economy has lost 6 ½ million jobs — and as that grim employment report confirmed, it’s continuing to lose jobs at a rapid pace. Once you take into account the 100,000-plus new jobs that we need each month just to keep up with a growing population, we’re about 8 ½ million jobs in the hole.

And the deeper the hole gets, the harder it will be to dig ourselves out. The job figures weren’t the only bad news in Thursday’s report, which also showed wages stalling and possibly on the verge of outright decline. That’s a recipe for a descent into Japanese-style deflation, which is very difficult to reverse. Lost decade, anyone?

Wait — there’s more bad news: the fiscal crisis of the states. Unlike the federal government, states are required to run balanced budgets. And faced with a sharp drop in revenue, most states are preparing savage budget cuts, many of them at the expense of the most vulnerable. Aside from directly creating a great deal of misery, these cuts will depress the economy even further.

So what do we have to counter this scary prospect? We have the Obama stimulus plan, which aims to create 3 ½ million jobs by late next year. That’s much better than nothing, but it’s not remotely enough. And there doesn’t seem to be much else going on. Do you remember the administration’s plan to sharply reduce the rate of foreclosures, or its plan to get the banks lending again by taking toxic assets off their balance sheets? Neither do I.

I certainly am feeling the early moments of a "lost decade". My family's income is declining, and the value of my investments and my home have fallen sharply. I am trying to figure out how I will be able to accumulate enough assets to fund both my retirement and the education of my children, and the only idea that I can come up with is to reduce my current spending and start saving more.

Which is what you do in a depression.

Like this one.

__________________________
And by the way, I would note as a serial copy-and-paste artist, that Krugman is an excellent writer, from a technical point of view. His columns fit together like Chinese puzzle boxes, each paragraph tightly linked with the one before and the one after.

Another shocker from the big banks

From the Times, Bank Fees Rise as Lenders Try to Offset Losses:

Even now, after all those bailouts, banks never seem to tire of dipping a little deeper into your wallet. Despite the tough economic times and increased scrutiny from Washington, they are keeping most fees at record highs, and are eking out slight increases on others like overdraft charges — a step they rarely took during past recessions.

The result? Americans are paying more to save and spend their money.

And while the increases are still relatively small by historical standards, they illustrate how banks are looking for almost any nugget of income to help offset huge loan losses and lower revenue as consumers buckle down on spending.

The nation’s biggest banks — those that received the biggest bailouts from taxpayers, and are once again gaining strength — charge fees that are on average at least 20 percent higher than those at smaller lenders, according to Moebs Services, a economic research firm used by banks and federal regulators.

Some of the charges are getting more creative. Several big banks — including JPMorgan Chase, US Bancorp and Wells Fargo & — recently began billing some small-business customers for federal deposit insurance increases. Citigroup and PNC Financial assess around a 3 percent international transaction fee when customers swipe their debit cards overseas.

I love the idea of the big banks tacking on a surcharge to cover increased FDIC deposit rates. First I'm going to crater my business, and then when the government tries to recoup its costs in bailing me out, I'll pass the charge on to you.

The only bank fee that I've paid in the past 10 years has been rent on a safe deposit box. And I get personal service from nice people who know me. And I'm earning very competitive rates on my CDs.

Why would anyone patronize a big bank when so many better alternatives exist?

Update 7/5/09: Even the Journal is on this story.

Insomnia

After a crushingly busy weekend (what, Wednesday already), I find myself with a slew of ideas for posts and no time to write anything decent. So instead of creating a whole bunch of mini posts and cluttering up your feed reader, I'm going to aggregate them myself. Or aggravate myself. Or something.

What it Costs to Live in a Small Town

I live in a small New England town (about 6,000 people). It's kind of like the small New England town I grew up in. There are a pair of old white churches at the town common. A sleepy village center with a single traffic light that turns into a blinker after 8PM. An old cemetery. A pleasant library with a librarian who knows me, my wife, and my kids. One grocery store, one bank, one liquor store, one dry cleaner, one gas station, one dentist, and one auto mechanic.

Every spring, the town gets together at Town Meeting to approve a budget and argue about whether the tree warden is doing a good job.

Unlike the town I grew up in, however, my town is about 15 miles from downtown Boston. And that means that the town is full of rich people. Whenever a small old house gets sold, it's promptly torn down and replaced with something in the $2 to $4 million dollar range. The high school student parking lot crawls with Range Rovers and Audis.

So if you're poor, like us, you spend all your time honing your class resentment, and wondering if maybe you'd be happier in a more middle-class town. Where you cold argue with your neighbors about whether to cut funding for the schools, for open space, or for the library. Or for all three. Instead of whether the tree warden is doing a good job.

What if we Did have Inflation?

The nattering nitwit Alan Greenspan used to marvel at the fact that even with low interest rates and strong economic growth, there was very little inflation in the US during the boom years. Well, as pointed out earlier, the computation of the Consumer Price Index (CPI) does not include house prices. Housing costs are included based on rental prices.

I do not have the data (or the time) to recompute the CPI using home purchase instead of rental prices, but given house prices rising at 15% per year, and housing making up about 25% of CPI, I am guessing that "true" consumer inflation was at least 300 basis points higher than reported by the CPI.

The flip side of this, of course, is that we are also now in the midst of a true deflationary spiral (probably negative 3-4% CPI, considering house prices instead of rents, which are rising slightly as foreclosures remake tenants out of homeowners).

Beware the Median?

As reported last month by the Journal, a rising median existing home sales price datum may actually indicate that house prices are getting lower, not higher:

The trouble, notes Ivy Zelman, chief executive of housing research firm Zelman & Associates, is the NAR's sample will increasingly include more-upscale homes as a glut of distressed, low-priced houses leaves the market.

Lately, as much as 50% of home resales have been foreclosures, and most have been lower-priced homes.

Now the foreclosure vortex is gripping higher-priced homes. A house that sold for $600,000 during the boom and $400,000 in foreclosure will be recorded by the NAR as a $400,000 sale, lifting the national median but suggesting no real improvement in housing.

"It will be very difficult for investors watching the median existing-home price to realize it could be masking deflation at higher parts of the housing food chain," says Ms. Zelman.

The most reliable statistic for gauging home prices remains the Case-Shiller same home sales index, despite pathetic bleatings from the real estate industry.

Target-Date Funds: A Case in Point for Obama's New Consumer Protections

There's a lot of debate going on right now about the President's proposal for a new agency to regulate consumer financial products. The banks, not surprisingly, are against them because they will surely cut into bank profits.

While all you rugged internet individualists out there may bemoan the intrusion of the nanny state into your personal financial life, if you've been burned by a target-date fund that left you without money to pay your kid's college tuition, you might be interested in reconsidering.

Here at Hedonic Adjustment World HQ (we used to own a car adorned with a bumper sticker that said "Capitalism is Organized Crime"), we find that the fact that restricting the kinds of products that banks can sell to consumers will save consumers money and reduce the (extremely high) profits earned by banks reason enough to embrace the idea.

But that's just us.

Un-Busted

This blog, and many others, heaped scorn on Edmund Andrews for his memoir of his life as a defaulting subprime borrower, Busted.

In particular, the author's sheer stupidity, his failure to disclose that he and his wife filed bankruptcy during the period of time covered by the book and that his wife had earlier filed for bankruptcy to discharge other debts, and the potential conflict of interest between his covering the mortgage meltdown as a New York Times reporter and his personal situation as a defaulting subprime borrower.

Well anyway, I had quite firmly resolved not to ever support Andrews by buying his book, but that didn't stop me from borrowing a copy from the library.

And I have to tell you, it's a pretty good book.

When the Times excerpted it in the Magazine last month, they only published the personal experiences of Andrews, not his actual reporting on the subprime mortgage story. The book itself, is probably three quarters reporting on the mortgage story, one quarter personal sob story. The sob story is pathetic, a middle aged slob who ditches his wife and kits from some South American hottie (sound familiar?), only to get tangled up in the reality of trying to support two sets of wives and kids on one upper-middle class salary.

On the reportage side, Andrews does an excellent job pulling together the interactions between the different players in the mortgage industry, and he provides a very clear account of some of the nuts and bolts of how the mortgage-back securities were constructed.

To see how this worked, I deided to track the course of a pool of Fremont [a subprime lender] mortgages called "JPMAC 2006-FRE1." FRE1 was a bundle of nearly $ billion in mortgages that Fremont had sold to JPMorgan Chase and that JPMorgan Chase had resold as securities in January 2006.

A quick glance at the prospectus for FRE1 confirmed that the loans were truly creepy, made to borrows with bad credit, many of whom weren't documenting their incomes and weren't putting any money down. In other words, people like me. In spite of all this, there it was in black and white: 80 percent of the bonds for FRE1 had been rated triple-A.... In the FRE1 pool, the four Triple-A tranches offered bonds totaling $756 million. Even in the non-subprime pools, these "senior" or "super-senior" bonds came with a number of special privileges....[such as]..."overcollateralization", which was a complicated formulat to channel some of those high-interest payments from borrowers into extra collateral. If all went well, the tiny tranches at the bottom would become fatter over time and better able to absorb defaults.

The other thing that Andrews's book makes clear is that the primary driver behind the explosion in lending wasn't on the demand side but on the supply side. The investment banks like JPMorgan Chase were making huge fees creating these securities, but they needed the raw material -- mortgages -- to produce the finished product. When they figured out how to manufacture AAA securities out of junk mortgages, and collect the fat underwriting fees, the demand for loans became insatiable.

Andrews describes the story of what you might call a "responsible" subprime lender, who didn't write no-doc loans but did write higher-interest loans for low-quality borrowers, and how he was pressured by Merrill Lynch to start writing no-doc loans to help feed Merrill's need to generate more MBS fees.

All in all, a good read.

Hello my government friends

According to my traffic logs, I recently was the recipient of an extended visit from someone at the FDIC. I've had earlier visits from the office of a US Senator and from the Federal Reserve.

I would simply love to know who you are, if you're from the FDIC. Reply with a comment or send an e-mail to hedonic.adjustment@gmail.com. I promise not to blow your cover. Any further.

And tell Sheila Bair that she is doing an outstanding job.

Boy would I be pissed off I worked at Harvard

Harvard is on track to lose about $8 Billion from its endowment this year.

Two hundred and seventy five workers are being laid off.

One of Harvard's endowment managers, with a salary of $6.3 Million, is leaving.

You do the math.

More thoughts on inflation and the current Fed regime

Even with all the liquidity and easy credit that the Fed has dumped into the system, US economic activity has declined by about 4% year-on-year. If liquidity and cheap money were all that it took to cause inflation, we'd surely have it now.

Is the Fed's liquidity and easy credit showing up as income for American consumers? No. It's cheap to borrow money right now, but it's not like the Fed is telling people they won't have to pay it back.

While it may be "obvious" that low rates and rapid money supply growth will cause runaway inflation, keep in mind that for a long time it was also "obvious" that the sun revolved around the earth.

Most interesting referring page...

...this blog is linked to by a Polish personal finance blog at http://mojepieniadze.blox.pl/html. Google translates the title as "My Money - Personal Finance with Common Sense". And here's a typical entry:

Of course, the man can not be converted into money. It is said that man is worth as much as to give yourself to others. Najbiedniejszy man can be a very valuable friend, father, husband, and so on. This, of course, important, or not who knows the most.

However, on the basis of personal finances as the man most be calculated. We must simply do the balance sheet of a company called "John Doe" or "Mariola Wisniewska. Enumerate all the assets and liabilities, and then subtract the latter from the former.

I guess personal finance is pretty much the same wherever you go...

Shocking News

From CNBC: New Rules on Home Appraisals End Up Thwarting Many Sales:

I hate to say I told you so, but on May 1st and again on June 1st, I told you about the potential negative ramifications of the Home Valuation Code of Conduct. Today the Realtors confirmed what I had been hearing all across the mortgage industry.

“In the past month, we have suddenly been bombarded with many stories of, at the last moment, transactions falling apart because appraisals are coming in unrealistically low,” said National Association of Realtors Chief Economist Lawrence Yun. “As a result it opens up a new round of negotiations between a buyer and a seller or in many cases the buyer just steps away.”

The HVCC forces a firewall between lenders/brokers and home appraisers. Gone are longstanding relationships between a local mortgage broker or lender and a local appraiser.

Now, lenders and brokers are forced to use appraisal management companies (ironically – or maybe not so ironically—many of which are owned by the big banks). These companies hire independent appraisers across the country and call on them to do the local appraisals.

Realtors say some of these appraisers are not only not local, they don’t even have access to the local MLS. They are doing appraisals using computer models, often incorporating distressed sales as comps, and often not even knowing that the home had extensive renovations or an addition. As a result, the appraisals are coming in far lower than the agreed-upon purchase price.

Imagine that. Now that appraisers are no longer allowed to collude with lenders to gin up inflated appraisals, they're actually looking at what comparable homes are selling for. They're actually looking out for the lender's interest.

Shocking!

“The new HVCC is certainly increasing processing times, raising costs for consumers, and in often cases bringing in valuations that don't appear to be correct as a result of lesser experienced appraisers from outside the area appraising properties at potentially lower valuations,” says Craig Strent of Bethesda, Maryland’s Apex Home Loans. “When that happens that throws the refinance or the purchase mortgage out of whack of course and creates fairly large problems for the financing, so we're seeing some really negative effects as a result of this HVCC.”

That would be really negative effects for loan originators, mortgage brokers, and real estate agents, anyway.

Starting off behind

As in, it's Monday morning and I'm already behind. Like on my blogging. So three quick ones for a Monday morning...

Inflation? Fuggedaboudit

Why worry about it? The Times says everything's going to be OK:

The Fed will start the exit process when the economy is still below full employment and inflation is below target. So some modest rise in inflation will be welcome. The Fed won’t have to clamp down hard.

SKEPTICAL? Then let’s see what the bond market vigilantes really think.

The market’s implied forecast of future inflation is indicated by the difference between the nominal interest rates on regular Treasury debt and the corresponding real interest rates on Treasury Inflation Protected Securities, or TIPS. These estimates change daily. But on Friday, the five-year expected inflation rate was about 1.6 percent and the 10-year expected rate was about 1.9 percent. Notice that the latter matches the Fed’s inflation target. I don’t think that’s a coincidence.

But if the inflation outlook is so benign, why have Treasury borrowing rates skyrocketed in the last few months? Is it because markets fear that the Fed will lose control of inflation? I think not. Rising Treasury rates are mainly a return to normalcy.

In January, the markets were expecting about zero inflation over the coming five years, and only about 0.6 percent average inflation over the next decade. The difference between then and now is that markets were in a panicky state in January, braced for financial Armageddon; they have since calmed down.

My conclusion? The markets’ extraordinarily low expected inflation in January was both aberrant and worrisome — not today’s. As long as expected inflation doesn’t rise much further, you should find something else to worry about. Unfortunately, choices abound.

Personally, I think all the bleating about inflation being the inevitable consequence of all this loose money is mis-informed. Too much money chasing too few goods causes inflation, but it takes both the money and the chasing, and right now, nobody's chasing anything.

Intentions, Best of

High-minded Boston-area bumperstickeration collides with the reality of bumper life:


What I need to do more of

Watching the sunrise at dawn...



...And what I need less of:

The Journal notes that as unemployment expires, more workers go onto welfare:

Antoinette Tatum has been receiving food stamps since September when she and her 4-year-old daughter moved to Kensington, Md. When her car transmission failed, Ms. Tatum couldn't commute to her job in Baltimore, about 45 minutes away by car, so she quit. Unable to find a full-time job, Ms. Tatum did temporary work but found that the more she earned, the fewer government benefits she received; ultimately she couldn't make ends meet.

"The government, they help the extremes. But people in between have the hardest time," said Ms. Tatum, 28. "You don't make enough money to get by but you make too much to get help." She turned to welfare, and expects to begin getting checks at the end of this month. She is considering staying on welfare and going to college instead of seeking another low-wage job.

The recession is straining many state welfare programs. State budget woes often mean more cases without more employees. And the demand for cash assistance is squeezing funds for job-training programs targeted both at the unemployed with little work experience and unemployed professionals with extensive work experience.

Now this I find irritating

From the Times, an article on how credit card companies have started writing off delinquent card balances to the original debtor, rather than selling the debt to collection agencies.

The banks were bailed out last fall, the automobile companies last winter. For Edward McClelland, a writer in Chicago, deliverance finally arrived a few days ago.

Mr. McClelland’s credit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even.

It’s a deal, the account representative immediately said, not even bothering to check with a supervisor.

I read that story and I think about the new computer that I want to buy, but can't afford right now, and I think about the $2700 that McClelland just got for free from his credit card company, and it irritates me.

That's all.

Elizabeth Warren

One of my favorite people, Elizabeth Warren, is currently serving as the chair of the TARP oversight panel set up by Congress. In her spare time, she sat for an interview with AARP. Although it was created up to monitor how the TARP funds were used, Warren is unflinching in using the panel as her bully pulpit for advocating for the rights and welfare of ordinary citizens:

In April and May, Republican members opposed the panel findings. In April, former Sen. John Sununu, R-N.H., criticized the panel for diverting attention from its focus on TARP when it examined a range of other policy options instead. In May, Rep. Jeb Hensarling, R-Texas, similarly criticized the panel’s evaluation of banks’ lending to small businesses and families, saying the panel went beyond its proper scope. Financial services lobbyists have long assailed Warren and charge that she’s using her new post to further push her own anti-industry agenda. The American Bankers Association, a trade group that represents lenders, declined to comment to the Bulletin on Warren’s criticisms of industry practices.

In fact, one presumes that Warren is one of the engines driving the current proposals for a financial regulator mandated specifically to protect consumers from bad financial products. I really like Elizabeth Warren, and I think her basic personal finance advice is spot-on:

While she monitors the massive bank bailout, Elizabeth Warren has several tips for the family budget. “It’s not the government’s role to save someone who is in debt because they went to the mall and charged thousands on their credit card,” she says. “When many people budget, they start by thinking how to reduce their lattes or cable TV service. What’s more critical is to focus on the big expenses you need to pay each month, with about 50 percent of your income going toward that.” Another 30 percent should go toward “flexible” costs including eating out, clothing, vacations and hobbies. Save the remaining 20 percent. That means consider housing needs above wants. Reshop your insurance to cut costs. Rein in credit card purchases. Finally, avoid taking out a second mortgage or other loans. “That takes debt that you may have been able to handle into something that can cost you your home.”

This is an easy one to try at home. Since she doesn't mention taxes, take your monthly take-home pay (add back in health insurance and retirement savings), then see how close your expenditures hew to the 50-30-20 rule she outlines.

"Billing Error"

Among the many trials of advancing age for me is a stubborn case of lateral epicondylitis. I visited an orthopedist a month or two ago, paid my $20 co-pay, and got poked, prodded, and injected with cortisone. I went happily on my way (well not really happily, because my arm still hurts, but that's another story) until yesterday, when this bill arrived:


There's a lot of mumbo-jumbo about this and that, and then at the bottom there's this entry for "INJ/DEXAMETHASONE." You can't see it in the picture, but the date of that entry for that item doesn't match the rest of the bill (the first three items -- the services and my copay -- were dated 3/13, the remaining items -- the insurance payments and adjustments -- were dated 4/14 and 4/30, and then the last item is back-dated to 3/13.

My first thought was that my cheesy health insurance plan didn't cover medications administered in a clinical setting, but it does. So I called the number on the bill. As soon as I asked what the bill was for, the clerk said, "Oh I see what happened. I'll take care of it. You can ignore that bill."

This is not the first time that I have had this experience with this billing company. It is obvious to me that they randomly pad their patients' bills, in the hope that people will just pay the extra $15 or $20, thinking that they forgot to pay the co-pay or something.

Which is why I save every single receipt.

No Tuesday Post

Tuesday is my regular blogging day, but as I made my way to my secret blogging spot (taxpayer-supported WiFi, comfy chairs, surrounded by richly compensated holders of public pensions -- you figure it out), I couldn't face any more time in front of the computer.

So I went to my secret walking spot and a spent a couple of glorious hours outside, in the lingering evening light at the end of a misty June New England day:


If I had been so foolish as to waste the evening blogging, I might have written about

• The question of whether or not a single person could 'deserve' to be paid 10,000 times as much as another person, and if so why. Is it right, for example, to be rewarded for things like intelligence (which are hardly under your control)? What about hard work? What about a person with a very low IQ who works extremely hard?
• How should public employee retirement be paid for? What's wrong with being able to earn a pension in 20 years? If you contribute to a 401(k) at 15% of your pay for 20 years, that would be enough to retire; isn't that what a public employee is doing? Also, lots of public jobs (especially law enforcement) don't make sense as lifetime jobs -- it's not realistic to think that police officers are going to be effective past age 55, for example.
• Pay cuts. I had to take a "temporary" one, but like the article says, as companies realize how little leverage their employees have, look for the cuts to become permanent. Union anyone?

Every now and then the Globe gets one right

From Sunday's Op-Ed page, an essay from an editor at the Atlantic on the high social and moral cost of our cheap credit culture:

Cheap credit disassociates our wants from our needs, distances the thrill of ownership from the kill-joy vexation of having to pay for it. But credit is a tool like any other - a chain saw comes to mind - that is extremely useful when used with knowledge and forethought, but extremly [sic] dangerous if used capriciously. The siren call of "low, low introductory prices" can mislead us, not only in the case of credit, but in many things.

Cheap loans, cheap goods, cheap food all exact a price. In the long run, many of us pay through the nose for all those incredible "bargains," not only with our credit ratings, but with our health, freedom, and even our futures. Freshly minted college grads chin-deep in debt have little choice but to grab whatever job they can, regardless of its long-term prospects, or its relationship to their interests and goals. Home "owners" who bought into "no money down, low-interest" balloon mortgages discover too late that they not only do not own their home, but that the bank owns them.

Last night for his bed time story, my son selected Henry Hikes to Fitchburg, which retells this short passage from Walden:

One says to me, "I wonder that you do not lay up money; you love
to travel; you might take the cars and go to Fitchburg today and see
the country." But I am wiser than that. I have learned that the
swiftest traveller is he that goes afoot. I say to my friend,
Suppose we try who will get there first. The distance is thirty miles;
the fare ninety cents. That is almost a day's wages. I remember when
wages were sixty cents a day for laborers on this very road. Well, I
start now on foot, and get there before night; I have travelled at
that rate by the week together. You will in the meanwhile have
earned your fare, and arrive there some time tomorrow, or possibly
this evening, if you are lucky enough to get a job in season.
Instead of going to Fitchburg, you will be working here the greater
part of the day. And so, if the railroad reached round the world, I
think that I should keep ahead of you; and as for seeing the country
and getting experience of that kind, I should have to cut your
acquaintance altogether.

This passage, on choosing between the working-earning-spending-consuming life, or the life of exploration, discovery, and contemplation makes me long for a life without credit.

On the other hand, boy am I sick of typing this blog on my slow old Powerbook G4 computer.

Boston Globe Money Makeover

Yeah, it's 2:00 in the morning. No sleep for the weary. The Boston Globe's Money Makeover this weekend caught my attention:

So he applied for a Boston Globe Money Makeover, saying he needed some help. "We are fighting over finances constantly and trying to figure out if we can send our oldest daughter to private school next year," the 36-year-old sergeant wrote in his application. "With as much as we make - over $160,000 last year - we still seem to be maybe three paychecks away from serious financial trouble."

Fee-only financial adviser Katie Weigel of LongPoint Financial Planning in Concord says many families find themselves in a similar situation. "Everyone else may look like they are doing great," she told the Natick couple when they sat down for their money makeover. But as with ducks that seem to glide effortlessly across the water's surface, the reality is that "underneath everyone is paddling really fast."

I was struck by the very modest appearance of the house in which this family of five lives (in Natick, MA):


But overall, it sounded like this family was in pretty good shape. Decent income, public sector pensions (hope that works out well down the road), retirement and college savings plans in place.

As always, one longs for more details from a Globe Money Makeover, like what are they spending on child care (a lot, I'll be, with three kids and two full-time working parents), how big a mortgage, all that kind of stuff.

Angry Internet Guy, of course, has a different take:

Why does it make AIG so mad that this family (presumably) has good health insurance?

Saturday Morning Cartoons

That's what we'll be watching in an hour or two, as the kids start rolling out of bed. But until then, here are a couple of tidbits from Hedonic Adjustment.

Cliff, Consumer Spending Falls Off of

From Floyd Norris at the times, a nice summary of how bady consumer spending has cratered, as well as the pop in savings. He notes that the spending collapse is much greater than the income collapse, suggesting that our current downturn is somewhat decoupled from the unemployment rate.


Best Marital Happiness Advice Ever!

Also from those happy scamps at the Times comes this advice on how to get a better night's sleep:

Save stressful activities, like arguments with your children or a review of your finances, for early in the day.

Great advice. Make appointments for those big arguments in advance. I love it!

Bill Shatner and Me

William Shatner and I both have one thing in common: kidney stones. OK, two things in common. We can't stop telling people about the big one we just passed.

From Ouch

Angry Internet Guy comes to visit

From a (different) leafy enclave west of Boston comes this comment on my post on Tim Geithner's house troubles from Angry Internet Guy (aka Anonymous):

The fact that Tim Guitner couldn't sell his million dollar+ home means simply this: there are no more wealthy people left in America.

Happy now, a------????

You are getting your wish!

Potty mouth though I am in real life, this is, after all, a family-friendly blog.

But is AIG really right? Do I hate rich people? Is the fact that a 70-year old tudor in Westchester won't sell for $1.6 million a sign of the apocalypse? Why did I even bring it up?

Well let's put that first canard to bed right now. I love rich people. As a card-carrying member of the mass near-affluent (90th percentile of income, 95th percentile of wealth) I worry a lot about keeping up, and getting ahead.

So what does it mean that Geithner's house won't sell? Well think about what it takes to buy a $1.6M house today versus in 2004, when it last sold. Right now, the absolute limit that anybody's going to lend you on a house is 80% LTV with a 32% total debt-to-income ratio. Also right now, any loan over $729,000 (a jumbo) will cost you at least 7.5%. That's a monthly payment of $8,950. Add in $2200 a month for property taxes and hazard insurance, and that's a monthly housing bill of $11,500. Qualify for that at 28% debt-to-income and you need an annual income of $492,000 ($41K a month). And that's after plumping for a $320,000 down payment.

Back in the boom times, 2004, you could have borrowed the whole $1.6M at 5% on a variable rate (saving $500 per month on the mortgage, believe it or not). In Westchester, you could have found a mortgage broker who would have let you borrow up to 40% debt-to-income, so you would have only needed a $345,000 annual income.

But of course, these ain't the boom times. And they ain't the boom times 'cause of all those boom times people who did just that, and their boom time buddies who securitized those crap loans, and their boom time buddies who use used those bonds as collateral to pay multi-million dollar bonuses to crooked bankers, and and and...

The point of my original post was to illustrate, I hoped, how even one of the smartest, savviest, brightest guys you'd ever want to meet, got done in by the housing market. Geithner is paying at least $10,000 a month to service the debt on his old house. With luck, he'll find a tenant to rent it for $7,500, so he's only losing $2,500 a month (less broker's fees). The loss will help on his income taxes, and if he rents long enough -- and that won't take too long -- he will lose the tax exemption on gains when he sells, but also be able to collect a loss.

If you work hard in America, you should be able to buy a nice house, in a nice neighborhood. But right now, the distribution of wealth is so uneven, and the ways that we've been financing houses so ruinous to everone, that that dream is broken. No investment banker works 10,000 times harder, or is 10,000 times more virtuous than any plumber. But the wealth showered upon that banker (and many like him), together with the insane lending of money, caused Americans to bid the price of a basic necessity -- housing -- out of sight of all but the richest or most foolish. House prices will continue to rain down upon us, both the just and the unjust. And is Mr. Geithener shows us, also upon the wise and upon the foolish.

Ooops

From the AP news wires comes word that Timothy Geithner and his wife have been unable to sell their one-point-something million dollar suburban New York home, and are now renting it out for $7500 a month. Thanks to the miracle of online public records, we can know what they paid, and when, and what they owe:

Geithner put his five-bedroom Tudor near leafy Larchmont on the market for $1.635 million in February, after heading to Washington for his job as the nation's top economic official.

A few weeks after the asking price was dropped to $1.575 million, the home was rented for $7,500 a month on May 21, said the agents, Scott Stiefvater of Stiefvater Real Estate and Debbie Meiliken of Keller Williams Realty New York.
...
Although $7,500 might seem like a lot of rent, it probably falls a bit short of the monthly mortgage payments on the Geithners' two loans totaling $1.25 million, plus $27,000 a year in property taxes.
...
Records show Geithner and his wife, Carole Sonnenfeld Geithner, paid $1.602 million for the home in 2004.

Ouch. talk about your bad timing.

Now there was much harumphing in the blog-o-sphere about how Ed Andrews' own subprime mortgage follies created a conflict of interest with his financial reporting duties at the times. Does Tim Geithner's personal financial stake in the housing market crate any problems for him?

Tuesday's Grab Bag

On Tuesdays, well some Tuesdays anyway, I take a little time out to write Hedonic Adjustment posts. I use all the bits and pieces I've collected that week. Sometimes multiple posts, sometimes one big mega post. Like this one.

My California Doppelgangers

From the Times, the story of a pair of doting, yet somewhat hapless, older parents. They had things pretty well organized financially until Dad's employer (the state of California) started cutting his pay:

The Ferrells had only recently begun to relax a bit after Mr. Ferrell, 55, received a 5 percent raise in December. But the furloughs, which are slated to extend at least to mid-2010, took away the raise and then some, dropping Mr. Ferrell’s take-home pay to $4,856 a month from $5,308.

In January, the couple sat down at their computer in their cluttered living room and waded through their major bills, including the mortgage, utilities and car insurance. The Ferrells concluded they had just $1,200 a month left over to cover everything else, from groceries to diapers.

That's kind of our story at the moment too (less the exhausted savings and credit card debt). Trying to squeeze several hundred dollars out an already pretty snug household budget.

Side note: Check out some of the just plain nasty comments this story generated:

From Tim in Cambridge Massachusetts:
Is this a typical story? Here is a 55(!)-year-old man with little kids and his wife has to work... and they are in financial trouble.

Unless dad makes over a hundred thou a year on his own, why have so many kids at his age? And mom doesn't even have a professional job. How did they think they could afford their family?

Guess the college educations are out now, huh? Unless the kids can get scholarships.

Children shouldn't have to worry because their parents didn't plan better for a rainy day. This family is one major illness away from bankruptcy.
Bottom line: nothing beats family planning. Too late now.

From RB in Mt. Kisco NY
No layoff's or pay cuts for our government employee's. No need to make due there.

The average government employee makes twice as much as his private sector citizen. Plus, government employees get much better health and retirement benefits than the private sector employee.

Private sector employees are being laid off by the hundred of thousands each month. Not the government worker. They are secure.

Our elected officials who depend on the campaign contributions of the municipal workers union are beholding to them come contract negotiation time. A true conflict of interest.

Inverted Class Resentment

I hear and read a lot of what might be politely called union bashing. It mostly goes like this:

It's ridiculous that those union workers get paid $50 an hour, have guaranteed pensions, and free health care in retirement. I have to pay my own insurance, I'm stuck with a crappy 401(k) and no pension, and I don't make $50 an hour. Get rid of those unions now!

You hear this about public workers and private workers, and the thing that always surprises me is that the person complaining about it thinks that the answer is to punish the unionized worker. Hey, a defined benefit pension and retiree health care sounds like an awesome idea! Why is the answer to inequity to make everybody as worse off as the worst?

We spend to impress, but nobody's listening!

Hard, hard news from the Times. Apparently, all that money we spend on purchases that display our taste and wealth (OK, mostly wealth) are largely ignored by others:

But once you’ve spent the money, once you’ve got the personality-appropriate appliance or watch or handbag, how much good are these signals actually doing you? Not much, Dr. Miller says. The fundamental consumerist delusion, as he calls it, is that purchases affect the way we’re treated.

The grand edifice of brand-name consumerism rests on the narcissistic fantasy that everyone else cares about what we buy. (It’s no accident that narcissistic teenagers are the most brand-obsessed consumers.) But who else even notices? Can you remember what your partner or your best friend was wearing the day before yesterday? Or what kind of watch your boss has?

A Harvard diploma might help get you a date or a job interview, but what you say during the date or conversation will make the difference. An elegantly thin Skagen watch might send a signal to a stranger at a cocktail party or in an airport lounge, but even if it were noticed, anyone who talked to you for just a few minutes would get a much better gauge of your intelligence and personality.

Worried about inflation?

Paul Krugman's not:

Still, don’t such actions have to be inflationary sooner or later? No. The Bank of Japan, faced with economic difficulties not too different from those we face today, purchased debt on a huge scale between 1997 and 2003. What happened to consumer prices? They fell.

All in all, much of the current inflation discussion calls to mind what happened during the early years of the Great Depression when many influential people were warning about inflation even as prices plunged. As the British economist Ralph Hawtrey wrote, “Fantastic fears of inflation were expressed. That was to cry, Fire, Fire in Noah’s Flood.” And he went on, “It is after depression and unemployment have subsided that inflation becomes dangerous.”

...

So is there any reason to think that inflation is coming? Some economists have argued for moderate inflation as a deliberate policy, as a way to encourage lending and reduce private debt burdens. I’m sympathetic to these arguments and made a similar case for Japan in the 1990s. But the case for inflation never made headway with Japanese policy makers then, and there’s no sign it’s getting traction with U.S. policy makers now.

All of this raises the question: If inflation isn’t a real risk, why all the claims that it is?

...

But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.

I do think he hits the nail on the head in the last paragraph: Massive government deficits only bother Republicans when they're spent. Deficit-funded tax cuts that enable the wealthy to spend aimlessly, that's OK!

Busted

Earlier I posted a kind of throwaway post about Times reporter Edmund Andrews adventure with subprime lending. Well it turns out that, just like self-serving bloggers everywhere, Andrews was telling the story that he wanted to tell, not necessarily anything connected to reality.

A thoughtful and astute Megan McArdle at the Atlantic pulls together the real story. Turns out that the hub around which this story actually turns is a one man's miserable mid-life crisis. At 45, our narrator falls into a torrid affair with the "brainy, regal, sexy, fiery and eclectic" Patricia, whom he had met years before in high school. This affair leads to the end of Andrews' "brusing" 21-year marriage, saddling him with $4,000 (or $5,000 if you believe Patricia's bankruptcy filing -- more on that in a moment) in alimony and support.

Blithely, the two take on a $400,000 subprime loan, which they quickly balloon to nearly $500,000 plus tens of thousands of dollars in credit card debt. They stop paying the mortgage, and of course the bank is so swamped that they basically wind up living in the house for free (they're still there).

McArdle reports, however, on Andrews's new wife's two bankruptcies. One, in 1998, she sought to discharge $200,000 in taxes and close to $100,000 in other debts. Then in 2007, after the marriage, Patricia files again, seeking to discharge $55,000 in debts, including $29,000 borrowed from a family member. This second bankruptcy was originally filed for Andrews's wife alone; only when a creditor (Comcast) objects, is Andrews forced to file as well (revealing the mismatch in claimed alimony payments).

McArdle points out that these filings provide a strong hint that Andrews's personal financial disaster was much more a matter of horrendous life choices and out of control spending than anything to do with housing or the mortgage industry. Andrews seems unable to see this, even when he writes it:

Patty spent little on herself, but she refused to scrimp on top-quality produce, Starbucks coffee, bottled juices, fresh cheeses and clothing for the children and for me. She regularly bought me new shirts and ties to replace the frayed and drab ones in my closet. She thought it wasn’t worth agonizing over nickels and dimes.

What Andrews's story is about is irresponsibility. About two people who wanted to live a good life on $2700 a month, in a nice house, with nice clothes, and nice coffee. Poster children, and I do mean children, for every thing you've ever thought about overspending, undersaving, mindless American consumers.

We need a national usury law

As Bernie Sanders points out:

“When banks are charging 30 percent interest rates, they are not making credit available, they are engaged in loan-sharking.”

But of course, the Senate didn't go along.

They might have if they'd read this.

One way to get out from under your subprime mortgage...

...write a book about it.

Read the story of how a $120,000 a year financial reporter for the New York times poured himself deep into a hole of debt, one subprime mortgage after another.

Bob’s [the mortgage broker] original plan was to write two mortgages, one for 80 percent of the purchase price and a piggyback loan for 10 percent. I would kick in the final 10 percent, cashing out a chunk of New York Times stock — my last. If I had been a normal borrower, the whole deal would have sailed through at a low interest rate. My $120,000 base salary and my assets were easy to document. But given my actual income after alimony and child support, I couldn’t possibly have qualified for a standard mortgage. Bob’s plan was to write a “stated-income loan,” or “liar’s loan,” so that I wouldn’t have to give the game away by producing paychecks or tax returns.

Unfortunately, Bob’s plan hit a snag a few days later. “Ed, the underwriters say that your name is on another mortgage,” he told me. “That means you’re carrying too much debt.”

The mortgage was on my old house, which I had turned over to my ex-wife. As part of our separation agreement, she accepted full legal responsibility for making the payments. But the separation agreement also spelled out exactly how much I had to pay each month to my ex-wife. If we showed it to the underwriters, they would reject me.

Bob didn’t get flustered. If Plan A didn’t work, he would simply move down another step on the ladder of credibility. Instead of “stating” my income without documenting it, I would take out a “no ratio” mortgage and not state my income at all. For the price of a slightly higher interest rate, American Home would verify my assets, but that was it. Because I wasn’t stating my income, I couldn’t have a debt-to-income ratio, and therefore, I couldn’t have too much debt. I could have had four other mortgages, and it wouldn’t have mattered. American Home was practically begging me to take the money.

Despite the obvious red flag of applying for a Don’t Ask, Don’t Tell loan, I wasn’t paying that much for the money. The rate on my primary mortgage of $333,700 was a remarkably low 5.625 percent for the first five years, though my monthly payments would probably jump substantially after the fifth year. On top of that, I was paying a much higher rate of 8.5 percent on my “piggyback” loan for $80,300. Even so, I would be paying slightly more than $2,500 a month for the first five years. It would get expensive eventually, but I could worry about that later.

Of course things don't work out, and our reporter is now 90+ days delinquent and waiting for his share of the bailout.

Read the story.

Now it can be told: The real problem with the economy

Courtesy of CNBC:

...In a separate report, producer prices rose 0.3 percent, also more than expected and a sign that the economy remained a threat to the economy...

No, really: