September 2008 Archives

HOW YOU CAN HELP: DECREASE YOUR CREDIT CARD DEBT

The following is an explanation of what's happening for intelligent people who don't track this stuff -- in the form of an analogy:

There's a fictional town called "Carville", where the majority of people sell new and used cars. All the outlying towns come to Carville to buy cars, because the market is great for cars there -- since that's where everyone's selling their used cars.

Between 2002 and 2007, the five largest car dealers, Al's Autos, Bob's Beauties, Charlie's Cars, Diane's Diesels, and Eddie's Engines, were going gangbusters. They were expanding their inventory, buying up used cars left and right, and even loading a lot of these cars into trucks and selling them in lots to smaller car dealers; that was standard procedure -- the smaller dealers would buy these lots from the ABC dealers (that's what they were called) and the smaller dealers would turn around and sell these "wholesale" cars at higher prices.

Now the Carville town government had a requirement of all sellers. You could only sell cars if you kept at least 1 new car, or equivalent, per 100 used cars. The "or equivalent" was a rule our little town's mayor made that said any car worth $15,000 or more was considered a new car equivalent.

Based on that, the ABC dealers always kept a portion of their cars as new and equivalents, so that they could sell all those cheap used cars that were moving like hotcakes. The dealers even sold car lots to each other based on this sort of new car requirement -- so sometimes, overnight, Al would call Diane and say "Diane, I'm short two new cars for what I have on hand, will you sell me a pair of new cars at wholesale?", and she'd agree -- since Al had 98 new cars in hand for the 10,000 used cars he was holding. She'd charge him a small fee, and everyone's happy -- no problem there, standard business.

Now, someone realized that if you took apart 10 used cars and put the nicest pieces back together again, you'd end up with an "equivalent to new" car -- one that could be counted as part of your new car requirement. So the ABC dealers, since they had the most cars, started chopping used cars as they came in and making these higher value "equivalent to new" cars -- which was cheaper than buying actual new cars -- how great is that?!

Before you know it, they're not only making these "chopped new" cars for themselves, they're selling them to each other for equivalency headcounts as well, and selling them to smaller dealers as well -- there's a whole new kind of car here, and frankly since the value of a chopped new is so much higher than the pieces it's made out of, the ABC dealers were focusing on chopped new cars a great deal.

For five years, it's a wild ride. They realize that they can go after cheaper and cheaper used cars, chop them into just barely equivalent cars, and actually create MASSIVE inventories of new or equivalent cars, so they can go out and get tremendous amounts of used cars -- just vast lots -- Al went from 10,000 used cars and 100 new cars to 200,000 used cars and 2000 (!) "chopped new" cars. He was buying and selling car lots to folks as far away as Indiana -- making money hand over fist ... and nobody ever expected it to end -- because it wasn't some bubble, it was just a great way of doing business.

Then one day, there was a car accident -- and one of the drivers was driving a chopped new car. In the accident, the chopped new broke into pieces and the driver was severely injured. People at first didn't notice, until more chopped new cars started breaking apart in car accidents. See, chopped new cars were great for regular use, but they actually were terrible in a crisis -- they collapsed like a cardboard car, and people were getting hurt badly.

All of the sudden, nobody wants to buy chopped new cars. They're dangerous, they go bad at the worst possible moment and can't survive a crash. So the chopped new cars lost their value. Well ... that meant they were no longer equivalent to a new car -- heck, they weren't even equivalent to a used car. They were rolling junk, worth nothing.

So on a dark Monday morning, the ABC dealers went out and looked at their vast fields of cars, and realized they had a major problem. They had massive counts of used cars (remember Al's 200,000 used cars?) and only a handful of new or equivalent cars. So first, they called each other.

Al called Diane and asked if she had any new cars she could sell him at wholesale -- she replied that she was just about to call him and ask the same thing ... or would he like to buy a few lots of used cars so she can drum up the money needed to get the new cars she needed? Well, nobody had enough new cars. In fact, all of Carville had maybe 150 real new cars and close to 1,000,000 used cars on hand. Nobody was going to be able to afford the tens of thousands of new cars needed to keep Carville alive. Now what?

So -- here's the analogy explained:

* Carville is the Financial Industry

* Each of the ABC dealers is a major Investment Bank (Morgan Stanley, Goldman Sachs, Bear Stearns, Lehman Brothers, and Merrill Lynch)

* The new car or new car equivalents is "Assets on Hand" -- this is a requirement that the Government and lenders have for how much money you must have on hand before you can lend, or borrow money. Clearly, when you go to get a loan, the bank asks you what you have for collateral -- but what you may not know is that the Government won't let banks lend money unless they have a certain amount in cash or cash equivalents -- assets. These restrictions are lower for Investment banks -- but "regular" (or commercial) banks have very strict requirements for how much cash on hand they must hold. (See Reserve Requirements explained for more details)

* The used cars is the loans and other MONEY MAKING methods all these banks and Investment houses had out there. It's the equivalent of how many things in your house you've bought on credit vs. with cash. Imagine if most of your entire home is bought on credit (if that's the case, stop reading and fix that now) -- that's how "leveraged" the banks got. Well, that's how leveraged they tend to be in general -- but in this case the "ABC dealers" were basing it on these crazy "chopped new" cars ... which are...
* The "Chop New" cars are the CDOs (See Collateralized Debt Obligations for more details) that the Financial Industry ("Carville") was slinging around as if they were real assets ("new car equivalents"). The CDOs basically are an armful of debt - and the big monster in this case is consumer debt, in the form of crazy sub-prime mortgages (Mortgage Backed Securities aka MBSs) wrapped up with a bow and treated basically like money. That's great, until we start seeing...

* The car crashes are when individuals started defaulting on their consumer debt. These defaults were getting more frequent -- which forced the Financial Industry to review the MBSs and realize that these MBS "chopped new" cars fell apart in a financial crisis -- individuals with low credit ratings had been scooping up vast amounts of debt, being put into these CDO/MBS securities -- which were then sold to the major banks. When all the bad consumer debtors started defaulting on their crazy loans (those "half-caff with a twist" super sub prime ARM cheater mortgages that sane people avoided), those individual loans made the CDOs that had them bundled, into garbage. All of the sudden...

*The major investment firms realized they had massive amounts of loans out there, and their assets were next to nothing -- they had no capital, they couldn't match Reserve Requirements (where applicable) -- and all they had were giant piles of these useless CDO/MBSs filled with defaulting debt.

So what happened?

Well, to date of this post -- the mayor and government of Carville realized they had to buy all these "chopped new" cars from the dealers, or all of Carville would fall. The hope is that the Mayor's people can fix the chopped new cars, or at least hold them long enough for the good ones to be worth something again.

"But that's going to cost the town $700 Billion", someone shouted.

"Well,", said the Mayor's banker, "if we don't do something, there won't be any more cars to sell, and frankly, without cars, nobody can drive, and if you can't drive, the farmers can't sell their goods, people can't get to the store, and the whole sky will fall. Folks will be trapped on their own farms, living off the land. We gotta do something."

...and where it stands right now is that the Mayor, his banker, and the town elders are all sitting down to figure out how to get this money available to the car dealers so they can get back to selling cars, and unwind this mess.

What happened to the ABC dealers?

* Lehman Brothers (let's say that's Al), failed. They've filed bankruptcy protection (they're not closed, they're just saying they can't pay any of their creditors and need protection until they recover, you'll see them again)
* Merrill Lynch (Diane) found a neighbor, who never got a big piece of the "chopped new" business. See, that neighbor is a truck dealership -- and they're required to have many more new trucks per used truck (let's say 10 new trucks per 100 used trucks vs. 1 new car per 100 used cars). Since they have stricter requirements, they were less exposed, and tended to act more conservatively (usually). Coincidentally, since they're kept in a more strict position and act more conservatively, the town of Carville lends them money at a lower cost (The Federal Reserve System). These are the "real" commercial banks. That neighbor bought her for almost nothing. That neighbor is Bank of America
* Goldman Sachs and Morgan Stanley (Bob and Charlie), went to the mayor and said they'd like to become truck dealers -- primarily in the hopes of getting their hands on that cheaper Carville town lending that truck dealers get. That's helping, but not a given solution. "Old Jack", the smartest man in Carville, sauntered in from his ten million acre ranch and told Bob he'd give Bob some of the money he needed if Old Jack could have a whole bunch of things from Bob (including a 10% dividend, which pays essentially $1.3 million a day). Of course, "Old Jack" is Warren Buffett -- what a great dealer :)

* Bear Stearns (Eddie) died early and was sold to JP Morgan months ago (not to be confused with Morgan Stanley)

But the saga continues -- as the Mayor and his people determine how to deal with this -- Washington Mutual, a "truck dealer" found itself so massively extended in these CDO/MBSs, that they couldn't meet the strict requirements, and the Government seized them and sold them ALSO to JP Morgan

What does the future hold? It's gonna be more expensive to buy a used car for a while (get a loan), because everybody's gotta make money and the prices will go up -- and if the Government does nothing, Carville will go bust and we're all living in our farms alone. How's your farm?

Your Farm:
Your farm is your personal financial status. You should be primarily as debt free as you can be -- your mortgage, if you have one, should be very traditional and the lowest rate you can have -- get out of your credit card debt, period.

Another thing about all of this is where it can get worse. See, there's a LOT of Credit Card debt out there -- and it could make things worse. If consumers are defaulting on their mortgages, then they're also going to default on their Credit Card debt. That's going to create ANOTHER burden on the banks, and make the heavy lifting even heavier.

HOW YOU CAN HELP: DECREASE YOUR CREDIT CARD DEBT
How much credit card debt should you have? (None, but...) If the cash you have can't pay the debt you carry, you've got too much. Stop investing, stop buying, pay off your cards now -- it's how we got here. You want responsibility? Yes, the ABC dealers are responsible, but the extreme credit card debt of consumers is the cause.

To do that is going to take an emotional shift. When you look at your flat screen TV, enjoy it -- don't then look at mine and say "Well, his is bigger, I need a bigger one too." -- stop looking at your neighbors and comparing; just look at yourself and be happy, in other words -- live off the land on your own farm, live within your means.

Bottom line? $10,000 cash is better than $20,000 and $10,000 in debt -- for you, your farm, and our country.

If you have read Adam Smith's The Wealth of Nations or one of the hundreds of books that comment on that classic, you'll probably know the term "the Invisible Hand". This term references the outcome of a fully open free-market society that is driven by self-interest.

But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavors as much he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

Adam Smith - The Wealth of Nations

Smith's primary point is that when people work for their own interest in a fair, open market, they contribute to the overall good of society in the process, not through their own cooperation with others towards that overall good -- but by virtue of the economic process, the good comes about as if by virtue of an "Invisible Hand" guiding things.

In modern "short speak", if you look out for yourself, that's gonna help everyone.

Well, there are a few huge problems with that notion -- not operationally, but philosophically ... problems that don't go into maudlin morality or any other such notion -- but simply outline that the Invisible Hand requires what I call transparency.

In the movie Wall Street, the character Gordon Gecko says the famous line "Greed is good."

As any novice investor or trader will tell you, greed and fear are the enemy when it comes to managing your portfolio -- they cause you to make emotional decisions that undermine your overall return. So, in essence, (as we all know from our 2nd Grade Teachers), Greed actually is not good.

But what happens when a society, having been educated to the very valid concepts of competitive advantage, and even Ricardo's comparative advantage -- get it wrong and begin to equate Greed with self interest?

What happens if, after reading two paragraph synopses of Smith's ideas, an entire community, like the Investment Community, gets it in their heads that Smith has created some sort of license to be a jerk, and cheat the next guy -- since the process of looking out for yourself makes all nasty maneuvers justified? We end up with the sort of debacle that's been happening over the last 6 months.

Transparency, in my nomenclature, does not simply apply to the pedantic demands by wounded civilians that the corporations open their books, share the emails of their CEOs and allow us to see what they were thinking. I present, instead, the idea that risk itself has an opacity -- a quality that requires us to ensure that what we know is everything necessary to be known. You cannot work for your own self interest if you do not understand what that self interest is. In the old saying, if you can't see the sucker at the poker table, it's you.

Consider the example of the driver who does not know the bridge is out. He is driving along, safely at the speed limit, when his wife calls and informs him that she is going into labor and he should race home so he can be with her as the baby is born. In his mind, it is suddenly in his best interest to get home quickly, so he makes the choice to accelerate -- thus giving himself no opportunity to respond to the missing bridge in time and soon he's swimming to the far side, hoping to call his wife from a soggy cellphone.

Risk cannot be completely removed, and as he accelerates, the driver increases the possibility of that risk -- but he is oblivious to that relationship -- he has driven on this road a thousand times, he is a careful driver -- and while yes, driving faster is a higher risk, it's a calculated risk he is willing to take.

So, the question becomes -- how does one make the situation more transparent for him, so that he can better recognize the choices he is making and truly make decisions in his own best interest? Such a question becomes the focus of regulators -- the point of the exercise -- and that opacity is their job to conquer.

There are 5 places that the opacity against self interest can originate. The first and most likely unavoidable is random chance. We cannot rule out random chance - it will always be the Scepter of God -- wielded at his Will and impervious to our attempts to control it.

The second most important one is our own ignorance. If we do not understand what we are doing, we are that driver blindfolded or refusing to read the signs by the side of the road. There will always be lunatic drivers out there -- call them day traders and gambling speculators -- but for the most part, if we can generate a better and simpler methodology for enabling ourselves to see clearly -- but also to understand the details.

If our driver sees a sign in Chinese, or is illiterate -- what will he do? He will act in perceived but inaccurate self-interest, eventually hurting us all in the process.

The third source of danger is the ignorance of others. That also would be remedied by the same things that would save us. Others, presumably working in their own best interests, may advise us to our own detriment. The man's wife told him to move quickly -- she was also ignorant of the bridge.

The fourth source of confusion is the intentional act of others but not directly intended -- there is the drunk driver who drove over the sign in a stupor -- didn't know what that bang was, and drove on. That driver did something to confound us, but didn't know it. That's the largest group of people who interfere with the transparency of the invisible hand.

Finally -- for the sake of this post -- the fifth source of confusion is the intentionally evil person. Sadly, many people are equating "getting over on the next guy" with self interest -- which is foolish. If you make the world blind so you can be the one-eyed king -- you will surely starve.

So -- the question of my study becomes ... how to control the transparency -- and how to know when you are truly seeing a transparent situation, and not just a mirage?

iTunes has added a feature that's just great, at least for tonight. It's called "Genius" and I like it. It matches songs you have to other songs you have -- but more important, it matches songs you're listening to at that moment to songs on the iTunes Store -- which is frankly like crack.

I've spent the most money I've ever spent in one day on iTunes because of Genius.

I'm loving the music variety and the music extension ... it's great.

Ok ... back to 9/11 -- thanks Osama, you're still a sad little man who doesn't know God at all.

Well, that's done.

Now, back to my rambling ... I have to ramble tonight -- I'm tired but not enough to fall asleep yet -- I'm gelling on this music, thinking about writing and just stretching my thoughts and getting limber here again.

I wrote a little during the day today -- that was good ... got a few facts down, raw stuff that I'll have to edit the heck out of later -- but good stuff all the same.

Ok -- random phrases:

Blue skies at dawn don't exist
A cut doesn't have to be bad
Snowflakes just want to be the same
Birds don't ever know the taste of candy
Bugs have no concerns about the disappearing rainforest -- the world is still a jungle for them
Dogs love people, who do we love like that?
Candy is an interesting topic -- who created it anyway? Was it made as a luxury or as a way to placate children? Are all luxuries just ways to placate the children inside of us? If not, why do luxuries exist?

I think the Mountain Goats are a great band.

If you look into your own eyes on a day that's happy, you never stop to watch your own expression ... you're too busy being happy. But on the days when you're dark, you see so far into the emptiness that you wonder why you even need a mirror anyway.
Today, I'm ignoring my mirrors.

If a lover gives you a chalice, don't hesitate -- it bruises the grape.

There is more hay on the planet than people, there are more insects than hay, there are more molecules of air than insects, and if you took all that and expanded each one to the size of the solar system -- you'd still be nowhere near the size of God's mind -- or the universe for that matter.

Love isn't about flowers -- it's about the muscle, bone, and sinew that keep two people living together at the side of a river with nothing but a cloth to cover them and a bucket to carry water. Love isn't about doves, it's about pain, consumed gratefully so others won't. Love isn't about chocolates, it's about tearing down this wall forever ... the one that divides everybody from everybody.

Ok -- I'm done rambling into my open mike ... 'night all... God loves you -- don't believe me? Well, whatever is out there caring about you is God ... and if you don't think He's there -- help me tear down this wall.

I woke up yesterday with vertigo. Dizzy and not stopping. Crazy.

By noon, I was seasick and tired -- but so what? I just stopped moving.

Kathy and I got to the doctor by 4pm -- I've got Vestibular Neuritis ... not as dramatic as it sounds. The nerve between my ear and brain is inflamed in some way -- so I get dizzy until the inflamation goes away.

Maybe God wants me to sit still and write -- I think so. I'm flailing around with other things -- lost a bunch of money in the market in one swell foop because I tried something I didn't understand ... but again -- so what?

I'm sitting here, music in head, bound to the ground until I get over the ear thing -- which could be days, could be weeks.

Nothing to do but write, and then write some more. I think I'll enjoy it. Or not. Who cares?

Like I have a choice -- gotta do what the man in the sky says -- so write I do.

Meanwhile, the vertigo makes me feel weird -- I'm definitely in a strange brain space. Gonna try to get to the office tomorrow -- that should be amusing.

Do you ever just get to the end of the day and wonder what you did with it? I tend to do that and then look back and realize I've actually done a lot of little things -- primarily because I'm not a fan of doing nothing -- so by habit, I end up doing stuff.

Today -- an empty day -- I got BBQ and went to the construction site of a friend's house, chatted him up about my old church, networking, and his new house. I dropped water off for testing by a lab. I ministered to a friend in Boston and prayed with him.

I took a call from the office about purchasing FC/SC fiber strands from our vendor, and approved the order.

I installed a new stock management program, read the Wall Street Journal, watched Friday Night Lights online through a piped feed to our flat screen TV, updated my daughter's iPod, bought a new AC detector at Home Depot, got a tea Misto at Starbuck's, played with my friend Pat's dog, watched Raiders of the Lost Ark with my son (to help make sure he skipped the scary parts), had our friend Pat over to dinner, and wrote a background article for a friend that's writing an article for the New York Times.

Then I organized the songs on my iTunes, downloaded a new app that sorts songs automagically, called my semi-estranged brother and talked about the relationship between the Native American nations and the BIA, but I forgot to call my wife's uncle Steve about coming over for dinner.

Finally, I read all my emails (about 20), and wrote this post.

...just another nothing day -- so why don't I feel like I did anything?

Tomorrow -- the kids start school.

Kathy went off to bed.

I'm all alone with this blog again ... so what? I wrote something last night, a starter page for Rat's Nest -- liked it -- handed it off to a few people, one read it and gave me some feedback -- the rest promised to ...

So tonight, I'm blogging to get started -- just kick it off ... get my voice going -- get my thoughts running.

I may have finally gotten to a pattern that can make me write -- I think -- maybe.

The point is that I start with music on headphones, late at night, with the whole world asleep, and just sit down to this thing and chatter -- then, when I'm limber ... I write.

How's that? You get to read my warm up tripe and I get to write what matters to me.

hmmm...

that's about all I've got for the blog -- besides the fact that it's hard to get STARTED writing on this thing -- but at least it publishes. That's good.

I saw some funny stuff on Comedy Central's website about Obama's acceptance speech. He's still my guy -- but I'm a little worried about his financial plans. He wants to strap a lot of financial burden on an economy that's struggling to stay standing right now ... he wants Universal healthcare -- which I think IS critical, but at the same time, mandating that parents MUST insure their children sounds kind of naive to me.

He's also looking to do some things to small businesses that seem myopic to me ... but whatever -- he's still my guy thus far. That's all I've got ... I expect disagreement ... my opinions are my own.

Ok -- I'm off tonight -- can't write much -- put a little here and there ... but there's not much to add -- so I'm gonna go play the Wii... why? Because I can ...

Here are a few titles of books I want to write:

Rat's Nest
Ritual
A Perfect Rainbow Circle and the Meaning of It
Faith
Dog
Empty Water

There are others -- but well, wishes mean everything, right?

It makes me nuts -- all I have to do is develop the habit to sit down and start typing, like this -- and before you know it, I'm writing a book -- but I need (NEED) to publish ... I don't care about writing things down -- I care about other people reading them.

I want to write about children lost on the streets of the world, I want to write about brothers who don't know each other, I want to write about a God who Knows us better than we want to know ourselves -- I want to write about things that don't matter ... because they're the things that matter the most.

Here's a few blabbering phrases that I got the other day...

Sedentary Warriors -- that's a coinage of every white-collar "killer" who goes to work, tears it up for his or her family, and never moves from the chair they work in.

Feather in a Storm -- that's just a nice turn of phrase... it's probably the safest place to be in chaos

So, those titles have to do with real books I have written in my head, but don't want to write because people may not like them. What's THAT about? Why should it matter?

I can tell you ... because there was a time in my life when absolutely nothing that came out of my mouth mattered to anyone -- I was virtually a piece of furniture ... "What will we do with him? Should we put him there, or over here?"

So, with that as a foundation -- how do you get to a place where you live your every day carrying literal (ok ... minor pause ... I'm listening to Duran Duran's "Rio" -- had to chair dance to the refrain :) )

ok... anyway... back to whatever serious thing I was saying... oh right -- everything that comes out of my mouth carries literal weight for other people's emotions ... if I put someone down, it could be someone who works for me, or someone who thinks I'm pretty smart, or someone I used to pastor, or someone who looks up to me, or someone who relies on me, or someone who is checking in with me to get his or her life back on track ...

Well, then don't put people down. Duh. But what about the perceived slight? What about the one that they're thinking when I'm doing something else? How do I navigate that? Well, then I have to be ready to (...her name is Rio and she dances on the saaaand...) think about what people might be thinking about what I'm saying and be ready not to say it (!)

Welcome to my world. That's on a good day. Then there are the days where I blow out -- I just can't take the pressure anymore, and I just pop -- I let everyone around me know that they suck because they're not reading my mind as much as I'm trying to read theirs -- and you know what? Then I get put in the "crazy angry" box -- and everybody stops listening.

Soooo... now what? Write? Right.