Roughly the TRUTH

I’m illiterate, but should an English teacher really fail me? A growing number of Americans say no…

…At least when it’s the banks doing the grading. An informed public keeps the wheels of democracy and capitalism greased. However, financial illiteracy still plagues many in the “middle class.”

Underlining the need for reform in schools, disgruntled and desperate borrowers are turning to the courts for help in an effort which should serve as a warning; and if in doubt, just look south of the border where a wave of socialist reformers have recently been swept into power:

“Across the nation, anger and litigation are growing against the tactics of subprime lenders, who offer easy credit for homes that are turning out to be too expensive for millions of Americans now that mortgage rates are going up.”

The King of Consumption or the Queen of Denial
The recent run up in asset values was largely influenced by the easy money atmosphere which prevailed following the economic downturn in 2001. It’s really just a result of basic supply and demand:

1. Cheap money and loose lending standards flood the housing market with buyers (many of whom were never truly fiscally viable)
2. Multiple bidders compete for limited goods (homes) and prices rise
3. Builders struggle to keep pace, resulting in a supply glut once rates rise and standards tighten

A simple analysis by anyone looking at the loan types these “boom” buyers used, could’ve concluded with confidence just when all this trouble would begin.

Some of the most popular loans during this period were ARM’s. Such mortgages typically have rate adjustments (per terms of the note) based on some index plus prime after a fixed period of time (frequently 2 to 3 years). 2007 is the year during which many homeowners will feel that pinch according to various reports.

Coming to Terms
You could argue that many believed rates would stay low, but this is major folly at best. The simple fact that interest rates were at all-time lows should have given many pause. It wasn’t just laymen who fell into this trap; as the WSJ noted in an article last year; Lenders Try to Keep Mortgage Boom Alive:

“More than $300 billion of ARMs issued to borrowers with good credit will begin resetting over the next two years, according to Lehman Brothers Mortgage Research, with $718 billion more of these loans resetting in 2008 and 2009. An additional $507 billion of ARMs issued to borrowers with poor credit will reset over the next four years.”

This over-exuberance may just be a cultural thing, but the best way for government to impact culture is through our public school system, not with laws and regulations limiting democracy and capitalism.

Back in 2005, it could be argued, that even Greenspan got in on the irrational exuberance:

“Lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately,” he argued at the height of the housing boom.

While Mr. Greenspan may have been right about the ability of lenders, I guess that when a final decision is left to human beings, reason and reality aren’t always the best of friends. It must be said, when enough demand exists for something, you can be sure that some go-getter will be right there looking to make a quick buck; even to the detriment of others.

Strong Minds Break Chains
If you take the loan of your own volition, sign up for the class, the lender has the right and the responsibility to hold you accountable for your financial literacy, or lack thereof. Even with these challenges, we should not be deterred - Demand for things that society agrees are “unhealthy” can be minimized, but only to the extent we successfully use our resources to educate the public. In the end, it’s the responsibility of the individual to make the right choice - it’s society ’s responsibility to provide access to the tools for making that choice.

“Yet without a well-informed public, our liberty itself is in peril.”
- Thomas Jefferson

Related Resources
- Real Estate Finance In-Depth, a retrospective (.pdf)
- Annenberg Institute for School Reform
- TIME.com: How to Bring Schools Out of the 20th Century
- Federal Reserve | Personal Financial Education
- The Wall Street Journal Classroom Edition
- State of the Nation’s Housing 2006 | Harvard JCHS
- Residential Mortgage Market in 2007 | MBA
- The Fed’s Consumer Handbook on ARMs

[UPDATE - 3.22.07]
Debating government intervention on Kudlow & Company tonight was Robert Reich, former labor secretary under Bill Clinton. The falseness of his heart was abundantly clear; if not outright frightening - especially given the position he held…I suspect this may have had something to do with Hillary’s comments on the mortgage market.

Watch the debate between the Dynamic Duo.

Valuable insights are gained by Bill and Melinda Gates since embarking on a philanthropic mission via their foundation. They recently discussed this on PBS’ Newshour…

The Interview
Judy Woodruff posed challenging questions to the couple entrusted with billions in other peoples money:

“There’s been some improvement, but in terms of academic achievement, improved only slightly, and in math, it appears to have gone down. What lesson is there from that?”

From the mouth of Melinda:

“It would be great to work in just new schools or new models of schools, but we’re realizing that you have to work at the district and the state level. You have to have policy changes that support these 1,800 schools that we’re working in.”

“It would be nice if the curriculum that was there really worked, but, as you start to look at it, we’re realizing that the gains we’re making are in reading and in English[…]But you’re absolutely right: Math and science, there needs to be a curriculum change, and sometimes even teacher training to make sure that we’re teaching the right things to students.”

Bill provides an interesting insight, linking the foundation’s dual causes of promoting global health and modernizing the education systems:

“The impact of improving health is that the population growth goes down, and so you can educate more kids, feed more kids. It’s paradoxical that, when you have better health, families choose to have less children, because they’ve been having enough children so that they can be sure that a few of them will survive and take care of them. So as health improves, then all the other problems are dramatically easier to tackle.”

Listen to or read the full transcript of the interview.

Some Thoughts
A sure-fire attention killer is learning math for math’s sake; this was true for me in most subjects. As for todays youth, I’d bet that things haven’t changed much. I was lucky enough to be shown the “light”…the practical application of this knowledge opened a new world of possibilities. My motivation came as the result of finding more effective strategies to get what I wanted.

What Motivates a 10 Year-Old
G.I. Joe and He-Man
Those blue and white ticker tapes run across the TV every night my father (a banker) gets home - I eventually had to ask him, “What could possibly be so interesting about this that you watch it like it’s your religion?” I was facinated by the idea that people were earning money not by “going to work,” but just putting the money they earned into pieces of paper (You mean there’s a way to get EVERY Star Wars action figure besides mowing lawns!). As time passed, this led to discussions of financial statements, the various ratios derived from them that investors use value companies and the function of interest rates.

More Recently
I’ve been facinated by the analytics used in search engine rankings (although I have yet to actually delve into the topic, the interest is there…now, if only the time was).

So, what’s motivated you to learn what would otherwise be a dull topic?

Bye, bye Net Neutrality…

For proof, look no further than a situation in September in which hundreds of thousands of people who use the popular social-networking site Facebook rebelled against a new feature that some charged was Big Brother-esque, Majoras said. Within days, the site’s founder had quieted some of the fury by giving people the option of turning off the “minifeed,” which shows people whenever someone in their network makes a change to their relationship status, favorite music or other profile information.

An aweful analogy; comparing Facebook to an ISP.

It’s like comparing a car maker with a toll road operator.

Check out the FTC hearings webcast and form your own opinion, but remember, it was a “free market” which produced Hitler’s Nazi party.

Dont’ count on government to save for your future…

The U.S. government is threatening the financial future of todays youth. Like a group of dis-jointed heroin addicts, our apathetic congress has ignored record budget deficits, America’s spiraling debt and has effectively shunned an entire generation in favor of temporary, quick fixes. This article, Your free financial report card on MSN Money, provides provocative evidence for this thesis. For instance, the future of Social Security, remember that old debate? Liz Pulliam Weston, the author, has compiled some interesting numbers to help you sort through all the political banter surrounding this issue:

The farther out your retirement and the more money you make, the more you may want to discount the estimated benefits on Page 2. (Higher-income workers may see their benefits cut more than lower-income workers, if Congress decides to preserve the safety-net aspect of the retirement system.) What this means:

* If you’re in your 20s, you might not want to include the estimates at all when calculating how much you want to save. If you do include them, figure on getting 25% to 50% of the amounts on Page 2.

* If you’re in your 30s and 40s or make more than six figures annually, you might figure on getting 50% to 75% of the promised benefits.

* In your 50s, figure on receiving 75%.

Liz also explains a very simple and easy way to get a snapshot of personal earnings growth over your entire working life - something the government is actually capable of providing us with. Read this article not only for eye-opening insights into our countries welfare system, but also benefit (or at least find some extra motivation…for you competitive types) by comparing your own finances with others in your demographic. Here’s a sample of the stats for those aged between 60-69:

Enjoy the read and if you’re among the younger generations (you’ve probably heard this before, but) remember, plan your own retirement - don’t be fooled into thinking the government will (or even can) do it for you.

Update (11.07.06):
Another article from the good folks at MSN Money.com to help you see how far behind (or ahead) you are of your peers; Your 20s: See how your wealth measures up