Porkulous or Stimulus (Update)

Earlier this year (February to be exact), I wrote a piece (check it out here) about the "stimulous" plan that the newly inaugurated Obama administration crammed...er...passed into law. Needless to say, I cast a skeptical eye on the bill as it simply had way too much government waste included in it AND the money did not flow fast enough to give the economy the jolt it desparately needed. It is now becoming even more clear that the Obama administration did not pass the best bill possible as the economy remains in the tank, unemployement continues to increase (and the rate of unemployment is rapidly approaching double digits) and there is some loose talk of yet another "stimulous" plan (seriously, this is no joke)! Check out the recent interview on CNBC with Art Cashin of UBS ("stimulous is part Hoax..." WOW!):

To shed a bit more light on this, Joe Biden recently admitted that he and Obama "mis-read" how bad the economy was (here is one of the many news stories on the topic). It's somewhat laughable that he can suggest this and get away with it! Don't you recall all of the speeches about how this was the worst economy since the Great Depression (hard to say they mis-read it, eh)? Here's one example from a January 2009 speech from Obama (read the entire speech via the link):

"Throughout America’s history, there have been some years that simply rolled into the next without much notice or fanfare. Then there are the years that come along once in a generation – the kind that mark a clean break from a troubled past, and set a new course for our nation. This is one of those years. We start 2009 in the midst of a crisis unlike any we have seen in our lifetime..."

That sounds pretty dire! Well, the economy IS pretty bad (it's at least as bad as the early 80's and maybe worse than that) and I just don't buy that they "mis-read" it when, speech after speech, Obama talked about the "worst economy since the Great Depression." I think it's more likely that Biden and the Obama administration continue to try convince the American people that none of this is their fault even after they've ramped up government spending and passed an enormous spending bill with a "Stimulous" title on it. To be fair, they did inherit a pretty lousy situation and things were clearly getting worse when he took office. But, the American people are tiring of the blame game (Obama's approval rating is down to the low 50% range when it was in the mid to upper 60% range when he took office) and the ineffectual nature of Obama's economic proposals to date (trends in his approval rating prove this out - click here for Rasmussen data).

We were sold this "stimulous" package on the promise that it was necessary to turn things around and that it would bring us out of a tailspin. Unfortunately, it now appears that we were sold a bill of goods (don't say I didn't warn you in the February 2009 blog post).

I sincerely hope that Obama will refocus on what really matters right now (HINT: "IT'S THE ECONOMY, STUPID!!!") and drop plans for massive spending on healthcare and taxes green house gases (aka Cap and Trade). Making the case that we can't fix the economy unless we fix healthcare and the environment just doesn't make any sense. Let's get this economy going BEFORE dealing with these other issues. After all, if the economy (aka current and future tax base) continues to shrink, we definitely won't be able to afford any of these other initiatives.

SHOCKING MORTGAGE REVELATION!!!

In news that will SHOCK the country, people that made poor financial decisions over the last 24 months continue to make poor financial decisions (and they are still not paying bills on things they still can't afford). In a Reuters article whose conclusion is just entirely too predictable, the government is reporting that borrowers that stopped paying their mortgages once, are doing so again!!! Shocking, I know.

OK, so that's my poor attempt at blogging sarcasm, but you get the point. Why would anyone expect "loan modifications" to be successful? Sure, they may help some fraction of the folks that are having a tough time and were legitimately scammed by predatory lenders, but the simple fact is that there were WAY TOO MANY people buying homes that should have never bought a home in the first place (most of them are not bad people, they just were not ready to take on the responsibility of owning a home). So, as I've predicted many times in the past, loan mods just won't work for most loans because the people that should have never bought a home in the first place still own a house they still can't really afford!!!

Since when did renting gain such a stigma? There is nothing wrong with renting a place and making it your home. We (the politicians especially) got a little caught up in this whole home ownership/american dream thing and we are now paying for it in the financial, real estate, business and every other market you can name. In what many of you may see as a bit of a stretch (but, I honestly believe it), Americans forgot that the American Dream revolves around EARNING things and not being given things (that whole sense of entitlement thing). What happened to saving for a 20% down payment before buying a house? If someone can work hard and save 20% (or even 10-15% fo that matter), they're not only putting a lot of "skin in the game" but they've also demonstrated financial management skills (i.e. they are likely to be very good credits). If we'd adhered to this very basic standard alone, we would not be in the mess that we are in! It sounded great that you could buy a house with only your good name and your word (stated income or "liar's" loans as they're now called), but it was all too obvious what would happen (people would stretch the truth...or simply lie to get what they wanted - a house they could not afford). Now, since we have not learned our lesson, let's give people something for nothing yet again - e.g. freebies to show them that defaulting on a loan ACTUALLY HAS A REWARD!!!!

So, let me summarize why this is such a silly policy:

1) people that should have never bought a house still own houses
2) the resultant homeowners STILL have no skin in the game (formerly known as a down payment); and, most importantly,
3) defaulting borrowers ARE BEING REWARDED for defaulting!

It's quite easy to see that people are going to continue to default until they stop getting freebies. I have several friends who are thinking of defaulting on their mortgages just so they can renegotiate with the bank! If this kind of silly policy continues, the downward cycle we are now in will only last longer and be more painful than it has already been. I really hope that does not happen. Wake up, Washington!!!

Let's wise up!

What happened to personal accountability?

The $700 billion bailout package has raised a lot of eyebrows on Main Street. After all, isn't it Wall Street's fault for making all these risky investments that went bad? If so, why on earth would the government want to use taxpayer money to bail them out? Well, I've listened to a lot of radio commentary and read a whole host of opinons and articles on the topic and I am disheartened by one key thing that is missing in all of these pieces; where is the personal accountability in all of this?

Let me make this a bit more clear for you if you are having trouble following me. If you were walking down the street and a drug dealer popped out and offered you some drugs for free, would you take them? You know it's bad for you even if it is free. You know this decision is not likely to have a good outcome for you, but you decide to give it a shot anyway because everyone else is doing it and the dealer tells you it's good for you and you can handle it.

Is it the dealer's fault that you decided to take something you knew was bad for you? Now we all know that the dealer is a bad guy and should be punished for breaking the law and dealing drugs. But, aren't you also somehwat responsible for your bad choice? Shouldn't you shoulder some of the blame?

By now, you know where I am going with this. Sketchy mortgage brokers and slick Wall Street types told you that you could afford that $500,000 house even though you had not saved for your down payment and you only made $50,000 per year. After all, all your friends and neighbors were doing it, right? Even though it was available to you, you knew it did not make sense that you could get such a loan. But, you took it anyway. Then, when your house rose to $700,000 in value, another slick mortgage broker told you take take a second mortgage for $200,000 so you could put in a pool, go on that nice vacation and buy that expensive car. Or maybe you could just refinance your first mortgage and "Pick Your Payment" so that you could cover the new GIGANTIC mortgage (at least for 12-24 months until the payment adjusted). Hey, you deserve it and everyone else is doing it. Never mind that you couldn't affored the first mortgage payment much less the second mortgage payment.

Now that all of these loans are going bad (not really a shocker, by the way), banks and mortgage companies are going under and the securities issued to allow these silly loans are defaulting, people are trying to blame everyone but themselves. Greedy CEOs, lying mortgage brokers, etc. are the only ones to blame. It's not my fault that my payments are TWICE AS MUCH as my income!!

Why don't people start to take a little responsibility for their decisions and actions. Sure, there are plenty of cases of legitimate fraud, lying, cheating and stealing and the corporations that profited from all of this mess should also be severely punished. But, if that were the only problem, we would not be in this mess. The bottom line is that Americans have spent more than we make for over a decade now (think negative savings rate) and it is catching up to us. So, here is who I blame (in my opinion):

1) Individuals: if you are not diligent enough to read your own loan documents and understand them, then you probably shouldn't be taking on the debt required to buy a house, car, etc. While the small print is mind numbing for sure, the Truth in Lending Disclosure is actually pretty easy to read (shows the costs of the loan and your payments over time). If your paycheck was only $2,000 per month, you can't afford a $4,000 per month payment (now or 24 months from now)! It really is that simple! Spend less than you make (that's called saving, by the way) and don't get duped into believing it's OK to do otherwise.

2) Congress/Federal Reserve: The knuckleheads in Congress and the Fed have promoted easy money for so long now that we all believe we are entitled to it. When a number of Congressmen raised the issue that Fannie and Freddie might be a disaster in the making (in 2004 and 2005), most folks in Congress buried their heads in the sand. "We are meeting our housing objectives" (this is code for people that can't afford homes are getting loans for them - this is also known as "subprime" and the initial shoe to drop in this mess). Even Alan Greenspan (who shoulders a good chunk of the blame for his easy money and 1% interest rates) noted that Fannie and Freddie were a potential ticking time bomb. No one in DC listened and now they want to spend $700+ billion to try to fix the problem (I'm skeptical this will work, by the way).

3) Wall Street/Ratings Agencies: We were all convinced that the smart guys on Wall Street had invented a way to make risky borrowers less risky. Somehow, through financial alchemy, Lehman Brothers, Bear Stearns, UBS, etc. all convinced us that you could take a bunch of risky loans, wrap them up into a nice little bow, slap some insurance on them and call them AAA quality. Then, the ratings agencies, who were being paid to provide ratings on these securities (no conflict there), called them "Investment Grade" which allowed pension funds, retail investors and others to buy them up. As if that weren't bad enough, the investment banks et al decided to borrow 30 TIMES their equity capital to buy these toxic securities (for every $1 of capital they had, they would borrow $30 and buy these bad securities). When it came time to borrow more money as loans came do, the investment banks imploded.

So, what can we learn from all of this? First of all, people need to take responsibility for their own decisions and the consequences for those decisions. If you bought more house than you could afford, you have to live with the consequences of that decision. If you are spending more than you make on your credit cards, that too has a consequence for you. Just because you got a great 0% APR offer (think free drugs - see above) that doesn't mean it's a good decision to load that card up. I fear that the government bailout only reaffirms the dangerous and increasingly pervasive cultural phenomenon that individuals are not responsible for their own decisions. If there is always someone to bail you out when you make a bad choice, then is it really all that bad a choice to make in the future? The corollary to this is that good decisions are not rewarded, but rather penalized (think higher taxes). Until we return to the basic economic principals of freedom, individualism and true capitalism, I fear there is going to be a lot of economic pain in our great country.

$500 oil coming?

A recent Money.com article points out some reasons to be concered about the future of oil prices (actually, prices are up some $25 today along, as I write this article). While I am the last person on earth that should be predicting oil prices, I thought P2P-Loans.com readers might appreciate the analysis presented in the article below from Fortune Magazine.

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Here comes $500 oil

(Fortune Magazine) -- Matt Simmons is as perplexed as anyone that it has fallen to him to take on OPEC, Exxon, the Saudis, and all the other misguided defenders of conventional wisdom in the oil patch. Why should one investment banker with a penchant for research be required to point out what he regards as the obvious - that from here on out, oil supplies can't meet demand, and if we don't act soon to solve this crisis, World War III could be looming?

Why should a man who scorns most environmentalists have to argue that locally grown produce and wind power are the way of the future? Why should a lifelong Republican need to be the one to point out that his party's new mantra - "Drill, baby, drill!" - won't really fix anything and that his party's presidential candidate is clueless about energy? That the spike in oil prices earlier this year wasn't a temporary market anomaly and the recent retreat in prices is just a misleading calm before a calamitous storm? That we're headed toward $500-a-barrel oil?

Read the rest of this article online at Fortune.com (click here).