Thomas Galvin
Purveyor of Fine Pulp Fiction

I root for the bad guy.

Tax Season is again upon us.

Much like the holidays, it seems to come earlier and earlier every year. Unlike the holidays, though, I don’t see this as an annoyance: I like to get these things taken care of as quickly as possible, and while Jingle Bells in October will send me into fits of rage, getting my W2s and Ps and Qs and sundry other tax-related forms in February and March makes me eager to see just how badly Uncle Sam has stuck it to me in the preceding three hundred and sixty five days, and to take a little bit of that back.

Many financial advisors would accost me for actually getting a tax rebate, saying that I am just giving the Government an interest-free loan. They are correct. On the other hand, I lack the patience for paperwork necessary to correct the issue, and I like getting a check in the beginning of the year. I think of it as enforced savings. Laziness for the win.

Regardless, many Americans are now in the midst of tax preparation, and many of those many are already planning on how they are going to spend their return. A down-payment on a car. A new computer. A shopping spree at the mall. For those less fortunate, a nice, warm cup of coffee.

Allow me to propose some alternatives.

1. Start An Emergency Fund Everyone should have some money set aside for an emergency. If the car breaks down, or the furnace blows up, or your water main breaks – or, if you’re like me, and all three of those happen in the same bloody year – it’s comforting to know that there is already money set aside to deal with the problem. Dave Ramsey, author of The Total Money Makeover, recommends setting aside at least $1,000. I have already done this, so it isn’t an issue for me, but if you don’t have an emergency fund, why not use your tax return to start one?

2. Pay Off Your Debt Debt will cripple you. America’s debt problem is a horrible, amazing thing; millions of people are living beyond their means, and getting further into the hole every day. Why not use your tax return to start climbing out? A portion of my tax return is going toward paying off my student loans.

3. Pre-Pay An Upcoming Bill Getting out of debt is great, but so is not going further into debt. If you have an expense that you know is coming up, why not set aside your tax return to meet it? I’m already thinking about next year’s heating bills, and another portion of my tax return is going toward pre-paying that bill.

4. Break Your Credit Card Habit Continuing on the “debt is bad” theme, you can also use your tax return to help break your credit cad addiction. I will typically put a few hundred dollars a month on my credit card, just to buy groceries, gas, and similar expenses. I pay this off every month, so it isn’t a terribly important issue for me, but for many others, their credit card debt – and the interest the owe on it – grows every month. Why not use your tax return to help change the tide? A portion of my tax return is going to be set aside for the expenses I normally put on my credit card. Then, when next month rolls around, I’ll spend the money I would have used to pay off my credit card to meet that month’s expenses. Credit Card addiction broken.

5. Start Investing Assuming you’ve done all of the above, that you’ve established an emergency fund, payed off your debts, and aren’t in danger of going into more debt, why not start making your money work for you? You don’t have to be a stock broker or financial wizard to get a return on your money; all you need to do is open a high-interest savings account. I use ING Direct, and whatever is left of my tax return this year will go into this account, quietly and consistently earning me about 3.5% every year.

I move almost all of my money around on-line; what I don’t pay for in cash I generally pay via online bill pay. This has two effects: one, I very rarely write checks anymore, and two, it makes it kind of hard to reconcile my checkbook each month.

When you reconcile a checkbook, you go through each transaction the bank has listed, and each transaction you have in your own records, and make sure that they match. This is a pain in the butt, but it’s important to do so every month.

Case in point: I was going through my bills last night, and discovered a charge for $29.99 that I had no record of. It was payed to “Market Billing on behalf of Tel Media.” I’ve never heard of these people, so I know that I didn’t write them a check. Even more interesting, when I downloaded the image of the check, my address was listed as being in Chicago, Illinois.

I did some digging this afternoon, and it turns out that this is a fairly common scam, being run by some company in Cyprus. They somehow got a hold of my bank account info, created a fake address for me, and dummied up a counterfeit check, the same kind of check my bank sends when I use online bill pay. Which makes me one of the thousands of victims of identity theft in America. I feel so honored.

A quick trip to the bank and five minutes of paperwork cleared up the whole matter, but if I hadn’t been checking my account, I would be thirty dollars poorer, and they would be thirty dollars richer.

Always, always check your monthly statements.

I have been planning to write an article on the Subprime Mortgage mess for some time now, but I haven’t been able to make it clear enough to be easily understandable and short enough to be readable. Fortunately, this profanity-laden series of stick figures has done all the hard work for me. I present to you: the Subprime Primer

Small Loans, a predatory lender owned by Money Tree, Inc, gave a $200 “payday loan” to a disabled, elderly, illiterate man and thereafter took in his benefits check for him and paid him a small “allowance” out of it, less the money they deducted as “repayment” on the loan. All told, they took thousands from the man over a period of years, bleeding him so badly that he ended up homeless, begging for power to run the machine that treated his chronic lung infection.

Mr. Bevels, who can’t read, says a clerk helped him fill out papers that instructed Social Security to send Mr. Bevels’s $565 monthly benefits to an account at an out-of-state bank, which transferred the money back to Small Loans or its parent, usually within a day. As is often the case, Mr. Bevels’s bank earned no interest and didn’t come with either ATM cards or checks.

Every month for nearly four years, Mr. Bevels, who is known around town as “Buckwheat” because of his thatch of yellow-white hair, rode his motorized mobility scooter to Small Loans to pick up his “allowance,” which was sometimes as little as $180 a month, he says.

From The Wall Street Journal, via Boing Boing.

I recently watched James Scurlock’s film Maxed Out, a documentary discussing America’s addiction to debt.

This culture of debt is a fairly recent occurrence. A few short decades ago, credit cards didn’t even exist. The movie actually plays a clip from the CBS Evening News, where Dan Rather made the announcement that “today, for the first time since World War II, America became a debtor nation, owing foreign governments more than it is owed.” Today, this seems like the way it has alway been, but back then, it was news.

There were a number of poignant moments in the film, from the soldier called into active duty in Iraq, facing bankruptcy because of his extended tours and small stipend, to the retired woman who is packing up her house because she can no longer afford the payments, and knows it’s only a matter of time before the bank forecloses, but the most harrowing moments come at the end of the film. Two mothers, friends and apparently neighbors, are discussing their children’s college experience. Both students applied for and received multiple credit cards, and each racked up over ten thousand dollars in debt. For a while, they made a go at it, working extra jobs, paying off what they could, but eventually they decided that they had gotten themselves into an unwinnable situation, and so, before they even turned 21, both laid their bills out on their dorm-room beds, and hung themselves.

The tactics employed by the credit companies can only be described as “predatory.” They intentionally target individuals of limited means, individuals that will likely only be able to make minimum payments, thus insuring a customer – and a source of income – virtually for life.

My political views have traditionally been quite laissez faire, but the more I study this issue, the more that is changing. I want to make it clear that the people who get themselves into debt often carry a great deal of blame; often, debt is a result not of desperate circumstances, but stupid decisions. And because of this, I had believed that the government had no legitimate role in all of this: it was up to the consumer to educate and protect themselves, not Washington.

I believe, though, that it is legitimate for government to prevent an individual from intentionally harming another individual. When someone is murdered, we don’t simply say that the victim should have better protected themselves; rather, we find and punish the murderer. When someone is a victim of fraud, we don’t simply say that the victim should have been more savvy, we find and punish the con man.

There is no legitimate reason to charge 30% annual interest. There is no legitimate reason to extend credit to people who will never be able to repay it. There is no legitimate reason target the most financially vulnerable in order to increase wealth. And because there is no legitimate reason, it should end.

Finally, I want to add that not all credit is bad. I would not have been able to go to college if I hadn’t been able to take our a student loan, and my career has made that investment more than worth the cost. I would not be sitting in this house if I had not been able to get a mortgage. And I do occasionally use credit cards, for gas or for groceries, out of convenience, although I am in the process of weaning myself off of that habit.

The point, though, is that I have been careful. My credit cards almost never have more than a couple of hundred dollars on them, and they are paid off each month. My mortgage payment is about 25% of my monthly income, but they told me I was “qualified” for a loan more than three times larger. My student loans have a reasonable interest rate, but I’m still paying them off.

We all need to educate and protect ourselves financially, and if America is going to continue to be the economic power of the past, it must break this addiction to debt.

If you have any kind of interest in investment, or the economy in general, I recommend Bill Moyer’s interview with John Bogel.

John Bogel invented the Index Fund, the type of mutual fund that pretty much every investor should be involved in, the type of fund that routinely beats every single other kind of fund ever invented. Fortune magazine has named him one of the four most influential people in the investment industry, and Time has named him as one of the one hundred most powerful people alive. So when John Bogel has something to say about our economy, it’s probably a good idea to at least give him a polite listen.

What he has to say isn’t particularly surprising, but it is somewhat surprising to hear it coming from a man as wealthy and powerful as he is. His two basic premises, that our economy is too reliant on debt, and that we have moved from a customer-centered focus to a management-centered focus, are really the dirty secret most of the financial industry is hoping no one notices, and when Bogel speaks about these things, you get the sense of a father watching a son go awry.

Some choice quotes:

Well, ultimately, the job of capitalism is to serve the consumer. Serve the citizenry. You’re allowed to make a profit for that. But, you’ve got to provide good products and services at fair prices. And that’s the long term, that’s what businesses do in the long term. The businesses that have endured in America have done that and done that successfully.

But, in the short term, there’s all these financial machinations in which people can get very rich in a very short period of time by creating highly complex financial instruments, providing services that can be cut back easily as in the hospital article, not measuring up to basically their duty.

But you don’t have to be an economist to know that a great deal of or a minimum in our economy is coming from borrowed money. People are spending at a higher rate than they’re earning, and we’re starting to pay a price for that now. Particularly in the mortgage side. But, eventually, that could easily spread and people won’t be able to do that anymore. You can’t keep spending money you don’t have.

The US economy is on the brink of the biggest recession since the 1930s. Consumer prices have risen sharply, consumer wages have stagnated or fallen, wealth has consolidated, widening the gap between rich and poor, and debt, both personal and federal, has ballooned.

The whole house of cards is about to fall.

There are four primary causes to all of this. The first is the rise of off-shoring; as more and more jobs are sent overseas, more and more US dollars are also being sent overseas, leaving American workers poorer on the whole. In addition to that, we have largely become a service-based economy: we do things, we don’t make things. So when we pay someone from China, for example, it is for a real, physical product, but when we pay an American, it is for an intangible service, like real estate brokerage or fund management.

The second is debt. Both consumer and federal debt has skyrocketed over the last eight years. This means that the average American has no real savings to speak of, nothing to retire on or even to get through hard times with, and since a lot of the federal debt is owned by foreign nations, the value of the dollar is also rapidly falling. The US Dollar was once the be-all and end-all of international currencies, but it is rapidly being supplanted by the Euro.

Which is related to the third cause: stupid-easy credit. In the past, in order to get a loan you needed to prove that you were able to repay it. Over the last couple of years, however, the standards have been drastically lowered, so much so that some institutions were extending credit to people that couldn’t even prove that they were employed, much less able to repay their debts. This is due in large part to the way debts are handled. In years past, when a bank made a loan, they would have to eat the loss on the loan, and were therefore careful about who they extended credit to. Now, they package these loans as securities, and split the risk among several institutions. This used to be illegal, and for good reason. Since lending institutions felt insulated from risky loans, they extended credit to a large number of people who had no way of repaying their debts, and the result has been billions of dollars in write-offs.

The final piece of the puzzle is the Sub-Prime Mortgage scandal. In a sub-prime mortgage, banks offered loans at “teaser rates” for less than they actually cost the bank to finance. This meant the bank was actually loosing money for the first few years of the loan. After those few years, however, the interest rate reset, and the borrower would face drastically higher monthly payments. Most borrowers were counting on their homes growing in value, allowing them to refinance when their loans reset, but since the real estate market is collapsing, this wasn’t feasible. This means millions of homeowners are facing foreclosure, and banks are facing billions of dollars in losses.

Anyway, if you’ve been watching the news today, you’ve noticed that the stock market is falling like a twelve year old girl wearing heels for the first time, and stock brokers are throwing themselves off of buildings like it’s going out of style.

The Federal Reserve cut in prime rate by 0.75% this morning, which is the biggest cut since 2001, in hopes of spurring the economy. I took a moment to try and figure out how they were going to correct the problem of easy credit by making it easier to borrow money, and then decided it wasn’t worth my effort.

Until this morning, I owned a bunch of stocks. Most of it was in real estate, which turns out to have been a bad idea. The fund I invested in had, over the past five years, returned an amazing 30% profit. As of this morning, I had lost about 10% of my initial investment, and it looks like it’s going to get worse from here.

I’m not too worried about it, since I’m not planning on retiring any time soon, I don’t have any immediate need for that money, and I don’t invest anything I can’t afford to lose, but the principle still irks me.

By this evening, I will have sold off everything that I am legally allowed to get rid of. I will still have a metric ton of stocks in my 401(k), and I am not looking forward to seeing next month’s statement, but as much as it is in my control, I am no longer invested in the stock market. All of my savings and investment money is now in a nice ING Direct account with a 5% annual interest rate.

This is a viscous feedback loop. The market starts doing poorly, and people get skittish. Skittish people sell their stocks, which brings the total market value down. This makes even more people skittish, which makes even more people sell, which…

So, I’m doing my little part to help this collapse. I’m having a hard time feeling guilty about it, though. The people who keep this particular castle have been asleep on their watch, and since they aren’t protecting us, I think it’s fair to protect ourselves.