Would You Take A Bailout?

I know I would not take a bailout. The government likes do do things like cap executive pay, force your top executives out, and even put you into bankruptcy. I am not really seeing an upside to getting emergency money from the government.  I do not think GM or the banks are either, since the banks are in a hurry to pay the TARP money back and GM is going into bankruptcy, the situation it was trying to avoid.  There is a lot smaller moral hazard there than I thought there would be.

The one upside to all of this I see is that creditors are probably going to be more open to negotiating with their debtors.  If the GM and Chrysler creditors had been willing to cut a deal, they would probably be getting a bigger return than they are now.  After all, once the federal government got involved, it is going to protect its interests first.  It is kind of like taking money from a loan shark.  The federal government will make sure it gets paid first.

So, remember all of this before you try to get bailed out by the federal government.  Taking money from them comes with a LOT of strings attached.

“Falling Home Prices Don’t Help Anyone”

I heard someone say that today.  I just felt like yelling at them.  Falling home prices do help some people, people like me.  Right now I can afford to make a good-sized house payment, but I don not own a house.  I do not own one because I am still saving up to make a large downpayment.

The other day I also heard someone ask, “What will it take to get the buyers on the sidelines to buy?’  They were wondering if it was things like lower interest payments.  It is not.  Lower home prices are what are going to bring more buyers to the table.  No one wants to admit that, though.  They want to keep believing their home prices should not be falling.

Maybe The Market Needs A Bank Nationalization

I keep hearing that the bottom of a bear market is when everyone just gives up and sells off. However, the market has been vacillating up and down with a downward trend, but we have not seen a huge sell-off.  We just keep on sinking.

Maybe what the market needs to capitulate is a major bank or two to be taken over by the government. Maybe that is the straw that will break the camel’s back and plunge the market to its lowest point. Then we can start to recover.

Just at thought, not an edorsment. (Or a sermon for those of you familiar with a certain mega-church.)

The Economics of Micro-Finance

In its simplest form, micro-finance is the loaning of small amounts of money to people.  It is usually done in developing countries in order to help fund and fuel development.  Small amounts of money are loaned to entrepreneurs and paid back within a year or two, usually.  Repayment rates are usually high and highest among female borrowers.

Now I will start to speculate.  I think micro-finance works better than just a hand-out because the need to repay the loan pushes people to succeed.  If you give someone $500, they take it and do what they will with it.  If you give them $500 and require it to be repaid, they need to make sure that $500 helps them to earn at least enough money to cover the principal plus interest.  Then, after the loan is repaid, they can continue to earn that money.

So, how does one get involved in micro-finance?  Well, I have two suggestions:

The first is Kiva.org.  It is a charity, and it accepts $25 donations and gives them to micro-finance organizations in various companies.  You get to choose the loan to fund.  The drawback, as far as I am concerned, is that you do not get a return on your money.  You get your money back if and when the loan is repaid, but you do not earn any interest on your money.  You also cannot claim your donation as a tax-deduction.

The second website is microplace.com.  It is a for-profit site, and allows you to give money to support micro-finance loans.  The difference from Kiva is that you do earn a return.  The highest return I have seen is 5%, which is pretty low considering there is a fair amount of risk involved.

So, until micro-finance starts providing returns commesurate to its risk, it will mostly be the domain of charities.  I am waiting for the day it does start returning the proper rate.

Bailout Trade-Offs

I am pretty sold on the idea that, for long-term economic growth, tax cuts are one of the best things.  They keep more of the money in the economic machine.  However, short term, I do not think tax cuts have any real stimulating effect.

So, what do we do?  Do we spend our way out of the problem?  I believe a large spending stimulus package will stimulate the economy in the short term.  Throwing that much money into the economy and money will start flowing through the economy.  What remains to be seen is how far and how fast it will flow.  If it flows fast and far enough, it might just get us out of this downturn.

The downside to the large stimulus package is the large increase to federal debt.  It prevents larger future tax cuts because that debt needs to be paid back with interest.  So, it appears the cost of stimulating the economy now may be slowing the economy’s long-term growth.

Is it worth it?  I do not know.

Who’s Afraid Of The Big Bad Prosper?

The SEC is, according to NPR’s Planet Money Podcast.  That is why Prosper.com is going through its quiet period.  Apparently the SEC does not know quite how to classify peer-to-peer lending networks like Prosper.com, so it closed Prosper down pending some filings and discussions.  Hopefully Prosper will come back in a form similar to when I started investing, because I really want to keep increasing my number of loans.

P.S.  Planet Money is a great blog and podcast and pretty accessible for those without a financial background.

Getting On Top Of Finances

One of my resolutions this year was to be more active in the finances.  Right now my wife pays all the bills and keeps an eye on the accounts.  All I really do is contribute money from my paycheck.  So, I have begun accounting for us in a nifty little program:  KMyMoney2.  Even though I run GNOME, I like KMyMoney2 better than HomeBank and GNUCash.  So, I am running a KDE application on GNOME.  It is another of the features I like about Linux and Ubuntu.

This will also fit in nicely with the accounting class I am taking this semester.

Prosper.com Update

Four months ago I posted about loaning money to a person through Prosper.com.  I loaned $50 of the $10,000 the person borrowed.  The interest rate was 18.65%.  So far, the person has been paying back the money.  Four months means four payments, the the 36 the person has to make.  So, I am 1/9 of the way to getting all my money.

I would have made another loan by now, but Prosper.com is going through a quiet period in order to complete an SEC filing.  With the $7 and change I have been repayed, I will only have to pay another $43 to make another loan.  So, as I get paid back more and more, loans become cheaper for me to make.

I will post more when the quiety period is over and I have made another loan.

The Cost of Credit

In my last post, I had a throwaway line about how by saving up for presents, I was not paying more than the purchase price for them.  What I meant by that was that if I had bought those gifts on credit, I would have been paying interest on them until they were paid off.  I have decided to include an example to illustrate what I meant.

Imagine you want to buy a new, high-definition flat panel TV.  You decide to save up for it over the course of a year, and put away $150 a month into a savings account that pays .71% interest annually.  (That is what my personal savings account currently pays.)  After 12 months, you will have $1805 in that account.  So, you go out and buy your TV a year later for $1805.87, even though you only put $1800 into the account.  You paid $1800 for a TV that should cost $1805.87.

Now, instead of saving for it, let us put it on a credit card that charges 18% interest.  You get the TV right away, and you decide to pay the TV off in one year.  In order to do that, you will have to pay $165.56 a month for a year to do so.  You end up spending $1986.75.  That means the TV actually cost you $186.75 dollars more than saving to buy it.  You paid $1986.75 for a TV that should cost $1805.87.

Say you cannot afford to spend $165.56 a month paying back your credit card company.  You can still afford $150 a month, though. So, you pay your credit card company $150 a month for 13 months and finish off the balance with a payment of $56.83.  It takes you 14 months, but you did not have to change your budget to do so.  How much does the TV cost you this way?  $2006.83, or $206.83 more than the $1800 of saving for it.  You paid $2006.83 for a TV that should cost $1805.87.

Credit is expensive.  Is it worth $200 to you to have that TV now rather than after you have saved up for it?  Not for me.

How I Do My Christmas Shopping

The last few years I have been a bit weird in how I buy my wife gifts.  Instead of charging them to a credit card and paying for the gifts over the course of a year, I have $15 from every paycheck put into a (very low yield) savings account.  Then, when Christmas or my wife’s birthday roll around, I use the money in the savings account and any money in my personal checking account to buy my wife gifts.

The greatest benefit to this are that the gifts never cost me more than their purchase price, since I do not pay interest on them.  The second benefit is that if an emergency comes up, I can use that money on something other than gifts if I need to.