Is This the End of the World?

I made the mistake of watching CNN for a couple of hours last night, including W’s scare-mongering.

So are we on the brink of utter disaster, the likes of which have never been seen before?

Should the taxpayers pay a million gadrillion dollars to bail out shady corporations and help hobos keep their homes they can’t afford?

I read a story of a city bus driver who, all by himself, purchased a $300,000 house 4 years ago. Of course, he bought it on a ridiculous ARM, probably around 1.25%. On a 30 year note, that initial payment works out to $999.76, not including taxes and insurance. His taxes and insurance on a house that size would be at least $200 a month, so we’ll round to $1,200 a month for his initial payment. Let’s assume the bus driver is a union bozo making more than he’s worth, say $20 an hour. For the record, that’s about $40,000 a year, or $3,400 a month, gross. Taxes would take that down to about $2,600 net. If this guy has no other credit cards, car loans, or anything, his debt/income ratio is 44%.

Most reasonable people would agree that your home really should only be about 25-30%. Even the most liberal ‘normal’ banks will not go above 42%. However, a lot of the shady banks would go as high as 50% with no money down.

Let’s now assume this guy has a car payment of $300 a month, and he drives 1200 miles a month, getting about 25 miles to the gallon. I think those are reasonable assumptions. He will spend 168 a month for his gas. Then he also needs insurance, at least another $75 a month. That means he is spending $543 a month on his car. So, his total monthly obligation so far is $1743.

Call me crazy, but he’s also going to have utilities to pay including natural gas, electric, and sewer/trash/water. That’s a minimum (assuming no television service). A home that large would suck at least $300 a month to power it up, so now we’re up to $2,043. Remember, his take home is only $2,600.

Now, does this dude have health insurance? Even for a young, single guy, his insurance is going to cost $100 a month. $2,143.

I’m also assuming he eats sometimes. I know from experience you can eat cheap if you’re a single guy, so we’ll give him $100 a month for that. $2,243.

General wisdom is that home repairs related simply to entropy will be about 1-3% of the home’s value each year. For this home, that would be $3,000 – $9,000 a year. We’ll be gentle and assume the lower number. That’s $250 a month. He now has $7.00 left over each month.

And remember, we’re assuming he has ZERO credit cards.

Now, his home is not longer worth that much because the bubble has burst. He can’t get refinanced, and his ARM is about to reset to, say 6.50%. That’s being gentle. His house payment is now $1,896 (plus the $200 in taxes and insurance) so $2,096. Or in other words, an additional $896 a month.

He has $7.00 extra to put towards it.

So what am I driving at with this super long example? Well, the government wants to buy up all of this bad paper and basically force banks to extend these teaser rates so Mr. Bozo can keep his house. Never mind that he purchased a home at least 2.5 times what he could reasonably afford. The taxpayers are now going to end up footing the bill for his decision.

W says that if we don’t bail out the banks who lent money to hobos, we’re on the verge of a depression the likes of which no one has seen before. I think W is full of crap.

Every time we bail out a big corporation we are increasing the tax burden on the middle class and small businesses. Why should we reward the greed, corruption, and stupidity of corporations at the expense of hard working people and small businesses?

The answer is, we shouldn’t.

But what does that mean to the economy? No, it’s not the end of the world. I believe that if you work hard and you aren’t in a silly industry (making Hummers comes to mind), you’ll be fine. There will be a lot of big banks going under, and there will be a lot of people in financial services losing their phony-baloney jobs. And that’s how it should be. If you were greedy, stupid, and/or corrupt, you deserve to sit in the unemployment line for a while.

It’s called a market adjustment. If we don’t let it adjust now and finally purge out all of the bad mortgage-backed securities, we’re just delaying the inevitable. The longer we put it off, the worse it’s going to be.

Call your senator and tell him we’re ready to face the music of a recession now rather than delaying it until we get a depression instead.

  3 comments for “Is This the End of the World?

  1. September 25, 2008 at 11:23 am

    It makes me want to puke that as a taxpayer, I have to help bail out these stupid people living WAY beyond their means and these sheisty mortgage lenders knowing that and letting them do it anyway. No one’s bailing me out of my credit card debt. No fair!!!

  2. Keith
    September 26, 2008 at 10:28 am

    Incredipete, I love you. You know I do. You are barking up the wrong tree.

    The lenders are the credit gatekeepers, why? Because most consumers don’t understand the lending agreement on their credit cards, more or less their mortgages, home equity loans, and car loans.

    Should I have to bail the borrowers out? NO. Should I have to bail the banks out? !@#$ NO! Should I have to suffer in a recession because they are bozos? NO.

    Any other options? Well, lets ask Europe! The Swedes did something pretty similar to this a while back (http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html?em) By some accounts, we are actually working on the problem sooner than they did, and so we could be in a better place.

    My personal suggestion is to also have the courts declare that the people who sold the loans are criminally and civilly liable for their actions. They had a fiduciary responsibility to the client and the lenders (who in turn committed fraud to get people to buy up all these bad loans, so nail them too!). I’ve met enough of these sub-prime-ARM-no-money-down-max-your-loan-to-what-your-credit-rating-allows-so-I-can-make-my-maximum-commission-bozo-salesmen to say that it would be dangerous to assume that the majority of these bad loans are really the responsibility of the borrowers.

    Oh, and part of the bailout should include a provision allowing non-responsible parties one pardon for assault on anyone previously employed in the sub-prime industry. VIGILANTISM FTW!

  3. September 29, 2008 at 10:10 am

    How’s yer arm??

Comments are closed.