Lessons From Hell

October 16, 2008

I’m getting crisis fatigue. I’m tired of hearing about it and I’m tired of watching the market react negatively. It’s funny to me that all the people who were FOR the bailout basically promised us that the market was going to fall IF we didn’t approve the bailout. Well, guess what: we did get the bailout and look at what the market is doing. You guys are smart!

So, what can we learn from this credit crisis? I have a few lessons I can think of off the top of my head. There may be more. If I missed something, please leave a comment and let me know.

I present to you JLP’s Lessons From Hell:

1. You can only live outside of your means for so long. Eventually, you have to reign in your expenses and bring them in-line with your income.

2. A bunch of crap bundled up together and sold off in chunks is still CRAP! Seriously, who’s bright idea was it to bundle up subprime mortgages—the riskiest of all mortgages—and sell them off as “safe” investments?

3. Housing prices don’t always go up!

4. There’s a difference between what you can actually afford and what you are approved for.

5. READ the fine print—that’s where all the nasty stuff is going to be found.

6. Don’t trust ANYONE who profits off your business! Sure, there are ethical sales people out there but you can’t trust that they have YOUR best interests at heart. Remember too that mortgage brokers make a percentage of the amount they write. The more they write, the more they make.

7. Greed is a deadly motivator.

8. People need a basic education in money management.

9. Don’t use home equity to buy stuff or take a vacation.

10. Your home is not a bank.

11. Banks and brokerage houses are managed by people just like you and me. Although they may act superior to us, they really aren’t—as evidenced by how stupid their actions were in helping create this crisis.

I’m sure there are more lessons but this was all I could come up with. What do you think of this list? What did I miss? Leave a comment and let me know.

14 responses to Lessons From Hell

  1. #9 is a huge one. It’s one more reason this country got itself in trouble.

    The state of Texas in 2002/2003 passed a bill that allowed home owner’s to borrow against their home, before that you could not get a home equity loan. The bill passed under the guise that home owner’s should have the “freedom” to use their assets as they wish. And I’m sure a lot of people in this forum agree with that motto. Of course you can guess what happened, the banks own more homes now that ever before. And now you’ll see alot of baby boomers with no pension, no savings, no home and living off social security.

    What legislatures did not consider was that the majority of people cannot successfully manage their assets. This is why deregulation in so many areas just does not work.

    We need regulation that will help all American’s as a community, such as; 1) requiring 20% down on a home, 2) no home equity loans 3) require 401k participation(no opting out) and 4) limit credit card usage.

  2. Great post, JLP

    Like you, I’m getting worn out by this crisis du jour. And in the final analysis, it all comes down to behavior. And we’ve certainly seen enough bad behavior recently by Wall St, consumers, gov’t and business to last a few lifetimes.

    Come join the conversation at BehaviorGap.com

  3. How about “Debt is a hole”. Owning a 30-year loan is not ownership, but an act of great faith – pledging one’s future income and paying interest instead of simply the purchase price. One is a homeowner when they own a home outright. Credit means lack, not substance.

    Previous prices for homes were ridiculous. Shacks were going for big bucks. It was inevitable that values would decrease, because they were false.

  4. Housing prices don’t always go up, but rents here are up 25% over the last three years!

  5. Fatigue is getting me too.

    Another lesson I’ve seen too many times lately:

    12. If you are retired or close to retirement then the bulk of your retirement savings should not be in the stock market.

  6. nice summation.

  7. JLP, how about saving a little every month.

    Also unfortunately our government has not yet learned to live within its means. They are printing
    and borrowing money like there is no tomorrow.

  8. JLP –

    In re: “we did get the bailout and look at what the market is doing. You guys are smart!”

    I think you’re missing the point.

    The market is a psychological beast that gets things wrong in the short term, but nails valuations over the long run. The pressures facing ANY Treasury Secretary or Presidential administration are twofold: dealing with the underlying economic factors and the psychological well-being of the market.

    For historical examples, I’d suggest reading Robert Rubin’s book, In An Uncertain World. He, and the Clinton administration, tackled similar problems with both the Mexican and Asian Economic Crises of the 90s. How did they decide how big to make those international bailouts? They were looking for a number large enough to take care of the underlying factors AND appear large enough to reinstate overall confidence.

    Why $700 billion, and not $500 or $600? Look at Paulson’s testimony before Congress. He wanted a really big number to boost overall confidence!

    The failure to pass it the first time basically nullified this effect – it was still a large package, and can potentially address the underlying factors (longer term), but it didn’t provide the shock value needed.

    We’re facing a barrage of bad economic news, and that is what the market is reacting to. It’s pricing in the anticipated drop in corporate revenue and consumer spending for months to come.

  9. Number 12

    Don’t believe the president when he tells you not to regulate or monitor business or financial institutions because it is better to let them be free to operate as they see fit. The only thing this has accomplished is to allow the top 1% in the country to accumulate an enormous amount of wealth at the expense of the remaining 99%.

  10. Almost all mortgage originators are paid on commission – it doee not matter if they are a broker or a banker. I have done both and was paid in exactly the same way. Please level your crticism at mortgage originators – dont unfairly single out brokers.

  11. LOL I love #1 and # 5

  12. “10. Your home is not a bank.”

    I’d rephrase this as: Your home is not a money tree!

    😉

    This country needs a big kick in the @ss!

  13. My grandson got one of these loans. I was flabbergasted. He got a $200,000 loan because of how he handled his saving account. He had no job, no savings..And yet he has done well. He made two apartments and has rented them out. He has built a painting service to a rehabilitation business. He has savings. I do not advocate this. The problem is that the people who were in the banks buying these packages were the heart of the problem. And it was ALL OVER THE WORLD.

  14. 12. Have a contingency (Read EMERGENCY) fund because life happens! Note: Sudden unemployment is an emergency. Sadly, vacations, big screen TVs and the latest trend are not. Know the difference.

    13. Teach your kids all of the above.