We Don’t Need No Stinking Bailout Plan

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Photo courtesy of Michael Casey

After news began trickling out of Washington that we may be due another stimulus check, Pete from Bible Money Matters put together a great post asking why not just create your own stimulus check?  With news of the government (taxpayer) supported bailout plan dominating the news recently, I thought I would use Pete’s same logic by providing a few ways to create a personal bailout plan of our own.  After all, many of the problems on Wall Street could have been avoided if bankers and government regulators had applied the same common sense approach to money management that many of us out here in the real world apply every day.

  • Don’t spend more than you earn.  Unlike the government, regular citizens cannot print more money or borrow it from foreign countries to sustain spending beyond what we are bringing in.  No, here on “Main Street” that behavior leads to debt, and not the kind that can be bailed out by taxpayers.  Create a household budget and stick to it.  If you don’t have the cash for something then you simply cannot afford it.
  • Live frugal.  If more people lived well within their means there would be no need for this proposed bailout.  Just because opportunities abound to overspend, and there are people ready, willing and able to help you do it, doesn’t mean you have to take advantage of those opportunities.  Apply this logic to the housing market.  Just a couple decades ago people were perfectly content to live in homes with modest square footage, three bedrooms, and a small garage for knick-knacks and tools.  Now days everyone needs a bonus room, home office, double garage on a one acre lot.  To finance this “American Dream” many people leveraged their financial future borrowing over half of their income to support a house payment they really couldn’t afford.
  • If you have debt, pay it off and fast.  There are various ways to pay off debt, but at the heart of all the plans is the basic idea that if you live on less than you earn you will create excess money that can be applied to your current debts.  That’s really all there is to it.  Some people line up their debts by interest rates, making larger payments on the higher interest debts first.  Others prefer the debt snowball method of paying balances off smallest to largest.  I don’t really care how you do it, just do it!  And don’t let people convince you that debt is good, or that if it is low-interest you are better off investing the money.  If you aspire to be debt free, tune out the naysayers and make it happen.
  • Create an emergency fund.  With debts paid off, and living a frugal lifestyle, savings should be your next priority. Build a healthy emergency fund of 6-12 months of expenses–the more the better.  Many financial planners suggest 3-6 months of expenses saved, but I personally would sleep a lot better knowing my family could survive comfortably for a year in the event of a major emergency such as a layoff or illness.
  • Don’t suffer a spending relapse. Often times when people reach this stage of their financial recovery they backslide into bad habits of excessive spending.  Think of times past when the government got control of spending, balanced a budget and shrunk the national debt, only to see spending increase as national events changed the political landscape.  The government does not get the idea of an emergency fund, because in their mind a surplus is simply money unclaimed by a new spending plan.  Do not repeat their mistake–keep money in your personal surplus set aside for emergencies and keep your spending in check so you don’t have to dip into these savings to finance bad habits.

In some cases the best form of education we can receive is to be provided examples of how not to do things.  The poor money management lessons from our Congress are a great example of this type of negative behavior modeling.  Whatever you do, don’t follow their lead with your own finances.

Comments

  1. Thanks for the link!

    Interesting how a few years ago this whole mess could have been avoided, but the same people who are asking for the bailout now, are the same ones who voted not to regulate this more then. Go figure. We the taxpayer get the short end of the stick again :)

  2. I agree with the proposal that the money shouldn’t be a bailout (ie.- giving the money to the companies and taking control) but instead they should just loan the money at a killer interest rate — like 3% to 4%.

    What I don’t understand about this is why people are so eager to have the gov. step in and start running things. Having worked at a gov. office as a contractor, I can say that the gov. is THE WORST entity for running a business. There is only one company on this planet that can run a net loss each and every year and still be in business for over 200 years — the US government. The last thing they need is more responsibility than they already have.

    I also still have yet to hear the real reason as to why these companies folded in the first place. Was it Enron-type management? Was it a few hundred people defaulting on their loans? I still haven’t heard the whole story yet.

  3. @ DavidK
    There were several reasons, not the least of which was the loss of liquidity by the financial giants that held the paper. A security is only liquid if someone else wants to buy it. When you have a 40 to one margin on a group of loans and everyone is making payments regularly, it works okay. You make money, the people live in their homes, and if you suddenly need some cash, you can easily sell that security in the open market. BUT, at a 40 to one margin, anything over a 2.5% default rate means you’re upside down. Now, when you need cash, you cannot sell the security because no one wants it. BAM – crisis.

    Multiply that over tens of thousands of mortgages and you can see where the problem lies. It wasn’t necessarily that any one group was too greedy and had it in for another group, it was just bad financial management on the part of the financial giants that was made possible by bad legislation from your Congress. They (Republicans and Democrats alike) repealed good laws that would have prevented much of this crisis, presumably to generate votes from happy homebuyers, contributions from institutions and individuals, and happy bank/mortgage/financial lobbyists.

    That’s the simplified version anyway. :)
    It all boils down to liquidity.

  4. Thanks Ron for that simplified explanation of what has happened. It appears that the small snippets of info I’ve heard about allowing people who shouldn’t have qualified for home loans in the first place appears to be spot on. This “leveling the playing field” nonsense has definitely turned out badly in the long run. Who’d have thought that might happen? Perhaps we shouldn’t force opportunities to exist just to increase party donations and voting rolls.

    Here’s a simple idea — let the market manage itself. If someone doesn’t have the funds to get X, then we shouldn’t force the opportunity to be open to them. There is a good reason they cannot afford X. It’s almost like forcing evolution — it’s just not going to be rushed.

    One more question though. If it boils down to liquidity, then why did the companies need liquid funds to begin with? Unexpected operating costs? Mishandled budget? Or is it too early to tell?

  5. I’m furious about the bailout. For a while I hoped that Congress would do what it does best (that is to say, nothing) while the rest of us ride this storm out. Then I read in the news that it looks like the bailout is on. All I could say was… “I ate beans and rice for THIS?”

    The sick part of it is, there aren’t THAT many foreclosures. The news accounts I read suggest that ALL sub-prime mortgages are in default, which isn’t the case. The vast majority of them are not: they’re doing as we do, and paying down the debt while they climb out of whatever bad state of affairs knocked them into the sub-prime category to begin with. Yes, the national foreclosure rate is higher than it’s been in a while, and yes, the rate is higher still on subprime loans, but we’re still talking about a single-digit number. How is it that a single-digit number in foreclosure ratio is turning into a double-digit or triple-digit number in stock gain or loss percentage and a NINE TO TEN digit number in terms of Uncle Sam dipping into my pocketbook? I’m seeing some amplification here and I’m not believing it.

    Even with a 5% default rate it’s important to remember that 95% of mortgages in that category are good, and some are creating a heftier return on investment because the interest rate is bigger. If they were my investments, I would simply comb through them, separate the people with a good record from those with a bad record, and cull the herd. In a field stuffed with Harvard and Yale graduates, I’m not understanding why thinning the herd hasn’t occurred to someone else.

    My own mortgage, for example, is a nice, shiny little nugget of an investment for somebody. There’s never been a late payment, in fact I send in extra payments.

    Add to this credit cards, car loans, and other sources of income that banks have, and there may still be a slight net loss but it shouldn’t be enough to break the bank.

    I’m thinking that all the conniptions over subprime mortgages are artificial. The timing of this drama is really, really dubious. I’m starting to suspect that there’s no real crisis at all. We’ve amazingly survived this last couple weeks while Congress hemmed and hawed. Nobody has taken a giant eraser and wiped cities off the map. I’m thinking that we could get by indefinitely without a bailout.

  6. I saw Mark Cuban being interviewed on the Fox Business Channel over the weekend and he had an interesting idea. What if he, and other billionaires, put up some of this $700 billion money privately, holding it in an exchange traded fund people could buy in to, and receive dividends from. Paulson and team would essentially roll all this bad debt into an ETF and put it out to the market for investment (funding).

    On the surface, it sounded like a much better plan than taxpayers supplying a loan to these finance companies, with any repayments going back into the government’s coffers.

  7. Well one thing I definitely do not understand is how the billionaires would actually fund it. People like Cuban and Warren Buffet (one of the richest in the world) don’t have actual cash to lend. For instance, most of Buffet’s money is in stock. Stocks, like antiques, are only worth anything if you can find someone to buy them. It’s even worse for stock as they are only valued if the company stays in business. If one of Buffet’s major share portions were to take a dive, then he would basically fall off the “50 Richest” lists quite quickly. (Perhaps I’m missing something simple here — I admit that I do not have a degree in finance or anything.)

    I am doubtful to believe suggestions made by many in a time such as this. I believe it is far too complex an issue to be understood or even easily solved at a moment’s notice. Though people like Cuban and Buffet are intelligent investors, they still base their thought processes on a thriving market and a free economy. If the gov. steps in, the rules change. They change in ways that no one can imagine.

  8. this from another board and another poster

    This is not a bailout of wall street. It’s a “funding” of the US Economy.
    More than likely, according to Warren Buffett, the government will make money on this transaction.

    Credit is the lifeblood of any economy. If Credit doesn’t flow, economy stops, people loose jobs, less tax revenue…you can see where this goes

    Couldn’t have said it better myself, the US (and the rest of us) are in for some serious pain. Another Great Depression no, a long deep recession yes.

  9. @DavidK: I share the same doubts, and your assessment that they have oversimplified a rather complex idea. Since I’m more of a free market idea, I am drawn to such big ideas, but admit it would take a lot of logistical maneuvering to pull off.

  10. I’m no expert in financial. I just wonder what is the alternative than the plan right now. Doing nothing? I agree about individual who can’t afford a loan shouldn’t get a loan. I even don’t believe in car loan. But how about small businesses that try to run their business but can’t get a loan to stay afloat. What is your opinion on that aspect? It seems that the problem is not confined to just wall street. Small business, mid-sized business, big business seems to be impact by the credit freeze. Can the economy survive it?

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