From the Prez this week:
"We've seen mortgage, uh, interest rates, uh, go down, uh, to historic lows aaaand we've seen a, uh, very significant, uh, pick-up in refinancings. Uh, that has the fact of not only putting money in the pockets of people but also contributing to stabilization of the housing market."
Oh. Great.
Somebody please remind me ... how did we GET in this mess in the first place?
Oh, yeah, historically low interest rates which allowed people to over-leverage their houses in favor of current consumption spending.
I was a finance major, so I should probably not be so arrogant. But I can't help it. One semester into Finance 101, I declared that the whole industry could be summed up in four basic (meaning not complex, not mystifying) concepts. I taped the list up on my dorm wall. Upon graduation, moving out of the dorms, I double-checked my youthfully exuberant list. Guess what. I had nothing to change or add. Finance really is that simple. I really can't understand why it remains such a mystery to most people, apparently including the entirety of the talking-head class and most politicians.
Perhaps it's just not worthy of their attention because it's not sexy. Thinking about finance doesn't lead to orgasm or procreation or satisfaction of our innate narcissism. So, let me speak in the language of narcissism. Let me try this metaphor:
- Savings is protein, vitamins, and calcium: building blocks of a necessary strong frame for the body. To be clear, the body CANNOT be strong or capable without these building blocks.
- Investment is exercise: it builds muscle atop the frame, making the body more capable. There is NO other way of building muscle than exercise.
- Consumption spending is empty carbs: an immediate, but short-lived boost of energy, followed by a sickening crash. It solves an immediate need without any lasting benefit. Sadly, this boost trains the brain to seek more and more empty carbs, to the exclusion of other, healthier behaviors. The only tangible thing left over is disgusting, useless fat which is extremely difficult to get rid of.
- Leverage is substance abuse: from coffee to cigs to crack cocaine, the result is merely the illusion of increased energy, strength, and capability. To maintain the illusion, you have to take on ever-escalating amounts of the stuff. The dose becomes toxic and eventually lethal. And once you stop, you're gonna wish you had died.
