For roughly seven years I’ve written on economics, social issues and the markets. In several areas of the economy and markets have I put forward what I believe would be an improvement in what we have now, whether it be in the area of health care, education, monetary theory and practice or energy.
Leverage, for example, featured all of these areas of the economy in quite-significant detail. But in the time since its publication, along with the time before that I and a few others have spent writing on these matters, little has changed and in fact one can easily argue that economic matters have gotten much worse for the average American.
I want to advance a “unifying theory” if you will that underlies all of these ills. I’ve talked about it a bit in the last year but I believe we must bring it front-and-center in our economic debates both among our associates and in the political sphere.
It is simply this: We must stop and reverse the financialization of all areas of our economy.
What am I speaking of in this regard? The increasing acceptance by us in being sold a payment instead of a price.
You may not have noticed it but virtually everything nowdays is sold this way. And unlike the various perverse games that are played in Washington DC to screw you in one form or another this one is completely under your control; no President, Senator or Representative can force you, at gunpoint, to acquiesce.
Consider the common situation with cell phones that I wrote about in Leverage: You walk into a cell phone store to get a new phone and are told it’s “ninety-nine dollar!” No, that’s not the price. The price is in fact $99 down and about $40 a month imputed for two years; that $600 phone in fact costs about $1,059! The rest was extracted from you because you allowed yourself to be sold a payment ($100 a month for cell service) instead of a price.
If you bought a price instead you would have paid $500 for the phone and then $50 (or less!) for the service. Indeed, you can do that now — it’s called Straight Talk over at your local WalMart. There is no subsidy on the phone and the price is $45 per month for unlimited talk, text and 2Gb of data — about half of what Verizon or AT&T want for the same thing. Oh, did I mention that you’re actually running on their networks anyway? Yeah, that too.
So by refusing to allow the cell phone store to financialize your service and phone you pocket about $25/month when all is said and done. That’s $300 a year with which you can buy an (inexpensive) vacation or just a few nights at your local bar. $25/month doesn’t sound like much but for many people it’s about half of their monthly water bill, and that’s nothing to sneeze at — especially if you’re tight on money.
Let’s look at another example: College educations. You’re sold a payment when you start playing the loan game. “Yes, you awesome and unique high school senior snowflake (and you fine parents of said snowflake!) all you need to do is sign right here and when you finish your education, of course at the top of the class with straight As, you’ll land a great job earning $65,000 a year and will pay a mere $500 a month to cover this grand educational experience, complete with a fabulous student center, indoor pool, tennis courts and, of course, sushi every night.”
Uh huh. What they forgot to tell you is that in order to do this you will have borrowed $45,000, or over $10,000 a year. Your parents will have raided their retirement funds for another $50,000 — money that, over that same ten years, will be the difference between them eating cat food down the road and being reasonably comfortable. Your so-called “education” in fact will cost approximately $100,000, or six times what it cost just 30 years ago, dramatically outstripping inflation.
The real bad news is that this “affordability” presumes you succeed, and even if you do you’re still in trouble. Why? Because $65,000 a year is a gross income of $5,417 per month. The problem is that most lenders will not allow your total debt service to exceed 36% of your gross income and even that is unsafe. That 36% means that all debt service must not be more than $1,950 monthly — that’s housing, car payment and the student loan. Your student loan will chew up better than one quarter of that right up front and if you have a $500 car payment on top of it you’re now down to under $1,000 a month for all mandatory housing spending including principal, interest, property taxes and hazard insurance.
How much house does that buy? Let’s look — at 5% interest and a 30 year fixed loan assuming your hazard insurance is under $500 a year (achievable in most parts of the country) you can finance $177,705 worth of house.
That looks doable in many parts of the country, until you realize something else — the places where you can land that $65,000 a year job have no chance of having hazard insurance and property taxes both payable with that $500. Indeed it is not uncommon for the property tax on that $170,000 house to be $3-4,000 a year in metro areas that support your $65,000 salary!
Now run the numbers starting with your same $5,400 in gross income, allowing $1,950 for all debts and subtracting off $750 for the student loan and property tax on the house, plus another $500 for the car payment. You now have $700 a month with which to buy the house, and by the way that only buys a $130,000 house.
How many of those are in that major metro area and aren’t crack houses? Uh, yeah.
Now you know why you are sold a payment on that education instead of a price; it allows the glib-talking salesman (commonly called a High School counselor or admissions “adviser”) to not bother telling you about all the math you ought to do before agreeing to these terms. It also evades a discussion about what happens to those numbers and your economic life if you don’t finish in four years but instead take five (adding 25% to the cost) or worse, you leave without finishing at all but still have the debt.
Without financializing the cost and preventing you from declaring bankruptcy and walking away you would never accept this and no lender in his right mind would give you the money either.
Now let’s look at cars. The other day I wrote about the utter insanity of the average new car costing $32,000. How did that happen? Simple — you’re sold a payment instead of a price. If you walk into a car dealer and tell them you can “afford” $300 a month they will do everything in their power to find a vehicle they can sell you that will “cost” $300 a month. However, the way they get there won’t matter to you because you just told them how much you’ll spend monthly, without regard to how much the vehicle actually costs!
By going down this road you virtually assure yourself of getting screwed out of thousands of dollars and what’s worse is that you drive the demand curve for those higher prices northward which hurts everyone else irrespective of whether they came into the dealership intending to do the same thing or not.
Of course houses are the worst offenders in this regard. That’s how we wound up with the housing bubble — financialization. And it’s how we’ll get screwed again and again until we stop it, because as soon as you allow this sort of manipulation to take place in something as essential as housing (or transportation) you are going to get reamed by it no matter whether you participate or not.
No, you don’t “win” by participating while others “lose.” You all lose because you overpay.
Let me expound on that a bit. When we allow financialization to take place the means by which you overpay seems complex or even ethereal but it really isn’t. The banksters and other people in the transaction have a huge database of outcomes to look at for statistical purposes. That is, theyknow what the odds are of your defaulting on a given loan and since they have millions of examples they have an enormous amount of information in this regard. You, on the other hand, have none of that information and what’s worse is that even if you did it wouldn’t help you much because you don’t know where you fall on the curve.
It is human nature to believe in our own exceptionalism. However the fact is that experiences on an individual basis tend to fall on a statistical bell curve; some bad, the median being the most-likely, and some good. The goal of financialization is to allocate almost all of the benefit from a given basket of transactions across that bell curve to everyone except you.
Sit down and think about this folks. You buy a car to get to work, the grocery store and similar. That is, to transport you and your effects from place “A” to place “B” and back again. That has utility value to your life and if you analyze it sufficiently you can actually put a financial number on that value in dollars, with the alternative being either public transportation or the use of human muscle power (by either walking or riding a bicycle.) That utility value varies widely; for someone who lives in a big city with a good public transportation system it may actually be negative when all costs such as city stickers and parking are taken into account, but for most of us there is positive utility value present.
Financialization is all about analyzing that value across the entire base of cars sold and then allocating all except a tiny little bit of that value to the people selling both the cars and the money.
Note that without financialization the car dealer has much less information about the value to you of a given vehicle sale, and he has less capability to capture that value to you. If you have wondered why a dealer in a big city often prices cars lower than a rural dealer you might think it’s mostly about the number of cars sold. Not entirely so — it’s also about utility; the person in the country can’t realistically choose to walk or ride the bus!
But when you financialize the car transaction now the entire nation gets averaged on that bell curve and the amount extracted from you and transferred to them goes up. Not only do they have vastly more data to integrate and thus the supplier’s information becomes more-superior but in addition there is another party involved in the transaction — the lender — and he insists on getting paid for his work as well.
Left to its own devices this will ratchet prices higher until all but the last dollar of utility value is extracted from you on average and winds up in the dealer’s, the manufacturer’s and the bank’s pocket. Anyone who is left of the peak of the bell will see negative value in the transaction, while those who see positive value will see much less of it. This is simply due to information asymmetry but the blame is yours because you allowed it to happen.
The same thing has occurred with education. Why can’t you spin pizzas on weekends and in the summer and pay your way through collegewithout any loans at all? You could do that 30 years ago — it wasn’t particularly difficult either. You had to work full-time in the summer and perhaps do the first two years at a community college, but it penciled out — even if you didn’t live at home. Today that’s impossible; you’d have to work 120 hour weeks in the summer and 40+ during the school year, and you probably still can’t hit the numbers without borrowing.
Has Calculus changed in the last 30 years? Has chemistry? Has pretty-much anything else? No. What has changed is that the financialization has allowed colleges and lenders to collude in analyzing the outcome data and then ratcheting up the price so that only those on the right side of the bell curve get any financial benefit at all from attending; those on the left get hosed and those on the right get a fraction of the benefit they should.
The college, however, along with the car manufacturer and dealer, don’t care because their goal is to maximize their profits and so long as half plus one of the people participating get some benefit there will be those they can sell their scheme to.
The Real Estate business is likewise polluted with this crap for the same reason. Whether you will benefit in the long run doesn’t matter any more. All that matters is whether there is a marginal amount of economic benefit that can be siphoned off and whether those on the right side of the curve will keep a single dollar. So long as they do and you keep playing the game continues and prices are ratcheted up with nearly all of the benefit going to someone else.
Here’s the point though folks — we can stop it.
You, I, everyone else.
We stop it by refusing financialization.
Especially things like cars and educations along with consumer consumables like cellphones. In other words, reduce to the maximum extent the ability of others to use their superior information and aggregation of data against you.
And before you pipe up and say “But if I do that I’m screwing myself!” consider that for most of us our desires and influence extend beyond our own person. Most of us have or want to have children during our lives. By participating in this scheme whether we win or lose personally we are screwing our kids because the economic impact of this scheme falls worst on those who follow us.
I will argue that while there are sociopaths among us, and many of them, most of the population doesn’t want to financially screw their own children for their personal aggrandizement. The problem is that most people don’t understand how signing that FAFSA, buying a $35,000 car on an 8 year payment schedule, going along with Obamacare or playing the “real estate” game hoses their kids — and grandkids.
But it does; if you doubt it find and defend a competing explanation for why it is that in the 1970s and early 80s you could spin pizzas and work in the summer to go to college, paying the entire nut to do so, and yet today the cost has risen at six times that of the minimum wage making that course of action impossible.
That is, in the 1970s and early 80s anyone who could pass the classes and had the desire to go to school sufficient to work in the summer and on weekends could do so without taking on debt. That meant that whether you came out ahead (e.g. you finished and got that good job) or not you were not financially ruined by attending; the worst case was that you failed and lost your investment you had previously earned spinning the pizzas.
Today we impoverish a large percentage of those who attempt to attend college — on purpose. It’s our (we being those who have tolerated this crap for the last 30 years) fault and if we don’t educate the younger people in this country and demand it stop it will continue to be our fault.
You can no longer claim ignorance folks.
Now the question is whether you will continue to willingly participate.
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