Friday, November 28, 2008

Black Friday

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The other morning, there was the Black Friday shopping poll. It appears that most of you don’t partake, either because you hate shopping or crowds, or you only shop on-line.

Me, I’ve been a long time Black Friday shopper, albeit not in the way most people think about it. This year, though, I’m not really shopping on Black Friday. And it’s all political and economic. (Surprise)

In general, Black Friday is a great time to shop for toys, and I buy a lot of toys. Also gloves, scarves, hats, coast, aspirin, and those mixed gifts of teas, coffees, jams and candies. Highly impersonal things. None of which end up with anyone I know personally. It all goes to the drives for people who need these things – Toys for Tots, the local Senior Center drive, those trees at the mall where you can pull a tag and fill a wish.

My adult friends and family know that for holiday presents they get little notes saying things like “I took the money that would have gone for a present for you and instead, sponsored in your name….” I do this because I don’t personally know people who need things. I do have friends who are having a harder time this year than last, but we all are lucky enough to have roofs over our heads, and food in our pantries, and therefore, my money goes to people who are cold and hungry and joyless.

The thing about this that relates to politics and the economy is some of the code that President-elect Obama has been using in his economic pressers this week. He has alluded to the sacrifices people will be making, and how things will be changing. He says it in relation to both economics and medical care. It’s subtle, but I’m pretty sure I can see where it’s going.

Years ago, banks used to have something called Christmas Clubs. You would put a dollar, or five, in a savings account every week. You got it back in one lump sum in early December. They did away with the clubs a while ago, but I kept putting a few dollars in a jar every week, and that’s my Black Friday money. It doesn’t sound like much, but you’d be amazed what you can do with $250 and a bunch of good sales. Last December, I lucked into 150 pairs of gloves for $100.

The point is, it’s current money. It’s not HELOC money, nor any other form of debt.

And that’s one of the things our economy is going to require of us. To use current funds, to save for things, While the $800 billion released earlier this week by the Fed will help with the availability of mortgages, car loans and tuition, it will no longer be a case of “I want it, I can have it.” The oversight that everyone wants will not just be for executive salaries and an end to front-end loaded derivatives, but also to the availability of funds for those “regular folks” who look at borrowing.

This is likely not going to play well with most political views, because most people like “ideals” but hate any implementation which involves them directly.

The first example is that of a home mortgage. “Back when” getting a mortgage meant filling out a stack of paperwork which documented one’s income, debts, assets, and sometimes included references. The information was reviewed by a banker, or a board at the bank, and the mortgage was granted if the amount of the monthly payments came out to less than 30% of income and the person/couple was putting down 20%. (The percentages might have varied depending on certain local customs, but not by much.) The idea was that one shouldn’t have more house than one could afford.

By insisting in the 20% down, it was close to impossible that the value of the mortgage would ever be more than the value of the house. It was a HOME, not an investment.

For more than a decade, that hasn’t been the case. While people may argue whether the fault of the mortgage crisis was due to the people who pushed no-doc mortgages, or the people who took them out, the point is, by not requiring downpayments, any loss to the house value made the mortgage upside-down. That is, the economic dependence on housing only worked so long as people lived temporarily in housing and then traded up, made possible by “values” which kept rising.

The government shares some culpability in this due to the fact that the tax code allows for an interest deduction for mortgage interest. In fact, for most Americans, the difference between whether one can itemize or not is a function of whether one has a mortgage. No mortgage, and it’s standard deduction for you. Be able to itemize, and all of a sudden the ability exists to write off all sorts of other things which, by themselves, won’t cross the threshold.

As a political and economic reality, to “right” the housing market means that either the cost of housing needs to fall to where more people can afford a median-priced house on a median income, or there will be a gap of many years where people need to save substantial amounts of money to put a downpayment on a house.

But the other reality is that the economy needs more people in new houses (new to them, not necessarily new stock) because that is the driving force for the purchase of new appliances, furniture, fixtures, paint, curtains, etc. to furnish the new house. But this time, those purchases will need to occur with current money, or the fundamentals of the economic meltdown will still exist.

So what to do? It may be that the tax code is altered to support saving and not borrowing. It may mean certain above-the-line deductions. (For those of you who are not American, you can deduct from net income certain deductions granted without having to itemize. This lowers the net income one actually pays taxes on.) These deductions could be for things like savings, but also green improvements to one’s current home, interest on car loans to encourage car purchases, interest on credit cards to help people get them paid off more quickly, or any other behaviour the government wishes to encourage.

And as for cars: for a long time, Americans have liked to buy (in general) all the car they could afford. To allow people to have more car than they could afford, the idea of a lease was hatched. A car lease is like a 36 month car loan. One pays less per month than he would to buy the car, and at the end of the lease the lessee would either pay off the remaining value and keep the car, or return it.

In the next economy, it may be that people go back to only buying cars that are affordable. When I was in high school, these were called “beaters”.

To get our economy back on track, are you willing to give up anything? Will people IN GENERAL be willing to live within their means? Will the far left demand that the government provide all that the left believes it is entitled to? Will the far right populists?

Remember that the value of America, of the world, has shrunk by trillions in the past several months. The argument can be made that “the value” was always imaginary, but still, people believed their homes, retirement accounts, stocks, etc, were worth a certain amount, and now they aren’t. With the monies that are left, do we fund national health care? Better schools? Use everything as seed money? Do we take easy fixes, or stick to the values necessary to build an economy on a strong foundation independent of political expediency?