The Whole Damn Sham ... A Must read article by Jason Kelly

February 27, 2009
As governments around the world mortgage the future to save the financial system, do you ever wonder what's so worth saving? If a bunch of deadbeats failing to pay their mortgages in the U.S. takes down the global economy, I say we need a new system.

What a fiction the whole thing turned out to be! All those slogans, all those logos, all those buildings, and all those brains that could have been put to something useful were instead wasted on financial engineering. At its most basic, banking is not complicated. You lend money to people who show a reasonable ability to pay it back. They benefit because they end up with something more valuable than the sum of principal and payments on the loan; the bank benefits by getting interest.

Banks did it well for a long time. Then, in the mad rush for more, more, more profits in any way possible, loans were packaged and repackaged and distributed around the planet until nobody knew who owed what to whom. When the payment didn't come through, the whole line collapsed. Poof! Just like that.

And we're spending trillions to get back to it!

Those who never mismanaged their finances are doing fine these days. With no debt on credit cards, no outsize debt on property, and no auto loans, it's hard to get in hot water. Unreasonable? Not to me, not to many others who've emailed me, and not to our grandparents. Read any book on financial planning or pay attention to literature and you'll run across the evils of debt. From my stock book:
Debt and death sound a lot alike, and that's no coincidence. You don't even need a finance book to arrive at this conclusion, all you need is a good literature class. Emerson wrote in May-Day and Other Pieces, "Wilt thou seal up the avenues of ill? Pay every debt, as if God wrote the bill."
Whenever I'm in Los Angeles and see some shaved-headed punk driving a sparkly new SUV that cost more than $50,000, I always think, "Yeah, that's paid for." Look at any busy road and ask how many of the cars are paid off. Not many.

Most people's financial lives are a complete mess, and there's no excuse. I'm tired of hearing that financial planning is not taught in school, that our parents didn't teach us, that it's too complicated. Those of us who managed to discover the ills of debt went to those same schools, grew up with imperfect parents, and were able to grasp the oh-so-complicated idea that paying 18% interest on a pair of sneakers isn't good math.

Financially stupid people are America's most toxic asset.

It wasn't just the bankers, after all. The people offering senseless loans had to find people financially senseless enough to sign on to them. Did you fall for a loan you couldn't repay? I didn't. Are you making payments on a depreciating automobile? I'm not. Have you ever borrowed money for anything that didn't end up being worth more than what you borrowed? I haven't. Have you ever carried a balance on a credit card? I haven't.

After voluntarily shackling themselves to a life of debt, people complain about their lack of financial freedom. "I hate my job, but I need the money," they say. "I can't get ahead because my house payment and car payment are so high that I have to pay for everything else on credit cards, and the tab just keeps climbing."

Yet, some of us were able to figure it out. The people angriest right now are not the poor or the rich, but the ones from any class who bettered their situation through their own hard work and sacrifice.

I am not from a rich family. When I attended the University of Colorado, I paid my own way. I was surrounded by rich kids from California with credit cards from their parents. The bills went straight to California so the kids never even saw them. They went skiing on weekends; I went to my part-time job delivering sandwiches. They partied; I studied. They made fun of my beat-up old car; I was just glad to keep it running on meager wages.

When I was a senior, I applied to work at IBM. The company invited me to its Silicon Valley Laboratory in San Jose, California. I told the human resources manager that I didn't think I could afford to get there, and asked if I could interview instead at the local Boulder plant. There was a pause, then he said that IBM would pay for my transportation. I thanked him profusely, bought the best suit I could afford, and flew to the Silicon Valley Laboratory for a test and series of interviews, and IBM offered me a job as a technical writer. I was elated. I will always have a special place in my heart for Big Blue because of that break. It was the only company that believed in me. I never knew the meaning of the term "competing offer."

When I graduated, I did so with student loan debt and it drove me crazy. I barely made the trip to California in that beat-up car of mine, found the cheapest apartment near the lab, and lived the life of a pauper until those student loans were paid in full. I clamored to a zero balance within a year, driving that same old car the whole time. I parked it on the far edge of the IBM lot, in the shadows of trees.

Once I got to zero, I kept the spartan lifestyle going and saved a nest egg to start investing. It hit $1,000 then $5,000 then $20,000 and in less than four years of aggressive saving and the strong stock market of the 1990s, it topped $100,000. Life on top of a $100,000 stash of cash is very different than life at -$50,000 or -$10,000 or even $0. There's freedom. Freedom to quit things, freedom to start things, freedom to go places, freedom to meet people.

I rewarded myself with a -- no, not a new car -- a newer used car. With all due respect, I bid adieu to IBM because I knew within two weeks of my arrival that corporate life was not for me when a senior writer said, "If you want to know where you'll be in ten years, just look at someone who's been here ten years longer than you." I did so, and promised myself I'd never make it past five.

IBM was the only "real" job I've ever had. I started my own company after leaving, and never looked back. In running one's own company, financial management becomes even more important. My company has never spent one day in debt. All new ventures are financed with positive cash flow. All mistakes I pay for myself. All profits I use to grow and try new things. It's not credit cards that make it possible, it's not a bank, it's smart financial management.

So, when all those former classmates with their credit cards and their children with their credit cards reward themselves for nothing by getting in hock up to their ears, I have little sympathy. I don't think they deserve to stay in their homes just because they're in them. I think they deserve to stay where they can afford to stay. If they want to stay somewhere nicer, they should work harder or save more carefully. There are lots of used cars to drive. There are lots of cheap places to buy clothing. There are plenty of ways to have fun that don't involve shopping.

Which brings us to the whole damn sham. Rather than seeing this as a chance to encourage a more responsible lifestyle, the government is using my tax dollars and yours to get the credit cards sliding again, the oil flowing again, and people in hock on new cars again. Consumption, consumption, consumption is the rallying cry of business, and the business of America is business, so the government is on it.

For what, after all, is the stimulus package attempting to stimulate? A restrained life of living within our means? No. It's stimulating consumption. All the big talk of get the credit markets moving again, banks healthy again, balance sheets strong again comes down to this: we need little Susie to get a loan for a really cool new car she can live without, drive it to a shopping mall to buy crap she doesn't need with a credit card she shouldn't have, and return to a home mortgaged at a price higher than she can afford. That way, when she can't keep up with all of it, she'll have to fall back on other credit cards, and bank balance sheets will be strong again. Great!

The system was shot to begin with, so let's let it fall to pieces, let everybody who deserves to be broke go broke, let the dire collapse the government keeps warning about take place before our very eyes...and then start fresh with lessons learned.

Nothing will pound financial sense into somebody better than going broke. So let the pounding begin.

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