Attempts at a Sustainable Lifestyle…

This week has been an emotional roller coaster ride for all of us who have investments of any type.  It seems like nothing is safe haven for your money anymore.  Even if you hold your money in your mattress you would lose it due to the high inflation.  The scent of fear is really overwhelming in the air.  I have been really busy at work but I think everyone seems to be frustrated and sobered by what is happening.  It seems that every single day the government comes up with a new scheme to do something or the banks “inject” money into the system.  Here is what it really means and why we as individuals can only go with the flow.

American Dollars and much of modern money is based on a fiat system, which means that the money we earn is a type of credit declared by the United States government to be legal for paying back debts and buying things.  There is really nothing backing the money other than the word of the government.  Central banks around the world control much of the money systems and they can technically  create or destroy money at their whim because they do not need to produce anything to create money.  Since money is basically a legal instrument, banks and governments are intrinsically involved with each other.  It is actually really easy to conjure money out of thin air, all that needs to happen is for a government system to say so.  So when Paulson says that the financial system is sound, what he really means is, “Trust us, we will print more money and make people believe they have wealth to spend!”

The financial industry understands that they are not actually producing anything and they are just playing a giant numbers game so they have nothing to lose.  Afterall, banks are just trading promises between a variety of folks and I really think that intangible quality of money made a lot of people more irresponsible than they should have.  When the numbers game failed and promises were broken,  quite a few banks ended up with actual assets such as foreclosed homes, but most of them find these homes to be a liability because they don’t want to play with actual property, they just wanted to play with balance sheets.

Now money only has value when people are willing to accept it.  I could have a $100 yuan bill in America and people will probably treat it like a piece of garbage, but in China I could buy a bunch of groceries with it.  Why would a grocer in China accept a piece of paper that’s useless in America?  Is he daft? The fact of the matter is that we are all already too deep in this system where we accept a certain currency even though at its core it is just a piece of paper.  This is why the governments and banks want our trust.  They want us to believe that the money they are creating by the stroke of a pen is good and acceptable.  They want us to know that we can continue to work hard and produce goods and be compensated in ephemeral numbers.  They want to continue the game.

Money is an illusion, and I don’t even mean that in a metaphorical way.  It literally can be conjured up from thin air by those in power.  This is also why I’m not too worried about our financial markets.  As long as the banks and governments are in control, they will continue to tweak the game for their own survival.  So pick up an index fund and watch those little numbers swing up and down, but remember that it really means nothing until you have to use it and actually buy something tangible.  This may seem like you should spend everything and go in debt, but remember, most of us are not in power and we can’t make money magically appear.  Most of us still have to pay taxes and debt interest to those who control the global money game, and that can get very frustrating, but that’s life. Don’t worry about your portfolio too much and enjoy the sunshine and don’t be a workaholic because the time you have on this earth is more precious than a few numbers.  That’s all we can do.

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So by now I am sure all of you know that Lehman Brothers has filed for bankruptcy and Bank of America purchase Merrill Lynch. Additionally, one of the largest insurance companies, AIG, is in deep financial trouble and was just bailed out by the government. In reaction to the news, the Dow Jones industrial plunged more than 500 points yesterday and regained more than 140 points today. It all sounds quite unsettling and volatile right now, but I really think bad things need to happen before things can get any better, and this is my reasoning.

First of all, I think most of us have had the experience of eating something horribly uncouth and falling ill. What usually happens is a bit of a stomach ache, and then full blown diarrhea, but once the last bit of toxin is out of your body you start to feel better. I think the financial markets is basically in the middle of a cathartic bowel movement right now. As many commentators have said, the debt and mortgage backed securities were “toxic” and these securities poisoned many firms and it is only natural that we’re seeing death and destruction. As a result, the more prudent firms are surviving and becoming stronger. For example, Bank of America has snapped up Countrywide and Merrill in the midst of this, and their position as a financial services company has been strengthened.

The problem I see with the current situation is the string of bailouts being handed out by the United States government. Last week it was the bailout of Fannie and Freddie, and today AIG just got an emergency $85 billion loan and the government will be receiving a 79.9% equity stake. This pretty much means that the United States government is now the largest insurer in the world. The problem with this is not only that the government is throwing good taxpayer money after bad, but that the United States is taking on enormous amounts of financial risk.  If the government left these companies alone and let them perish or be gobbled up by competitors, then the resolution to their failure might come quicker and the government will not have to borrow countless amounts of money that have to be paid off for decades.  Right now we are seeing policies that mirror the policies that possibly extended The Great Depression and that’s what’s truly frightening.

So in conclusion, I guess I am saying that 500 point stock market drops do not really bother me all that much because I am a long term investor, but these hundred-billion dollar bailouts are really disconcerting.  How many of these bailouts can we taxpayers really afford?  How many years will America be slave to its lenders?   It is hard to know the future, but Washington should really let the financial markets work itself out without prolonging the current pain.  I hope that people would remember what happened to lead up to the current financial crisis, and learn something from it, but unfortunately I think history  tends to repeat itself over and over again.

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Today I read an excellent article called The Key to Wedded Bliss? Money Matters.  The author pointed out several things married couples could do to improve their relationships with themselves and their money.  I should summarize them here with my personal experience.

Talk and share goals - The hubby and I are pretty different in terms of our money management, but I think I am converting him into a saver.  We have talked quite a bit about retirement and having kids, and we generally agree with each other about what we want in the future.  Communication is definitely important in a marriage.

Run a home like a business -  I keep a running spreadsheet of our incomes and expenses for each month and give the hubby a report at the end of every month just to let him know how we are doing.  This has worked fairly well for the past year.

Be supportive of careers - We are very supportive of each other’s careers right now.  We both have pretty good jobs as engineers.  If either of us had a great job opportunity elsewhere I think we would both be okay with a move. 

Enjoy, but within reason - We spend our fun money mostly on food and vacations.  The hubby also loves games and gadgets.  As I wrote over a year ago, we started a budget where 2% of our income goes to entertainment.  That has worked out quite well and we still have a surplus in the entertainment fund.  As I wrote in my Wise Bread article from yesterday, there needs to be a balance between pleasure spending and saving, and I think we are doing fairly well. 

Use a mediator - Fortunately, the hubby and I haven’t really had fights about money, but we’d probably use our parents as mediators if we did have some unlikely scuffle.

Maintain some independence -  Both the hubby and I have credit cards, bank accounts, and investment accounts under our own names.  We also have a joint checking and investment account.  This is important because I think we should maintain our own credit histories. Also, we can’t have joint retirement accounts anyway.   So even though we are married I think we are both pretty financially independent.

Invest in your marriage - The hubby and I spend A LOT of time together when we are not working.  Sometimes it feels like too much, but that may change when we have kids.  We are definitely not workaholics and we like playing games and watching TV together quite a bit. 

Since many couples split up because of financial issues,  I feel that money management is an extremely important part of a healthy marriage. However, love and respect needs to come first before a couple can compromise on their money.  For example, I know that the hubby made a lot of concessions on the things he wanted to buy in the past year because he loves me and respects my saving ways. He also started to use coupons, FatWallet and subscribed to SlickDeals on his own (I am really proud of him).   On the other hand, I have also made compromises with the hubby and enjoyed spending more money and time with him.   He acknowledged that I am not as cheap as before.   Marriage is about becoming one single unit, and our attitudes toward money simply manifested how we balance each other.   I am having more fun with the hubby and  he’s glad that I am dealing  with the finances he  dislikes so it is a win-win situation.  So finally, I’d like to say that money management skills are able to be acquired, and if a couple really wants to fix their finances together then they can definitely do it, but if a couple do not care for each other enough to manage their money in a positive way together, then that may not be so easy to fix.  So my conclusion is that money management is much much easier than marriage management, and there is no reason not to tackle it first.

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As a tax paying permanent resident of the United States with no right to vote, I am watching this election with a lot of disgust and a little bit of amusement. I think this election is really turning into a giant soap opera and I’m not sure how it will turn out, but the prevailing themes have been racism, sexism, and elitism. These are my opinions on what I have seen so far. Feel free to stop reading if you are not interested in my political commentary.

Now on the issue of racism, I’m pretty sick of hearing the rhetoric that if you don’t like Obama you are a racist. I was also pretty sickened by the fact that Obama and the democrats attempted to draw parallels between Obama and Martin Luther King Jr. and the Civil Rights Movement. Historically, the Democratic party was the party of the slave owners and the Republican party was formed in opposition to the Kansas-Nebraska Act which would have expanded slavery into Kansas and expanded the power of the slave owners. Eventually, Abraham Lincoln became the first Republican president and the slaves were freed. During the Civil Rights Movement, the democrats were mostly against the desegregation and civil rights laws. It was Republicans who pushed through the The Civil Rights Act of 1964, a key piece of legislation that outlawed segregation and also created equal employment opportunities for women. One of the Democrats who voted against the Act is Senator Robert Byrd of West Virgina and he is still in office at the age of 91. He is a former member of the Ku Klux Klan and said the following in a letter, “I shall never fight in the armed forces with a Negro by my side… Rather I should die a thousand times, and see Old Glory trampled in the dirt never to rise again, than to see this beloved land of ours become degraded by race mongrels, a throwback to the blackest specimen from the wilds.” He now says that he made a mistake by joining the Ku Klux Klan and endorses Barack Obama. He may be reformed, but it doesn’t change the fact that he supported racism for decades and the democrats have pursued racist agendas for hundreds of years. In a way, I feel that the Democrats are simply using Obama as a tool in the current moment. They are attempting to shed their racist past by using Obama as a symbol of change and I think it definitely worked. Apparently many people now believe that Republicans are the intolerant and racist party because they do not say nice things about Obama. I think that is pretty hypocritical because I am sure many of those old Democrats have nothing nice to say about Obama in their private letters.

The next big theme of this election is sexism. The hatred poured out against Hillary Clinton has pretty much divided the Democrats. There are allegations of caucus fraud by the Obama campaign and one female Clinton-supporting statistician has compiled a 98 page book about what happened during the caucuses. There are a lot of stories of fraud and intimidation conducted by the Obama campaign. The most serious and comical group that sprang out of the Hillary bashing by the Democrats is P.U.M.A, which stands for Party Unity My Ass. They are really serious about supporting Hillary, and there are hundreds of groups of these democrats who believe that the proverbial “old boys club” have shunned their candidate Hillary. Now McCain has picked Sarah Palin in response to the treatment Hillary received. I think it was a brilliant move even though Sarah Palin is the polar opposite of Hillary Clinton on pretty much every issue. Is Palin being used as a gimmick? I believe so, but the response of the Republican party towards Sarah Palin has been extremely enthusiastic, and in a way they are using the sexism of the Democrats against them. So far, the more liberal media has bashed Palin for having kids and having a high powered career at the same time. And just today I read a ridiculous comment by South Carolina Democratic chairwoman Carol Fowler that said Palin’s “primary qualification seems to be that she hasn’t had an abortion.” The funny thing about all of this is that the more they trash Sarah Palin, the more backlash they will receive. There are so many women in America that juggle being a mom and having a career, and I think when the media and rabid Democrats make comments that insinuate Palin isn’t qualified to do her job because she is a mom of five, they are inherently insulting many working woman across the nation.

The final -ism of the election is elitism. In the last election the Republicans painted John Kerry as an elitist that lived in a giant mansion with his ketchup heiress wife, and Kerry lost. This time, it is McCain who has the heiress wife and 8 or 10 homes, but somehow Obama is still more elitist. From where I am standing, both McCain and Obama are pretty far removed from the average American. However, Obama seems more elitist because he is a well spoken and well educated black man and Rev. Jesse Jackson actually said that Obama “talks down to black people” and that he wanted to “cut his nuts off”. Obama did make a lot of critical comments about the African American community including “I don’t know who taught them that reading and writing and conjugating your verbs was acting white, we’ve got to get over that mentality.” With these comments, it’s understandable that some people feel that Obama is elitist, but I think Obama is just being himself and being honest. Technically, you want to have the more educated and wise people in public office, but being humble and likable is also very important because the common man and woman do the voting. So in a way it makes sense that elitism is an undesirable trait, but I don’t think Obama or McCain should act dumb or poor just to be more likable. They are who they are, and there is nothing wrong with being well educated and wealthy as long as they govern with integrity and wisdom.

In the 16 years I have lived in America, it seems that Americans rarely vote on the important issues such as the economy and healthcare. Most of the time we have a personality contest filled with personal attacks. This election is definitely the most heated and divisive election I have seen thus far. It is also by far the most entertaining. I think whatever happens, this election will start a grand social experiment. We will either have the first African American president or the first female Vice President. As demonstrated by this election, racism and sexism are still alive and well in America and if either Palin or Obama fails miserably in their administration they could set back the group they represent. No matter what happens, I just hope things do not get worse than they already are. As the Chinese proverb says, “It’s better to be a dog in a peaceful time than be a human in a chaotic world”.

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The latest news is that Henry Paulson is “readying his bazooka” to let the government take over Fannie Mae and Freddie Mac completely since the dastardly housing bailout bill passed in July gave him the power.  This is actually very scary news for many reasons.  Here are some of my thoughts.

First of all,  no one knows what the exact damage would be yet since the housing meltdown is not over.  Fannie and Freddie hold over $5 trillion dollars in mortgage loans, and own about 44% of all the foreclosed homes as of August 2008.  Since foreclosure numbers are still stacking up the amount of losses Fannie and Freddie will sustain is still going up.  Once the government officially takes over these enterprises taxpayers would be paying for all the loan guarantees and costs to dispose of these foreclosed properties.  Even if the housing market does not worsen, I think it is safe to say that the Treasury will stand to lose billions if they take over Fannie and Freddie

The situation right now is that if the government does not take over Fannie and Freddie then they may not stay open for very long since investors have lost quite a bit of confidence in the mortgaged backed securities spewed by these companies.  The stock prices of these companies have plunged and they’re drowning in billions of losses.  Without Fannie and Freddie’s guarantees on loans, it would be harder for everyone to get loans and home sales will be even slower and that will simply bring about more losses amongst the financial industry.  It is almost like  the government almost has no choice but to step in and stabilize the mortgage and credit market.

Interestingly enough, both McCain and Obama agree that Fannie and Freddie should not be bailed out since they are supposedly private entities,  but these two government sponsored enterprises have so much influence  and so many loans now that just letting them fail could have a huge impact on the real estate market.    I think it is really bizarre that these two companies were allowed to operate in such a way that they are government sponsored, and yet not carefully regulated to take on sensible risks.  Where was the line drawn?  Now that the crap has hit the fan, taxpayers have to pick up the pieces?

So on one hand, I agree wholeheartedly that Fannie and Freddie need to be restructured by the government for the good of the economy, but will they do it correctly this time?  If the current lending and fraud prevention practices continue, Fannie and Freddie will be nothing but endless money pits where taxpayer money bleeds into oblivion.  If management becomes good and these enterprises become profitable again, where will the money go?  Will taxpayers see any return on the good fortunes of these companies as their former shareholders once did?  Right now, there are so many questions and so little answers, and the big unknown future of Fannie and Freddie is rather frightening.

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