The Truth About Wealth Creation

You hear arguments that the rich are getting rich, while the poor are getting poorer. Is that really true? Not according to some researchers who have tracked average income per capita of various countries for the past 200 years. They have even animated the graph so you can see how the wealth of the world grows over that time. You will also notice that countries where they restrict free trade and personal property ownership are held back. Notice the countries where free trade and personal property ownership are highly supported by the rule of law become the wealthiest in the world. Capitalism isn't evil, and it isn't greed. Capitalism isn't perfect, but it creates an environment where wealth is created. Socialism and Communism on the other hand are shown historically to destroy wealth.

Under free markets and well supported private property ownership, the poor get richer and the rich even richer. There may be an increasing gap between the (relative) poor and the rich, but everyone is better off. The problem isn't the wealthy, it is the less wealthy (the poor) not creating enough new wealth.

New Rules, Old Tricks

The Credit Card companies are up to the same old tricks. Since the Credit CARD Act of 2009, credit card companies are inventing all sorts of new fees to get around the new rules. They have to, to replace the $390 million they will be losing every year in fee revenue. It is the same old story, regulators impose new regulations to curb abuse of cardholders, and the extremely high paid attorneys representing banks find new ways around the laws. The more laws we pass, the more complex it all gets.

Another way they play tricks is with the marketing of the cards. Have you heard of the new "professional card"? It is like a corporate card but has the same terms as a consumer card, which means they aren't covered under the card law. Balance transfer fees are increasing and you can save money avoiding the annual fee by meeting the minimum spending limit each year.

Folks, if you do business with snakes, you get bit no matter how many times the government passes a new law to supposedly "protect" you.

An FDIC Secret You May Want to Know

The FDIC doesn't insure everything you have in the bank. Forbes Magazine recently reported on this. In fact, they even have a website to help you calculate what you will recover. You think you will get all your money back, that is what people assume. But recognize that FDIC insurance is an insurance policy just like every other policy. It has defined coverage in the fine print that has exceptions. Go to their website and see what you are really going to recover if your bank fails.

Is The Business Model for Banking Viable?

I ask this question in the title because every where we turn we find that banks can't make enough money to sustain themselves. This has been true for a long time. Back in the 1980s, Citibank almost went under because they were paying out higher interest rates for money than they could lend. That was when they invented issuing credit cards and exporting interest rates across state lines to get around state usury laws. It saved the banking industry.

Even though they have difficulty making money, they open numerous branches with plush offices within a few miles of each other all across the country. The corporate offices are built out with only the highest quality materials and the furnishings are only the best and most expensive available. Bank salaries for management and executives is as good or better than at the most profitable corporations in the U.S., many times much better.

Yet, with all of this, we have a serious banking crisis throwing our economy for a loop. What is their solution? Not to cut back on their overhead at a fundamental level in their business model, but to find new ways to charge customers more for their services. BofA and other banks are now preparing to charge fees for basic checking services. This is also true of credit cards, as they start attaching annual fees to accounts. Every business deserves to make money, but only for value they provide. Banks are trying to make money using a seriously flawed business model. They need to start providing more value for what they provide, not just start charging their customers more. They need to cut back on their lavish offices and branch facilities and become better stewards of our money.

That is why I recommend moving all your accounts to a credit union. They are non-profit entities and are owned by their members. You aren't just an account holder, you are a member. You participate in the business of the credit union. Banks are trying to make way in congress to put greater burdens on Credit Unions because they are giving them tough competition, not by adding value, but by legislation that will cost consumers more. This is being done in the financial reform bill being considered in congress now. Write your congressman and representatives and stop this madness.

TeleCheck

Did you know there is yet another company collecting information on your spending habits and telling retail stores whether or not they think your check is good? They operate much like a credit bureau except they collect information on the spending patterns in each one of your checking accounts. They don't have access to your balance, but they judge your risk by your check writing history in the account you are using to make a purchase. If they have no history, and the check is too large of a risk for them, they will tell the retailer to reject the check.

So if you try to purchase a computer, for example, with a check from your money market savings at an Apple Store where they use TeleCheck, you will be rejected since you have no check writing history in that account. If you call TeleCheck afterwards and get an explanation they will tell you to write some small checks at Walmart, (check out this link for why you should never write a check at Walmart) or one of their other clients to build a history with them. It is kind of like a credit history. Then they will let you buy a computer with your own money in your money market account after you have proven creditworthy. TeleCheck is angering a large number of consumers by embarrassing otherwise creditworthy people by rejecting their checks.

Here is one complaint I found which is chilling when you think about it:

Telecheck, TRS, Inc., is harassing me for money I do not owe them. They have made a huge mistake that is costing me $100. I went shopping at Wal-Mart and presented my check. For whatever reason, the check machine would not work right. I got my check handed back to me with a slip that said my check was not used and my account was not charged. Well, I began getting calls from Telecheck saying my check to Wal-Mart bounced. Of course I did not have a check at Wal-Mart, being that I did not get any merchandise. I have been to Wal-Mart and been presented paperwork showing that Wal-mart received no money for that transaction, yet Telecheck wanted me to pay them for it, not once but twice!!! Telecheck ran it through AGAIN costing me another $35 for a total of $70 that my bank wants back for the NSF charges. Telecheck wants $18.63, plus $80. No one at this company will listen to me on this and they will not do what they need to do to end this. They just want me to pay them off. And I will NOT do that!!! I wish some one out there could help me on what to do to get this resolved and to stop Telecheck from harassing me.

What bothers me the most about this is that TeleCheck will embarass consumers into playing their check writing history game to build up their database, and start acting like a new kind of credit bureau. At the same time, they collect on bad checks, and have been trying to collect from innocent consumers. Eventually, if everyone plays along, you won't be able to write checks without first establishing a check writing history with them once they have dominated the marketplace. However, if you get rejected, you can use your debit card to complete the transaction. Does this encourage the use of credit cards, or what? Make it difficult to pay with a check so you'll use your credit card or debit card instead. (You know better than to use credit cards, right?) Also, what is even worse, if your checks are stolen, TeleCheck will approve checks on your account based solely on your checkwriting history, then if a thief writes a check, TeleCheck will come collecting from you if the check bounces. It seems from the complaint above they can draft your account without your permission.

You have a right, under the Fair Credit Reporting Act, to get a free copy of your consumer report from them. You just go to their website for instructions. They'll ask you for a deluge of sensitive personal information to prove your identity. They claim they'll use it to establish a positive history with them, but after speaking with a representative about this I found that they will establish a spending limit and you have to build up to a limit for that new Apple computer.

So if you think you might like to buy a new MacBook down at your local Apple Store. Don't use your credit card. You do better to stop by the bank and withdraw the cash for the purchase first. Start asking before you write a check if they use TeleCheck, if they do, pay cash instead and file a complaint with the store manager and let them know how TeleCheck is treating consumers and if they continue to use TeleCheck you'll shop elsewhere.

Papers Please!

If this healthcare bill actually makes it to the President's desk, you are going to need to start keeping proof that you have a health insurance policy or pay a penalty on your income tax. Our income tax system started as a temporary voluntary tax to fund a world war and has grown into a strong arm collection agency for the Federal Government. As the constitutionality of this gets tested, you will have to keep acceptable proof handy in case the IRS comes knocking.

A Second Wave of Foreclosures

This chart, which you see above in this blog post, illustrates the second wave of mortgage defaults that are coming. However, there is a thing called "Early Option ARM" and these loans are negatively amortizing already and so it is reasonable to expect they will be reseting early, like now, not next year. Sometime in the next 3 to 12 months, we will see another wave of massive foreclosures. Do you see how debt works yet? Do you see how destructive it is? Economically and politically?

Something Has Got To Give Soon

We are reaching the point of no return. Soon, if not already, we will have to go into more debt just to pay the interest. What happens then? You might want to think about getting ready. This is building like a snowball and the fallout when all the money being printed by the Fed to fund this filters into the economy, you may not want to be holding U.S. currency. In fact, all the world currencies are tied to the dollar, so you may not want the bulk of your wealth in any currency. The only way I see to minimize the effects of hyperinflation on your wealth is to hold gold or silver, or some similar type of commodity that can be liquidated on the other side of a hyperinflation crisis, but not needed during the crisis.

Spend More Money to Keep From Going Bankrupt?

And you thought you had to spend less money when you are going bankrupt. At least that is what all the financial experts say, including bankruptcy court judges. What universe are we living in now where you can spend your way out of debt?

We are Now Facing the Realities of Debt

Dateline recently aired a show about how deep in debt we are, especially with credit cards, Americans are these days. The show reveals the consequences. It shows how the collection industry is booming as a result, and how they are getting more creative with their strong arm tactics. Follow the link and watch the videos and read about the show.

The Accounts Receivable Management industry advisor that publishes "Inside ARM" reported a rebuttal claiming that the report doesn't represent the industry practices. This is the public stance that any collection agency is going to officially take. However, having worked in collections myself for a while in my previous financial career, I know that what happens behind the scenes is not really like that. Collectors are encouraged to do whatever they need to, but are discouraged from doing it officially. I saw collectors fired when things went bad and the company turned on them making the individual employee the sacrificial lamb for the media. That is exactly what is happening in this report. Employees that were stars, are now bums, simply to save face for the company.

You must know your rights and you must enforce them when you face collectors knocking on your door or otherwise contacting you. To avoid this altogether, get rid of your credit cards before you get into trouble, and establish a crisis fund for emergencies. You don't need to go into debt for an emergency.

The Best Time Ever to Cut Up Your Credit Cards

You could make $300 for closing your credit card account! Citigroup, Chase, and Capital One are cutting back on their rewards programs, raising interest rates, and increasing fees. American Express recently offered some of their cardholders $300 to close their accounts. Citibank is offering a $100 gift card to those who were signed up for the "Thank You Rewards" program, and sent out a letter stating that they can revoke any rewards program any time they choose.

If you have a credit card with a reward program, you are spending more than you would otherwise. Chase did some research and found that its cardholders that participate in these reward programs showed a fast increase in spending. Yet at the same time the rewards are becoming harder to cash in. But the result of all this is that cardholders with high credit scores are becoming the new targets, and the strategy is to get them hooked in with rewards programs, and then jack their interest rates up, and start adding fees.

More Debt Problems You Need to be Aware Of

Debt causes inflation, it isn't the only cause, but since we have a "fiat" currency excessive creation of new currency devalues the existing currency. Our government has worked in concert with the Federal Reserve Bank to create almost $1 trillion in new currency in 2008. Here are the numbers from the St. Louis Federal Reserve. This is money already created. In 2009, we should expect to see this number skyrocket due to the bailout money yet to be created from the stimulus bill and bank bailouts. The government is creating a new debt bubble. This is one that will have even more serious consequences than the mortgage bubble that we are now experiencing. This is brought on by having a central bank, in our case the Federal Reserve Bank. Ron Paul has written a simple bill that we need to urge our representatives in Washington to pass that will solve this problem. Go here for more information. Call your congressmen. In the meantime, buy gold, or risk losing your buying power to hyperinflation in the near future.

What You Can Do To Protect Yourself

Here is a short video for you, to give you a little insight on why you should consider getting completely out of debt.

Bailout Update

If you take a closer look at the bailout numbers, you will find that it is now exceeding $2 Trillion, with more expected by the Obama administration yet to be announced.

Scott Snider, partner and chair of the government relations and public policy practice at Steptoe & Johnson, Washington, D.C., says $365 billion will be spent on the Troubled Asset Relief Program (TARP). Not all of this money has been spent yet. $125 billion has been promised to "other banks" like those corporations that are becoming banks to qualify for bailout money. (i.e. GMAC). $15 billon of that money was claimed when the government released $7.58 billion to Pittsburgh-based PNC Services Financial Group, Inc., $3.41 billion to Fifth Third Bancorp and $1.3 billion to SunTrust Banks, Inc., including others. $20 billion of the TARP money is being used as seed money for the government’s Term Asset-Backed Securities Loan Facility (TALF) program, under which the Federal Reserve will extend up to $200 billion in non-recourse loans to holders of asset-backed securities (ABS) backed by consumer and small business loans in a bid to free up the ABS market.

After the Bear Stearns' $29 billion bailout in March, was the $200 billion government takeover of mortgage finance giants Fannie Mae and Freddie Mac in early September, AIG for $152.5 billion (more than $127.5 billion has already been spent out of that) then Citigroup for $325 billion. $16.7 billion was spent in other FDIC takeovers of more than 20 banks Washington Mutual was the largetst. Now we are up to $1.1 trillion, not including the remaining $180 billion TARP not yet included in the calculation. There is $1.4 trillion in a commercial paper funding facility, $320 billion for the FHA, $659 billion in money market guarantees and $9 billion in student loan guarantees. The total is another $2.4 trillion.

We thought that the $700 billion number tossed around at the beginning of the crisis was a lot of money. Somehow our government has decided it has a bottomless checking account. So we need to get ready for some serious economic consequences not too far down the road. Stay out of debt, including your mortgage, become financially independent by saving aggressively and intelligently, lower your lifestyle as low as possible, and batten down the hatches.

Bad Bailouts, Good Americans

By Robert P. Fry, Jr.

"I used to have my own construction company," a taxi driver named Bruce explained. "We built houses here locally in Birmingham."

"How big was the company," I asked, "How many houses did you typically build?"

"Anywhere from 10 to 15 or so per year."

"What happened?"

"We had a project going last year with 15 lots. We'd put in all the roads and sewers and had about 9 houses built when everything just stopped dead in its tracks…No buyers. And more than that. No phone calls, no inquiries, no agents calling, nothing. The market for new houses simply died."

"So what did you do?" I asked.

"I'm still not sure that I handled it all correctly," he began. "Ourproblem was the debt on the property. The interest cost was roughly $1,000 per day. So even though we stopped all of our other expenses, there was nothing we could do about that. But we had some other assets. So we started selling things to make the payments. Finally, we got so desperate, we sold my son's Corvette and, after that, the condo in which he was living while attending the University of Alabama.

"I never thought I would have to do something like that," hecontinued, "but the corvette was worth $25,000, which meant we could pay the bank for another month. But even after that, we ran out of money. So we went to the bank and started giving them the unsold houses in lieu of cash every time we got behind on the payments. When we finally ran out of houses to give them, we had no choice but to give them the remaining land and then file for bankruptcy."
"That didn't solve all the problems," Bruce explained, "since we still needed to put food on the table and had other bills to pay. So late last year I leased a cab and started driving. That has worked out pretty well; the cab has really been a blessing. So I decided to buy this cab just a couple of months ago."

Bruce, who looks to be about 50-something – with a daughter out of college and a Corvette-less son who's a sophomore in college – works all night Friday and Saturday, gets up in the afternoon Saturday to watch a little football and gets up Sunday morning to go to church, then starts making runs to the Birmingham airport around 4:30 Monday morning. I heard not one word of complaint about his new life, just the simple statement, "The cab has been a real blessing."
There were, of course, some good chuckles about that. With the move from business owner to cab driver, he admits that some of his friends and family haven't known what to say to him.

"What are you doing these days, Bruce?" my friends ask.

"I'm driving a cab."

"Oh. (Long pause.)…What kind of team do you think the Tide will have this year?"
But Bruce doesn't seem to care much about "what the neighbors say." He cares about what his family says. When it came to selling the Corvette, Bruce told me, "Taking my son for a drive and telling him that I needed to sell his car was probably the lowest and most difficult moment of my life."

"We had done everything that we could for our kids and I was worried that I might have raised some sort of runny nosed-kid who needed a Corvette and would never be able to support himself. In addition to selling his car, we sold the condo where he was living and couldn't even help him pay the rent on his apartment so he had to get a job while going to school."
Bruce then told me how his son had gotten a job and was still doing great in school and now calls him regularly just to ask, "How are things going, Dad?"

At which point I said to Bruce, "So was it worth going intobankruptcy, just to learn that you have a son who is actually astand-up man?"

After a moment's reflection, Bruce smiled, "Yes it was."

Bruce and his family and friends – people who get up every day and do what they need to do to provide for their families and to be good members of their communities – represent all that is still good in America. They are honorable people who spend all that they have to pay their debts, even if, like Bruce, it ultimately leads to bankruptcy. And when their businesses fail and life must go on, they take whatever job they can find to put food on the table.

How unlike the whiny, self-indulgent, profiteers who guided Wall Street's leading investment banks onto the shoals of insolvency. These people, who have nearly destroyed America's banking system, should be acknowledging their failures. Instead, they are demanding ever more of our resources, and of our children's resources, as the price for not making things even worse.
America would be better served if Hank Paulson were driving a cab in Manhattan, instead of trying to give billions of dollars of other peoples' money to his friends and colleagues on Wall Street. As a cab driver, there is some possibility that he would learn the value of a dollar, the importance of community and the inherent dignity of all good work. At the very least, we would all be $700 billion better off, less tips.

Fry is a writer for Agora Financial

Credit Card Reform Update

On December 18th, Congress passed a reform proposal to take effect July 2010 that puts to rest all the abusive contractual terms that allow credit card companies to blindside cardholders with excessive charges. The reform includes:

1. Eliminating double-cycle billing.
2. Eliminating confusing due dates.
3. Eliminating Universal Default.
4. Stopping the charging of over limit fees from temporary holding amounts (i.e. car rentals)
5. Requiring higher interest rate amounts be paid down first.
6. Simpler credit card terms.
7. Clearer disclosure in advertising
8. Banning "fee harvesting" from cardholders with lower credit scores.
9. Disclosing foreign transaction fees in solicitations, before the account is opened.

Sounds great doesn't it? I bet your congressman wants you to know they are doing this for you, and are going to make sure you are taken care of in terms of consumer credit. Well, don't break out the bubbly stuff yet. In the meantime, responsible customers who never make a late payment are getting significant rate hikes. Also, your Senators and House Representatives are milking this for a couple years to garner favor with voters until legislation comes down the pike to either overturn this or make it unenforceable. Two years is a long time. If you bet against this actually becoming reality, the odds would be in your favor. Just taking a closer look at the list and asking what it would look like in reality makes you wonder how real it really is, some of these would require an entire new oversight agency just to monitor and enforce.

New Rule Against "Unfair Practices"

There is a new rule against "unfair practices" at the Office of Thrift Supervision. It will be interesting to see if this actually makes any difference, or is even enforced. Chances are it will only mean that cardholders will be given an "express" reason for the increase in their interest rate that they would not have been given a reason for today. This isn't even supposed to take effect until 2010 and there is plenty of time to undo this with new legislation. Could it be a smoke screen by regulators to make Congress look like they are trying to protect the consumer?

The New Term "Rate Jacking"

Citibank, and other creditcard issuers, are starting a new practice, raising interest rates on customers who pay their bills on time for no good reason.

Banks are hurting, and they need to raise money these days. Why are they hurting? Because they push loans on people who can't afford them, then when the loan goes into default they think they'll start collecting tons of fees and interest. However, it is backfiring on them now. People aren't able to pay anymore at all, and the banks are losing for a change. Many people are now in total meltdown, losing their jobs, their homes, and everything. So the creditcard doesn't get paid at all from the people who were the "sweet spot" for the industry. To make up for this, Citibank has decided to punish its good customers by making them pay for the defaults. So much for taking responsibility for their own actions. This is referred to as "rate jacking".

Good thing you don't use credit cards anymore, eh? Pretty soon they'll figure out how to get more money from those who pay their accounts off every month. Don't be so arrogant to think you can outsmart them.

It Seems It Will Never End

The bailout total just keeps growing. If this keeps up, the Dollar will eventually be thrown into hyperinflation. Look at what is happening in Iceland this month. Watch the video on that web page featuring Glenn Beck. Here is how things are adding up so far:

$29 billion for Bear Stearns
$143.8 billion for AIG (thus far, it keeps growing)
$100 billion for Fannie Mae
$100 billion for Freddie Mac
$700 billion for Wall Street, including Bank of America (Merrill Lynch), Citigroup, JP Morgan (WaMu), Wells Fargo (Wachovia), Morgan Stanley, Goldman Sachs, and a lot more . On top of $45 billion for Citibank, comes a guarantee of $306 billion in bad loans.$800 billion to buy mortgages issued or backed by Fannie Mae, Freddie Mac, Ginnie Mae and Federal Home Loan Banks.
$200 billion for the auto industry
$200 billion to buy securities tied to student loans, car-loans, credit card debt and small business loans.
$8 billion for IndyMac
$700 billion to $1 trillion stimulus package (from January)
$50 billion for money market funds
$138 billion for Lehman Bros. (post bankruptcy) through JP Morgan
$620 billion for general currency swaps from the Fed

“The numbers change so fast, it is hard to even add them up. Rough total: $3,651,800,000,000 .00 ($3.6 Trillion)

To put that into perspective, the Federal Debt was $5.7 Trillion when President Bush took office. In September 2008, it was up to $10 Trillion. Now in the space of a few months, we have increased it 36%. In September, it was 70% of the GDP, the highest percentage since 1955. The trend is on a steep incline. This is an indication that hyperinflation is not far away. This is a good time to be out of debt, and have as much savings as possible. Realize that Gold is a store of value. When hyperinflation hits, holding gold may be the best way to hedge against that inflation.

The Debt Clock

You know we are in trouble when the debt clock runs out of numbers.