Here’s a common question:

“When can I take money out of my 401k?”

It’s a question that’s been asked more than usual over the past year.  Many people are watching 401k balances dwindle due to the big stock market dip while others are dealing with new financial stresses.  When times are tight and you’re looking for money, that pile of cash in your 401k looks inviting.

But can you actually start yanking money out of your retirement plan?  In some cases, you might be able to do that.  In others, you could be stuck.  It’s going to depend on your unique circumstances and the 401k policies your employer set up.

You can cash out your 401k when you retire.  At that point, you pay the standard income tax rate on the dispersals.  Obviously, though, most of the folks asking “When can I take money out of my 4o1k?” already know that they can have it once they retire.  They’re more interested in whether or not they can get fast access to that money.

Generally speaking, there are two circumstances that will allow you to actually pull money out of your 401k plan.

First, if you terminate employment, die or become disabled.  If you’re canned or finally scream “Take this job and shove it!”, you can get access to the dough.  Termination of employment, regardless of whose idea it was, qualifies you to play with your nest egg early.  If you die, the funds are available to your heirs.  That probably isn’t part of your plan, though.  If you become disabled, you can also get to the money.  We don’t want that to happen, either, though.

Second, you can often take a chunk of your 401k money if you are experiencing a serious hardship.  Many plans have caveats in them that will allow contributors to withdraw a portion of their 401k money under certain specific circumstances.  The desire for a better television set does not qualify you for a harship exception.  Nor does your bad decision to go on a spending spree with your credit cards.  These early-access opportunities are reserved for those who end up facing serious medical bill problems or who may be waiting for the sheriff to come by with that foreclosure notice.  If you can’t document a serious emergency, don’t expect to get your money out early.  Even if you do, you probably aren’t going to be able to get more than a small percentage of the total funds in the account.

So, if you’re not quitting (or getting laid off) and you’re not staring down the barrel of a financial crisis unrelated to your personal debt obligations, how can you get to your cash?

To be honest, you can’t.  Yes, it’s your money.  However, in exchange for receiving any employer matching funds and the tax advantages associated with having a 401K, you give up some of your control over the money.  It’s yours, but you can’t have it just because you’d like to hit the casinos or pay off the folks at Discover.

You may be able to secure a loan against your 401k, though.  You’ll have to pay it back with interest, though.  And if you happen to lose your job before repaying the loan, the balance will suddenly become due in full.  It’s not a dream scenario to take out a loan this way, but it is sort of a roundabout way of getting your money in your hands.   Oh, and you’ll only be eligible for a loan representing a fraction of your total balance.

So, that’s how you can do it.  The bigger question is if you should do it at all. Generally speaking, the answer to that is a resounding “no”.  They’re going to automatically hold back a percentage to cover the income taxes on your cash out and you’ll also get hit with additional penalties for pawing that cash before hitting retirement age.  Usually, that combination of disincentives is reason enough to leave your money in place until you retire.

(NOTE:  We keep using the word “usually” for a reason–many of the answers to this post’s questions can only be determined with certainty after carefully reviewing the rules of your specific plan.)

“When can I take money out of my 401k?”  When you quit or get fired.  When you’re facing a serious economic hardship or when you retire.  That’s about it, unless you count taking out a loan.

In the end, however, you’re better off not scrambling your nest egg.  Leave your 401k money in place if you can.  As Dave Ramsey apparently said:

QUESTION: Chad and his wife have $35,000 in debt between credit cards, student loans and car loans. They bring home $150,000 a year. They also have $25,000 in their 401-K savings. He wants to (pay off his debt). Should they use that money to eliminate their debt?

I would never cash out retirement savings to pay off debt unless it is to avoid foreclosure.

So, we’re in a recession.  We’ve been in recessions before.  We know what a recession is, definitionally, but that doesn’t really give us any idea of why we have them.  What are the causes of economic recession?

Quite frankly, the answer to that question will depend upon who you ask!

David Cornish blames unrestrained capitalism and exessive greed.

Gaynor Borade sees a link between oil price spikes and the onset of recession.

Tejvan Pettinger argues that tight fiscal policy and fast, unsustainable growth have both led to recession in the past.

Stormy Brain explains why so many people are happy to blame the Fed for recessions.

A Washington University news article maintains that experts blame excessive consumer debt for our current economic downturn.

Love a Recession has three lists of potential causes.  The “mainstream” outlook, the authors personal opinion and other potential causes.  The range from speculation to underwhelming consumer confidence to Satan.  Take your pick, right?

Love to Know has an article with the title, “Causes of Economic Recession” that doesn’t even bother to list a single potential cause of recession.  Instead, it maintains that it’s “difficult to predict the causes of economic recession”. 

Another vote for high oil prices in this video.

How about government spending overseas, inflation and the fear of a recession.  Maybe FDR was onto something with that “the only thing we have to fear…” thing, huh?

Those crazy kids who don’t mind being associated with Lew Rockwell blame excessive government regulation.  No.  Really.

Are you getting the gist of this yet?  NO ONE REALLY KNOWS WHAT CAUSES A RECESSION.

That doesn’t stop them, however, from pretending as if they do have an answer.  Not so coincidentally, the causes they uncover are often linked to specific governmental programs of which they don’t approve on other grounds, too.  

In other words, if someone tells you that George Bush caused the recession, that someone probably doesn’t have a “W” bumper sticker.  

If someone tells you that the recession is a direct results of government policies designed to promote minority home ownership via subprime lending, you can probably guess how they’d feel about that policy even if we weren’t in a recession.

For every so many people who blame deregulation for the recession, there is at least one person out there who will take the contrarian view that regulation caused it.  

As far as I’m concerned, you can spin the wheel and embrace whichever pet “cause” it stops on, because your causal analysis isn’t going to amount to a hill of beans anyway.  

The more important consideration at the moment is the fact that we’re in a recession and we might wanna think about how to get out of it before too many more people end up losing their jobs and/or homes.

Which is why I’m proposing the Big Omnibus Recession Elimination Solution (BORES).  Basically, it boils down to developing alternate energy sources to reduce the price of foreign oil and our exposure to price spikes while we engage in less restrictive monetary policy and encourage increased consumer spending (but not debt).  We do this while cutting foreign aid to our allies and banning speculative stock trading.  We’ll deregulate all business by drafting better regulations that will make us more recession-resistant, even though we’ll recognize the inevitability of recessions as part of the business cycle.  Oh, we also need to find a way to defeat Satan.

That’s BORES.  And that’s what you end up with if you start believing the various single (or even “one or two”) issue explanations of the underlying causes of economic recession.

Here’s a riddle for you…

What product is often compared to insurance by experts even though other experts make a point of saying it shouldn’t be confused with insurance?

What product’s market is said to be worth seventy trillion (yes, trillion with a “t”) dollars even though no one knows how much the product is actually worth?

What product’s market has been completely devoid of regulation even though experts had been cautioning that its crash was impending–and that said crash would have massive repercussions?

Give up?  The answer is the credit default swap.

If you’re like me and virtually everyone else in the world, you may have heard this term once or twice in passing over the past several years only to see it in the headlines almost every day for the last several months.

And, if you’re like me, you could probably use a hand making sense of the discussion surrounding credit default swaps.  Let’s see if we can break down this complicated financial instrument so it all make a little more sense…

Defining a credit default swap isn’t that tough.  Lil’ ol’ Wikipedia actually does a good job of laying it out:

A credit default swap (CDS) is a credit derivative contract between two counterparties. The buyer makes periodic payments (premium leg) to the seller, and in return receives a payoff (protection or default leg) if an underlying financial instrument defaults CDS contracts have been mistakenly compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if a specified event occurs. However, there are a number of differences between CDS and insurance; the buyer of a CDS does not need to own the underlying security; in fact the buyer does not even have to suffer a loss from the default event.

That gives you an idea of what a “CDS” is, but it doesn’t really explain why they exist.  We can turn to Investopedia (that’s two “pedias” in one post, kids!) for a little context:

The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.

Which brings us to a more pragmatic consideration.  Who, specifically, has been using credit default swaps and why have they been doing it?  Time Magazine explains it rather nicely, even though it does tread on the wrong side of the Wikipedia definition’s admonition against making a comparison with insurance:

Credit default swaps are insurance-like contracts that promise to cover losses on certain securities in the event of a default. They typically apply to municipal bonds, corporate debt and mortgage securities and are sold by banks, hedge funds and others. The buyer of the credit default insurance pays premiums over a period of time in return for peace of mind, knowing that losses will be covered if a default happens. It’s supposed to work similarly to someone taking out home insurance to protect against losses from fire and theft.

Now that might not seem like the biggest deal in the world when you consider the scope of the overall economy, but it actually is one of the biggest things out there.  The CDS market was a seventy trillion dollar business.  And almost 40% of it is in the hands of major financial institutions.

So, why is that a bad thing?  Sure, there’s a lot of money in the CDS market.  That, in and of itself, isn’t a problem.  What’s the problem?

There are several.

First, a lack of regulation/oversight/rule-making/whatever led to a very serious problem in the credit default swap biz.  Namely, people started trading these instruments back and forth with no one really bothering to consider whether the people taking on the risks associated with the swaps actually had the means to make good on them in the event of a default.  That wasn’t a well-known problem until…

Second, (you guessed it)  defaults started happening.  You can blame that on the subprime mortgage crisis or any of the other potential explanations for our journey into the land of recession.  The fact of the matter, however, is that defaults started springing up and the folks who were supposed to be able to cover the associated costs have been coming up short.

Third, these defaults and the failure of credit default swaps is giving banks a good reason to reconsider some of the bond lending and other investments they were willing to make earlier.  All of that talk about a credit freeze is starting to make sense, isn’t it?  As the aforementioned Time article noted, ” this could impact everyone from mortgage-seekers to municipalities that need money to fix roads and build schools.”

Fourth, there’s this even bigger problem of a potential domino effect.  You see, all of that crazed CDS trading, in hindsight, seems a little divorced from reality.  Consider that one expert explained that those who own default swaps don’t even know what they’re worth.  No one does.  No one has any good idea to figure that out, either. That led him to ask a very important question:

How does a global financial system work when you don’t know how to value assets?

The answer is scary because a global finance system may not be able to work at all under those circumstances.  Remember, we’re talking about seventy trillion in investments.  Thus, one columnist stated:

It could take years of litigation to figure out who owes whom what. The fear is that once the system starts failing, there will be “cascading defaults” and because the CDS market is so huge, its failure threatens the whole global economy.

I know this post is a little heavy on the doom and gloom.  It’s worth noting that not everyone shares the perspective that the CDS market’s unraveling will lead to all of us living like Man and Boy in The Road.  Whether they believe that letting the market run its course or appropriate interventions can stop the “cascade”, there are people from all economic and political persuasions who do see a way out.

Let’s hope one of them is right.

And that we follow his or her advice.

Economic downturns create new opportunities for the motivated and creative.  Although that’s a very good thing, it does come with a slimy underbelly about which you should be aware.

Our apparent recession is bringing out the best in many people, but it’s also providing hucksters and other nefarious souls with a platform from which to conduct some pretty unscrupulous business.  Consumerist recently outlined five scams that seem to have traction during recessionary times.  I found one of them particularly interesting–the “hidden bankruptcy”.

An advertisement trumpets, “consolidate your bills into one monthly payment without borrowing” or something similar.  That’s the come on.  What isn’t mentioned in any of the promotional materials is the actual methodology they advocate to accomplish that goal.  They’re doing their best to dance around using the “B” word–”bankruptcy“.

In some cases, businesses (and I use that term loosely) may offer debt consolidation services that will involve the customer filing for bankruptcy.  These “bankruptcy mills”, as U.S. Representative James Moran (D-VA) terms them, do their best to drag customers into the filing process, touting its advantages without necessarily explaining alternatives and the negative consequences of a bankruptcy.  Put simply, it’s sleazy.

In other cases, you might encounter someone trying to sell you a guide to debt consolidation.  You won’t realize it until you receive the “guide” (thanks to some careful marketing) but it will be little more than some cobbled together information about how to file for a bankruptcy.

These ugly tricks are common enough that the Federal Trade Commission has issued a special consumer alert in which it “cautions consumers to read between the lines when faced with ads in newspapers, magazines, or even telephone directories” that offer debt reduction services or techniques.

Bankruptcies aren’t always a bad idea.  There are cases in which filing for a Chapter 7 or 13 bankruptcy can make a great deal of sense.  However, most people can find ways out of their debt problems that won’t involve filing for a bankruptcy.  These alternatives will also allow them to avoid the negative repercussions that inevitably follow a filing.  A bankruptcy might allow you to escape the burden of some debts, but it will also saddle your credit reports with a scarlet “B”, making it exceedingly difficult to obtain credit for legitimate uses.  A bankruptcy may even prevent you from obtaining some kinds of jobs.

In other words, bankruptcy is a serious decision.  It shouldn’t be done on a whim and it certainly shouldn’t be encouraged absent the consideration of other options.  Companies who advocate bankruptcy, particularly those who do so while trying to hide their real intentions, should be viewed suspiciously, to say the least.

The FTC and other sources recommend looking for ways to resolve debt problems that don’t involve the “nuclear solution” of a bankruptcy.  These include trying to work out arrangements with creditors, changing personal money management approaches, considering legitimate debt consolidation alternatives and working with reputable credit counseling services.

Those who find the “bankruptcy mill” advertising campaigns too disingenuous may also want to consider discussing the matter with their legislators.  Moran, for instance, supported an amendment to the 1999 bankruptcy bill that would’ve required:

“debt relief organizations to disclose the nature of the services they offer, explain to consumers the alternatives to filing bankruptcy, disclose the rights and obligations of a debtor who files for bankruptcy and the consequences of a bankruptcy filing. The purpose of the amendment is to educate the consumer about bankruptcy and bankruptcy mills before it is too late; in other words, before the debtor has made an uninformed decision.”

Although my personal predilection is to favor free speech whenever possible, including commercial speech, some may want to reconsider that idea if companies are acting in an intentionally misleading fashion and are clearly victimizing consumers in the process.

Personal finance is all about watching your money. You need to spend, invest and save wisely to reach your maximum potential.

As someone with an interest in personal finance, I’m a massive fan of consumer education. Smart consumers spend more wisely and make better decisions.

I want you to avoid bad deals and bad companies. I strongly support online research as a means of protecting your interests as a consumer. Knowledge really is power and individual consumer self-empowerment is great.

So, it would stand to reason that I’m also a fan of websites dedicated to revealing scams and rip-offs, right?

Wrong.

At least I’m not a big fan of the most successful online “pro consumer” site and I’m actually very suspicious of many others.

The reigning champ among sites that purport to give consumers the low-down on bad businesses is Ed Magdeson’s Rip Off Report. For reasons that defy both logic and Google’s stated preferences, Rip Off Report is often one of the top results when you query search engines with company names.  It’s a busy place, frequented by thousands upon thousands of Internet users looking for information about businesses.

If you aren’t familiar with the way Rip Off Report works, here it is in a nutshell:  Anyone can sign up with the site and then submit a warning or complaint about a business that consumers engaged in pre-purchase research can then find.

That sounds good, but the reality is a little stickier.  Although I’m sure there have been many people who have avoided bad deals because they read a post on Rip Off Report, there are big problems with relying upon it for smart guidance.

Many of these reasons to be wary of Rip Off Report apply to other similar sites, where user-generated content or reviews serve as foundational material, by the way.

Here’s why you need to take those negative reviews with a grain of salt (and then some).

The customer isn’t always right. I know that people love to say that the customer is always right, but that doesn’t make it true.  Anyone who’s ever worked in a retail environment knows that a hefty percentage of customers are very wrong.  They’ll also tell you that the ones who are the most wrong are also the ones who are most likely to complain.  The folks who are willing to take the time and effort to unload on someone via Rip Off Report may not be your best source of entirely accurate and sane assessments of situations and transactions.

There’s zero editorial control. There’s very, very little exercise of editorial control at Rip Off Report. That isn’t an accident, either.  The lack of editorial meddling is one of the reasons why its ownership can deftly avoid losing defamation lawsuits via the safe harbor provisions of existing laws.  In any case, though, no one is actually monitoring or investigating the often wild complaints lodged by site users.  These entries could’ve come from a perfectly reasonable person who wants to warn others of bad business tactics.  They could also come from a frustrated fiction writer on a two-week whiskey bender who has a series of psych diagnoses and has opted not refill necessary prescriptions.  The comments can be 100% accurate or complete fabrications and no one is testing them before publication at the site.

Where there’s a lot of smoke… Rip Off Report is a fairly frequent target of lawsuits.  Some are tossed out, some are settled and others end up resulting in uncontested judgments against the site’s ownership. We can argue about the legal and overall merit of individual cases, but when you start hearing the same accusations from a variety of seemingly reputable people, you might reasonably assume that something might be wrong.

Following the money. If you run a business and someone unleashes on you with a scathing review, you can get the folks at Rip Off Report to intervene on your behalf.  You’ll just need to pay them.  Alot.  Charging companies to battle negative reviews appears to be a key component of the ROR business strategy.  That’s alarming, to say the least.

There are other reasons to question the veracity of the complaints lodged at sites like Rip Off Report. Some contributors are obviously disturbed and/or of limited intelligence.  You’ll notice a variety of obviously baseless reports and a tendency amongst those “squeaky wheels” to wedge any inconvenience into the “evil conspiracy” category.

Being a smart consumer is great.  Self-education can be one of the best ways to protect your money.  Sites like Rip Off Report, however, aren’t the best place to get an education.

In our next post, we’ll discuss a few ways to get better information about the quality and legitimacy of those with whom your considering doing business and a few other consumer education tips.

NOTE:  By the way, if you’re interested in learning more about ROR and its founder, I strongly recommend a rather lengthy article that originally appeared in the Phoenix New Times.  I think it’s at least somewhat fair to the site and its operator, Ed Magdeson, and it’s a lot more comprehensive than other criticisms of the site.  Let me add that whether you love or hate the site, it’s certainly a very interesting story.

Those who’ve focused on the shortcomings of the recent G-20 Summit have dismissed it as a “circus without a ringmaster,” “Hamlet without a prince”, and “a rather dull scrum“.

If anyone was expecting the one-day conference to become a “Bretton Woods II”, they were certainly over-optimistic. We didn’t witness a complete reinvention of international monetary management rules and no one walked away believing that a new framework for global cooperation had been set in place.

G-20 Summit Shortcomings

The limits of the summit’s significance are readily apparent. For instance, although those gathered pledged to do whatever might be necessary to stabilize the financial system, no one seemed willing to divulge any specific numbers with respect to individual nation members’ stimulus plans.

The G-20 was basically silent on the hot topic of re-examining and re-calibrating exchange rates, too. Sometimes silence is significant and the failure to address this topic in a meaningful way definitely cut against the significance of the session.

It’s no surprise that the group will need to gather again in April. Some analysts argue that this production of “Hamlet without a prince” was doomed to fall short of major change due to the absence of the next U.S. President, Barack Obama. Although globalization is slowly but surely rendering the U.S. a significant player instead of the player in the field, the presence of a lame duck certainly curtailed the drive for members to try to iron out future plans.

A recent BBC News story from Bridget Kendall wondered if a second version of Bretton Woods, the 1944 agreement between allied nations on the management of international financial and monetary affairs, might be on the way. The article noted the possibility of a major power shift on the immediate horizon and the potential to see substantial changes in the way the world approaches an increasingly globalized economy.

The G-20 Summit didn’t measure up to those lofty standards. However, a closer examination of the summit reveals that it’s limitations didn’t prevent it from planting seeds that could result in significant changes for the global economy.

A Departure from Old Models

The most important part about a G-20 gathering may be the simple fact that it is not another G-8 meeting. The expansion of participating voices represents a significant departure from a system dominated by the U.S. and Europe.

The G-20 may very well represent a crumbling of the “old guard” and it certainly creates previously non-existent opportunities for other nations to add their perspective to international economic questions. That recognition of increasing globalization could set the stage for even bigger changes in the nature of international agreements.

Although we may be a long way from the G-125 some advocate, there is no question that the days of trying to manage a world economy from a handful of western capitals are numbered. The meeting involved a great deal of discussion of how emerging economies should have an increased role in a variety of functions, particularly with respect to the International Monetary Fund.

Put simply, the very fact that a G-20 assembled is meaningful, regardless of the actual policy decisions that did or did not emerge.

That’s not to say that the sole value of the summit was symbolic, though. There actually were some interesting and potentially significant decisions to come out of the meeting.

G-20 Accomplishments

One of the most staggering things to come out of the meeting was the expression of the sentiment that global financial markets are not sufficiently self-regulating and that governmental interventions would be a necessity if the global economy is to be stabilized. Although it would be a stretch to argue that international policy since Bretton Woods has never been truly “laissez faire” in nature, this up-front support of active intervention represents a significant change in overall expression and may be evidence that those with a more market-oriented approach are losing influence.

The pledge of G-20 nations to stabilize international markets came with some specific policy proposals, too. There was a strong call to increase the regulation of hedge funds and advocacy for heightened oversight of credit rating agencies in recognition of stubborn credit problems.

Trade issues also made it to the table. Notably, the membership agreed to a 12-month prohibition on new protectionist measures. Calls for the re-initiation of the Doha trade talks were also well-received. Those who had wondered if recent global events would lead to more cooperation or increased isolation seemed to have received an answer in support of cooperative trade and engagement.

It would be premature to argue that we’re on the brink of a massive structural change in international monetary and trade policy. The G-20 conference clearly didn’t yield a sea change. However, despite its limitations, it does appear as if the foundation for a different approach to world economic issues may be in place.

I may have lost faith in Wall St., but today I regained faith in Congress.  The House shot down the $700 billion bail out… and I could not be happier.  And you wanna know why… Ok, but first let me lay the groundwork just in case…

The gist of the bailout plan

HR 3997 would have allowed the Secretary of the Treasury to establish the Troubled Asset Relief Program.  This program would have been allowed “to purchase and to make and fund commitments to purchase, troubled assets (shaky mortgages and mortgage-backed securities) from any financial institution.”

My president, our president decided that it would be a good idea to use $700 billion of our tax dollars to save the finance industry.  He wanted to buy shaky mortgages and mortgaged-backed securities.  We all know what a mortgage is, but…

What is a mortgaged-based security?

It is sort of like a bond… an IOU.  Potential homeowners go to banks to apply for a home loan.  The bank issues the mortgages.  And then, the bank pools the loans into neat little packages and sell them on the market.  The people who buy these neat little packages receive interest and principle payments every month whenever the homeowners pay their mortgage.  In essence the investors are lending the money to homeowners and expected to receive payments every month.  The bank’s role in this is as the middleman.  For its services of connecting the buyer and lender, the bank receives a service commission.

Plain English…

Ok I got 10 friends who need a hundred dollars each.  They all ask me if I can loan them the money.  I shell out the $1,000 at 15% and get them to sign an IOU.  Then I turn to my friend Joe Blow and I say look Joe, buy these IOUs from me for $1,000. And when my 10 friends pay the bill, I’ll send you all the principal ($1,000) and interest ($150).  All I want is a small services fee of $2.

So I make $2 and Joe gets $148.  However, Joe now assumes all the risk.  If any of the friends don’t pay the bill, it is Joe who will be shafted, not me.

The problem with mortgage-backed securities

Generally, there is no problem.  Most times mortgage-backed securities are a safe bet.  Yeah, there is some risk involved, but usually not much.  The way it works is that the IOU is secured by an asset… the house.  The house is appraised by the bank, the applicant has adequate income to repay the loan, and the bank verified the homeowner’s financial credibility.

But… What happens if the house is over-valued, if the applicant overstates his ability to repay the loan, and if the banks did not adequately qualify the mortgages?

So here enters the problem…

Well what happens is… that those mortgage-backed securities are worthless and investors will lose a lot of money.

Lately, investors have been taking a lot of losses on these mortgage-backed loans because the mortgage pools are filled with subprime products, foreclosed properties, soon to be foreclosed properties… just a mess of worthless assets.  (I’m not really sure if “assets” is the right word to use here because asset implies value.)

Who are these investors?

Mortgage-backed securities are big business.  And because of the perceived low risk, many entities buy them…banks, hedge funds, pension funds, mutual funds.

Alright now back to why I am glad that this bailout was voted down.

The bailout would have rewarded corporations for bad behavior

The bailout would have alleviated the mortgage risk exposure of financial institutions (and only financial institutions).  Aren’t these the people started this mess in the first place?  Financial institutions were being careless and greedy.  They knowingly exposed themselves to subprime lenders in order to increase short term profits.  Not only did these financial institutions give money to those with questionable financial credibility, but they also engaged in other greedy and deceitful behaviors.  They overvalued houses so that they can issue first and second mortgages.  They came up with all these colorful ways to qualify borrowers… balloons, no interest mortgages, one year ARMs, etc. They made stupid choices in order to fatten their pockets, but it backfired.

I hate to get on the Harper story again, but just think about this… JP Morgan Chase loaned a family a half a million dollars.  The borrowers… a house wife and a home security alarm installer (not wealthy people).  The loan was secured with a house that cost almost a million dollars to build (the house was a free gift from Extreme Makeover: Home Edition).  At one point the family was trying to sell the house for $950,000.  It did not sell.  Why… because regardless of how much the house cost to build… a house (or anything else for that matter) is only worth as much as someone is willing to pay for it.

The house is in Lake City, GA.  The median income in Lake City $38,000, the median house value, $125,000… both less than the medians for the state of Georgia.

Now granted I don’t know much about the neighborhoods in Lakeland, GA… but the Harper’s old house was ummm… a dump (I’m not trying to be ugly, but it was).  The dump was torn down and replace with a mansion.  Great!

But if the Harper’s old house was a dump… then chances are that the houses around it are dumps too.  What sane person with a million dollars or even a half a million dollars would buy a mansion that was surrounded by dumps? I know if I had that kind of money to spend on a house, I would not be looking to buy a mansion that sits in the middle of dumps.  I would want a mansion that is surrounded by other mansions.

No matter now much it costs to build, nobody is going to buy that house for so much money.  The house is not worth a half a million, it is only worth what someone is willing to pay. 

Location, Location, Location - that is what the realtor says.  I am no realtor and I understand that.  So why would JP Morgan Chase value that house at a half a million dollars plus.

Anyway, the family could not repay the loan and it went into foreclosure.  The house went up for auction.  I am not sure what it sold for, or if it even sold at all… but either way, that was a horrible business decision on JP Morgan Chase’s part.

Taxpayers should not have to foot the bill for the bad decisions of borrowers and lenders.

The federal government has never come to my rescue when I did something stupid.  So why should they help stupid… (greedy) banks? And anyway a bailout out does not solve the problem.  It is just a band aid.  Bailing out banks just frees them to go out and make more bad decisions.  So way to go House!  I think you all really voted for the people on this one.

Dear Exxon,

Last year you made $40.6 billion in profit. I made $24,600. (Mine wasn’t all profit though.) Clearly, we move in different circles. Your ways are not my ways. Your kung fu is greater than my kung fu. Your gross receipts for 2007 alone topped out at over $404 billion, which is bigger than the gross domestic product of no fewer than 120 nations.

Wow.

My writing profits for 2007 totaled about $78, (which is what the US is currently shooting for in terms of gross domestic product. We’ll get there, I’ve no doubt.)

I have a question to ask you, if you have just a minute.

I am doing much better this year, and I see that so are you, with over $10 billion in profits in the first 2008 quarter alone, and the price of gasoline now pushing $4.50 or higher in lots of parts of the US, and diesel even higher, so high, truck drivers in Spain are acting up. Good for you. That’s what capitalism is all about, right? Profit, profit, profit. And you are leading the pack, holding the torch as it were (don’t hold it too close to all that oil though…you know what happened at that BP refinery). I commend you for your initiative and success.

Here’s my question:

Why did you find it necessary to fight the $2.5 billion in punitive damages for the 1989 Exxon Valdez spill, a spill that released 10.8 million gallons of crude oil into Alaska’s Prudhoe Bay and covered 11,000 square miles of ocean, a spill you admit was your fault and no one else’s. I mean, you have the money, right? We’re talking 1989 here. Since 1989, you’ve made so much profit that all the zeros won’t even fit into this blog, so let’s not even go there.

Perhaps you have forgotten that the Exxon Valdez oil spill instantly killed somewhere between 250 and 500 thousand sea birds, 250 bald eagles (an American icon which at that time I believe was actually an endangered species to boot), and 22 Orca whales, not to mention sea creatures of all kinds too numerous to list much less count.

Thousands of volunteers saved you most of the painful and hopeless work of trying to save these rare, suffering animals so you could instead take way too long finding a subcontractor to spray deadly chemical dispersants, surfactants, and solvents (which, damn the bad luck, didn’t work very well) all over the already poisoned Bay. So it’s not like you didn’t try at all, and to be perfectly fair, cleaning up oily messes is not really your thing. You are in the business of finding and selling oily messes.

Still, what did it cost you to fight this thing legally for 19 years running?

Corporate lawyers don’t work cheap. Even the ambulance chasers around here get $100 an hour, so I know you had to spend far more than the penalty just arguing the penalty in court after court after court.

What’s up with that?

Were you afraid that if you were held to some basic, minimal standard of corporate responsibility it would end up cutting into your impressive profits? If so, I wish you’d have called me first. You don’t have sic a squad of corporate attorneys on people and birds and fish already drenched in oil to preserve your right to be irresponsible. All you really have to do is get one of your pals elected President (oh, I forgot, you did that already), and then hire a big, glossy advertising firm to make beautiful commercials with lots of politically correct ‘green’ imagery and multinational persons wandering around on sand dunes and seashores and stuff like that, all to show how sensitive and environmental you are. That’s what BP and Dow Chemical do, and it works great.

People will believe anything if it’s on TV.

I know you won’t answer my letter. I know you are busy. It’s just that, for the life of me, I can’t understand why you would spend more than the original $2.5 billion, just to get it reduced to $500 million 19 years later. Maybe you aren’t aware of this, but right now, people in this country don’t like you very much. People think you are greedy and uncaring and tyrannical. People think you are gouging them and doing whatever you please and damn the consequences. When you don’t bother to even respond to those kinds of feelings, we start to feel like you don’t really care about us very much.

At the beginning of 2007 NOAA determined that you still have 26,000 gallons of crude oil poisoning the sandy soil of Pruhoe Bay Alaska. I just want to ask you this one favor:

Please don’t charge them for that oil.

Thanks for listening. Your little capitalist fan,

Pam, PFA

PFA is happily participating in the Carnival of Financial Goals hosted by Cash Money Life, a sort of internet-wide blogger party taking on a variety of themes revolving around various topics related to goal setting. This month’s topic is Declare Your Financial Independence.

But how do you declare your financial independence when you are afraid of losing your job, prices on everything are skyrocketing, and you can’t even afford to drive your SUV anywhere anymore?

Actually, I’ve been thinking lately that the tough economic times we are going through right now do have another side, a silver lining of sorts. That silver lining is the opportunity to make yourself over completely. Part of that make-over is out of necessity. You can’t afford to drive so you walk now and take the bus. You can’t afford your favorite supermarket anymore so now you shop at Sam’s Club and the Dollar Store and Aldi’s. The mall? Forget it. When you need new pants it’s Goodwill or K-Mart for you.

Why not take it to the next level?

Ask yourself, “If I could do anything I wanted, what would it be?” Once you have the answer to that question, ask yourself if you might be able to actually do that thing if you were free of the debt and constant purchasing your old, pre-recession lifestyle involved. Sometimes it takes a crisis to force us to look at ourselves and our world a different way.

It is possible to pay off debt, but you have to be willing to cut up your credit cards and never use them first. If you can make yourself do that, you’re halfway there. Once they are all cut up, start paying as much as you can on the one with the highest interest rate, and pay the minimum on each of the others until that first one is paid off. So say the minimum on your highest rate card is $90 and you can pay $200. You pay $200 until your balance is paid off, then you close that card and apply that same $200 on top of the minimum payment on whatever card has the second highest interest rate. You do that until they are all gone.

You can find a great list of calculators, including a calculator that shows what it will take to pay off your credit card, at Bankrate.com. Calculators are a great tool for helping you to see what is possible, and also what the true cost of credit is. For example if you carry a $15,000 credit card balance at 21% (which, sad to say, is about average in the US), and you make the minimum payment each month of $375, you will pay $34,360.87 in interest on that original $15,000 in purchases, and it will only take you 554 months (or, a little over 46 years) to pay it off. Ouch.

Now, what if throw just $15 extra a month at that debt? Couldn’t help much, right? Wrong! If you pay $390 on that same card, just $15 extra each month, you will pay the card off in 65 months, or about five and a half years, and pay $10,134.33 in interest. That’s a savings of over 40 years and over $24,000!

What else could you lose right now that would open up a world of choices? What if you didn’t have a $2000 mortgage payment? If two of you are living in a 3000 square foot newer home in the suburbs, and if you don’t plan on children soon or have already had your children, you might want to dump the mini-mansion (if you can). A modest ranch in a decent city neighborhood, or an older home with all the charm and fireplaces, will save you money on transportation and save you money on your mortgage.

If you live in the midwest, a nice older home closer in can be had for around 100K, give or take ten thousand dollars; even less if it’s a repo and you can negotiate a short sale. Even with no down payment, that’s only about $730 a month at 7% interest. If you can put $20K down on it, you’re looking at a house payment of $531!

What kind of life could you chose to lead if you had no unsecured debt and a house payment if $500 or so?

That may not be what you want at all. Maybe financial independence to you means lots of money coming in, not small amounts going out. If that’s the case, this is your moment.

When Billy Vasquez, the blogger who writes and maintains The 99 Cent Chef first started his blog on cooking with dollar store ingredients, he was getting five or six hits a day. Now he’s averaging 5 or 6 thousand hits a day, and like they say, the hits just keep right on comin’. In times of crisis, the person with the bright idea gets the cash, and it doesn’t have to be a bright idea that costs a lot of money to start up.

I’ll be honest with you. I took some of my own advice last year in late October, early November. I wanted my unsecured debt to be gone, I wanted to do something I cared about more than my depressing day job. Specifically, I wanted to write for a living, something I equated to wanting to be a Ballerina or Space Barbie. That was my general sense of how possible my goals were.

As of today, I’ve paid off my car and two credit cards, and have two cards left to pay off. In March, I cut back my day job to 20 hours instead of 40, because I was so deluged with writing work I could not keep up, and what’s more, it paid better. Last September, if someone had told me that was even possible, let alone that it would actually happen, I’d have laughed myself silly. Yeah right! And yet, here I am. Currently I’m looking for a way to ditch the day job altogether (hint: health insurance is the stickler), because I have a couple of book ideas I’m pitching and my freelance work continues to grow.

None of this would have happened for me though if I hadn’t taken some time to 1) figure out what it was I really wanted in my life (I’m 55–midlife crisis time, dontchaknow), and 2) DECLARE MY FINANCIAL INDEPENDENCE, which is known less dramatically as goal setting.

Knowing what you want isn’t half the battle: It’s 99% of the battle.

What do you really want? It might just be that the world is waiting to give it to you.

Yesterday, the FBI arrested two mid-level Bear Stearns investment bankers for intentionally over-valuing mortgage-backed securities even while their real value was plummeting. One of the bankers, Ralph Cioffi, valued one of the funds as having lost 6.5% in April, even while colleagues were valuing the same fund as losing 18.97% in that single month.

Now, of course, from all the major investment banks and global banks with investment arms comes the chorus of promises to self-monitor. (I’ve seen this play before. Have you?) Credit Suisse, Merrill Lynch, Morgan Stanley, and Citigroup are all rushing into the spotlight to assure the press and the public that they are cracking down on this sort of thing. Hard.

Sure they are. NOW they are. But how long will that last?

I predict it will last exactly as long as lower-level bankers are still being arrested and the whole thing is still in front of the press. Excuse my cynicism, but bankers today are under unbelievable pressure to make their employers money whatever the cost to their own integrity and safety. I’m not saying this excuses Bear Stearns Ralph Cioffi and Matthew Tannin, but I am saying that it is disingenuous in the extreme for corporate management to be out in front of cameras behaving like it is all very shocking and they certainly will not be tolerating any more of this, no sir. Juz terribul. Oh my!

In the past year alone several prominent CEOs retired early with huge golden parachutes after losing the financial institutions that employed them billions of dollars. They are not in jail. They have more money than God, and this as a reward for destroying the corporations that employed them through raw greed, financial mismanagement, bad investment decisions, and more than anything else, slippery underwriting practices and sleazy sub-prime mortgage deals. I guess if you are a CEO it’s OK. If you are a midlevel banker at an investment firm, you’re goin’ down, buddy!

It’s pretty hard to feel sorry for investment bankers. (Ever see the film ‘Boiler Room?’) On a personal ‘yuck’ chart they rank somewhere between insurance and car salespersons and attorneys; they move a little higher or lower depending on the firm. Still, the whole spectacle yesterday reminded me somewhat of the Abu Gharib scandal, in which a few low-level soldiers were hauled in front of cameras, charged, upbraided, and publicly shamed for actions that clearly originated in the offices of Donald Rumsfeld and Dick Cheney.

The soldiers deserved the court marshals. Where are the trials for Cheney and Rumsfeld?

Ever since Reagan, we have been singing the praises of deregulation and laissez-faire capitalism, and this is what it has brought us to. Now, all the weasels are scrambling for nice deep holes to hide in before any camera lights are shined in their direction.

When will we ask the bigger questions?

When will we say, you know what? This corporate model is not working very well. The financial industry is in a mess that verges on total collapse. The entire US has been gravely affected by it, and month after month it just gets worse and worse. When will we ask, How can we regulate the financial industry so this doesn’t happen for another 100 years or so?

Because it will happen again, you know it will. It’s the nature of the beast. The safeguards put in place after the Great Depression to prevent banks from collapsing, and the regulations put in place at that time are, by almost universal consensus, no longer working. That is because investment bankers have found ways around them, and retail banks and mortgage lenders, hungry for bigger bonuses and the chance to impress stockholders, have snapped up every chance to circumvent or slide under the law, just to make that extra buck. That’s what capitalism is all about.

The extra bucks have all floated to the top (what ever happened to the ‘trickle down theory?) and now the rest of us can’t afford to get to work. The entire economy is severely out of whack, so severely out of whack that no one even understands it anymore. Why not? Because it has never been this bad.

People who work for a living, or are laid off for a living, know this. Over 90% of us live on less than 50% of the money made in the US, and now that money is not being made. Fewer and Fewer people are working at all. Arresting a couple of suits and parading them around on TV is not going to fix any of that.

US prisons are already holding more people than any other country in the free world. Is there room in them for all the bankers who are breaking the law, or have done so during the housing bubble and the mess that followed? Probably not, but the image of shoving a bunch of bankers into shared cells with murderers, drug dealers, and child molesters is a compelling (and I confess, oddly appealing) one. Would they get tattoos? Would they become somebody’s bitch? Would they take up smoking?

Are there any Starbucks in prisons?

At the very least their presence would help even out the racial inequality in prisons across our nation. But until somebody addresses the underlying problem, it’s really just a big show.

Don’t hold your breath waiting for the big guys to go down.

They’re still in office until after November.