Friday, March 2, 2012

Hollowed Out Economy?

How do you hollow out a company or an economy?  By loading it up with debt.

Mitt Romney's Bain Capital, the Mohegan Sun Casino, your Home Equity Loan, and your Parent's reverse mortgage, all have one thing in common - they are ways of hollowing out companies, lives, and our economy, by loading us up with debt.

In the not-too-distant past, we actually owned things in this country - our houses, our cars, our factories, our lives.   When someone got a car loan, it was for 24-36 months.  The 72+ month car loan simply didn't exist, nor did leasing, outside of the commercial arena.

Similarly, when you bought a house, you got a mortgage, and then you paid on it until you sold the house or paid it off.  The idea of refinancing again and again to get a better interest rate simply didn't exist, because rates were stable.  And the idea of taking money out of your home to spend was just not done - you would need that money to make the down payment on your next house.

Similarly, companies were not laden with debt, and often actually owned the land and factories they operated from.  A company was worth money because it made money, and it also had some actual liquidation value, more than pennies on the dollar.  GM's factories were an asset, not a liability, back then.

Today, it is very different.  We live in a debt culture, and during the last two decades, we have hollowed-out our lives, our companies, and our economy, all so we can go on a spending spree.

The antics of Bain Capital are well known.  You buy a company, load it up with debt, and then take the money before the thin shell of the company collapses in your wake.  The secret is to be out of the shell before it collapses.  The Bains of the world are risk-takers, just as those companies that implode buildings are risk-takers.  But strictly speaking, they are not creating wealth, just destroying and making a profit from destruction.

In your personal life, this hollowing-out has been a trend that has accelerated in the last two decades, culminating in our recent economic meltdown.   People like to blame Bush, Obama, the Republicans, the Democrats, or the "Wall Street Fat Cats" - and certainly all of these people have a hand in things.   But the greater conspiracy is what I call the conspiracy of 330 million people - which was the actions by all of us in hollowing out our own lives to satisfy the now while sacrificing the future (or simply not thinking about it).

So, in the 1990's and 2000's, people went on a refinancing orgy, taking out cash or getting lines of credit and buying "stuff".  Why not?  Property values and stock values were climbing - so why not "cash out" some of that money and have a party?

Problem was (and is) that taking out loans is not "cashing out" but merely borrowing.  No one wanted to sell their stocks, as they were locked into 401(k) plans with hefty tax penalties.  And why sell, when the market is doing so well?  Why sell the house when it is going up, up, up in value?

So instead, we borrowed against these inflated assets, and the result was catastrophe, as the value of the inflated assets sank back down to where they should have been (and then kept going down) while the loan balances remained and the payments were still due.  People's lives collapsed, as the thin, hollowed-out shell lacked any real support.  But for a brief time, this hollowed-out shell certainly looked impressive.

Old folks were encouraged to take out "reverse mortgages", which I have written about before.  These served to hollow-out their retirement, as it took their largest remaining asset, and then loaded it up with debt.  Their net worth plummeted, while their immediate cash-flow increased.

 Many others entered retirement with traditional mortgages, car payments, and credit card debt, relying on their pension plan to pay for it all.  A great plan, until Mitt Romney comes to call, and Bain Capital "hollows out" your pension plan, leaving you with 40 cents on the dollar, and a dollar's worth of loan payments to make.

What is worse is that many financial advisers still feel that hollowing out is a good strategy.  They believe you should tie up all your money in stocks and never pay off your mortgage.  So you are heavily invested in the market, but also heavily in debt.  What happens is, well, 2009 happens, and it all goes horribly wrong as the debt remains and the stocks drop in value.   But the financial adviser collects 5% either way.

Have you hollowed out your own life?  What is your net worth?  Do you actually own anything?  If you have loan payments due on everything in your life, chances are, you are hollowing yourself out.  And it never ceases to amaze me how some folks do this.

The other day, I was talking to a fellow with a BMW X5.  He was commiserating that he had to spend $3000 on repairs at the mechanic (my mechanic labor cost to date:  $0 - you can't own decade-old BMWs and not know how to use a wrench).   But what amazed me was that he said, "Well, I only owe $3000 on the loan at this point."

A loan?  On a 12-year-old car?  What's the point of that?  And what was weirder was that he owned four cars, one of them an exotic sports car, and owed money on most of them.  And yes, he complained about being broke all the time.

Just a simple thought:  How about owning ONE car and actually owning it?  The cost savings, in loan interest, collision insurance, registration fees, repair bills, and the like are staggering.  In fact, they are enough to go out and OWN a second car.

But he was hollowing out - borrowing more to have more, when he could own outright for a lot less.

It is tempting to hollow out - you get "more" up front, in terms of shiny cars and jet skiis and vacations to exotic destinations.  But long term, you suffer - and suffer greatly - for it.