Friday, March 2, 2012

Playing Teeter Totter

Playing teeter totter, as a kid, was fun, until the fat kid jumped off his end, while you were still up in the air.

Teeter Totter.  It is what a lot of people played in the 2000's.  Many Americans - middle class Americans - had nice houses, nice cars, some savings in their 401(k) and a huge mountain of mortgage debt.

In many cases, people had as much in their 401(k) - or more - than their mortgage debt.  And many folks started to wonder, "Gee, it is such a swell idea to have all this money on paper and at the same time have all this debt?"

And many folks started to wonder, "Gee, can I cash in my 401(k) and just pay off my mortgage?" and the answer is, of course, no - not without some huge tax penalties.

And in 2009, just like in the schoolyard, the fat kid got off the teeter totter when we were way up in the air - leveraged in debt and invested heavily in stocks.  And the teeter-totter slammed down, breaking our coccyx and sending us to the Nurse's Office.  The fat kid got an hour's detention.

Once home value and stock values declined at the same time, the whole thing went wrong, in a hurry.  Suddenly, the home was worth less than the mortgage balance, and the value of the 401(k) dropped as well.   We went from a balanced position, as shown above, where debt and equity neatly match (but still produced a net worth of ZERO) to a situation were debt far outweighed equity.  Ouch.

Today, the economy is recovering, despite what Fox News is saying.  But many folks are going right back out and doing the same old thing - loading back up with debt and leveraging themselves.

But many others are not - gun-shy and worried about getting caught in the same problem again.  And many economists argue that this is a "problem" with our economy, as banks want to loan money, but qualified borrowers with legitimate borrowing needs are hard to come by (deadbeats who want to buy a Camaro, however, are dime-a-dozen).

Of course, you have to make your personal financial decisions to benefit you.  Yes, there are people out there dumb enough to think that buying a brand-new car and going heavily into debt is "helping the economy" and therefor a good thing to do.

All I can say is, let the other fool do that stuff.  Do what is in your best interests.  And playing teeter totter is never a very safe game.