Monday, November 19, 2018

Broke, USA

"Annual income twenty pounds, annual expenditure nineteen pounds, nineteen shillings and six pence, result happiness. 
Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
- Wilkins Micawber, in David Copperfield by Charles Dickens

With that quote begins a fascinating book from 2011 that I just became aware of.   Broke, USA by Gary Rivlin details the abuses of the consumer finance industry in exploiting the working poor.   It is a good book, although a depressing read.  And the big problem with the book is that it is not aimed at the working poor, who likely will not be able to plow through its many pages of sad reading, but rather at the middle class, in explaining to them what is going on.

The initial profile in the book is a case in point.  A poor but decent person moves back to his hometown in retirement with his wife.  They buy a modest house for $60,000.  His wife gets sick, and he refinances the house to pay bills.  HFC sticks him with a loan at over 13% interest, plus a home equity line-of-credit at nearly 20%, and the whole deal is laden with junk fees and mortgage insurance, which is a waste of good money.

The sad thing is, the guy thought he was getting a loan at 7.2% and relied on verbal promises by the closing agent that that is exactly what he got.  He either didn't bother to read, or was unable to read, the not-so-fine-print on the many documents, one of which should have disclosed the interest rates on the loans in pretty clear terms.

So you know how it plays out.  With his mortgage rate nearly doubled, and medical expenses piling on, he loses the house and ends up in a trailer (where, ironically, he started out years before in Florida, before moving back to his home state and buying a house).   And in a way, you can see why the poor live in trailers - they are a very simple financial transaction, if not a favorable one.  The prospect of losing your trailer is not as scary as losing your home.

(Of course, the first mistake he made was putting medical expenses on a credit card.   If you are facing a medical bankruptcy, your home and your retirement accounts may be protected.   But when you convert medical debt into a home equity loan, all bets are off - you end up in foreclosure).

Now to most middle-class people, there are two reactions.  The first is that it is a real pity - and a real crime - that these poor folks were taken advantage of, that is, assuming the facts are as told by one side of the story.   The second reaction is, how can someone be so stupid?

And right there is the problem with money in America.  If you are stupid with money, you are poor.  The smarter you are with money, the wealthier you are.   This is not to say that sometimes dumb people don't end up with money - our President is a prime example.  However, as many have noted, his vaunted business acumen is anything but.  He would be wealthier today if he merely invested his inheritance from his Dad in an index fund.

The most profitable enterprise Trump got into was the branding of his name and the creation of his reality-show personality - two things that are being quickly eroded by his entry in to extreme partisan politics.  Someone smart with money might shy away from politics - I wonder if former Mayor Bloomberg realizes this.   But then again, he actually has money - lots of it - and is not merely a branding franchise.  But I digress.

The book was written after the crash of 2008, and outlines the impetus for the Consumer Financial Protection Bureau that was created under the Obama Administration (and systematically dismantled under Trump).   If only we could protect these poor people from themselves, we think, they wouldn't fall into these financial traps!

It is a nice thought, but a futile one.  If you really want to protect the poor, you could start by closing the thousands upon thousands of casinos that have opened up across America in the last few decades.  And the lotteries - the unseen tax on the poor.  Shitty deals abound for the poor, I am not sure what closing off one avenue would do.   And as I have noted before, if you make something illegal, often you either drive it underground, or the shysters find new ways around the laws.   If you outlaw "buy here, pay here" used car sales - another scam aimed at the poor - they just morph into "lease here, pay here" deals and avoid your new rules.

The poor will always be with us, Jesus said, and I am starting to get an inkling of what he was getting at.  No matter how fair you try to make the system, there will always be people who just don't understand money and squander it in short order.   Myself, I say this from experience, as in my early life, I spent money willy-nilly and bounced checks and did other stupid things.   Today, of course, you bounce a check and you could end up in a for-profit jail or for-profit "diversion program" and owe hundreds, if not thousands, of dollars in fees.    The system has always been stacked against the poor, it just seems in recent times, we have decided to harvest and slaughter them for profit.

A more recent article on CNBC discusses negative-option subscription services, which are still around and still annoying.   One company in particular, Adore Me, sells bras and swimsuits online, with a "subscription" that is opt-out at checkout.  If you don't uncheck the subscription box, you automatically are signed up to have $40 a month or so debited from your bank or credit card and saved as "store credit" on their site.  If you try to cancel this, they put you on hold and make it difficult to cancel.  If you cancel with store credit available, they keep the store credit.   Yes, the FTC sued, and there was a settlement.  But no word on whether this equates to all consumers getting all their money back.

The article quoted one of the former employees of this company, who admitted they put customers on hold (unnecessarily) for long periods of time to wear them down and hope they would hang up or decide not to cancel the service.  Nothing happens by accident, these days.

What was jarring to me was the customer they profiled in the article.  She said she first noticed the monthly charges several months later when her debit card was declined.    That could have been me, at age 22, failing to balance my checking account for weeks or months on end.   Today, I balance it daily, which is a lot easier to do because we still have the Internet (despite Ajit Pai's best efforts).  Furthermore, my bank (Bank of America) sends multiple reminders whenever a charge is made on my credit card, and again when it is cleared.  They also send reminders of checks cashed, deposits made, and my daily balance - all of which is easy to set up on their site.   You can get reminders by text or e-mail.

So when I charge something on eBay or Amazon or whatever, my phone buzzes almost immediately with a new message from Bank of America - a charge has been made to your account!   It is hard for me to fathom how someone can let months go by without noticing a recurring charge on their account.  I would know in seconds.

But that is the new me.  The one that decided, a decade ago, to start this blog and stop being careless - at least too careless - with money.  In the old days, not long ago, I paid late fees and didn't think much about paying bills on time.  I put them all in a stack and paid them once a month or when my clients paid me.   It was a pretty stupid way of managing my finances.

Worse yet, I was a sucker for subscription services, "bundled" deals and other charges that eat away at your wealth.  And I was reluctant to sit down and talk about money with my spouse.  And I never set up a budget, thought about how much I was spending, whether my cash-flow was negative or positive, or whether my net worth was decreasing or increasing.

Well, that changed.  But the scary thing is, as a college educated person, I should have figured this out a long time ago.  My financial maturity didn't really kick in until age 40 or so.  For others with less smarts, perhaps it never does.

In her book about how poverty (and the United States) sucks, poverty lady complained that suggestions by "middle class people" on how to get ahead were of no use to her.  Save $5 a week?  That might only net you $260 a year! (which is better than $0 a year, but she doesn't see that).  Buy in bulk to save money?  Who can afford that?

To some extent, her critique has merit - once you fall down the ladder of poverty, the tricks and tips that the middle-class and upper-classes use to get ahead are of little use to you.   Hey, if you deposit $100,000 into an investment account at Bank of America, they will waive all bank charges and even stock trading fees!   Isn't that a useful tip for someone making minimum wage?

Once you have money, it becomes incrementally easier to make more money - you are offered the best rates and the best deals.  If you don't have money, you are offered the shittiest deals out there - and it is incumbent on you not to take them.

But, that is not to say the poor are off the hook for their own malfeasance.  Even in my spendthrift days, I had some modicum of smarts and skepticism about finances. And when I made boner mistakes, (such as buying a brand-new car at age 21) I realized quickly they were mistakes and didn't do something stupid like double-down my bet by trading in for yet another new car.

I knew, even at that tender age, that I had to look out for my own interests.  I knew, for example, that:
1.  The guy trying to sell me something - anything - was not my friend, no matter how friendly he seemed. 
2.  That verbal promises were meaningless, even without the statute of frauds (anything dealing with real estate has to be in writing). Just because some salesman says something, doesn't make it true. 
3.  Advertisements are not factual documentaries, but a series of small lies designed to get you to buy things.
4.  Anything that seems too-good-to-be-true probably is.  When someone tells you that you can "have it all now" and pay later, odds are, it is a shifty deal. 
5.  The marketplace is an adversarial battleground.  Just because the guy at the corner store smiles and is nice to you, doesn't mean that his financial interests aren't often diametrically opposed to yours.  Yes, sure, he wants happy return customers.  But yes, he also is making a profit from each and every purchase you make.
The last is critical.  You have to approach every financial transaction from selling a house to buying a stick of gum as a battle that ends up in a draw (in a best case scenario).   In every situation, each side hopes to put one over on the other (or would prefer to).   We all crow about the "bargain" we got at the store - thinking we "won" in that transaction - but in most cases, we actually lost, or at best, it was a tie.

Of course, the easiest way to avoid these problems is to consume less, and thus get involved in fewer transactions.

Of course, where I learned these basic principles was, in part, from my parents - who were middle-class people whose families had clawed their way up the economic ladder from poverty.  They learned firsthand, that ripoffs abounded, and schooled their kids not to make those mistakes.

For people born into poverty, there likely is no such schooling.   And compounding this is the blaring megaphone of commerce - online and on the television - that promotes its own agenda.  People pay hundreds of dollars a month for cell service, and then tell you how they scored a "free" cell phone from the phone company.   They just don't get it.

So while I support the idea of the Consumer Financial Protection Bureau, I am skeptical it will accomplish much.   The poor will always find ways to make themselves poorer.   And no they are not reading this blog. 

And that is why I say, I didn't write this blog to help the poor, or in fact to help anyone at all, other than myself.  I guess the bottom line is, we each have to look out for ourselves, and that is a very hard thing to do.