Generally, we don’t like to gloat too much here. However, for years on “The Money Show”, you’ve heard us say that Fed head Alan Greenspan was not the so-called great economic “Maestro” most everyone else seemed to think he was, and in general, was not doing a good job at all. Well, it now appears others are starting to see the light.
At a recent forum at Suffolk University Law School in Boston, U.S. Representative Barney Frank (as reported in the Tuesday, May 20th edition of the Boston Herald) had the following tidbits to say about Mr. Greenspan and the mortgage industry/credit meltdown:
· “I believe that if the Fed under Alan Greenspan had issued the regulations that are now being promulgated, we would have much less of a crisis.”
· “To Greenspan, you had two choices – (raise) interest rates drastically and take down the whole economy in the process, or let (market excess) go on.”
· “Congress gave Greenspan [under legislation passed in 1994] the authority to regulate mortgages – but he wouldn’t do it…He would say ‘Oh, the market knows better.’ Well, the market clearly didn’t [Respresenative Frank's empahsis] know better.”
· Additionally, representative Frank contrasted Greenspan to current Fed Head Ben Bernake, who has begun and plans to continue to use the 1994 law to regulate the mortgage industry. As Representative Frank put it, “Bernanke is kind of the ‘un-Greeenspan'.”
In short, what Representative Frank said (and, it appears, others are beginning to realize) about Alan Greenspan in general and the regulation of the mortgage industry in particular is what we’ve been saying about Alan Greenspan on “The Money Show” for years.
Alright. Maybe we do like to gloat, just a little.
Tuesday, May 27, 2008
Sunday, May 18, 2008
PAYING DOWN YOUR MORTGAGE EARLY – 5-18-08
Recently, a listener posed this question: a well known, and usually very objective consumer magazine suggested that consumers who find they have ‘extra cash’ each month would be much better off (i.e. – would ultimately get a much better return) if they invested that money rather than using it to “pay down” their mortgage. At first glance, such would seem to be good advice. Unfortunately, such advice is too general to be considered a hard and fast financial rule of thumb. Why?
Two main reasons. It’s true, if you invest your ‘extra cash’ in a good investment vehicle that gives you a better return than your mortgage rate, than the advice is sound. However, what if you purchase a bad investment vehicle (always a possibility, and not one you can definitively know beforehand…indeed, one never knows whether an investment is good until one has owned it for a period – usually a long period – of time) Or, what if you purchase a “good” investment vehicle which – if it truly is safe – will have a relatively low interest rate (for example, a short term treasury bond). In either of those two cases, paying down your mortgage with your ‘extra’ cash would end up being a better (from a net return perspective) idea.
However, while extremely important, net return is not the only reason to choose an investment vehicle or strategy. What the consumer magazine doesn't take into consideration with this ‘advice’ is the psychological effect (which should not be neglected out of hand) that having the mortgage on one's home paid off has upon many people (i.e. albeit conservative, the “comforting” effect of that knowing you’ll own your home free and clear sooner gives to many home owners.)
The bottom line point, therefore, is two-fold. First, as we’ve noted many times, with very few exceptions (for the exceptions, see the BestMoneyinfo website), financial rules of thumb usually do not present sound advice. Second, when deciding when and where to invest one’s money, you should always start with a potential net return analysis (namely – which investment(s) will, or are most likely to, bring you the best net return, with the lowest – or, at least, an acceptable – degree of risk). However, when finalizing your decision(s) as to where to invest your money, your peace of mind (basically, your risk tolerance) should also be taken into consideration.
Two main reasons. It’s true, if you invest your ‘extra cash’ in a good investment vehicle that gives you a better return than your mortgage rate, than the advice is sound. However, what if you purchase a bad investment vehicle (always a possibility, and not one you can definitively know beforehand…indeed, one never knows whether an investment is good until one has owned it for a period – usually a long period – of time) Or, what if you purchase a “good” investment vehicle which – if it truly is safe – will have a relatively low interest rate (for example, a short term treasury bond). In either of those two cases, paying down your mortgage with your ‘extra’ cash would end up being a better (from a net return perspective) idea.
However, while extremely important, net return is not the only reason to choose an investment vehicle or strategy. What the consumer magazine doesn't take into consideration with this ‘advice’ is the psychological effect (which should not be neglected out of hand) that having the mortgage on one's home paid off has upon many people (i.e. albeit conservative, the “comforting” effect of that knowing you’ll own your home free and clear sooner gives to many home owners.)
The bottom line point, therefore, is two-fold. First, as we’ve noted many times, with very few exceptions (for the exceptions, see the BestMoneyinfo website), financial rules of thumb usually do not present sound advice. Second, when deciding when and where to invest one’s money, you should always start with a potential net return analysis (namely – which investment(s) will, or are most likely to, bring you the best net return, with the lowest – or, at least, an acceptable – degree of risk). However, when finalizing your decision(s) as to where to invest your money, your peace of mind (basically, your risk tolerance) should also be taken into consideration.
Monday, May 12, 2008
ECONOMISTS'S PREDICTIONS -- 512-08
If you’re a regular listener to The Money Show, you’ve probably deduced that we don’t put a lot of stock in what economists and economic pundits have to say about the present, and even less in what the predictions they make for the future. Here’s a perfect example why.
As reported in the May 9th edition of the Boston Herald, Wellesley College Economics Professor and “housing market guru” Karl Case, despite the doom and gloom most continue to predict re: the residential housing market, sees strong signs that the decline in the housing market has hit bottom and is ready to turn upward. Mr. Case (who is the “Case” in the “Standard and Poor’s/Case-Shiller home price index” – an oft-cited monthly measure of the residential housing market), bases his prediction on statistical evidence which illustrates that, over the past 30 years, every time a particular measure of housing “starts” drops below 1 million (which it did, recently), this has signaled the beginning of a turnaround in the housing market.
Now, we certainly hope Professor Case is correct. However, as we’ve stated many times before, as Mark Twain originally said, there are lies, damn lies, and then there are statistics. But, that’s not the point here. Rather, the point is that, recently, a well known Yale economist predicted that, not only isn’t the housing market about to turn around, but rather, price declines in home values in this downturn may be worse than those experienced during the Great Depression. Who exactly is the economist who made this particular prediction? Robert Shiller, who happens to be Karl Cases’s business partner and the “Shiller” of the “Standard and Poor’s/Case-Shiller home price index”.
What’s the point? Actually, there are two. First, when it comes to economists and economic pundits, you can always find one (and usually, many) predicting one of the numerous possible economic occurrences along a 180-degree spectrum that could occur in the future. Second, as to the general record of correctness of the predictions economists make, the old saying, “Hindsight is the only 20-20 vision”, holds true.
As reported in the May 9th edition of the Boston Herald, Wellesley College Economics Professor and “housing market guru” Karl Case, despite the doom and gloom most continue to predict re: the residential housing market, sees strong signs that the decline in the housing market has hit bottom and is ready to turn upward. Mr. Case (who is the “Case” in the “Standard and Poor’s/Case-Shiller home price index” – an oft-cited monthly measure of the residential housing market), bases his prediction on statistical evidence which illustrates that, over the past 30 years, every time a particular measure of housing “starts” drops below 1 million (which it did, recently), this has signaled the beginning of a turnaround in the housing market.
Now, we certainly hope Professor Case is correct. However, as we’ve stated many times before, as Mark Twain originally said, there are lies, damn lies, and then there are statistics. But, that’s not the point here. Rather, the point is that, recently, a well known Yale economist predicted that, not only isn’t the housing market about to turn around, but rather, price declines in home values in this downturn may be worse than those experienced during the Great Depression. Who exactly is the economist who made this particular prediction? Robert Shiller, who happens to be Karl Cases’s business partner and the “Shiller” of the “Standard and Poor’s/Case-Shiller home price index”.
What’s the point? Actually, there are two. First, when it comes to economists and economic pundits, you can always find one (and usually, many) predicting one of the numerous possible economic occurrences along a 180-degree spectrum that could occur in the future. Second, as to the general record of correctness of the predictions economists make, the old saying, “Hindsight is the only 20-20 vision”, holds true.
Monday, May 5, 2008
HOW SHOULD YOU USE YOUR REBATE CHECK?– 5-5-08
Shameless plug – a business reporter from the “Concord Monitor” recently called. The question they asked was simple – how should one spend their “stimulus package” rebate check. Thirty minutes later, the answer was completed.
The point? First, despite what the Bush administration hopes, most consumers should not be spending their rebate checks on disposable consumer items (and thus, the so-called stimulus package won’t do too much stimulating. The other part of the stimulus package – mostly overlooked by the media – are some of the tax breaks it gives to industry, which could have a small stimulus effect. But that’s another story.)
So, second, what should you do with your stimulus package check (which, really, is simply a tax rebate.) As with virtually all money related matters, it depends on your specific situation. However, following are three possible options that likely are good ideas for a large portion of the population:
· Pay down high interest debt. If you’ve got credit card or other consumer debt with very high interest rates (10% or more), pay down the debt.
· Fund an Emergency Fund. If you don’t have, or have a very small emergency fund (see the “Emergency Fund” blog or the Emergency Fund section of the BestMoneyinfo website for an explanation of Emergency Funds), start one or add to your current Emergency Fund with your rebate check.
· Fund a Roth IRA. If you max out your 401K, 403B, or other tax-deductible retirement plan, and if you qualify, fund a Roth IRA either for 2008, or – if you’ve filed an extension, but haven’t filed your final 2007 tax return – you can still fund a Roth IRA for 2007.
Of course, as President Bush himself recently admitted (more than likely, reluctantly), consumers can use their rebate checks to offset the rising costs of necessary consumer goods, such as gas (and fuel in general) and food. Such use of rebate checks will not have the originally desired effect of stimulating the economy (but, indeed, the Bush Administration and Congress’s stated hope that this tax rebate would make a serious dent in and greatly stimulate the current lagging economy was always a pipe dream.) However, if, as suggested here that most consumers end up using their rebate check for (if they can afford to) one of the three options listed above, or (if they can’t afford any of those options) use the check simply to help make ends meet, than, unlike so many things that the current administration and Congress do that is bad, this piece of legislation can be counted as a good thing.
The point? First, despite what the Bush administration hopes, most consumers should not be spending their rebate checks on disposable consumer items (and thus, the so-called stimulus package won’t do too much stimulating. The other part of the stimulus package – mostly overlooked by the media – are some of the tax breaks it gives to industry, which could have a small stimulus effect. But that’s another story.)
So, second, what should you do with your stimulus package check (which, really, is simply a tax rebate.) As with virtually all money related matters, it depends on your specific situation. However, following are three possible options that likely are good ideas for a large portion of the population:
· Pay down high interest debt. If you’ve got credit card or other consumer debt with very high interest rates (10% or more), pay down the debt.
· Fund an Emergency Fund. If you don’t have, or have a very small emergency fund (see the “Emergency Fund” blog or the Emergency Fund section of the BestMoneyinfo website for an explanation of Emergency Funds), start one or add to your current Emergency Fund with your rebate check.
· Fund a Roth IRA. If you max out your 401K, 403B, or other tax-deductible retirement plan, and if you qualify, fund a Roth IRA either for 2008, or – if you’ve filed an extension, but haven’t filed your final 2007 tax return – you can still fund a Roth IRA for 2007.
Of course, as President Bush himself recently admitted (more than likely, reluctantly), consumers can use their rebate checks to offset the rising costs of necessary consumer goods, such as gas (and fuel in general) and food. Such use of rebate checks will not have the originally desired effect of stimulating the economy (but, indeed, the Bush Administration and Congress’s stated hope that this tax rebate would make a serious dent in and greatly stimulate the current lagging economy was always a pipe dream.) However, if, as suggested here that most consumers end up using their rebate check for (if they can afford to) one of the three options listed above, or (if they can’t afford any of those options) use the check simply to help make ends meet, than, unlike so many things that the current administration and Congress do that is bad, this piece of legislation can be counted as a good thing.
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