![[Lottery tickets]](http://wearehugh.com/public/2008/01/lottery-tickets.jpg)
Three seemingly unrelated articles came across my radar today:
Not-so-rich buy Texas Lottery’s $50 ticket.
“The lottery was never designed for rich people,” said Rep. Garnet Coleman, D-Houston. He called the $50 ticket a state-orchestrated scheme to entice people of limited means to spend more. “The people who play are still people who can least afford to spend $50 … they’re people who struggle to live off what they make.” … “The $50 ticket salvaged our entire fiscal year last year,” said Robert Tirloni, projects manager for the Texas Lottery Commission, bringing $137 million to state coffers since the game’s debut in May and helping the commission close a $93 million gap in revenue between 2006 and 2007.”
Jingle mail, jingle mail, jingle mail — eek! “Jingle mail” is the practice of homeowners who have no equity (because of home equity loans, or interest-only mortgages, or whatever weird shit) simply mailing their keys to the bank and moving out. At least one person I know is considering doing this, despite the tax consequences.
[J]ingle mail could be explosive. People who might have been reluctant to walk away from underwater mortgages because it seems socially unacceptable may change their minds once they see their neighbors easing their financial burdens by checking out.
Beijing Blocks Deal For Citigroup Stake
The Chinese government’s apparent rejection of a planned multibillion-dollar investment in Citigroup Inc. by state-owned China Development Bank suggests there may be limits to Beijing’s status as a cash source for Western banks … Citigroup had hoped to sell a stake valued at about $2 billion to China Development Bank as part of a second round of fund raising to improve its books, in the wake of losses from its exposure to U.S. subprime lending and its decision to fold off-balance-sheet investments into its own accounts.
So Citigroup et. al. are scrounging for cash because they gave houses to people who can’t afford to live in them, and people are dumping the houses because there’s no incentive for them to stay. I think it’s pretty obvious what needs to be done. Mortgage lenders need to stop sending people monthly statements and start selling $1000 lottery tickets instead. Scratch and win, and you can get free home repairs, upgraded appliances, hard-wood floors. A jackpot gets you a new address. Scratch and lose, and you still get to live in the piddly little 7,000-square-foot shack you’ve got now. All you have to do is keep playing.
Yeah, that’s harsh. I know not everybody starts life on the same starting line. And I feel for the people who did nothing but lose their job at the wrong time and got caught up in this whirlwind. The people I don’t have a lick of sympathy for are those idiots who make as much as I do, who are — on paper, at least — as educated as I am, who have no savings and no equity because they felt they just had to live in a McMansion and load up their credit cards with 60-inch home theater systems with 7.1 surround sound. No sir, not a lick of sympathy.
I’ve lived below my means for my entire adult life, from the day I got my first job. Living in a one-bedroom apartment when I could have afforded my own condo. Living in a nice, modestly-sized house on a 15-year fixed mortgage when I could have had one of those 7,000-square-foot monstrosities just down the street on a fucked-up balloon payment mortgage that brokers were trying to push on me not 4 years ago (when I refinanced one 15-year fixed into another — at almost exactly the lowest rates in 20 years, thankyouverymuch).
I know I spent a lot of money on my house last year, what with the renovation of the downstairs living room. Is this hypocritical? Well, it turns out it wasn’t really a lot of money. We paid roughly $15000 to add 150 square feet to our house. That’s $100 per square foot. We bought the house in 2001 for $107 per square foot; now it’s worth $135. (I know this for a fact, because every house within 20 miles just got reappraised last year.) If it keeps appreciating until we sell it, it may turn out that we made money by renovating. Or it may not. We’re not counting on it, and that’s not why we did it. We had cash — because we live below our means — and we wanted to spend it on a little more living space for us and our kids.
That’s what you get to do when you’re the creditor instead of the debtor — spend it on you and yours. The Chinese understand that. What, you think they’re lending us money so they can blow the vig on lottery tickets?
§
How ironic that when I switched away from this post, and back over to my email client, the first thing that popped up was a piece of spam entitled, “LOTTERY WINNER!” I couldn’t have timed it better, had I tried.
— John Klassa 
Dude, most of the people caught in the sub-prime mess did not buy gargantuan McMansions. They simply bought homes they really couldn’t afford. These homes could’ve cost anywhere from $100-500K or more. But a lot of these folks are on the lower end of the economic scale. There aren’t too many hedge-fund managers taking out a sub-prime loan to buy their 5 acre mansion in Greenwich, CT.
— SM
Very well-said. I owned a (modest) condo when I lived in Seattle and had plenty of savings, and when I moved to San Francisco a few months ago I made a decent profit on the sale of the condo, which was still cheaper than most of the luxury condos that are flooding the market. My plan in SF was to buy another condo but everything here is so expensive, so I’m just renting instead (and still paying way more in rent than the interest portion of my mortgage in Seattle, sigh).
The CA housing market is so messed up, though… there were some very nice units that were perfect in every way (size, quality, price point, etc.) except that they were being sold as a tenancy-in-common – financed with an interest-only mortgage. I don’t get why the hell people do interest-only mortgages to begin with, and on a TIC that’s just ludicrously stupid since then you can’t even refinance it unless you can get all the other shareholders to agree. (Then again, TICs seem pretty dubious as well.)
— fluffy
With all the advantages you have had in your upbringing and economic status, you have the nerve to be self-righteous about your spending habits?
— Jason D.
> Dude, most of the people caught in the sub-prime mess did not buy gargantuan McMansions
Yeah, I know. California housing prices and all that. Around where I live, they’ve been building (and are still building!) a lot of McMansions. They ain’t all CEOs living in houses like that. And I personally was pushed — hard — on some wacky crazy mortgage schemes when I bought my house and again when I refinanced. I passed, sensibly.
— Mark
@Jason: yeah, because only uneducated hicks living on subsistence wages are allowed to talk about money. What. Ever.
I have made the most of my education and the other opportunities that I have been given. But I still live in a house I can afford and drive a car I can afford. Lots of people in my position chose not to, and now they’re paying for it. If that makes me a self-righteous asshole, then damn, the world needs more self-righteous assholes.
— Mark
Add to your equation the fact that Citibank is buying Countrywide Mortgage, which has been hard-hit by the mortgage crisis.
The weird thing is that the Chinese aren’t spending it on theirs–they’re saving so much money that consumption is highly depressed in China. Instead of saving that money, they could be spending it on the needs of their people. In America, those who overconsume (90% of us), live “better”. Those of us who save live more securely. I think that’s actually consistent with what you said in the post.
Whether or not you find that persuasive, I’d recommend the Fallows article. It’s extremely good.
— Justin
@Mark @Jason… I agree, America in general obviously needs more self-righteous assholes if living below means and using money wisely is the definition.
I’ll be out of debt completely (school, car, credit cards) at the end of this year and hope there are enough foreclosures around for me to take advantage of the moment. Renting with roommates has been a huge boon for me.
I’ve heard it said that the financial ignorance is no excuse. People *should* feel like idiots for playing lotteries and getting into mortgages beyond their means. And the flip side is that people who come out on top *should* rightly feel good about it. Living below your means is *not* easy in our spend-spend-spend, sale-sale-sale culture. Well done, Mark! Enjoy!
— Eliot
Something to bear in mind, Mark. I’m pretty certain that you went to either a private school or public school where people were still willing to spend money on things like well-equipped schools and enough money to attract teachers who could actually TEACH, instead of a new widescreen TV and a trip to Disney World. That gives you opportunities beyond the wildest dreams of most of the English-speaking world.
— Jake
At least in California, these mortgages were pushed as “your last chance to own a home”, by people who knew what they were doing. I for one *hope* that some of the largest financial corporations in the nation collapse and their execs go to prison like the S&L execs did. Buncha scrotes, they deserve no less.
The ads said (to people who were already hard-pressed just paying their rents) that these lenders would fix things so that it actually cost less to buy than to rent, if the buyers acted quickly enough.
This does not excuse the buyers for accepting the bait, just as the free stuff the credit card companies offer college students does not excuse the students for graduating with thousands of dollars in debt. Still, blaming the victims instead of the perpetrators is both wrong and stupid. Just because you did not get sucked into one of the traps the lending industry lays does not mean that you are smarter than someone who did fall for it, nor does it mean that you will always escape their clutches.
Actually, most of the people I know did not get these loans either. Even with all the manipulations that the industry performed, they still didn’t qualify.
— W^L+
I went to public schools every day of my life from K to 12. Yes, they were good ones. My father, especially, was and is a huge supporter in public schools — so much so, that he commuted almost an hour each way to his job so I could live in a district with good ones. At 18, I got into an Ivy League university, full-pay, no financial aid. My parents weren’t rich when I was born. They just lived below their means… for 18 years.
I won’t deny that I’ve had many opportunities. But financial idiocy cuts across class, race, education, everything. There are lots of doctors and lawyers who make a hell of a lot more than I ever well. Doesn’t mean they automatically know how to handle all that money.
Though apparently (read my first link) rich neighborhoods are statistically less likely to play the lottery. But that doesn’t mean they’re saving; it just means they’ve found other ways to piss away their money.
— Mark
@Justin, wonderful link, it is a very good read.
— Alok
I’d prefer to contribute to your view that Chinese people generally save and don’t live beyond their means, but I think it’s a matter of which generation you are.
Most of the people around my age can spend just as well, and do. If the financial good fortune isn’t coming as quickly as we’d like, at least we can spend as if is?
People are less rational nowadays about spending, and saving, it’s becoming easier to get credit.
— James Wu
Good public schools (or the lack of them) are at the heart of the problem. A 2005 article on middle-class debt references a few studies showing that people pay a premium (in some case triple the original cost!) for housing in a catchment area of a good public school.
— James
Lotteries have always been the most insidious form of taxation. Only the poor play them, because only the poor see no other way of earning money. Lotteries then spend a lot of their money on schemes to help the disadvantaged, to make them seem humane, but a lot of the money ends up in other things which have no direct benefit to them. Essentially you’re taking money from the poor to help the middle-to-upper classes feel better about themselves.
As for the sub-prime mess, most of it was poor borrowers fiddling loans they couldn’t afford, some of it was poor brokers selling loans to clients when they felt the clients couldn’t afford it. And of course, the whole mess is rooted in debt securitisation (selling on bundles of loans to investors). Unfortunately it’s gathering momentum, so even Mark’s house may lose value in the medium term. I have to laugh at the house-price though, I’m in London: a 2-bed apartment 4 miles from the city centre costs over $500,000 with around $3,000 every year in property taxes.
Incidently, about living “below” your means – which is essentially about livving within your means given long term planning, just two years ago Ben Bernanke was complaining that “Europeans were saving too much” and that Americans were saving just enough, and it was the European “savings glut” that caused trade imbalances. It seems this crisis is convincing him otherwise, which is good.
— Bryan
> even Mark’s house may lose value in the medium term
That is entirely possible. Luckily we’re not planning to move anytime soon. Hopefully our circumstances won’t change to force our hand.
> I have to laugh at the house-price though, I’m in London
Well there’s your first problem. :) Come over state-side and check out North Carolina. I got my own yard for that price, too.
I do miss London, though. My mother used to run a small travel agency sending people to England and Wales. We piggybacked on her business trips to vacation all over, including London. Haven’t been there in years, though. Is the London tube system still best-of-breed?
— Mark
@James. Thanks for that link. It has really given me something to think about.
— W^L+
I’m not sure about best of breed, however it does successfully manage to pull itself from the brink of destruction each and every day (except the odd day when it fails of course, those are always fun). They have some big plans though http://www.campaignforcrossrail.com/maps/T2025_indicative_tfL_trnsprt.pdf .
If you haven’t been here in 10 years you’d be shocked, there’s been a lot of (surprisingly high-quality) building going on, especially going East. It’s a very modern metropolis. I’m only here two years and I’m still getting used to it, and the permanent sense of history of course: my stroll to a local park involves passing one school where Peter Sellers and Michael Gambon attended, another older school building where T.S. Elliot taught and John Venn (inventor of the eponymous diagrams) learned, itself near the cemetery where George Elliot and Karl Marx are buried, to arrive in Hampstead Heath, which has a history all of its own.
Of course property prices aren’t much better back where I’m from – Ireland – though I find myself somewhat cheered by slow pricking of the property bubble there. Fortunately Ireland’s sub-prime problem isn’t as acute as in the U.S., and the banks are being clever enough to use a seize-and-lease-back system so people aren’t getting (visibly) turfed out of their houses, which would spook the market even further.
— Bryan
“pull itself from the brink of destruction each and every day” is pretty much the best description of the London Underground I’ve ever heard. It does it with aplomb though, as much as we like to diss it, I’ve yet to travel on a better underground system.
— Mark
It bears pointing out that many of the people who you are so judgmental of went into debt and credit crisis in order to have EXACTLY the kind of life you are so smug about being “below your means”. Nice house in a subdivision, renovation, art on the walls, fancy new computers, SUV, etc. The fact that you had enough assets, parental help, education, and salary to pay for it, and they didn’t, does not make you morally superior.
— Andrew
Well, that’s the funny thing about money: someone always has more of it than you do, and there are always ways they can spend it that you can’t. I could have spent my adult life chasing after things I couldn’t afford: a nice house on the lakeside, original art from Sotheby’s, top-of-the-line overclocked computers, Ferraris, etc. But I didn’t. And now I get to worry about compounding interest instead of compounding debt.
— Mark
“Nice house in a subdivision, renovation, art on the walls, fancy new computers, SUV, etc. The fact that you had enough assets, parental help, education, and salary to pay for it, and they didn’t, does not make you morally superior.”
He’s not coming off as morally superior. Giving people with limited means access to unlimited cheap credit isn’t doing anyone any favors. I’m offended by jerks like you that peddle poverty and ignorance as some sort of superior moral position.
Aspiring to better yourself is one thing, buying houses, and consumer crap that are grossly beyond your means to repay for is idiocy. The janitors who make $28k a year who are pimped as “victims” because they cannot pay their $500,000 mortgage should be arrested for fraud, pure and simple.
Both sets of my grandparents were born to peasant families in Ireland during WW1. They had limited access to education, but they were determined to succeed, and emigrated first to England and then to the United States. One side of family eventually owned a few taverns, my other grandfather worked at multiple jobs, eventually retiring as a mid-level civil servant.
Both sets of grandparents raised 4-5 kids in modest homes in NYC. All of those homes were mortgaged with 25% down. All of their children attended private, catholic schools. All went to college. That meant no color TV until the 80’s, hand-me-down clothes for the kids and a 70 hour workweek for my grandfathers.
— Brian Duffy
> The janitors who make $28k a year who are pimped as “victims” because they cannot pay their $500,000 mortgage
While I agree with the rest of what Brian says, I’m worried that we’re veering into the realm of hypotheticals and strawmen. Here’s a real example of actual people living beyond their means, in this case with new cars. (What, you thought the idiocy was limited to houses?)
Quote: “Cindy Gerhardt has rolled over so much debt on successive vehicle purchases — five in three years — that she now owes almost $43,000 on two trucks worth no more than $29,000 and, she says, perhaps as little as $22,000. … Gerhardt [is] a secretary who lives with her husband and two children in Clinton, Okla.”
As it happens, I blogged about my latest car purchase, last August after a car wreck. I said, and I quote, “a local dealer has a used model in just the right color, with leather seats and a sunroof, for only slightly more than my insurance settlement check. Which means that by this time next week, I could be driving the car of my dreams with no car payments.” And I did, and I am.
This doesn’t make me morally superior to the secretary in Oklahoma who felt it necessary to buy five new cars in three years. Just more financially realistic.
— Mark
Moral superiority has nothing to do with it. This is about sound decision-making and risk. As Mark rightfully points out, no matter how wealthy or poor someone is, there is always someone who has more. Those who took out ARM’s and the like wanted more for less .. and were willing to take a risk to make it happen. Now that their roll has turned up snake-eyes, some want to blame anyone but themself. What a crock of shit. As they say, they made their bed, now they have to sleep in it.
I happen to be one of those people who actually live within their means. I only buy what I can afford, I save religiously every month, I pay off my credit card bills each month, my car has 100k miles on it, and I haven’t missed a payment on my 30 year fixed-rate mortgage since I bought my house eight years ago. Could I have bought a bigger house? Sure, but I didn’t … BECAUSE I COULDN’T AFFORD IT. Now I get to look forward to a recession and higher taxes to bail out my neighbors with their new cars, swimming pools and home additions.
What a country!
— Keith
I think that savers are as much responsible for this mess than borrowers. Each dollar you save is a dollar that Wall Street is going to “invest” in a market bubble that will devastate the US and the world.
I was offered a job for a firm that offered no health insurance but a “generous” 401K. I told the owner “no thanks” — a 401K makes Wall Street rich here and now… Who knows what it’s going to be worth, if anything, thirty years from now when I need it.
Given the systematic irresponsibility of Washington, Wall Street and Silicon Valley, the most rational attitude to take may be “carpe diem.”
Today there were two enlightening articles on Yahoo finance, just to show you the bad advice that rains down on Americans:
http://finance.yahoo.com/expert/article/economist/63874
This guy says that the problem with unemployed people, say, autoworkers in Flint, Michigan, is that they don’t have the right skills. If they had the right skills, like being a baseball player that can sign a $280 million contract, they wouldn’t have any problem.
This is the message of the “Rich Dad” books… You can become a multi-millionare or you can die disappointed in your 50’s. People don’t perceive a middle ground.
Unfortunately there isn’t much room at the top.
People today don’t see a path to a reasonably secure future — the only option that looks attractive is to be the baseball player who gets the $280 million contract. Thus, they treat their whole life like a lottery ticket — it makes sense to take out 150K in loans to go to school… it makes sense to raid your home equity to get plastic surgery… any kind of consumption that helps you “pass” as a higher-class person just might help you get one of those rare “good” jobs
http://finance.yahoo.com/insurance/article/104306/How-Safe-Is-Your-Rental-Car
Auto Safety is one area where Big Business has turned around 180 since the days of Ralph Nader. You can’t go a single day on Yahoo Finance without seeing some article about auto safety… About how you’re going to DIE if you’re driving a Toyota Corolla or a Hyundai Elantra. (Funny, they never show you the Youtube videos of what happens when a Ford Explorer rolls over at 85 mph on the freeway)
Three sectors of the economy have had exploding costs since 1980:
* health care
* education
* housing
all of these are about security, status, and in particular, passing your status onto your children. People are afraid their kids will be killed in they live in a “bad neighborhood”. People are afraid that their kids won’t get a good education if they live in a “bad neighborhood.”
Feeling overwhelmed by real and imaginary threats, it’s no wonder that people focus on what they’re told, hundreds of times a day, what they need to do to survive.
— Masked Bandit
The only real way to fix the sub-prime problem is the one thing that’s never going to happen, let the collapse happen. This entire mess was produced by issuing shoddy loans and the reselling thereof. Unless the parties involved take real losses, the root of the problem, unrelenting greed, will not be tempered.
The banks that made these loans and the investors that purchased them need to take the resulting heavy hit to thier bottom line, otherwise, the market economy that is the basis of American prosperity ceases to function. Perhaps even some of them need to fold.
But it’s not going to happen. The banks will get some sort of bail out. They have such vast ammounts of political capital (both figurative and literal), that they’re practically gauranteed some sort of federal band-aid. And in the end, who ends up paying?
You and me. Those of us who didn’t become involved in bad loans will foot the bill, while the corporate husslers who orchastrated this racket will continue on in thier high paying jobs or float onto the next one aloft a golden parachute. It makes me sick.
Years ago, I knew something was wrong with the housing market. I didn’t know enough to know what it was, but I knew something was wrong. Housing prices became stupidly high. In the small town I live in, at one point, there where more houses on the market than there even had been, and the developers kept building more of them. Even the most modest of these was a quarter million dollars. It just didn’t seem to make any sense to me, but I knew it wasn’t right.
Now we all know what was going on. In a way, I’m reminded of the tech bubble, which (ironically, considering I’m a tech geek), I belive the bursting of was a good thing. Companies that actually had a viable business model survied, the crazy hype that didn’t make any real business sense died, and stock priced dropped down to where they ought to have been all along.
Unfortuantly, I don’t belive that things are going to work out that way this time. The fed isn’t going to allow the irresponcible players in this fiasco to go under. Therefore, economic balance will not be properly restored.
Finally, a recent Time magazine piece explains why the proposed economic stimulus package being pushed through congress to supposedly help the situation will actually hurt the economy even more.
http://www.time.com/time/magazine/article/0,9171,1706769,00.html
— Levi Aho
I am no longer accepting public comments on this post, but you can use this form to contact me privately. (Your message will not be published.)
§
© 2001–present Mark Pilgrim