I'm James Maxey, the author of the Dragon Age fantasy series of Bitterwood, Dragonforge, and Dragonseed, the Dragon Apocalypse series of Greatshadow, Hush, and Witchbreaker, as well as the superhero novels Nobody Gets the Girl and Burn Baby Burn. I use this site to discuss a wide range of topics, with a heavy emphasis on cranky, uninformed rants about politics and religion and other topics that polite people attempt to avoid. For anyone just wanting to read about my books, I maintain a second blog, The Prophet and the Dragon, where I keep the focus solely on my fiction.

Friday, October 10, 2008

Will things get better, or worse? Round two.

According to google analytics, one of my most popular posts to this blog came back in May when I posted an article called "Will things get better, or worse?" I looked at some of the various forces I thought might push the world closer to paradise, versus equally powerful forces I thought might push us into an apocalypse.

This morning, listening to the BBC, the trumpets of the apocalypse seem to be sounding. Financial markets around the world are in full blown panic. No matter what happens in the long term, the fact is that we are going to enter into next year with significantly less wealth in the world. So, I find myself on a rainy Friday morning looking out over the gray gloom of the day and thinking, "Is it time to fucking panic? Seriously, should I be drawing the last hundred bucks out of my 401k and go shopping for some sort of semi-automatic weapon? Maybe stock up on canned goods to better wait out the rampaging hordes of looters that may start wandering the streets any day now?"

Fortunately, any fan of science fiction knows that the wisest advice ever offered is: "DON'T PANIC!" Instead of shopping for guns, I'll spend my morning instead washing my towels. (If you aren't getting the reference here, you are dead to me.)

And now, three reasons to panic:

1. We are governed by idiots, thieves, and madmen. If you're not willing to go that far, I still think you would have a hard time arguing that any major political figure of the last twenty years has covered himself in glory. No one, either democrat or republican, has shown any willingness to tackle our economic problems in a responsible fashion. Last week's presidential debate was astonishing in it's shallowness. Both McCain and Obama, when asked if this current crisis was going to change the way they would approach the office, basically pretended not to have heard the question. No one is showing even a sliver of honesty or wisdom. Obama has chided McCain for his "erratic" behavior, but Obama, too, got behind a trillion dollar bailout bill within hours of hearing it proposed and, having impulsively decided to support it, still stands behind it. Do you know how the $700 billion figure for the initial bailout proposal was arrived at? Pure guesswork. Nothing more than a nice, round figure that Henry Paulson thought was lucky because there was a "7" in it. There were never any hearings where independent experts were invited in to propose a true cost and show the mathmatical logic of how they arrived at the cost. Instead, we're going with a number picked with the same care people bring to picking numbers on a roulette wheel.

2. The significant chunk of the world's economy was built on stupidity. About twenty years ago, someone in the banking industry realized that credit cards could be a cash cow if they gave the cards to people who wouldn't or couldn't pay them off quickly. There was a time when, if you had a credit card, it meant you were an affluent member of the monied elite who regularly made purchases of items such as diamond rings, jet planes, and small island nations. If you were a person with a million dollars in the bank, said bank would issue you a card with a credit limit of upwards of ten thousand bucks. Today, if you have a credit card, it indicates you have a pulse. You are more likely to be buying pizzas than diamond rings. Pizza! PIZZAS! There are people in this world who go into Pizza Hut and go into debt for PIZZAS!!!! YOU MORONS!!!! Get the hell out of the gene pool, now!!!!

Ahem. Excuse me. {Wipes spittle from chin.} Deep breaths. Find my happy place.

Okay. Look, I'm not coming at this from some holier than thou position. I've put some amazingly stupid charges on my own credit cards. But, credit card companies have given consumers an amazing amount of rope because it's profitable for them to have people hang themselves. Banks want people to run up large debts with no plan on how to pay them off, knowing that while most people are lousy at math, they are also fundamentally honest and 90% of people will pay their monthly minimum payments, which are designed to have the debt paid off in roughly a century. People could live as if they were making $60k a year when they were, in fact, making only $40k a year, because every year banks would send them more credit cards with $20k limits. This can't go on forever. And, when it does stop, you're going to see a lot of empty parking lots at malls and shopping centers. An entire economic model has grown up out of people spending money they don't have. Once this house of cards collapses, it will take years, even decades, to build a more sound economy.

3. Even if you don't panic, you're surrounded by people who will. Remaining calm in the middle of a frightened mob is a good formula for getting trambled to death. So, I can sit here and calmly say I will be resolute and firm and not touch my 401k in a time of panic. But, the collective panic of even 10% of the populace invested in the market is enough to slash the value of my investments by half. Last year, the stock market was at 14k. If trends hold, we're going to see it hit 7k. Whether or not I panic, my single largest asset outside my house is in freefall, and what can I do about it?

Well, one thing I can do is think of three reasons not to panic:

1. People don't like being poor. I don't think that most people in America are going to switch to a diet of beans and oatmeal any time soon. We are still going to demand our pizza and sushi. We are still going to want our televisions and cell phones and GPS navigation in our cars. And, we're willing to work to get them. The world is full of carrots that will continue to motivate people to get out of bed and go to their jobs. People who lose their jobs will find new ones. You know all those jobs that they say American's won't do any more, jobs that require an influx of a few million people a year illegally to get done? We may even start doing those jobs again. The fundamental truth is, while American's are foolish consumers, they are also highly motivated and adaptable workers. We will keep things rolling through sheer worker inertia.

2. Every sale is a buy. This one requires a little thought, but, if the stock market plunges to 7k, it's going to be because people have sold a lot of stock in a panic... and other people have bought this stock at firesale prices. Let's say a speculator bought stock in North American Widget Corporation when it sold at $200 a share. The speculator went into the stock because it had been climbing like crazy in recent years, and he thinks that since it rose from $100 a share to $200 a share in two years, in two years more years it's going to be $400 a share! Now, in the panic, NAWC stock has fallen to $100 a share and the speculator is jumping out. Someone out there is buying that stock, hopefully becaused they've looked over the balance sheets and saw that NAWC is leading manufacturer of widgets with a good reputation and a highly trained workforce. NAWC stock didn't have a price to earning ratio that supported $200 a share, but it does support $120 a share, and the new buyer just make an INVESTMENT as opposed to a gamble. Panic punishes gamblers, but creates opportunities for the financially savvy.

As for the fall in house prices, we are now going to enter a market where cautious, careful people can buy houses for their true value, or even under their true value, as opposed to buying a house on the premise that it was a lottery ticket. Cable TV was full of shows on "flipping," where people would buy an old house for $400,000, paint it and put in new appliances, then sell it two months later for $600,000. Maybe now people will return to a more fundamental approach to houses... buying them as places to live instead of places to turn a quick buck.

3. Maybe... just maybe... we'll actually learn something from all this. This is, admittedly, my shakiest proposition. But, maybe we'll come out of this downturn uniformly smarter as a nation when it comes to money. People will realize that the government isn't going to save them and will sit down and take out pen and a notebook and start writing down their expenses and their income and start making some genuine financial plans. We had two decades where we've had bubble after bubble that offered easy riches. Now, perhaps people will stop and set financial goals appropriate to their income--or, set income goals appropriate to their desires and go out and get the training they need to get what they want. We could be in for five years of intense pain, but come out of it smarter, leaner, and tougher.

Right now, I'm slightly more optimistic than pessimistic. This isn't the next great depression, just a long-needed market correction that the average person will simply tough out. Just the same... don't lose track of your towel.


Michael Natale said...

Great post.

Can't I just vote for you?

James Maxey said...

If I'm ever elected to anything... panic!

rastronomicals said...

"Cautious Careful People" buying houses at their true value.

I hardly think that most of the members of the housing market were glibly going around trying to flip houses in the way that you say.

Here's my story, and I wonder how many people are like me. After 6 years with the same girl and about 15 years of living in rented houses and apartments, I was convinced by my girlfriend in 2004 that we should go ahead and buy a home.

Unfortunately, I happen to live in South Florida, which was at the center of the bubble. Fortunately, though, this was in 2004. The bubble had swelled, but was not finished, either.

So we find something decent in a decent neighborhood for 205,000. Which I don't have to tell you is a lot of frickin' money.

The only way I can come up with something even close to a down payment is by reaching into some retirement monies I've got, and even there I have to take out a second mortgage to cover the 20% a prime mortgage says I have to have.

But the mortgage is affordable, if barely so, and we move in (yay!) and I start making mortgage payments while trying to continue to pay down some credit card and educational debt I had.

That didn't go so well. While I had been used to paying 3 and 4 and sometimes 500 a month at the 20 grand or so of debt I had left, with the 2 mortgages I found myself unable to make those payments. I slipped into paying the minimum on my cards--and watched my debt go up.

Meanwhile the house is going up, too, as that superelastic bubble plastic of a housing market continued to expand outward and its walls became thinner and thinner. When the house reached 300, I refinanced.

I paid off all my debt (if not my girlfriend's) and my monthly bill payments went down. My interest rate went up 1/2 a percent and my mortgage was now 230, but as someone who took on a 35 year loan at the age of 38, that wasn't a big deal to me. I had taken care of the credit card debt.

Then the bubble burst, and while I haven't re-incurred credit card debt, and while my mortgage remains affordable, I am now upside down on my loan, the market now shows that my house is worth 225,000.

Even there, such is the breaks. Except now I hear that McCain and Obama want to throw money at the people who HAVEN'T made their payments, want them to be able to renegotiate their mortgages so they don't just walk away.

The cynical part of me says that if they're throwing money around, they should throw me 20 G's for a new down payment and I could walk away too!

But the sensible side merely says that there are probably a lot of people like me, who simply wanted a place to live and to settle down, and had no desire to "flip" or get rich quick, and kinda got screwed--even more than I might have.

James Maxey said...


As long as you aren't planning to move anytime soon, it sounds like you're not on the verge of financial calamity. Florida was hit hard by the bubble, but, on the upside, you have a roof over your head and while the market has fallen now, you are probably in a position to wait out the years it will take for the value of your house to get back above your mortgage.

I've made my own share of bad housing decisions. In my second marriage, I wound up agreeing to buy a house I had my doubts about affording. I borrowed from my 401k to made a modest 3% down payment, and still got a good mortgage due to my good credit. Unfortunately, a year later the marriage ended I was was left alone with a mortgage I could barely afford. I refinanced to a variable rate mortgage which lowered my payments a couple of hundred bucks, but by rolling the closing costs in I completely wrecked any equity I had. Eventually I sold the house of a loss, taking out another $7k loan from my 401k to cover the shortfall between the sale price and the mortgage... a loan I'm just paying off this month.

One reason I got into trouble was that I believed what experts were telling me. Mortgage lenders, real estate agents, and online debt calculators kept telling me I could afford more house than I was buying. Sure, on my own back of the envelope calculations, I could see how things could quickly go wrong. I would be okay as long as I never had to buy another car, or as long as my work remained profitable and I was getting large bonuses. But... the company I worked for changed ownership and the bonus structure changed to something far less generous, and, of course, eventually my 14 year old car had to be replaced.

This time when I bought my house, I ignored the experts and bought a house I knew I could afford under nearly any circumstances. If I wound up losing my job, I wouldn't lose this house. I think my house is a good investment not just from a money standpoint but from a peace of mind standpoint. I don't sit around worrying about whether my mortgage is going to eat me alive.

I agree with you that most people don't buy houses with the intention of flipping them, although I do personally know some flippers who did pretty well for a while. I'm not even saying that flipping is unethical or unwise. But, given that housing prices were rising far faster than incomes, it was pretty obvious on a grand scale that the bubble would burst; of course, in the small scale, it all came down to individual houses.

While you're waiting for the value of your house to rise again, at least you can take comfort knowing that the interest is tax deductable.