Sunday, September 28, 2008

Deal Reached on $700 Billion Bailout Plan

Just read on Seeking Alpha that the arrangements have been made to take the cow to the slaughter house.

$700 Billion Bailout

I have been reading about the $700 Billion bailout issue and been pondering about it for a while. The more I think about it, the less it makes sense to me. The government wants to buy foreclosed homes from banks and hold on to them till the market improves. It doesn't take a genius to figure out that this not a plan to help the foreclosure crisis. Its a plan to help the corporations write down a lot of bad decisions at tax payer expense. Why should any one have to think that this is going to work? Theoretically, It will give the banks much needed cash to get them to start lending again... essentially getting the tax payer to dole out $700 Billion to the banks, just to have them lend it back to us at a higher interest rate. Why does this sound like trying to beg from a beggar's bowl, promising to give back less than what was taken out, or trying to kill a bee with its own sting?

What's the guarantee that the bailed out banks wouldn't take the money and go invest it outside the USA, and then claiming they need more money? Didn't we already see the Fed injecting money into the market several times, only to have it rise back from the dead? If the government is serious about fixing foreclosures, wouldnt preventing foreclosure by addressing the real issues be better than waiting for people to go into foreclosure and buying them with taxpayer money? All this plan does is to move the problem from one place to another, without addressing the real underlying issues. This is like trying to avoid fixing a leaky roof by placing a pots to collect the water.

A a lot of smart people have determined the ROOT CAUSE of the current mess in credit markets to be the deteriorating real estate market. Though this seem to be the immediate culprit, I don't know if we can pin the blame on it as the only root cause.  With a large number of jobs getting outsourced, and practically all manufacturing being done outside the USA, is it any wander that we are in such a bad mess? We have successfully outsourced most well paying jobs, with the exception of the service sector that needs to have certain jobs locally. The whole country has been turned into consumers, and the few that produce and service, have their heads buried so deep in policies, they have effectively turned workers into nothing but robots.

When people have no jobs to pay for their mortgages, naturally, the next step is going to involve foreclosure. Why don't we then recognize outsourcing, instead of housing, as the root cause of the current mess? I guess its because no tax payer would want to bail out the greedy companies that outsourced their jobs. Housing is a much easier scapegoat that the taxpayers may give into. So, instead of pointing out the real root cause, a politically correct root cause is found that we can all relate to.

I wander if this $700 Billion is the end of it all. Does the government know how long they have to hold these houses for the markets to stabilize and start moving up again? What about the cost of managing the infrastructure for all these government owned homes? What about maintaining these houses? Have they considered lawn care, vandalism, frozen pipes from cold winters, home insurance, marketing costs, etc? The cost of home insurance for a vacant home tends to double or even triple, as insurance companies consider it to be a higher risk than occupied homes. So, by the time all these costs are taken into account, does the government still plan on making a profit? Are the taxpayers going to end up holding the bag for that too?

You can do a lot with $700 Billion, and I'm sure we can come up with 700 Billion ways to spend that money more constructively! For one thing, we can put that money towards projects that reduce our energy dependence, and create jobs. Why not use part of that money to create an efficient Mass Transportation system that works well, be affordable and convenient so that people can reduce driving, and thus the dependence on oil? Wouldn't a project of this size create a lot of badly needed jobs for the American economy? Ford and GM are also begging for $25 Billion of tax payer money for a bailout. Instead of blindly bailing them out, why not get them to make busses and trains for the Mass Transportation system? That in turn would allow them to keep employing their workforce for a project that would help us for a long time. The people that worked on housing can be employed to make bus and rail stations. If people have jobs that earn them money, they wouldn't have to go into foreclosure. Wouldn't this be a better way to reduce foreclosures at the root cause, rather than waiting for people to foreclose, and then buying those properties with taxpayer money? Isn't this better than blaming the people who worked hard to earn the American Dream? I am not denying there were speculators, or that bad loans were made, or that some lenders were preying on unsuspecting borrowers... what I am saying is that we are addressing the problem by putting band aids in the wrong places, instead addressing the REAL ROOT CAUSE.

Assuming we have a population of 300 million people, that should make each of us liable for about $2340 per person. Remember that $600 tax gift that President Bush gave us to go shopping? Well, it looks like the government has picked my pocket for nearly 4 times that amount! Just to be on the safe side, I think we need to get the government to give us in writing, which Billion they are referring to; the one that is a Thousand Millions, or the one that is a Million Millions!!! After all, we have been taken on several scenic rides before. When a $7000 Tax credit for the purchase of a new home" turns out to be a 15 year loan, and when we have to payback 4 times the tax break we got, all I see are lies, lies and more lies. Oh, I just forgot. Did we find those WMDs in Iraq or catch that Bin Laden guy yet? Are we still playing Porky and Bugs Bunny with the bad guys?

Its good to see that a lot of people are taking action to prevent the government from sticking it to us. Please support them by digging their stories, so that Washington will take note. It may be futile, but doing nothing is worse. Keep the American spirit alive, and Long Live the American Dream! digg it

I don't have a background in finance. My formal training is in engineering, so a lot of my thoughts are based on the simple principles of managing money. I got into real estate as a backup plan, because the only thing I knew was about computers, and the way things are going doesn't give me any comforting thoughts. I have learned a few things having gone thru the .com crash in 2000, and I needed to learn something different. I figured what I learn from real estate would not be a waste at all, as I would learn people skills, marketing skills and learn about an industry that directly and indirectly touches every part of our daily lives. All of these skills would be applicable to technology in one way or another. This is my way of dealing with uncertainty, allowing me to broaden my horizons and acquire new skills.

Monday, September 1, 2008

How to improve your credit score

Your credit score is an important measure of how well you manage your fiances. This is important to a lender because they expect you to make good on your promise to payback the money you borrow, with interest in a timely manner. It should be very important to you as well, because the higher your credit score, lower the risk to a lender, which translates into better loan terms for you. The first step would be to establish a line of credit, such as getting a credit card or shopping around for a car loan instead of paying cash. Once you do this, make all your payments on time. Being late with your payments lowers your credit score, and not paying at all would be detrimental to your credit score. Don't forget that improving your credit score takes time and effort, so don't be discouraged when you don't see immediate results. With determination, combined with discipline and sticking to your budget, you will be able to improve your credit score.

Here are some tips to help you maintain a good credit score.

1) Be sure to sign up for a free credit report at Annual Credit Report that allows you to get a free credit report once per year. Ability to monitor your credit score would help you discipline yourself by checking your progress periodically. Since there are 3 major credit reporting agencies, you will be able to get a free credit report every 4 months by requesting one from each of these companies once per year.
Don't confuse Annual Credit Report with the Free Credit Report, which is free for a trial period and then becomes a paid service after the trial period is over.
2) If you have been financially responsible living within your means and never borrowed money, you are still considered a higher credit risk. This is because you don't have a credit history and lenders don't know how good you are with paying back borrowed money on time. If you feel uncomfortable about borrowing money and still would like to pay cash, you could get a loan and pay it off with your first payment. Just make sure that there are no prepayment penalties when you apply for a loan. This way, you will establish good credit, and still maintain your life style and peace of mind of being debt free and financially responsible.

3) Don't apply for too many credit cards. To lenders, this is a signal that you are not responsible with money. Close accounts that charge you too much interest so you want to be tempted to tap the credit line.

4) Pay your bills on time. Being late on your bills is a perceived signal that you are unable to keep pace with your finances. You may have forgotten to write a check, but the damage is already done, and your credit score is affected. If you are the type that forgets to make payments, I would suggest automating your payments as much as possible. For instance, if you have a car loan, its easy to set up an automatic payment with your bank. Just make sure that you allow enough time for the automated payment to be delivered without being late as most banks require a certain amount of time to make the payment.

5) If you have had late payments due to legitimate reasons, make sure you contact the credit reporting agencies and add a note to explain why the payment was delayed.

6) If you have too many payments and it is becoming difficult to make payments, try to consolidate your debt, so you can have a single affordable payment instead of several unmanageable payments. Try your best not to get into a similar situation again by getting into the habit of using those credit lines again, at least until you have paid off your debt.

7) If you become unable to make the payments on time due to unexpected expenses, be sure to contact the creditors and let them know that this is temporary and try to work out an alternative payment plan to allow you to catch up without affecting your credit.

8) If you bought something that promises you no interest for a certain period of time, make a plan to pay it off at least a month before the first payment is due. Most of these offers would charge you all the interest for the past terms if you go beyond the due date of the 1st payment.

9) As you build and maintain your credit score, you will be tempted with offers of lower interest rates for periods of 6 months to a year or more. Make good use of these opportunities by moving your higher interest debt to lower interest offers, keeping in mind that you have this for a limited period of time as mentioned in item 8. Always be mindful of when your interest will change, and have a plan in place to be able to pay it off before that event. Don't count on getting another offer to a lower interest rate because your hopes may not materialize. Focus on what is within your control, not on what you expect.

10) Read up my other article titled Living Frugally and become a frugal spender. The government wants you to spend your hard earned money, going into extraordinary lengths to make you spend your money, and so do businesses. Basically, everybody wants your money! Its up to you to control your temptations, and keep a tight fist.