Rebate Checks

This article was written by Tedd Oyler, a Cambridge Finacial Planner in Michigan. He is a respected colleague of mine.


ECONOMIC STIMULUS
(A SKEPTIC’S VIEW)

OK, I see that I am going to receive a check from the government – maybe in May, maybe not – that is labeled a “tax rebate”. And I also see that I am expected to spend this money along with all of the rest of you in order to help the economy avert the recession that is predicted by so many of the experts.

Have I stated the undisputed facts correctly? I am not suggesting that it is factual that we are headed for a recession – just that the experts say we are.

If we can agree on the facts, then I’d like to delve into the facts behind the facts together.

If we are in a recession – or about to be in one – why? I sure do not know much about macroeconomics, but my layman’s understanding of the recent economic chatter tells me that we may have overspent ourselves into this purported recession. This was apparently accomplished because lenders made mortgage and credit card money available to us in gargantuan proportions, such that many of now owe much more than we can reasonably pay back.

A significant portion of this easy credit fueled a run-up of real estate prices (not “values” – there’s a difference between value and price) beyond levels that the market could truly support. Many of the mortgages were at 100% of the then-appraised “value”, meaning that any slippage in the market would render the mortgage upside down. The out-of-whack loan-to-value ratios, coupled with all the adjustable-rate loans and the ensuing entirely predictable increases in interest rates, have successfully created a thriving market in foreclosed properties.

In other words, over-lending and over-borrowing – in other words “over spending” – have us on the doorstep of the next recession. It is my understanding that economies go through recessions from time to time, so there is really nothing all that unusual about the predictions. What might be unusual here is the response of the geniuses we’ve elected to serve us.

This “stimulus” is really a return to us of tax money we’ve already paid in – which is actually an advance payment to us of a tax credit that will be available to us on our 2008 tax returns (to be filed a year from now), except that the President and Congress, in their profound responsiveness to economic theory, are also rebating tax dollars to folks who have not paid any in recently. I just shake my head – the Feds are in a pretty serious deficit-spending footing, so they give us back money that they will pay for by giving us a tax credit NEXT year. Meanwhile, all of this is financed by borrowing (T-Bills, savings bonds, etc) against future tax collections.

In other words, the Federal Government is borrowing from next year’s tax collection to pay us a few bucks this year, so that we’ll spend it to avoid predicted but not certain cyclical economic trending. And it is being done so as to incur interest costs of that borrowing well intro the future. Patriotism now means spend even if you don’t have it.

In still OTHER words, the President and Congress are modeling the very behavior that got us into this predicament.

Like I said, I just shake my head.

So, as a skeptic, I encourage you to stop the madness. I encourage you to not fall into the spending trap. When you get your little check this spring or summer, use it more wisely than the bankers who made bad loans and the debtors who borrowed too much and the Feds who are but pandering to your lower nature.

Here are some suggestions:
· If you have any credit card debt, pay your rebate towards that
· If you have no consumer debt, then pay the rebate towards home equity debt (not mortgage debt)
· If you have no consumer or home equity debt, then sock the rebate into a Roth IRA

If you find yourself drawn to spending the rebate on a new toy, then you are allowing yourself to be sucked into the spendthrift mindset that got us here. Just say “no”.

Scary News Stories

HOW MUCH SHOULD I CARE ABOUT ECONOMIC NEWS?

I admit it - I pay some attention to how the American economy is doing. And I even sometimes find myself experiencing emotional reactions to the news from time to time. What normal person wouldn’t? Heck, every news program and every talk show and every newspaper and newsmagazine start every edition with the most recent nerve-wracking dire economic news or prediction, don’t they?

Sub-prime mortgages – recession – Enron – Social Security funding deficit – makes you really want to turn on the radio, doesn’t it? And, despite your jangled nerves, you do in fact turn it on and you listen to the next bad thing being reported to you. And then you wonder what you should do in your own life to protect yourself against the next or most recent bad thing.

It is maybe impossible NOT to wonder. After all, you are charged with providing for your family or for retirement or for your employees. Yes, I wonder, too. When I am thinking through my emotions, which isn’t really thinking at all, I make immediate plans to get out of the stock market – or maybe I think that the market has nosedove as far as it is likely to and so I should jump more boisterously INTO the market. Neither of these reactions makes senses when one places them in proper perspective, nor do any other fear-based, knee-jerk responses.

Political fearmongers and talking heads benefit from our scaredy-cat reactions, since they are selling irrationality and WE are their market. Sellers of fear-based financial products (such as annuities and weird life insurance policies and beat-the experts investment schemes) profit handsomely from our lack of understanding of long-term economic reality.

When I find myself succumbing to the fears, I must resist. I hope you can, too.

There is a vast difference between what we really need and what the fear peddlers are telling us we need. They want us to worry about things we cannot control, things like what the greedy bankers are doing and what the Iranians are doing. I suggest that these things matter to you and me only on an infinitesimal level. Unless you plan to become a political candidate or a lobbyist, the only thing you can do about most of the macro “problems” that constitute the bulk of our spoon-fed economic “news” is become a more informed, less fearful voter and even then you are not influencing events a whole helluva lot.

Much more importantly, in our day-to-day lives, we are better off if we accept the news as (perhaps) factually true but not very important, and certainly not very important in out personal lives. When I am operating on all cylinders, I hear the latest stimulus package pabulum, for instance, and see it for what it is, which is that the political process is more interested in looking good than in doing good.

Then I work my way back to what it means to have financial peace of mind in my own life. Financial peace of mind is not made possible – or even likely – by the actions or behaviors of those external to me, by exogenous factors. My financial peace of mind is pretty much entirely up to me. This is either the bad news or the good news, depending on your mindset. If you like to blame others for your failures, then this is very bad news indeed.

What exactly can we control in our financial lives in order to assure, as much as possible, peace of mind? These possibilities boil down to how much we make, how much we save and how much we pay in taxes.

Income (from all sources) – we have more control over this that we usually think. Many of us want to blame the boss, but I do not want to hear it. If the job is bad, we can choose to go somewhere else. If the pay is bad, then we MUST. We can work better, or harder, or smarter or elsewhere – see, we have control.
Savings – whether in retirement plans or for emergencies, we have utter control over how much we save. If income is flat, we can still save more by lowering expenses or by becoming a wiser consumer. The more we save, the less we have to worry about.
Taxes – one of the quickest ways to generate savings is by lowering taxes. Income taxes are lowered by working at it, not by complaining about them. There are plenty of ways to increase savings AND lower taxes at the very same time.

If you’re not taking advantage of the opportunities you have readily available to you, then you are achieving financial discomfort rather than peace of mind, and the economic news will depress you. Remember, that we can create our own financial comfort and peace of mind.