Anyways, I saw the posters for upcoming concerts, and there were a few I wanted to check out. I haven’t been to a concert in quite a while, and I usually go in spurts—three or four in a relatively short amount of time, and then nothing for a long time. So today I went to LiveNation to look up tickets for AFI.

I have four questions:

1. What in the hell is a “ticket fee”?
2. If this “fee” is designed to offset costs of doing business, why is it charged on a per-ticket basis, rather than a per-order basis (since the marginal cost of additional tickets is exactly zero).
3. Why isn’t this “fee” simply built in to the price of the ticket in the first place?
4. Why is said “ticket fee” approximately 40% of the ticket’s face-value?

In my previous work in the real estate industry, I witnessed people who, after “owning” for 30+ years, sold their homes and walked out of the closing room without a penny to show for three decades worth of home mortgage payments. Over that time, they had at apparently every opportunity, cashed out equity. What they spent it on, I haven’t the foggiest — perhaps they did something smart with it. But probably, they bought boats and cars and vacations to Mexico, because that’s what most people do.

Lesson 1: Only take out your equity if you have a damn good use for it. A damn good use would be, ideally, something that generates positive cash-flow for you. Except for the direst of emergencies, you shouldn’t be spending that equity money on anything that is immediately consumed, or that depreciates in value.

We bought our house in February of 2008, and are now looking at the prospects for refinancing. We can now easily obtain a rate 1% better than our existing rate. Now, we’re not going to get rich off of the reduction (about $75) in monthly payments.

I asked what it would cost to knock another 1/2% off the rate, and was told that it would be about 2 points. Here’s where it gets even better: the mortgage guy told me that, “We think rates are going to be even lower towards the end of the year, and I don’t think it’s a great idea to pay for the rate now, if you can get it for free in November.” Slick, eh? Why would you want to pay for something that you can get for free?

Lesson 2: Refinancing now means that you have 360 more mortgage payments to make. Which I suppose is OK, until you do it again next year, and the year after, and again in 2015, etc. I don’t want to make mortgage payments forever, in fact, I don’t want to make a mortgage payment after I’m 45.  And you shouldn’t, either. I understand that the easiest way to be able to retire comfortably is to make sure you’re not locked into massive mortgage payments and other debt-servicing through your golden years.

If you want to make mortgage payments forever, you’re better off renting/leasing.  Falling for the “you can get it for free later” (which, I might add is anything but certain in this market) is the first step towards effectively renting your house from the bank. Pretty soon, you’ve lived in the house for 33 years and don’t have a dime of equity. By minimizing your monthly payments, you’re actually maximizing your indebtedness.  Unless you’re drastically axing your interest rate, you’re not going to get rich off the difference in monthly payments. So stop focusing on the monthly payments.

Lesson 3: If you put Lessons 1 and 2 together, math happens!

As long as you’re not taking cash out of equity, each time you refinance, the mortgage amount should be smaller than it previously was. If you’re getting a lower rate, and a lower balance, consider a note of shorter duration. If you can stomach an increase in your monthly payment, a 15-year mortgage would be worth considering,although you can probably get a 20- or 25-year note (and pay down your debt/build equity faster) for about the same as your currently paying on a higher-interest 30-year note.

If you had $15,000 lying around and I could guarantee you 18% over the next 6 years (compounded annually would give you $40,000) would you take it? So you don’t have $15,000 lying around, OK, you’re not alone. But you probably have $300 and if you budget your expenses, you’ll have another $300 next month, and so on.

A 15-year mortgage will going to cost you more each month, even if the rate is lower, but significantly more of your payment goes to principal, which means you build equity much faster. I ran the amortization schedule for a $150,000 mortgage for 30 years and 15 years at 4.5%. (I like the amortization calculator at Bretwhissel.net) Over a relatively short period of time (7 years) you’d pay off about 4 times as much principal on the note of shorter duration. For the examples, it would make the difference between about $19k worth of equity vs. $58k worth of equity. That $39,000 difference would cost about $15,000, and that comes from the extra $300/month that you paid.

You now owe $40,000 less to the bank than you otherwise would!

This means more proceeds if you sell, more equity in case of a dire emergency, and a greater ability to weather a stagnant or declining economy.  If home values rise over that time, you’ll just have that much more money when you eventually sell.  In either case, bad or good, you’re going to be better off in the long-run by making some small sacrifices in the short-run.

Lobbying groups representing mutual funds, banks and Wall Street say workers like employer-backed individual plans, especially being able to manage their own accounts. They continue to invest in them…

Of course most people continue to invest in them, because for most people, most of the time, it’s stupid to give away what is essentially “free”, albeit deferred, income. Even though prior to profit-sharing my account was down 40% for the past 12 months, that was all essentially “house money.” Neglecting to contribute to my 401(k) means practically zero marginal take-home income. I “like” my 401(k) the same way I “like” finding a quarter in the parking lot

And then the fear-mongering sets in. Financial industry lobbyists want to see some political action on 401(k) accounts, up to and including a “system similar to plans in Australia and the Netherlands, where professional managers make investment decisions.”

I would be very surprised to learn that “professional managers” aren’t already making the lion’s share of 401(k) investment decisions. After all, they’re the ones who determine which assets constitute which funds, at all times — and since most 401(k) “investors” have a relatively limited group of funds from which to choose (which are ambiguous to all but the most discerning and savvy investors), delegating the final decision-making to some other financial industry insider with a mandate to buy something, anything no matter what, differs from the status quo in no meaningful manner.

“Over the last year, we’ve seen the damage some of the financial wizardry has done,” said Steve Abrecht, director of benefits and capital stewardship at the Service Employees International Union. “Traditional 401(k)s don’t provide enough protection to investment risk.”

Oh, the hilarity! Since people contribute to them without thinking and fund managers are obligated to buy anything, even when all that’s on the ticker is junk I believe 401(k)s are likely the next big economic bubble, predominately because traditional 401(k)s are too restrictive to permit individuals to manage their risks.  For example, I’ve been blogging about the housing/mortgage/real-estate bubble for the better part of 4 years now — or, since I first became aware of the problems in graduate school; there are/were simply no satisfactory funds available to me. It looks like “cash” would’ve been the least-bad option, even though I would’ve been massively ripped off by inflation.

“Wizardry” is a clever term, because it conceals the truth: What we have seen is the damage that can be done by a government, its printing presses, and a banking cartel which depending on who you ask, is either pulling the strings and orchestrating the crimes, or accomplice to the government’s thievery.

In either case, neither the government, nor the financial industry is fit for the task of “fixing” the ways individuals save and invest for the future.

The unintended consequences of government intervention in individual retirement planning is terrifying: it’s so massive and affects so many people. I suggest that, as the working population grew over the last several decades, this process created its own macro bubble, for which there are a few contributing factors:

1. Even if prospects are poor, it seems foolish to turn down “free” and tax-deferred money.
2. The individual has relatively little control over the allocation of his funds, especially he can not “cash & hold”.
3. The individual can’t liquidate his holdings unless he’s unemployed, deqlinquent on your mortgage, or otherwise altogether financially f**ked.
4. There is no opt-out mechanism: even if fund managers think there is nothing worth buying, they have to buy.

For most people making small/minimum contributions, even abstaining from contributing to these plans would only make a barely noticeable difference in their take-home pay. Individuals, faced with the prospect of “free money” via employer-matched funds, as well as tax deferral, have a huge economic incentive to invest in these vehicles. People, faced with severe economic incentives to invest in these vehicles (“matching funds” and tax deferral) will more often than not, put 3% or 6% or 10% into a 401(k) type plan. Corporations get to include matched funds as part of total compensation, which is tax deductible, it’s like health insurance: “We offer this awesome Health Plan/401(k) plan as part of our total compensation package. You don’t have to sign up, but you don’t get any substitutions if you don’t, though.”

So, why wouldn’t someonesign up? Keep in mind that they’re not actually making a trade-off between A and B, they’re making trade-offs between A and nil. Now, the individual has essentially delegated her retirement savings to the fund. And the fund takes care of her retirement, so she doesn’t have to &mash; indeed 60% of working Americans think of their 401(k) as their primary retirement fund! But here’s the rub: The level of control which any individual can exercise over his account is relatively limited, for instance, Vin Suprynowicz tried to convert his holdings to physical gold, gold ETFs, mining shares, and finally to cash — he couldn’t do any of these! There are also strict limits on how and under what circumstances an individual may withdraw from her account, but typically one must be unemployed, delinquent on her mortgage, or have suffered the death of an immediate family member.

The bottom line is that people are contributing to these funds because they really don’t have another meaningful option. This is interesting, and terribly frightening, because I don’t think we’ve seen the tip of the iceberg yet.

The “value” of these funds have previously been buoyed by (essentially) forced contributions burgeoned by a growing workforce. Funds were being bought because money was coming in, and managers had no other option but to buy.

As the growth of the workforce slows or potentially declines, what happens to the values of all these funds? Or, to make mattes even worse, when the baby-boomers begin drawing down these funds (i.e., selling them) in order to draw a retirement income, what happens to their value when there’s nobody buying them on the other end?

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(H/T: Vin Suprynowicz’s recent editorial.)

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Kip Esquire responds to my 401(k) conundrum:

I would hope that your 401(k) has a money-market option.

There is a money-market option. I should have allocated more to that, several months ago. I didn’t. In any event, my 401(k) is rebalanced as of this evening.

http://1955design.com/journal/

1955Design follows up with,

Your fund family that your 401k is in probably has a gold or precious metals fund.

Although I am not sure that now is the time for that investment, either

I looked for this before, admittedly, I did not look very hard. I did not see anything that appeared to be a gold or precious metals fund. Some of these are ETFs or other things, and from what I understand are also highly leveraged. Many of these funds also are insolvent in a technical sense, meaning that they operate on a fractional reserve basis, too.

But, the market is up some 1,200 points since I wrote that. Go figure.

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Responding to my comments on anarchism and authority, Damaged Justice says

When a person possesses greater than average knowledge and/or experience regarding a given subject matter, we refer to them as “an authority on the subject.”

This accepted definition is a far cry from the “authority” who presumes to command others solely by the supposed virtue of superior muscle and firepower.

Agreed. This is why I find these discussions to be particularly difficult. Semantic confusion runs rampant when ideology is at stake. Franc has a new post at his blog addressing the immorality of hierarchies, but I haven’t had a chance to read it yet.

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Kip responds to my post, Gold is NOT a fiat currency:

You’re still tap-dancing around the core issue: gold only has value because people say it has value (or expect other people to say it has value).

…

The debate is instead whether it is better, in an advanced global economy to argue for a government that cannot debase gold or one that will not debase its currency. I continue to support the latter because I believe the former is simply unworkable.

I will respond to this comment in a stand-alone post, shortly. In the meantime, frequent commenter, Jeff Molby steals my thunder:

No, he’s specifically stating that that isn’t the core issue. Fiat currency has value solely due to government coercion. If the government disappeared tomorrow, so would the value of its currency. Gold would retain a strong value sans government.

You forgot the third possibility: a government that will debase its currency as often and as much as it thinks it can get away with.

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Tony, 1955Design, and Kip congratulated me on my marriage. Thanks everyone. Someday I’ll post some pictures maybe to my Flickr account.

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Shayou Wang left a comment on Gresham’s Law is Wrong.

In addition, it also works in the presence of Bimetalism fixed exchange rate or face values (also enforced by governments).

Exactly. The proper application of Gresham’s Law is not really an economic law of its own, it’s simply a case-specific formulation of general economic theory with regards to price floors or price ceilings. When a commodity is artificially over- (or under-) valued with regards to other commodities, bad things happen.

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Kip and I have a long-running dispute over the subject of jury nullification. In the most recent installment, Kip says,

I just find it utterly preposterous to suggest that it’s the “libertarian” thing to do.

Circumstances dictate the appropriateness of jury nullification. View individuals as moral agents, they are qualified to determine the justness (or injustice) of laws, and should render verdicts in accordance with proper morals. To use the fact that some people have a lousy moral compass as an objection to nullification on libertarian principles is a red herring.

Clay S Conrad comments:

You wrote that “An unjust law is a necessary condition for any appeal to nullification. ” I’d disagree.

Even the best laws can be misapplied, or unjustly applied. …

Clay’s point is that most laws, at one point in time or another, will eventually be used in such a manner that renders their application unjust. Point conceded.

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Thanks to No Treason for plugging my post, How Much Will The Bailout Cost You?.

In response to the same post, Azrael comments,

I am at the point where I expect this insanity and just do not see the point in getting angry anymore. As far as I am concerned our whole debt and monetary system is illigitimate because it is forced on us.

I’m not apathetic, yet. I try not to get upset over such things, but they do chap my ass, so-to-speak. There’s nothing I can do, per se, to stop these things from happening. The goal of libertarians, anarchists, agorists, etc., is to find a way to minimize the external costs imposed by this illegitimate system.

Jeff Molby comments:

Assuming that at least some of the assets are performing, some of the $700b will be recouped at some point.

Perhaps. But we, as taxpayers, who are ostensibly funding the TRILLION DOLLAR BAILOUT will never recoup a dime.

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Self-described “former AIG customer,” Louis left a comment on On Being Too Big To Fail:

there goes the proverbial credibility of the free market, the big fish falling in the safety net,saved from bankcrupcy by the the little guy…then ill’be dammed if i hear them talk about economy resilience again; help from the little guy, they will call it solidarity, expression he never heard in the mouth of those big fish when HE was in turbulent waters.

Louis! THE USA IS NOT A FREE MARKET, despite loads of rhetoric and propaganda to the contrary. What we see happening in the market right now is a textbook example of government interference gone wrong. But you’re right on the money with the second half of your comment: when the big fish goes bankrupt, we have to bail them out. When we go bankrupt, they take our houses.

The entire financial system is broken, beyond salvation.

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Ryan left a comment on If You Don’t Like it, Get the Fuck Out!

I agree but I feel that, especially following this coming election, we will have a certain population of Americans taking these people’s suggestion and “getting the fuck out” not because they bail on the ideals of this great country but rather because they feel that those ideals have been forsaken by the likes of whom you speak of and consequently feel threatened by the infringement on their personal freedoms and the consequences of similar ignorance. What do you think?

It seems that Ryan supposes that this year, many people will be exercising their right to “vote with their feet.” I’m not sure this year is any different than any others. And I think voting with ones feet is simply one more iteration of the “lesser of two evils” game. Where are they going to go? Some other country that sucks just as bad in some areas, worse in others, and is marginally better in maybe a few areas?

The point of my post was to challenge the notion that one is obliged to leave if he doesn’t like the system. I don’t think anyone should have to make that choice. It’s unfortunate, if it’s coming to that.

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My friend Brad left a comment on Of Greed and Charity

I remember the same conversation we had with Garrett in Grand Bend. Remember how he felt it was okay that rich people (or average income people) should have to be taxed more to help the less fortunate out. This guy Ryan feels the same. Nobody should be taxed on their income.

Mike Gogulski at NoState.com has an excellent post on the topic of this loser mentality, The Golden Rule is Insufficient. According to Mike, some people say,

I want to be taxed to provide essential services for other people. I want this because I know that I, like others, am greedy, and would not otherwise contribute to their well-being. This is especially important with respect to the well-being of others incapable of providing for themselves.

That sounds exactly like what Garret was saying. Mike responds to this idea, probably better than I ever could:

The Golden Rule is a poor ethic to apply when your morality legitimizes violations of yourself. Until you are possessed of a morality which regards other people as ends in themselves, rather than means to be exploited for whatever grand goal the day demands, using the Golden Rule as your ethical yardstick admits all manner of horrors.

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That’s all for now.

“I’m thrilled,” said Liz Kaczmarek, 30, of Clinton Township, who takes her nieces and nephews to the zoo frequently. “I don’t know a person who knows about the zoo millage who said they were going to vote no.”

I didn’t vote at all.  But even if I had, Liz, you wouldn’t have given a damn what my opinion was, because there simply aren’t enough of me.

Eric Ogunbase left a comment in response to my original post on the subject, A Zoo is Not a Public Good:

Growing up in San Diego makes one a “Zoo Snob”. However, I’ve been to both zoos (born in Hutzel Hospital many moons ago). I think the tax dollars of those in Wayne, Oakland and Macomb counties could be used for more pressing matters.

The Zoo is not one of them.

I couldn’t agree more. As long as the government is spending money, it should be doing something mildly productive with it.  Subsidizing people who want to play with big cats or cute penguins all day doesn’t count.

Meanwhile, Jeff Molby was busy commenting:

I take my son to the zoo regularly and I’m gonna go to the polls specifically to vote against this. BTW, I don’t even own a house.

That’s alright. Property taxes are passed forward to consumers of rental properties, too.  But it didn’t matter that Jeff voted against it.

The measure passed by a 2:1 margin, and is expected to raise property taxes about $10/year.  Why can’t the 2 who voted for it pay $15/year, and I pay $0/year?  That seems fair.

According to the article,

The tax, which is to cost the owner of a $200,000 home about $10 per year, will generate almost $15 million a year toward the zoo’s $26-million annual budget. The rest comes from admissions, concessions and donations.

Does the Detroit Zoo really only take in $2MM in concessions and donations revenues, annually?

Must be some sort of “new” math.  If the zoo is $15MM short, that means it only brings in $11MM/year. The zoo boasts over 1 million visitors per year, and an adult admission is $11 with discounted fares available to children, groups, and elderly. I’m going to assume an average fare of something in the neighborhood of $8.  That’s about $9MM in revenue, right there.

One commenter at the Free Press forum said,

It is just a shame that they didn’t ask for more money and make it free admittance. Then maybe people would go and utilize it…then sponsors would come…then the zoo would expand and get better…and more people would come…and more sponsors.

Right.  Just what we need – even more corporate welfare.

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Jeff Molby left a comment on Consumer Price Index (1800-2007)

 I’m no fan of the Fed, but I couldn’t find a source for the estimates used in the chart. It’s pretty, but meaningless without a list of the assumptions used.

You could look it up at MeasuringWorth.com (via EH.net).  They indicate $51 in 1800 is approximately equivalent to over $800 today.

Robert Evans left a comment, as well:

In general, statistics demonstrating that there has been inflation do not convince anyone that anything is wrong, because public opinion normally holds that a low but constantly positive level of inflation is good for promoting growth. That’s the belief that needs to be changed. Otherwise, you’re just preaching to the choir.

Robert! I think the point of that chart is that a “low but constantly positive level of inflation”  is not what we’ve experienced over the last 100 years.  This chart should give even the staunchest Friedmanites pause.

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Jeff Molby left a comment on Fiat Credit is NOT a Loan, in response to my position that “A credit card is not a loan. Sometimes they are characterized as unsecured loans, or unsecured lines of credit, but in truth they are not loans.”

You’re not suggesting that credit cards themselves are a source of the problem, are you? It seems to me that a credit card could be completely legit in a hard money economy. If the bank pays Best Buy in hard money, the bank is temporarily and conditionally surrendering an asset on my behalf.

Your title implies that we agree on that, but I think you should clarify your third paragraph to make it clear that the underlying fiat system is the problem rather than the practice of supplying credit via a standardized form of identification.

Yes and No. I think that credit cards as we know them are essentially a product of a fiat money system, in that regard the system is the problem and the cards are merely a symptom.

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Kip commented on Money From Nothing,

the Fed does not and cannot “monetize the debt.” Only the Treasury can do that. Federal Reserve Notes are not “the national debt,” Treasury securities are. The Treasury redeems them, not the Fed — either with tax revenues, proceeds from new debt or with currency (monetizing).

I consider the Fed and the Treasury to be two sides of the same coin, no pun intended. It doesn’t much matter which party technically monetizes the debt. The broader argument, that inflation is fraud, still holds, regardless of which half of the oligarchy is pulling the levers.

There were a number of comments on this subject, to which I’m still crafting a reply.

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On Chrysler Kills the Auto Lease I forgot to mention something.

When determining the lease price for a vehicle, the lessor must know at least two things.

1. The fair market value of the vehicle at inception
2. A reasonable approximation of the vehicle’s value at fulfillment

Most of the news reports are citing vehicles’ lower-than-anticipated value at lease termination as reason for killing the lease as a financing alternative. This is only half of the problem, for which their economic model certainly should have accounted. The other half of the equation is always overlooked.

My best guess is that for most of the vehicles leased in the last few years, the value of (1) was ridiculously overstated. Combined with the failure to accurately predict (2), the financing woes for the auto companies was exacerbated. Had they started from a reasonable value, their exposure to macro-economic risks like a recession would’ve been lower.

Of course, it’s a result of over-capacity, brought about (at least in part) by malinvestments encouraged by loose monetary policy.

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Kip, Esquire responds to my accusation, that governments are per se illegitimate in Comments # 22

You toss around the word “illegitimate” a little too recklessly. The argument is that “legitimate” is not a discrete quantum, but a continuum. One government can be more or less legitimite (sic) than another, and the metric by which legitimacy is measured is inoffensiveness to competent adults who have a natural right to life, liberty and the pursuit of happiness.

But to summarily dismiss all government as per se “illegitimate” is circular: you’re just assuming the answer.

I granted the idea that there is a continuum:

Conceivably, if and only if a government were to handle everything with kid-gloves, tread lightly and carry no stick, it would be less illegitimate than it currently is.

But this is a continuum of illegitimacy.  Since there is no “contract” and can never be any such “contract,” (which would qualify as “legitimate”), the endpoint, “legitimacy” is not within the operative range of this continuum but is instead an unattainable ideal state.

Sure, the less deviation there is from an impossibly hypothetical contract, the better off everyone ought to be, but when examining a legitimate contract, the parties must have had the opportunity to avoid the contract in the first place. This is a binary condition: either the parties had the opportunity to forge a valid, consensual contract, or they had no such opportunity.

Since nobody ever had a choice in the matter, I’m willing to defenestrate any pretense of legitimacy.

I mean, let’s call spades as they are. The fact of the matter is this: You are not allowed to disagree with the non-existent contract without ultimately getting shot.

(Anything wrong with this proposition, from a libertarian perspective? Just asking.)

Any government proclaiming any degree of legitimacy ought to recognize that killing people for mere differences of opinion is an heinous policy to pursue.

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One of the greatest black marks on American history was the Civil War. How is it, that every other western nation was able to eradicate chattel slavery without the bloodshed that beseiged the nation during the 1860s, claiming three-quarters of a million able men?

Not being a history scholar, I have no idea how the other nations managed to do it, but Vache Folle offers one solution to the problem in What was so great about slavery?

I don’t really understand why Southern elites hung on to the institution of slavery for so long. They would have had the same cheap labor force to exploit if they had emancipated their slaves and made them free laborers. They would also have gotten more Congressional representation since a freedman would count as an entire person for the purposes of apportionment.

Seems like a no-brainer, to me.

Of course, most people believe that the Civil War was in fact fought over slavery. I believe this was perhaps the popular cause, the rallying cry if you will. In fact, the Civil War was fought to “preserve the Union”, thus invalidating the sovereignty of allegedly free states and people.

The process by which banks create money is so simple that the mind is repelled. – J.K. Galbraith

The scams are, in no particular order of importance (since they all feed off of, and enable one another):

1. Debt Collection Practices & Impropriety
2. The Reverse Payment Prioritization Scam
3. The Balance Transfer Scam
4. The Penalty Rate Scam
5. Exploiting Ignorance: Money for Nothing

A brief review is in order: when borrowers default on a credit card contract, arbitration is generally foisted upon the debtor, by the creditor. The credit card companies are able to game the informational asymmetry they acquire over the course of many proceedings, to exclude arbitrators who show any tendency towards siding with the debtor.

Lurking below the surface, are the pseudo-scams that are used to keep borrowers in debt. Credit card companies routinely apply payments towards the principle bearing the lowest interest rate first, in an effort to create negative-amortization, and so as to collect more unearned interest payments. They offer low-interest balance transfers in an attempt to create such a negative-amortization situation, especially to their most-worthy customers (who are not otherwise profitable for them). Often, a single late payment causes interest rates on all debts (sometimes even on other credit cards underwritten by the same company) to rise to usurious heights.

Most people do everything they can to stave off default until it is the only available option. At this point in time, they have probably had use of their card(s) suspended for several months, they’ve accumulated mountains of spurious fees, and excessive interest charges. This phantom debt is then presented to an arbitrator who is, for all intents and purposes, chosen by the creditor, and used as the starting point for default negotiations, liens or encumbrances to be filed against real property, structured repayment agreements, and so on.

The circle is complete.

Some people might posit that consumers should make more prudent decisions, but when every lender is in-fact a loan-shark, and the monetary system is a scam that destroys the value of savings, decisions are often made that would otherwise be deemed imprudent. Capitalmarkets are profoundly distorted by legislation and monetary policy, as a result institutions are able to “loan” money at teaser rates which no honest man could bear.

If everyone paid off their balance in full each month, credit card companies would quickly go out of business, because there are few things less profitable than giving out perpetually interest-free revolvers.

Credit card companies are, as a matter of fact incapable of profiting from responsible borrowers. It is impossible to profit from these borrowers, because it’s impossible to charge them. It’s impossible to charge them, because all credit card companies have the legal privilege of creating debt obligations from thin fucking air. If one credit card issuer wanted to issue 30-day notes payable, they would quickly be undercut by another issuer who wrote the same obligations at a lower interest rate, and so on. The result is that none of the companies are capable of charging these customers anything.

The credit card companies’ modus operandi, is to figure out new and creative ways to get people to violate some obtuse term in a contract of adhesion, such that they can then charge whatever they’d like. Precisely, the problem is that they don’t want you to pay off your “loan” every month.  They want you, indeed, they need you to carry a balance.  So they come up with neat little ways of trying to prevent you from paying off your balance.  E.g., a “zero-interest balance transfer” is worthless, if you’re already carrying a balance – even a small one that you intend to pay off.

They prey primarily on financial ignorance, and although there is certainly some culpability on behalf of debtors, the primary reason for any of these situations is a political environment that encourages the creation of ex nihilo, no-interest debt obligations, and a legal environment that tolerates same.

Loans, or the extension of personal lines, always entails the lender’s sacrifice of present consumption in order to enjoy a greater future consumption. The “debt” embodied on a credit card statement is not, in any meaningful way, tied to any distinct amount of real, accumulated wealth. Nobody has lost anything when the borrower defaults, on the contrary, whosoever he purchased goods from has already received and has likely spent the money that was created out of nothing.

Fiat credit is NOT a loan for which anyone has put up any amount of collateral; it is a fiction and a fraud.

All good points, but your article ironically assumes that the gov’t will somehow be efficient with that $300m if it’s not spent on his little contest. We both know, that’s simply not the case.

I made no implications to that effect. I assume, as per usual, that if the people weren’t robbed of their $300M, everyone would be better off. The point is that politicians shouldn’t have the power to use money they took from you, against your will, and use it to bribe people to build things that they want to see built. When, (not “if”) there is a $300M profitable investment to be made in alternative energy, people will make that investment. In fact, people will start making those investments even though some of them will fail.

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Someone submitted one of my old posts about a man who was evicted from his homestead to reddit. I have no idea how sites like that work, and I don’t spend any time trying to get play there. Maybe I should: This post was the source of a considerable, one-time traffic spike. Like a 400% traffic spike. If you like my blog, submit posts to reddit, my blog is only as effective as the number of people who read it.

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Will celebrates the five year anniversary of his blog and notes that Bob Murphy’s Chaos Theory was instrumental in his intellectual development. I read Chaos Theory in early 2006, and it was the breaking point, beginning a phase shift that would take me away from the Randian, capitalist brand of libertarianism, to something much better.

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In Reader Mail #57 FSK notes that I missed several big points in my chain about Credit Card Scams, the most recent installment of which is Part IV: The Penalty Rate Scam.

David Z missed a big point. A credit card debt contract is a no interest contract. When you borrow via a credit card, the bank literally prints new money and loans it to you…

David Z missed another big point. Bankruptcy law was recently changed. It is much harder to discharge credit card debt in bankruptcy court…

Regarding the bankruptcy code, early this month, I wrote A Few Thoughts on the Credit Situation, mostly as a note to myself so that I would not forget for future purposes to reference it.

It is convenient that immediately preceding the current credit-crunch, a few notable things happened. The bankruptcy code was changed, and the laws surrounding the payment structure for unsecured debt were changed, which resulted in minimum payments that are about twice what they previously were. Shortly thereafter, the Federal Reserve began targeting higher short term rates (the discount rate) which results in contraction of the monetary base, and a diminution of the supply of loanable funds. If you were a politically connected banking insider, you probably knew all about these turns of events before they happened, and were able to profit immensely.

Despite my best intentions, it seems I forgot, anyways. My post on credit card scams omits this detail. I could backtrack and say that it wasn’t topical, since the bankruptcy code isn’t one of the scams (like trying to force people into negative-amortization debts) that they use, but it is relevant and I should’ve mentioned it.

I didn’t miss the first point, either, I just haven’t gotten there yet. I’m covering credit card scams one at a time. The ideas of ex nihilo currency has been mentioned in several of my gold-bugging posts in the past, the relationship between our current financial institutions, debt and no-interest contracts are forthcoming in the series’ conclusion.

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Hans Hoppe has practically made a career out of deconstructing the Hobbesian myth, the alleged “war of all against all” that most people envision as life without a government. His latest:

There is no way out of this predicament [the Hobbesian War] by means of agreements; for who would enforce these agreements? Whenever the situation appeared advantageous, one or both parties would break the agreement. Hence, people recognize that there is but one solution…the establishment, per agreement, of a state, i.e., a third, independent party as ultimate judge and enforcer.

Yet if this thesis is correct and agreements require an outside enforcer to make them binding, then a state-by-agreement can never come into existence.

Thanks to Stef at Democracy Sucks

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Regarding Heller (my opinion, here) and the presidential candidates’ statements in response thereto, Chris at The Liberty Papers concludes:

So either play the game by the rules, don’t play the game, or change the rules.

I have a couple questions, Chris:

1. What does that even mean?
2. What?

Don’t you see the problem inherent in this empty rhetoric?  You’ve presented three options from which to choose, when in-fact, only one of them is actually possible.  There’s no choice.  Not playing the game is simply not an option.  I don’t want to play the game, but I have to. I can’t change the rules so I play by them. Just because you chide me not to “play the game” doesn’t mean that it’s actually an option.  That’s the damn problem, Chris!

1. Debt Collection Practices & Impropriety
2. The Reverse Payment Prioritization Scam
3. The Balance Transfer Scam
4. The Penalty Rate Scam
5. Exploiting Ignorance: Money for Nothing

Under the terms of most (all?) credit card use agreements, the borrower accepts a default of Penalty Rate which goes in to effect in the event that borrower is late in remitting a single payment. The Penalty Rate is usually the maximum allowed by law, and often in excess of 24%. I have seen or heard of Penalty Rates as high as 29.99% but I suspect that in some jurisdictions they might be even higher.

It could be argued that there is justification for the Penalty Rate, as borrowers who are late or miss a payment are greater default risks. This very well may be true, but suffers from some variant of the post hoc, ergo propter hoc logical fallacy.

1. Borrower misses a payment
2. …
3. Borrower defaults

Did you see what happened there? They intentionally left out the interim step; the one where the borrower’s rate jumps from 9% to 25%, doubling or tripling the interest portion of the monthly payment!

This causes a negative feedback loop: If someone is diligently trying to pay down a credit card balance, paying $300 each month when the minimum payment was $150, the new, penalty minimum payment amount will be approximately $300. This effectively relegates the borrower to making interest-only payments (i.e., no amortization, whatsoever) for the duration which the Penalty Rate is in effect. This may be for a period of six months or longer. During this time, the borrower may continue to make payments in the amount which his or her budget permits, but is unable to reduce his balance in any meaningful manner.

The ability to repay or to pay down the balance is without a doubt negatively impacted by the imposition of a Penalty Rate.

I submit that the Penalty Rate, by itself might be sufficient cause for a large proportion of defaults. Before objecting, think on the margin: any borrower who was scraping by, is now unable to scrape by. These borrowers who would’ve been OK, had they tightened their belt, are now forced into default by the new, higher interest rate.  Theory dictates that the Penalty Rate is indisputably a prime contributing factor to default.

When analyzing data through extrapolated variables, there will always be an unusually strong correlation between the new variable, and the definitional components thereof. It is of paramount importance to avoid making value judgments or inferring causal relationships under such circumstances. There may well be a causal relation between a single missed payment and default, but the noise-to-signal ratio here is about a billion to one. Since the Penalty Rate has a 1:1 correlation with default (by definition, default always occurs after the imposition of the Penalty Rate) there is simply no way to know what the true default rate would be if the penalty were less onerous.

Under more proper loan provisions, there is usually a penalty for late payment, but it is almost never usurious (frequent readers of this blog will recognize that I rarely use this term, and then only carefully). Credit card companies seem to do everything they can to encourage default.

The Penalty Rate works in tandem with the Debt Collection Scam: interest and penalties pile up in order that the lender can claim a larger debt than would otherwise be due. This new debt bears no relationship whatsoever to any anticipated return on investment primarily because there was never any investment to begin with. The higher debt, now in default, is the starting point for any negotiations, arbitrations or legal action.  In essence, the creditor creates phantom debt which is treated by the courts and by corrupt arbitrators as valid. This is not about earning a fair return on borrowed money, it’s about exploiting people’s ignorance and subsidizing interest-free loans to people who don’t need them, none of which would be possible in a free market where debt couldn’t be created out of thin air.

1. Debt Collection Practices & Impropriety
2. The Reverse Payment Prioritization Scam
3. The Balance Transfer Scam
4. The Penalty Rate Scam
5. Exploiting Ignorance: Money for Nothing

Last time, I talked about the Reverse Payment Prioritization Scam, wherein the creditor applies payments to balances in the exact opposite order to which any rational person would apply them. The end result is that debtors generally are in debt for longer periods of time and pay far more in interest payments than they otherwise would.  A closely related, and perhaps more devious scam is one which I like to call the Balance Transfer Scam. The Balance Transfer Scam works like this:

There are a number of circumstances under which, if debtor is in reasonably good standing the creditor will generally offer  any number of incentives, including the option to transfer a balance from another card at a more attractive rate (plus a transfer fee of $50-150 depending on a number of factors).

These circumstances can be summed up: when debtor calls to cancel a card on which balance is outstanding, creditor will always offer a balance transfer as a first line of defense. If a card that has not been used in a while, but on which a balance remains, and is being steadily paid down, the creditor will send balance-transfer or cash advance checks to be used for any reason. These offers are generally accompanied by a teaser interest rate of 4.99% or something relatively low. They might even offer 0% on transfers for six months or a year.

Creditors do this because during that year, outstanding balances continue to accrue 15%, 19% or 23% interest! During this promotional period, all of the payments go towards paying down only that portion of indebtedness that isn’t accruing interest, when it is actually in the debtors best financial interest to apply payments in the opposite priority.

The balance transfer scam is attractive to debtors because of its nominally lower interest rate, and the appearance of consolidation: there is only one bill to pay each month instead of several. Along with transfer fees (which are generally a % of the balance to be transfered) which ensure that these loans are only nominally interest-free, the Balance Transfer Scam works in concert with the Reverse Payment Prioritization Scam.

The point of the Balance Transfer Scam is to turn less-profitable borrowers (i.e., those who pay all or most of their balances each month) into more profitable customers and more dependent borrowers. This scam is really attractive to creditors, because by design, the borrower becomes ever more indebted!