plural: (god)
[personal profile] plural
I'm the first to admit that most of what I post here
while entertaining, amusing and perhaps even insightful
isn't really all the important to your daily lives

but, [ profile] ernunnos posted this video and you really need to watch it.

It is a lecture by Harvard Law Professor Elizabeth Warren in which she describes what happened to middle class incomes over the last thirty years, and where we're going next.

Sure it is an hour long.
Sure it is a lecture at berkley.
Seriously, suck it up because it will dramatically change your perspective.

No excuses, tivo dollhouse or whatever TV show you were about to watch
and watch this instead.

Date: 2009-04-25 05:40 am (UTC)
From: [identity profile]
I liked the 'more children in families going through bankruptcy than divorce' line.

Date: 2009-04-25 12:09 pm (UTC)
From: [identity profile]

Date: 2009-04-25 11:43 pm (UTC)
From: [identity profile]
Dude, I'm way too busy delivering pizzas for extra cash to pay for those extra trips to the mall to watch something like this. Besides, it isn't as though anyone I KNOW is going to be watching it as well, so that I can impress them by having said I've watched it. Now if I'd heard about it on FoxNews, that'd be something else entirely...

Date: 2009-04-26 01:24 am (UTC)
From: [identity profile]
I'll never forget what you said when you toured our new house back in '05 (note the lack of quotes):

Not many people would have the courage to take something like this on, man...

Recall too, the particulars:

1) We were moving there for the schools.
2) We needed two incomes to afford it.

To our credit, however we made sure there was 1) room to expand the house instead of swapping it for another, 2) it was centrally located to any possible jobs for H, 3) a commitment to NOT move, no matter what.

Note what was left out:

1) Why do people need an extra 6 years for a 'middle class' existence? Where are they going to work? There aren't any small companies around anymore that can compete with capital resources, scales... they've GOT to be a very specialized cog in a very large machine to make it now.

Why people without kids are morons:

1) I've often heard, 'why should I support tax increases for school? I'm choosing to NOT have kids, I'm choosing 'properly' to save for myself... They seem to forget, however that any investments they make are going to be worthless if there aren't educated people to buy the crap from the companies they've invested in... it's completely symbiotic.

Nice bit, bubba... but nothing I haven't seen or thought about before.

Date: 2009-04-27 06:35 am (UTC)
From: [identity profile]
Indeed, although I was confident that if anyone could make it work it would be yall.

I think the important point is not the extra 6 years but rather that the entirety of that burden has been shifted to the families. Where in the 70s society carried the cost of preparing you for the workforce, now most people have to borrow thousands of dollars.

So a new family starting out, not only has about 100 grand worth of student loans to pay off, but the obscene costs of daycare/preschool (which I'll credit you for making me aware of) before they can even start saving for their child(ren)'s college education.

It pretty much assures that except for the most fortunate, the next generation will also have to take significant debt, and the situation will propigate itself.

The idea of people essentially being born into debt and most likely never been able to get out of debt, seems a whole lot like slavery to me.

Of course, you know how debt averse I am, so my perspective on the issue may be quite skewed.

Date: 2009-04-27 09:27 am (UTC)
From: [identity profile]
It pretty much assures that except for the most fortunate, the next generation will also have to take significant debt, and the situation will propigate itself.

I think that's just about right. If you consider H and I's background it's decidedly upper middleclass, granted we took about 10 years off from actively pursuing money, but we also have no debt for our educations... We make pretty good money today, but H is only making slightly less than 1/2 time money, so we've got a leg up in that regard toward saving money as we are slightly above water with her working 1/2 time. We have no debt other than auto/home loans. We live more frugally than anyone we know, and if we are lucky our boys may be able to 1) get through college with very little debt, 2) not have to support us in our dotage... hardly keeping our kids in our station... they are clearly slipping to a decidedly 'middle' class existence (although I tend to think of it more as a subset titled the American intelligentsia).

Two related observations I've made recently about others:

1) What is the push to having us refinance our house to a lower interest rate? We aren't going to be able to lower it more than 3/4 point, but we'll have to extend the term of the loan another 5 years making it impossible to pay the SOB off before we're 65... Where's the sense in that?
2) I was talking to a mother who recently went back to work to finish the renovations on the new kitchen they'd been trying to finish for years. She was lamenting that the school system she and our boys attend don't really cater to the extremely gifted... I told her that was our experience, but they do try (I pointed out letting O teach first graders, etc.) I then told her about our decision to augment the public school model with that online curriculum from 'the center for talented youth.' as it works out to about $200/mo... if it keeps O happy and occupied it may be a resonable alternative to 20K/yr private schools. She said they'd thought about that, had their kid tested, and he'd gotten accepted, but they ultimately BALKED AT THE COST... I don't think I'll ever get over that. You've got a new navigator in the driveway, you go back to work to get money to pay for a new kitchen on your $600K house, but you BALK at 200/mo for extended coursework for your kid?!

Date: 2009-04-27 11:49 am (UTC)
From: [identity profile]
Indeed, of course, they'll be in good company as I suspect the next 5-10 years are going to be pretty tough ones for a lot of people.

Well, it entirely depends on how much you can save per month on your payments and whether you would be disciplined enough to continue paying that amount towards your mortgage.

Assuming the cost of refinancing to the lower rate wasn't prohibitive, even a relatively minor monthly savings of say $200 could add up substantially if you continued to pay the old payment amount.

Say you refinance your mortgage and with the saving are able to make 13 payments a year instead of 12. Just that extra payment alone will reduce the term of your mortgage from 30 years to 17 years, which means you'd have your house paid off 8 years earlier than you would if you continued on the current mortgage. Not to mention it would save you tens of thousands of dollars in interest.

Without knowing the specifics of your mortgage I can't tell you exactly how much but there are lovely calculators online where you can enter all your details and it will add it up for you.

2) People are idiots, and would rather brag that their kid is too smart for the school / complain that the school doesnt do enough for their kid than actually make the choice (and pay the cost of that choice) to do something about it. I still can't think of the mother who refused us permission to transport her son in an ambulance to the hospital even though she was 45 minutes away because it costs 500 bucks.

Date: 2009-04-27 12:30 pm (UTC)
From: [identity profile]
DOH! Doing a refi and applying the money to principle... I'm ashamed to say that hadn't occured to me until you mentioned it, actually. We are currently overpaying our motgage to just shy of an extra payment a year. I'd noticed that the principle was going down, but honestly hadn't thought about doing the calculations to see how much sooner it'd actually be paid off. It's funny too that it wouldn't have occured to me because the mortgage company reassess every year and lowers our payment accordingly to ensure it'll take a total of 30 years to pay it off...

Are you sure it whacks 13 years off the mortgage? That seems a bit steep...

Date: 2009-04-27 03:57 pm (UTC)
From: [identity profile]
No need to be ashamed, I am jewish after all, the laws of compound interest are encoded into our DNA *grin*

Yup I'm sure.

I remember it quite well because it was such a huge difference both in terms of time and money not paid in interest.

It was one of those "Holy shit, really" moments.

Of course, if your company adjusts your payment down, then you would have to keep making 13 of your previous payment amounts to adhere to the 17 year schedule. Making 13 of your new payment amount will reduce the overall cost but each time they adjust it will reduce the amount you save.

You can find a nice javascript calculator that will let you play with numerous options for accelerated loan repayment here. I remodelled the original terms when I ran the question before and all in all, it cut 13 years and 120 grand from the schedule term of the loan in exchange (in my case) for an additional $250 per month.

Obviously your interest rate and loan amount will (I had a high interest rate and a low loan amount which increased my benefit significantly) adjust this somewhat. I ran for comparison a 30 year loan at 6.5% for $375,000 with an additional monthly principal payment of $150, and it shaved almost 5 years and over 88 grand off the term of the loan.

Pretty tasty stuff any way you slice it.

Date: 2009-04-27 04:52 pm (UTC)
From: [identity profile]
the other problem with previous analyses was not taking into acount the decreased principle at the refi... In my case dropping from a 5.25% to 4.75% rate whacks almost 30 months off the schedule for just shy of 53K savings...

Nicely done, bubba... nicely done.

Date: 2009-04-27 05:30 pm (UTC)
From: [identity profile]
Glad I could help, you can send my 10% commission check to the usual address ;p

Date: 2009-04-27 09:14 pm (UTC)
From: [identity profile]
Oh btw.

Whats your life looking like the latter half of May?

I'm thinking I might take a road trip out your way, spend a week or so visiting and pick up the boxes I have in your basement?

Date: 2009-04-27 10:05 pm (UTC)
From: [identity profile]
As of now, it's pretty clear... we're off to NC starting 6/12 though.

Date: 2009-04-28 04:46 am (UTC)
From: [identity profile]
I'm thinking something like May 23rd through 29th +/- 2 days on either end as I haven't decided if I'm going to fly out or do a road trip.

Date: 2009-04-28 12:16 pm (UTC)
From: [identity profile]
Sounds like a plan, brother...

Those boxes are mostly exactly where you left them... I've moved a couple around and noticed that they are starting to get a little aged. It has been like three years, no?

Date: 2009-04-28 11:51 pm (UTC)
From: [identity profile]

yup three years in august

I may have to repack them.

sounds good then, I'll update you as I get things fixed into place.

Date: 2009-04-27 02:36 pm (UTC)
From: [identity profile]

Using wikipedia, and verifying the following using Excel, I get:




So, if you have f=1, you'll get n=N

If you use f=13/12 (i.e. making 13 payments of size 'A' for each payment of size f*A... the number you suggested) on a 30 year mortgage (N=360), and APR=0.05 (i=.004167) you'll get:

n=345.1943, or 28.76619 years.

NOTE: this payoff time is dependent not only on the factor, but the original number of periods, and the interest rate. IF the apr goes up (to say 15%), n=353.6322... If the apr stays at say 0.05% and N drops to say 180 (15 year mortgage), n=170.0494

It's funny, because I've always heard something like what you'd suggested, but it was always, like 'an extra payment will take five years off... or if you double it, you'll halve length of the mortgage (in point of fact, doubling the payment on a 30 year fixed at 5%APR lowers the time to payoff to 241.8751... not even 10 years!) it seemed reasonable, but your number seemed way off and prompted me to actually work it out... I'm sort of stunned actually how little it actually matters...

As always, check my work brother as I'm actually a slack-jawed moron.

Date: 2009-04-27 03:31 pm (UTC)
From: [identity profile]
Definately a slack-jawed moron...

I just noticed the 'nper' function in excel... If I'm applying it correctly, 13/12 a 'normal' payment grinds out to 310.7826 (about 25.8 years)... saving you just over four years... I'm not sure why my formula isn't correct, and I've tragically lost interest as it's way closer to my conventional wisdom would say...

Again, there's no guarantee I'm doing any of this right as I've just proven, I'm a slack-jawed moron.

Date: 2009-04-27 04:05 pm (UTC)
From: [identity profile]
Nope, you are doing it correctly, I just didn't give you the correct set of parameters as it had been three years since I did the calculations myself.

Once I had the calculator in front of me and started actually modelling the terms of my original loan, I realized that I was overpaying by more than just an extra payment and that the contrast between my interest rate (high) and loan amount (low) put my particular situation into the outlier realm, particularly when you add in how much I was overpaying.

Date: 2009-04-27 04:59 pm (UTC)
From: [identity profile]
One could argue though that if you were able to earn better than your interest rate over the course of the loan, you'd be better off applying that stream of payments to the higher yield, as at the end of the day, you'd have more money in the coffers. The only thing is, it's easier to guarantee making a larger payment than it is you'll be able to guarantee a high rate of return...

Tragically in my case, I'm not convinced I could do better than mortgage interest.

Do you remember our former realtor/neighbor? The one who was trying to convince me to go interest only on the mortgage, then faithfully put principle payments into a moneyfund, and make the interest payments on the loan?

She hasn't sold a house in two years, and really, really coming to regret her decision to do so.

Date: 2009-04-27 08:48 pm (UTC)
From: [identity profile]
Actually, its pretty interesting.

Assume you have a 30 year fixed rate mortgage with a inital balance of $100,000.

From that point we examine two possible scenarios:

1) you deposit $2400 into an investment account once per year earning X% return for 30 years

2) You have a mortgage at rate Y% and you pay down your mortgage by an extra $200 per month and when your mortgage is paid off, you invest the same amount you have been paying for your mortgage in an investment account which earns the same X% for the remainder of the 30 year period.

If X = Y and Y = 5% then Scenario 2 nets a profit of $2,174.06

However, you only have to increase X to 5.13% before the value of Scenario 1 exceeds Scenario 2 (if only by $162.67).

Of course, then the question becomes is it worth the risk of the investment?

As long as you intended to stay living in the house, there is 0 risk in paying down the mortgage early and significantly less aggregate risk (because you are risking a smaller portion of your overall earnings) in the investments once the mortgage is paid off as you've already taken profits of just over 45k in the form of interest savings.

So the question becomes how much greater does X have to be than Y before it makes sense to take the additional risk.

Well, Lets see what values we get for P (profit) by representing the difference between X & Y with the variable Z (stated as X = Y+Z):

As I've already shown:

if Z = 0% then P = -$2,174.06
if Z = 0.13% then P =$162.67

Not exactly a stellar improvement over 30 years

if Z =0.5% then P = $7,316.82

Better but again only an annual difference of $243.89

if Z = 1.0% then P = $18,269.11 or $608.97 per year

If Z = 1.5% then P = $30,867.38 or $1,028.91 per year

Ok so at Z = 1.5% we are atleast at a sizable chunk of change but still questionable if it compensates for the risk.

if Z = 2% then P = $45,317.67 or $1,510.59 per year
if Z = 3% then P = $80,722.25 or $2,690.74 per year

At this point we're definitely in the territory of it being worthwhile, however we also have to recognize that as we make Z larger, the risk involved in the investments goes upsignificantly and becomes more difficult to obtain.

Given that Z = 3% is equal to a rate of return of 8%, that is pretty much pressing your luck for the risk adverse investments. To reliably earn rate of 8% or higher you are going to have to include some investment vehicles with significantly higher volitilaty.

Of course, getting an 8% return on a year isn't hard, nor is getting it for a few years in a row, but that is an entirely different matter than doing it for 30 years in a row.

I'd be hard pressed to think that you really could reliably outperform the value obtain through an accelerated payoff of your mortgage through conventional investment portfolios.

If you had your own business, I'd say you'd have a fair chance of significantly outperforming Y by investing that money into your business (assuming you are a competant business person) but then again, given the risk inherent in small businesses, I would think you would be better served by offsetting or dampening that risk by paying off your mortgage.

Date: 2009-04-27 08:56 pm (UTC)
From: [identity profile]
I'm also of a mind that it isn't entirely about profit... you need to have fallback positions of security. Since you live in your house it should be the asset of last resort, and as such you shouldn't leverage it unless you absolutely have to (i.e. most people when they purchase it).

It's a shame about Anne, but what are you going to do? I tried to warn her... she gave me a knowing look of someone who'd drank deeply from the kool-aid, and know amount of her cajoling would ever enable me to 'get it.' Shame on me, I guess...

Date: 2009-04-27 09:08 pm (UTC)
From: [identity profile]

The most valuable thing you can buy with money is the security of knowing someone can't take your house from you or your ability to feed yourself.

If you can do those two things, all of life's other problems are manageable.

Yeah, I hate to see nice people suffer (my vague recollections of her was that she was decent people) but what can you do, everyone thinks they can outsmart the system then all they see is gold and you'll never convince them otherwise.

Of course, her situation kind of reminds me of that century 21 ad from a couple of years ago.

"Honey, it will be ok, Suzanne researched this"

I have to wonder how many people took advice like Anne and other agents were giving and are now wondering how they got gravel in their vaseline.

Date: 2009-04-27 09:03 pm (UTC)
From: [identity profile]
Do you remember our former realtor/neighbor?

I do although it hadnt crossed my mind till you brought her up.

Yeah, she has to be hurting something fierce right now.

Its funny, how when it comes down to it, getting fancy with your money is always bites you in the ass.

When I went to buy Bettie, I had the cash on hand and was going to pay cash for her. My broker at the time convinced me to take out a motorcycle loan at 5.5% through my credit union and leave the money in the market.

Yeah well, 6 months later the market tanked and the money I should have spent on the Duc was lost about 25% of its value and I had a loan to pay.

Of course, I was at MSFT and making bank at the time so I didn't worry about it and by the time I liquidated my US stock positions in Dec 01, my portfolio has recovered so I was able to pay off the loan early and get out from under a stupid decision relatively cheap.

Now days, I don't care what the upside is, I'd rather know that my assets are protected from involuntary alienation than make a few extra bucks.

As I said at the end of my previous comment, I have enough risk in my professional/business life, I don't need to augment it with debt or financial risk in my personal life.

Date: 2009-04-29 03:28 pm (UTC)
From: [identity profile]
This is kinda simplistic.

Both here and below you can improve the models by including the tax implications (at least for US taxpayers, which I presume you are). Tax effects don't affect the overall feel of the space, but they do change the details, and particularly where the break-even point is in practice.

To summarize, for most US taxpayers:
* interest paid on a home mortgage is tax deductible
* investment income is taxed and/or illiquid (e.g., in an IRA)

Additionally, you should consider buying equity in the home as buying insurance against other financial woes (as it can be tapped via home equity loans), and the risks involved in failing to diversify investments outside of home equity (as the recent fail in home prices demonstrates).

Date: 2009-04-27 02:46 pm (UTC)
From: [identity profile]
dinking around a bit more to see some idea of the parameters it'd take for such a dramatic drop, it's sort of clear the BIGGEST factor is the interest rate. IF you seriously drop the rate, THEN you get a big bang for the buck.

Consider doubling your payment on a 30yr 2% mortgage, you'll get n=206.58 (about 17.215 years)

Date: 2009-04-27 04:02 pm (UTC)
From: [identity profile]
Yeah, because of my aversion to borrowing money (and the subsequent lack of credit that resulted) my initial rate on my mortgage was a steep 8.5%, on top of that my loan amount was only $175,000 so by paying an extra $250 per month I was really whacking it down.

Date: 2009-04-27 09:52 am (UTC)
From: [identity profile]
To be fair about the decline though...

In the years running up to the depression, America had extraordinary growth because they were able to claim through labor extraordinary resources. The labor came from a steady flow from Europe at relatively low cost. This accounted for a significant amount of upward mobility before WWII.

The depression hit, for reasons not dissimilar to that of today: Asset bubbles based on cheap credit. This caused a collapse in demand, which lead to an inflation of supply, putting more people out of work, rinse, lather, repeat.

The point of Keynes as I understand it was that government spending attempts to stall the 'putting more people out of work' phase... this will sustain the oversupply in the economy until demand rises to meet it... The hope was that as more people went back to work, there'd be a rise in demand and all would be good.

If this interpretation is correct, I suspect that it's application today may be misguided. Why? WWII left the US as the only major industrial power standing. We managed to retool the world with very little competition. I suspect THIS, combined with our overspending in educating the masses with the GI bill, etc. causing remarkable innovation* lead to to the generational increases in net worth, not some more adequately tuned equilibrium in the labor markets that she suggests**.

* I recently sat in on a panel that included the senior economics editor from Business Week who put nearly all the GDP gains of the 80s, 90s at the feet of R&D... since then R&D spending has collapsed, and with it GDP gains.

** This is her point isn't it? She's postulating a labor version of 'the paradox of thrift.' (TPoT: if everyone started saving more, demand would go down, and throw people out of work) In this case, she's suggesting that as the cultural shift lead to more people in the workplace, the price they made per person went down... but people weren't paying attention and augmented this with debt. Seems to me the only way to fix it is by 'resetting' the labor markets (i.e. have a wicked recession, throw a shitload of people out of work and start over... a global pandemic that wipes out 2% of the population without regard to class could work nicely too).

Date: 2009-04-27 12:59 am (UTC)
From: [identity profile]
Ah, Professor Warren. She's smart and I've seen her talk.

Her observations tend to be good - her solutions and implications, less so.

Date: 2009-04-27 01:05 am (UTC)
From: [identity profile]
but watching this. I only heard on the financial crisis.

Date: 2009-04-27 06:28 am (UTC)
From: [identity profile]
I think that is something that one could say we are all rather guilty of.

It is much easier to make observations than pose solutions.

Indeed, in this she seems mostly to be presenting interesting observations rather than solutions.

I'd be interested to hear some of her proposals, as I've found that when smart people propose even poor solutions, they are usually interesting to examine anyway


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