Monday, December 24, 2007

Manhattan Beach- Beach Cities: Christmas Eve Thoughts

If you've been following the financial news the last few days... amid all the Holiday hoopla... the financial pages have been running articles pointing the finger of blame about the real estate crisis, continuing credit liquidity issues, plans for government bailouts for some homeowners, and today the plight of credit card companies who are seeing some major delinquencies by customers.

Now as I've noted before...I'm not a certified financial planner or an economist from a prestigious east coast university. But I do know a thing or two about the Southern California South Bay-Beach Cities real estate market and life in general.

It seems to me that many of the developing financial problems stem from a view by the financial community that higher rates are smart business. Yes.. I understand all about risk pricing of money. As an economic theory it sounds great and makes perfect sense... the higher the risk the higher the cost of money. I think this is a great theory when dealing with large corporations and major players on the financial scene. However sometimes what plays out in the boardrooms doesn't seem to work very well in Joe and Jane's living room.

Common sense should tell you that bumping up the interest rate on a loan made to a marginal buyer and being surprised when they default is just dumb. The same can be said about the rising problems with credit cards. If someone is having trouble making the payments on a card with a 10% rate what would make you think they can make the payment on a card when the rate rises to 30%. Some policies just don't make any sense. One of my favorites is the one offered by furniture companies.. buy now.. no payments for 2 years. In two years the furniture is history and so are the payments.

I know that they bump up prices for those who can pay to make up the difference just as they do for health insurance premiums. The problem is that this financial policy really doesn't work. Look at Levitz Furniture (can Wickes be far behind) and other similar companies that market to marginal consumers.

So here's a novel solution.. don't make loans or hand out credit cards to those who can't afford them. Stop extending huge lines of credit to marginal consumers. What is so difficult about this concept?

The truth is I have no sympathy for any of these companies who made loans or extended credit to consumers they knew would have a difficult, if not impossible time making the payments. Need money.. just sign up for our easy no-qualify home equity line of credit. We have all received hundreds of pre-approved credit cards in the mail.. sign here for $XXXX. People in trouble will grab at any form of a life line and these card offers and offers of credit seem like a life preserver to those drowning in financial problems.

You may be surprised to know that most financial problems are due to the loss of income, divorce or death in the family; not frivolous spending. Sure it's not too bright on the part of those who grab at the offers; but if they had more financial smarts they probably would not be in so much trouble in the first place. That said it is also not my responsibility to pay higher fees because companies make bad decisions.

I may sound like Scrooge on Christmas Eve but it's time for the financial community to do what they claim consumers don't do..... take responsibility for their actions.

FYI: Scott Burns has an interesting column in the Daily Breeze today. It is definitely worth a read.


Anonymous said...

It's ok Kaye...I don't think you're being a scrooge. I've always said that our correcting market is going to bring to light how many people have been living beyond their means.

As we move into 2008, I say exercise frugal spending habits and save more. It's easier to spend money that it is to earn it.

Merry Christmas!

Kaye Thomas said...

I think we will definitely see people develop better financial habits over the next few years. I expect buyers to be far more careful about the terms of loans and to choose a lender far more wisely.