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BA 96 Personal Finance – Module 2Risk Management and Securing Assets3/2/09 The crisis
Risk vs. uncertainty
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Risk: probabilities can be assigned with confidence
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Uncertainty: no precise probabilities, flimsy foundation, sudden changesIncome insecurity: rise of uncertainty in American middle class (online)
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GDP grew but all the money went to the top 20% Job insecurityHealth insecurity
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25% (?) of GDP is spent on healthcare
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Rise of technology
people kept alive longer, more healthcare expensesRetirement insecurity
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No more pensions, now 401(k)… and everyone’s are dropping, crap.(paper is on bspace)–Compare this to another asset bubble, explain to another business person–Will have bubble-analysis system
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Investor excitement
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Financial boom
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Market euphoria
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Profit taking
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Panic–See JK Galbraith’s
Great Depression
–1879 was bigger than great depression – silver, railroads, etc–First one ever: dutch tulips– Japanese land boom ($1million/sq m!)
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Economy never returned because: banks cant mark assets to truevalue without going out of business (insolvent), so assets weren’tmarked down for 10 yrs
couldn’t loan money
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No recession, but flatlined for 17 yrs
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Export-driven economy + feudal economy
All little stores and big car exports
Couldn’t compete against Asian tigersMinsky’s stages
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Hedge
speculative
Ponzi
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People start borrowing because of easy liquidity
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Easy investments, good profits, so more people borrow to invest…
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“all capitalist economies get less stable as they go along” (profit
instability)Savings and loan crisis (1980s-90s)
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Banking and real estate, surprising
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90% of 585 bank failures were in OK and TX (but biggest was in CA)
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$800billion, nationalized banks, liquidated shareholders, sold back into ahealthy economy later
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Only cost $200billion once banks sold back
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(why housing prices? Why?)
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People say don’t invest in real estate – wtf, who says that…When the dot-com bubble blew, stock speculators were hurtCitibank and BofA are insolvent right now – assets aren’t covering liabilities
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Shit.
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Victim one: i-banks
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Industry is defunct (Lehman, Merrill, Morgan, Goldman, gone)
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People are even willing to buy American treasury bills! Even with norate of return! Wow, that’s bad.CDS (credit default swap) growth – not insuredBalance sheets get weaker and weaker, no insurance, no loans, economy doesn’tgrowIf you look at unemployment as unemployed + partially employed + given up, we’reat ~14% (GD hit a high of 25% with just the normal calculation of UE)US vehicle sales are in freefall, including foreign-made cars
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Honda was doing the best and they just fired their CEO
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GM loses $30billion (AIG lost $60billion
today
)
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Insolvent
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Auto-worker unemployment + supply chains + everyone else related to theindustry…
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Kept alive as a job program, not for the value of cars. Shit again.Retail sales are worseRestaurant sales down too
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Whole hospitality industry, actuallyBad analysis
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GSEs (Fannie and Freddie and collateralized debt obligations)
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They didn’t touch the
really
toxic stuff, tho
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Goldman, others followed their lead and squeezed them out
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Reaganomics – borrowing now, stealing from the future
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Over-stimulates the current economy
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Dot-com bubble led to people thinking housing was a safe investment… oops
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80% of mortgages done by not-banks!Interest-only loans
negatively
amortize
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People began to extract home equity up to the point where they couldn’t takeout any more
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Couldn’t make mortgage payments
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90% of money borrowed since 2000 is mortgages
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The kind of mortgage matters
10 vs 30 yrs, different interest rates, etc
Buying Cars (see textbook)
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What kind to buy?
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Logical: warranty, mileage, service
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Illogical: looks, sexy factor
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“buy a shitwagon”
Do not buy a new car or a late model because they depreciateSO fast
Cars don’t build equity
Diminishing returns: don’t buy too shitty a wagon
Toyotas and Hondas last forever, if you get the decent ones
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Mercedes sucks massively now
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Save your money for a home; cars are a waste of money
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Check out service costs, replacement costs, gas, taxes, insurance…
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Negotiating price
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Don’t start with sticker price, but buy the consumer report for yourlocation and desired car and they’ll give you
dealer
invoice price – youstart there
For American cars, do NOT pay >$500 over dealer invoice
For Priuses and stuff, it can be more
If they don’t cooperate, leave.
“always screw them one more time”
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Never involve the used car
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See “suckers” (movie)
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Better to buy at end of month, end of quarter, end of model year
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Stevens creek Toyota, walnut creek Toyota – best deals EVER
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“the internet makes a buyer’s market”
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If you’re thinking to lease, read terms carefully
3/9/09 guest lecture
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First lecture all about financial crisis; if you follow the news, things are stillgoing down. $2 trillion in sunk assets, likely stimulus package is notenough.
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We’re already at 10% unemployment
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We’re losing 600,000 jobs a month
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Starting to call this “the Great Recession”
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Now we’re talking about buying a house! Guest speaker: Ed
Some statistics/introduction:
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9 out of 10 millionaires were created by real estate investments
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Biggest investment in your lifetime is your house; makes a big differencein your future wealth
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FDR in 1933 – greatest fear we have is fear itself. And today we’re startingto see ripple effect.
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Reasons Ed believes this is one of the best times to invest in realestate:
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Interest rates are lowest ever
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But we haven’t bottomed out
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