The Great Trainwreck

I have been silent over the past few months as there has been so much transpiring. We have a new President, a change of power in Congress, a trillion dollar stimulus package, the most lost jobs in any 14 month period since 1939....

A friend of mine coined the current environment "The Great Trainwreck." He is using this term as the lead engine first derailed with the rest of the cars being pulled off the track by it, leading to what most refer to as the domino or trickle down effect.

In my mind there are two questions:
1. What started this?
2. What is the solution?

I am going to point a finger somewhere that no one else has. I am going to blame ACADEMICS, which I do consider myself one as I have studied all over the United States with numerous degrees and certifications but have only a decade of work experience.

ACADEMICS preach great information that sometimes is applied in a vacuum by practicioners. One in particular is the use of debt or leverage to acheive greater returns. I recently spoke to a large class of undergraduate students at a major university. The class was convinced to use student loans, car loans, home loans, to leverage their future income to get these items now. The ACADEMIC premise of the time value of money and that incomes rise over time so buy as much as you can now! This is the exact mentality that has gotten us into the Great Trainwreck. The use of leverage from a business perspective does have solid footing however its spill over application to personal finance is completely flawed. If a corporation implements a leverage strategy to increase ROE, the what-ifs can be addressed through modeling the risks and potential ooutcomes. In personal finance, no one addresses the fact that unemployment happens, the economy can have a severe recession, wages can decrease, and home values do go down. In business, they can divest themselves of problems areas, sell off divisions to raise money, issue new debt or even new equity to raise capital. Individuals don't have this ability and in poor economic times, cannot replace the cash inflow stream.

I would also like to address what I consider the biggest scam in the history of the United States. The argument of carrying a mortgage for the interest rate deduction. You will hear people all the time say, "why should I pay off my mortgage and lose the tax deduction?" I will tell you why, lets do some simple math. If you pay 5% in interest and are in the 20% tax bracket, then you still pay 80% of the interest or 4%. The argument is that over the long term, they can put the cash to work in the captial markets and earn a positive margin. That hasn't worked in this millenium yet.

In Canada, there is no mortgage deduction for tax purposes. The average canadian pays off their home in 7 years. Prior to the mortgage deduction, only 2% of homeowners had a mortgage. Post mortgage deduction, only 2% do not have a mortgage.

We need cleaner balance sheets, not in corporate america but on the balance sheets of individuals. We must learn to be more prudent with our earnings, pay down debt, recession proof your household, and when accomplished, the US will be recession proof.

Thanks for reading the long post and I look forward to your replies.