Even NPR Buys Into Banks' "Credit Score" Pitch

NPR’s Marketplace ran story a couple weeks ago about things to avoid charging on a credit card because banks or credit agencies might hold the charge against you if they don’t like the risk profile. I suspect this is not completely independent reporting. People involved in the banking industry actively promote “negative sell” ideas regarding their product. They want to sell loans. They say, “I don’t know if this product is for you unless our formula says it is.” You’re supposed to say, “Oh yes. The product is for me. I want to buy it!”

The banking industry has managed to get financial reporters to write articles about how worrying about your credit score is part of responsible personal finance. It is not. The credit score is based entirely on using their product (loans):

• Timely loan payments
• Outstanding loan balances
• Amount of time using loans
• Types of loans
• Number of loans opened/applied for recently.

Of course using their product makes them like you.

Net worth, income, and cash flow are not part of the formula, but they are way more important than whatever benefit you get from banks liking you as a customer.

I have amazingly heard of people in disputes who are more worried about the other party getting negative information on their credit report than they are worried about the other party suing them and taking their money. I certainly don’t want people giving me a bad reputation, but spreading lies via the credit report is far more innocuous than actually taking my money.

Banks have done an amazingly good job convincing people that to be responsible you should buy their product.

I have no axe to grind with banks or credit agencies. My report contains only accurate positive info, and as far as I know, their score for me would be decent even though I don't use loans. I am very satisfied with the local banks my wife and I use for personal and business banking. My complaint is with the industry as a whole.

House Health Care Plan Is Needlessly Broad and Costly

From the NYT: House Health Plan Outlines Higher Taxes on Rich

It sounds like a good thing that the government is proposing: a reasonable tax on the wealthy to provide healthcare for the poor. But is that what’s really going on? This tax is higher than it needs to be because part of the subsidy goes to the middle class. I suspect this is getting pushed through because the middle class has an emotional reaction to paying for healthcare. It’s a mistake for the government to treat that emotional paralysis by taking over that aspect of people’s lives.

The healthcare problem has two elements: the poor and the middle class. The poor can’t afford healthcare because not being able to pay for one’s expenses is the basic definition of poverty. Giving money to the poor, perhaps in the form of a healthcare subsidy, makes sense to me, esp if it is in some way geared toward helping people earn enough to get out of poverty. The House plan, by the way, doesn't even provide insurance for all the poor.

The middle-class healthcare problem is more subtle.

• Premiums paid by employers are deductible while premiums and healthcare expenses paid by individuals are not.
• Employees have to change plans within 18 months of changing jobs.
• Medical technology is getting better at predicting illness, which makes it harder to spread the risk of illness among a population.
• Some people get overwrought about the thought of buying healthcare services, even though they are emotionally capable of making other purchase. The media stoke their fears.

Creating a federal plan for the middle class, partially subsidized by the rich, causes multiple problems:

• It needlessly removes market forces from middle-class healthcare purchases.
• It makes the taxes on the richer more onerous. As marginal rates exceed around 50%, we start to see it affect people’s incentive to work and create value. Marginal rates are not that high yet, but this is a step in that direction.
• It gets the federal government involved in a big sector of the economy. It will be very difficult to extract the gov’t from this sector if we decide we want to in the future.

I’m really glad Obama is promoting healthcare reform. I just wish he could use a scalpel instead of a mallet.

Madison Should Maintain Community Development Authority Funding

The city of Madison should find a way to avoid cuts to its Section 8 housing program.

The program subsidizes poor families’ rent such that they pay 30% of their income toward rent. The Section 8 program pays the remaining rent up to a maximum. That maximum is being reduced. For a family of three, it’s going from $931 to $762.

Consider a family of three earning $20,000 per year, $1667 per month. The program aims for them to pay 30% of their income, $500, in rent, with program paying the rest up to a maximum of $931. If they were currently renting a $900 apartment, they will now have to come up with an extra $138 per month or move to a cheaper apartment.

$900 is not as much rent as it sounds. These families may be paying extra to live close to work and school to save on transportation costs. They may be struggling to keep their kids in a better neighborhood.

The federal government has many programs designed to keep people in their $250,000 houses they can’t afford. It’s a shame that they're not doing more for programs aimed at the poor. Madison should find a way to maintain funding for the program despite the recent decrease in anticipated federal funding.

Using the Web and Social Media to Promote Saving

On the most recent edition of the poorly-named Consumerism Commentary podcast, the show interviews a co-founder of a banking website called Smarty Pig. Smarty Pig is a website that helps people save up money for specific goals. Users can allow friends and family to track their progress toward the goal and even make contributions toward it. This could provide accountability for people who have trouble saving and provide a venue for relatives to provide monetary gifts toward important goals. Money contributed toward the goal goes to an FDIC-insured account based on funds Smarty Pig invests in CDs, so the rate of return is superior to a typical money market account.

Most people get no formal education in personal finance. All their knowledge comes from people selling financial products. They take on too much risk and therefore experience the slightest blip in the economy as a crisis. It’s nice to see a financial product that actually encourages good financial decisions. I have no experience with Smarty Pig apart from hearing a 10-minute interview, so I do not endorse the service. I personally wouldn’t be sanguine about sharing my family’s savings goals. I am happy, though, to see a financial business creatively promoting saving instead of using their creativity to get people into debt.

I would love to see the government get on this saving theme by creating tax-advantage accounts for various purposes like Emergency Fund, Saving for a Home, Saving for Transportation (a new bicycle in my case). We already have similar accounts for retirement, college savings, and healthcare.

Progressives off Track in Bemoaning Foreclosure

Somehow I got on the mailing list for Mom’s Rising. It’s a progressive newsletter focused on mothers’ issues. Today’s mailing was about foreclosure. Progressives are really on the wrong track with this issue. They show a person with a sympathetic-looking headshot but provide no details on why she can't pay her bills.

The unbelievable part of it is that OneWest — her bank — doesn’t even have to talk with my mom before selling her house right out from under her.

I wish they had said what they want the bank to talk about. Does Mom's Rising want them to call her and say, "So what did you do with all that money we gave you?" and then try to get her to give them a sob story?

Today, right now in fact, members of our partner organization, ACORN, are sitting-in at the offices of OneWest and the other three banks whose mortgage servicing companies won’t sign on to Obama’s Making Home Affordable plan.

I usually look up to people participating in a sit-in, but they're doing one to stand up for the right for people not to pay their bills? This position alienates everyone except for extremists who don’t believe in private property.

Foreclosure is a great thing for the consumer:

• The borrower usually is not responsible for the deficit balance if they owe more than the house is worth.
• The borrower doesn’t have to make payments during the foreclosure process.
• The foreclosure process takes several months, sometimes a year.
• In four year’s time the borrower will be eligible for another partially gov’t subsidized home loan, even though they didn’t pay their last home loan as agreed.
• Right now there are plenty of good deals on rentals because the real estate bubble led to excess supply.
  

What more do people want? This issue of how to handle people who don’t pay their mortgage humanely has been solved. Organizations like Moms Rising should focus on problems at that really exist. Complaining about foreclosure just furthers the erroneous image that liberals just want take wealth (in this case mortgage contracts) from productive people and give to the undeserving.

A Premier on Electromagnetic Interference (EMI)

The June 25, 2009 edition of Electronic Design magazine has a great four page primer on electromagnetic interference (EMI)- The Dark Force Of Evil In Electronics: Electromagnetic Interference.

The basics of EMI for non-engineers:
EMI is unwanted signals coming from (and occasionally getting into) electronic equipment. The most common type of EMI is noise from high-speed digital lines, i.e. lines that communicate a series of 1s and 0s. If the transition between 1s and 0s happen very fast and/or the wire carrying that signal is very long, the wire will radiate signals that can interfere with other electronic equipment. Signals normally travel down a wire at about 180ps (that’s 180 trillionths of a second) per inch. So if your wire is one inch long and a transition from 0 to 1 takes 1,000ps, you can treat the wire as a single element. If your wire is 10 inches long, however, one end of the wire can have completed its 1,000ps-long transition before the other end has seen even the beginning of this transition. A wire with a different signal on each side can act as an antenna transmitting unwanted signals. (This is just one possible cause of EMI.) A lot of electrical engineering is making sure high speed signals get from one place to another without being distorted or causing interference.

I like how the article begins with what sounds like engineers’ excuses when their product fails EMI testing:

Is there an electronic product or circuit that’s not susceptible to electromagnetic interference (EMI)? For that matter, are any devices EMI-free? Simply put, no.

Come on, nobody's perfect, hey?

On a more serious note, I like how it mentions that static discharges can cause EMI in a product (rather than the usual case of a product just emitting unwanted signals):

Don’t forget electrostatic discharge (ESD) as an interfering source. ESD, of course, is the momentary current flow that occurs when a high voltage between two points is dissipated. Lightning is the most powerful example, but any static discharge can produce EMI and damage unprotected circuits.

I experienced this the hard way last year on one of my projects.

A premier like the one in Electronic Design should be required reading for EE students.

Please Dismantle Employment Captive Healthcare

I would like to thank the health insurance industry for giving me an argument in favor of a government-run health plan.

From the AP:

The insurance industry Tuesday laid down a marker on health care, warning in stark terms that a proposed government insurance plan would dismantle the employer coverage Americans have relied on for a half century and overtake the system.

I am generally against a federal healthcare plan, but industry groups America's Health Insurance Plans and Blue Cross Blue Shield Association have pointed out one good thing about it: It would dismantle employment captive insurance.

See my earlier post about why employment captive insurance is so bad.

I don't want a federal program, but I have hopes that such a program would help the poor. The program’s availability to the middle class would be a fig leaf to distinguish the program from outright charity. Responsible middle class people would probably use it and then use their own money in cases where they want better service, just as the middle class uses Social Security's disability / life insurances and retirement benefits as a small supplement to products they buy in the market.

I suspect (but will never know) insurers would protest louder if we had a libertarian government making open plans to dismantle the employment captive system and encourage true competition at an individual level.