Juggling Dynamite

Nothing reduces future inheritance and spending ability like mortgaging to spend now.  A decade of low-interest rates has taken a compounding toll in the form of falling investment income for savers along with leaping shelter and education costs. This has prompted seniors to borrow against their home ‘ATM’ to live (via regular and reverse mortgages) and also to help their kids and grandkids buy into unaffordable property markets and an accompanying life of debt-servitude. See Seniors and their growing mortgages are wrecking the good-news-story on Canada getting its act together on debt:

TransUnion report also tells a worrying story about debt growth among seniors: The volume of new mortgages set up by what TransUnion calls the “silent/pre-war generation” (between the ages of 73 to 93) surged by 63 per cent on a year-over-year basis in the most recent quarterly data.

…“I’m telling you, there’s a lot of worried people,” [Terrio] said. “They’re taking the home equity they’ve built up over the years and now they’re turning it back into debt because they’re helping their adult children. A lot of it is home down payments.”

…While the number of new mortgages for seniors jumped 63 per cent in the first quarter on a year-over-year basis, mortgage volumes rose 18 per cent for boomers and fell roughly 20 per cent for young adults.

Thomas Stanley and William Panko’s illuminating book The Millionaire Next Door (1998) includes real-life intergenerational studies looking at when it tends to be beneficial to loan or advance funds to adult children, what the authors call “economic outpatient care.”  It turns out that helping children to buy homes they can barely afford can be giving them a life sentence of frustration and financial strain trying to “keep up” with neighborhood consumption patterns.  Loaning and borrowing or gifting to help one fund personal consumption is usually not financially constructive in the end.

A better idea in many cases is not to pile on the debt in order to help kids ‘buy high’ but rather to move to lower cost areas, or for the family to do things as a unit that helps them lower costs and increase cash savings for future down payment, education and retirement needs.  Sometimes this may be generations sharing one property for a time as many immigrants have traditionally done both in their countries of origin and once in North America.  Separate apartments in one home can be a highly efficient way to do this while still maintaining privacy and independence.   Other times renting while one builds savings is far smarter than buying with all the maintenance and related costs it brings on top of the mortgage.   The bottom line is that teaching and helping people to live with minimal debt, especially for personal consumption items, is one of the best gifts anyone can give.

Danielle was a guest on The Financial Survival Network with Kerry Lutz, talking about recent developments in the world economy and markets.  Here is a direct audio link.

Everywhere this month we are pummeled with finance-sponsored drivel and half-truths a decade on from the 2008 meltdown.  This morning as I was driving, it was retired Royal Bank CEO Gord Nixon’s turn to pontificate on CBC radio about how he managed to steer the bank safely through the ‘Lehman collapse’.  Conveniently of course, with no mention of the taxpayer funded-backstop, the Canadian banks tapped in the process.

An even greater insult to thinking minds everywhere, was JP Morgan CEO, Jamie Dimon’s public joust last week with President Trump, with Dimon bragging that “his wealth wasn’t a gift from daddy”.  Apparently Jamie believes the rest of us are too dumb to understand that he has become a billionaire over the last decade gorging on taxpayer-funded largess funneled to him and his cronies via politicians and central bankers.

Thankfully, not all of us are fast asleep.  Better Markets President and CEO, Dennis Kelleher, offers an antidote to revisionist financial historians in his must-read look-back today  Goldman Sachs failed 10 years ago today, to wit:

“As proved by an email from ten years ago (reproduced below), Goldman Sachs was ‘toast’ and would have gone bankrupt but for being bailed out by the United States government and taxpayers. Those bailouts saved the bank and the jobs, status and wealth of all the Goldman bankers. For example, the astronomical wealth of CEO Lloyd Blankfein, former President Gary Cohn, and all the other Goldman partners only exist today because they were bailed out. Just like the shareholders in bankrupt Lehman Brothers, their stock and options would have been worthless, including the recently reported $3 billion ‘Goldman partners’ haul on crisis-era options…

“While many are remembering the 10^th anniversary of the collapse of Lehman Brothers and the onset of the worse financial crash since 1929, there is too much spin, self-congratulation, and omission or denial of the actual facts. As we have detailed, the crash had many causes, but a big one was the reckless and illegal activities of Wall Street’s too-big-to-fail firms, which were nonetheless bailed out without any accountability. On this 10^th anniversary, it is important to remember that Goldman Sachs and the other too-big-to-fail financial firms only exist today due to the generosity and decisive role of the U.S. government and taxpayers in stopping the crisis and saving those Wall Street giants with trillions of dollars in bailouts. False narratives, forgetting or ignoring those facts and so many others may be comforting to those on Wall Street and their allies, but it blinds them to what is happening in the country and why.”

The facts remain that ‘Lehman’ was a symptom not the cause of the 2008 collapse. The cause of the global economy’s collapse was the decade of low rates, lax lending, speculative behaviors and increasingly reckless financial firms extracting quick profits at the expense of longer-term strength and viability. And because directing minds were not punished for their illicit acts and negligence, and indeed further enriched and promoted, rather than stripped of their spoils, these problems have grown bigger and more menacing for all of us since.