In September 2009 I wrote a post about learning the roots of the 2008 Financial Crisis. It really gets to the crux of why I was compelled to go on somewhat of an economic “expedition” to find out what went wrong with the U.S. economic system in 2008. Prior to the crisis there I wasn’t aware of any body of economic work that intelligently outlined the causes (not just the symptoms) of the financial crisis than the Austrian School of Economics. As I’ve said in earlier posts, I truly believe that the Austrian Business Cycle Theory (ABCT) is by far one of the most complete descriptions of the “science”, if you will, of economic booms and busts. In addition to the ABCT, I believe that the Austrians have a way of interweaving a healthy amount of skepticism when it relates to the government intervening in the broader economy.

Unfortunately many other economic disciplines make wild assumptions, often very overly optimistic assumptions about the value of government intervention. At the same time, I have my own skepticism on the benefits of a 100% Libertarian approach to our social and political problems, but they clearly have the right pulse on many of the causes of how financial markets and economic incentives can be distorted by “well intentioned” governments. Private corporations don’t get off the hook, but in the context of the financial crisis, they worked in tandem with the government to completely destroy the economy.

I want to make a couple of points:

1. Be an economic policy skeptic. All policy isn’t created equal. As a matter of fact, many of the policy “prescriptions” by the government were completely backward and financially destructive and/or these policies were instituted to benefit a few while impoverishing many.
2. Read some of the suggested resources below. As a matter fact, read as much economic policy as you can. Many times you’ll get to the “real” intentions behind a lot of these policies.
3. Your Congress is bought (Thank you Dylan Ratigan from MSNBC). Please watch the video below and make sure you listen to every single word. If it’s not clear after you watch this video that voting for these cronies is a waste of time, then just off yourself. Okay..that was a joke..don’t off yourself but really understand that depending on our “do nothing” Congress is a waste of time.
4. The only option left is civil disobedience. What I like to call “soft” anarchy. Be an active participant in the economy. Vote with your pocket. Our government was not always enslaved to corporate interests. This can be undone, but it’s going to take a lot more than marching, waving hands, and holding creatively snark protest signs in different cities. There’s trillions of dollars at stake and if a high level of creative destruction doesn’t take place by the people, then we are playing a very dangerous, albeit participatory charade of musical “armchair revolutionary” chairs. Instead of sitting at home or in a cafe we are sitting in the streets.

Books

• Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America by Matt Taibbi
• Greedy Bastards: How We Can Stop Corporate Communists, Banksters, and Other Vampires from Sucking America Dry by Dylan Ratigan
• Economics in One Lesson by Henry Hazlitt
• Road to Serfdom by F.A. Hayek
• The Return of Depression Economics and the Crisis of 2008 by Paul Krugman
• America’s Great Depression by Murray N. Rothbard
• Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas E. Woods Jr. and Ron Paul

(AP Photo/Julie Jacobson)

At the root of every social movement is the will to change the present situation for something better. At the root of the Occupy Wall Street protest, which has now moved to other cities around the country, the intention of this movement is to unhook the almost parasitical tentacles of Wall Street from government policy (Washington). More on this here

I don’t believe ANY significant changes will happen via government policy or Washington’s intervention. Washington is an entity that is in the last stages of terminal “political” cancer. At the end of the day, this has to result in the banking firms that were responsible for this crisis to be reprimanded for their corporate malfeasance. We should reward (with our business) those financial institutions that are fiscally responsible, and move our money out of those financial institutions that contributed to the financial crisis.

I’m not convinced that the TBTF banks really understand what they did, nor does our government really care to prosecute these banks who irresponsibly unhinged the global economy for their narrow benefit.

So what we truly need to occupy, is our apathy. It’s our apathy and reluctance to being properly engaged in our political process that has contributed to Wall Street usurping power from the laymen and laywomen. In short, we kept our eye off the ball for too long. This corporate takeover has been happening for decades. Some would say it’s been happening since the inception of the Federal Reserve Bank. Regardless of when you think international banks started unsettling our political process, we are clearly at a tipping point where banks have complete control over our political process.

My suggestion is we engage in a bit of creative destruction to bring the balance of power back into the hands of where it belongs. the Proletariat and many of the hard working people of America (and around the world) who watched their jobs, wealth, financial security and personal livelihood go up in flames by the Wall Street, Federal Reserve Bank, Government-sponsored enterprise (GSE) doomsday machine.

We should start with the following approach:

1. Remove all your assets and loans (checking, savings, IRA, Mutual funds, Brokerage accounts, credit cards, car loans, mortgages, etc) from all banks that were given a bailout from the government.
2. Take all those assets/loans and transfer them to a credit union or firm that was not given a bailout.
3. Everyone who did the first 2 steps should draft a personal letter using their own words and explain to the banks/investment firms (who no longer have your business) why you removed all your money. In addition to that, explain why you moved your assets to the other bank/investment firm.

It’s time to transform our thoughts into action. Show these banks and our “absentee landlord” government that they cannot push our society to the edge of financial oblivion, while profiting off that same financial destruction.

A bank is a place that will lend you money if you can prove that you don’t need it. – Bob Hope

Related Links

This post was inspired by Langton Hughes’s A Dream Deferred.

Rather than go through the typical romanticization of our founders on July 4th while gushing over the 1st Amendment like a first born son, I’m going to write about some of the pressing issues of an America that has broken it’s promise with it’s citizens. Some contemporary patriots might scoff at me for suggesting such a thing, but my audience are for those who have been left behind, and not those how have fortunately benefited from the American fruits of liberty. Contrary to popular belief, everyone has not reached the promise land. Let me be careful with that last line. I’m not suggesting we start helicoptering pallets of money down to the masses. I’m suggesting that upward mobility is becoming more elusive and contrary to popular belief America does not have more mobility than other nations. In fact it has one of the lowest.

Some might say I’m being too hard on America and I should tone the “anti-patriotic” language down. When your country is at Defcon 1 in regards to social and economic issues, you have to ring the alarm to let everyone know that that we have a 10 alarm fire. Why should I save “patriotic” face when we are not living up to what this country has promised since the ratification of the Constitution? I see America as a country that is slowly losing it’s way. We hear a lot of lofty speeches from politicians, but when the citizens are asked to make hard choices we fall back to our ideological political camps.

Below you’ll find a video that is extremely telling in regards to the current economic shift that is happening globally. James Wolfensohn, former president of The World Bank and CEO of Wolfensohn and Co. does an eye-opening presentation for Stanford Graduate School of Business students on the coming global economic shift. In short, America and some of it’s Western compatriots are running out of time. It has debt to it’s eyeballs and waning political leverage on the global stage. It has financial obligations (Healthcare, Social Security, etc) that’s depressing it’s ability to leverage it’s internal resources. China, India, Africa and many other GCC countries are gobbling up global GDP faster than the cookie monster disintegrates cookies. If that wasn’t bad enough, we have a populace that does not have the 21st century education and skills needed to complete on a global scale.

Without further ado I give you James Wolfensohn, who asserts that in the next 40 years, a global power shift will see today’s leading economic countries drop from having 80% of the world’s income to 35%.

• Documentary: Citizen U.S.A.: A 50 State Road Trip
• Half of Americans say that they definitely or probably couldn’t come up with $2,000 in 30 days
• Van Jones Launches Movement To Rebuild The American Dream
• Think Again: American Decline by Gideon Rachman
• Busts Keep Getting Bigger and Bigger. Why? by Paul Krugman and Robin Wells

I’ve spent the last couple weeks cruising through the documentary Collapse on my IPhone. The documentary is on Michael Ruppert, a police officer turned independent reporter who predicted the current financial crisis in his self-published newsletter, From the Wilderness.

There is some pretty scary stuff in Collapse. Mr. Ruppert goes way beyond just fractional reserve banking, fiat currency and Federal Reserve monetary policy, but spends a substantial amount of time on the potential societal impacts for the human population because there are limited resources on planet earth.

This documentary serves more of reality check than another boilerplate conspiracy theory piece. As Mr. Ruppert so eloquently stated:

Of course I’ve been called a conspiracy theorist but I don’t deal in conspiracy theory, I deal with conspiracy fact

The audio above is by far some of the truest and honest reality check I’ve heard since Alan Moore’s Culture of Steam quote regarding the doubling of information.

Another other choice quote from the documentary so you know what we are dealing with:

If your in a camp with a bunch of campers, and a bear attacks, you don’t have to be faster than the bear. You only have to be faster than the slowest camper. – Michael C. Ruppert

Let me be frank, understanding economics (at least U.B.E.P Understanding the Big Economic Picture) takes a lot of reading, patience and a hellava lot of googling archaic economic vocabulary that on the surface seems to make absolutely no sense. However, once you are able to get past the mysterious language of economics and understand the context of this vocabulary U.B.E.P becomes more concrete and eventually you’ll get the “Ahah” moment.

So why am I so relentless when it comes to economic stuff? Well for starters, the economic policies of government have very deep impacts on the amount of money we take home. From taxes, to interest rates, money in circulation, to how much our government spends on certain mandates and a slew of other things that would probably give me carpal tunnel syndrome in my fingers if I attempted to write out all the thousands of circumstances.

Below are 3 books which I believe are good starters or as I like to say “launch pads” into more sophisticated economic fields of thought. I believe there are several critical areas that each of these books cover. One is macro-economics (understanding how the sum decisions from individuals, firms, and governments impact trends, incentives and movements in the broader economic market), then personal economics (how your behavior fits into the larger scheme of the broader economic market), and how maximizing your personal utility is by far one of the most productive acts you can do to make your skills scarce, hence increasing your value in the broader economic market. These 3 books are as simple as it gets. No fancy language, no crazy complex charts, and lots of objectivity to give us an untarnished and balanced perspective needed to tackle many economic issues that challenge us on a day-to-day basis.

Naked Economics: Undressing the Dismal Science by Charles Wheelan

What is there not to like about this book? So simple and concise minus the ideological hyperbole of free markets vs government. Naked Economics strips away all the fancy rhetoric and explains economics in a language that just about anyone can understand. Don’t be discouraged if you bump into something that sounds unfamiliar. A simple “googling” of the particular word or phrase will get you back on track and it’s extremely rare that you’ll run into this issue. The author wrote this book because he was tired of all the “ivory tower” economist explaining economics in such a drab and complex way. If these mainstream economist are the only ones who understand each other and not the general public, what is the point? This book will clear the fog of economic misunderstandings, not to mention it’s pretty darn funny.

The Millionaire Next Door by Thomas J Stanley and William D. Danko

One of the first books that really helped me understand the difference between saving money instead of looking like you have money was The Millionaire Next Door. This book is the ultimate “Anti-Joneses” personal finance doctrine. What’s extremely helpful is this book attempts at destroying a lot of the myths and urban legends that surround wealthy people. Want to know why most millionaires are NOT entertainers and athletes? How is this possible..uh read the book. You’ll be shocked to know how much the average millionaire spends on his/her watch. Want to know? Read the book. Or how about how much the average millionaire spends on a car? Want to know? Read the book. I promise you, you’ll walk away with a new understanding of why saving is so important, especially when it comes to your own personal utility. Too many people carry a fictitious narrative about what wealth is and who are the fortunate few who’ve been able to reach the status of wealthy. I must read for those who are interested in finding out where the seedlings of wealth begin and how those seedlings grow into wealthy roots.

Outliers: The Story of Success by Malcolm Gladwell

One of the most difficult concepts to understand is the dynamic “magic” that keeps the economy chugging along. In short, incentives and human capital. Incentive is the factor that motivates an individual to do a particular act. In the context of economics, it’s usually more money and quality of life. In some instances aspiring for more money might not be tied to just material objects, but could be tied to savings which breeds financial security or other philanthropic aspirations. Malcolm Gladwell’s Outliers is all about the circumstances, timing, and incentives that allowed select individuals to do extraordinary things in the economy, while explaining what happens when people master the art of aligning their personal incentives with their stock of human capital. This is the driving force behind our global economy.

Honorable Mention

Economics in One Lesson by Henry Hazlitt

Once you finished with the first 3 books above, you can’t move forward with understanding economics before you read Economics in One Lesson. Although written within a Libertarian vein (I say this as a compliment), it’s does a pretty good job of removing a lot of the “economic myths” that seem to never go away. The language is a bit heavier than the books above, but it’s still a good read. Although written almost 60 years ago, the content is as relevant today as it was then. A must read for those who want to rise above the cloud of economic confusion and fallacious punditry.

Now that the 2010 midterm elections are over, all you have to do is view the NYTimes word train from both parties to see the growing dividing line between Democrats and Republicans. 2010 midterm word train vs 2008 election word train. The fault line between red and blue states is deepening. More polarization of ideas equals more congressional gridlock while getting less and less done for the country.

My mood is disappointed. Not because the Republicans gained more seats in the House and flipped several seats in the Senate. Not because the Dems got a licking because there are no jobs. Not because because some of the most extreme ideologues are now representatives in the U.S. government. Not because the youth and other Black/Latino voters decided to stay home during this midterm election. Not because the Independents were “fair weather friends” of the 2008 election that ushered in Democrat control of the House/Senate including the Obama Administration and have now “turncoat” in less than half a presidential term. This is not a “sour grapes” reaction, this is a “reality grapes” reaction.

I’m disappointed because the American people, yet again, have an extremely short memory and seemed to have absolved the Republican party of decades of policy incompetence. They have never been the party of small government, free enterprise, fiscal discipline and just because they say it a thousand times, doesn’t mean that this is the answer or that they should institute these policies that they espouse. We don’t need small government, we need a smart and accountable government. We not only need a policy that encourages free enterprise, but a ethical free enterprise system. I’m not convinced that any party, Democrat or Republican or the fringe Republican movement known as the Tea Party, have the vision or ideas that will lead to the needed policy changes that will pull America out of this economic funk.

It’s not JUST spending cuts, it’s what you cut, it’s not JUST tax cuts, it’s balanced tax cuts that benefit the whole and not JUST the rich, it’s not JUST small business that matters, but the working poor that need help too. The single most crushing reality of this situation is ideological rhetoric has trumped informed reality. Fiscal fantasy over fiscal discipline. The American people nor our congressional representatives are prepared to make the radical changes to fix our problems. The rapid “zig zag” movements between parties is a testament to this fact. The achilles heel of this political process is we do not have an objective citizenry (regardless of the left or right), that has the information needed to understand the difference between sound policy decisions that benefit the whole vs corporatist ideologues posing as honest politicians who pretend that they are offering sound policy decisions.

Understanding the hows, whys, and whats of domestic and foreign policy is difficult. To be honest, I spend a considerable amount of time probing for facts and I STILL don’t have a crystal clear understanding of this stuff . It’s probably why most people prefer 30 second sound bites that move them into certain ideological political circles than doing the grudging hard work of researching and objectively interrogating certain policy ideas. It’s easy to follow your emotions, while not challenging the status quo. People are constantly asking “Where are the JOBS?”. For you to understand this, you have to go back several presidential administrations to understand how we got here. It didn’t start with the Bush Sr. Administration or Clinton Administration although they exacerbated the problem and it most certainly didn’t start with the GW Bush Administration although they exacerbated the problem. And to think the Obama Administration was a prerequisite to this current fiscal crisis is absolutely ludicrous. You have to research all the fiscal policy decisions starting around the Marquette Decision (1978) which completely deregulated the credit card industry. If the so-called “big bang” was the beginning of the universe, then the Marquette Decision was the big bang for our future fiscal problems. Our current “jobless recovery” is a host of bad policy decisions (including Fed policy) that was institutionalized for last 30 years.

Pointing a finger at any one political party is a waste of time. For what it’s worth, the one single book that has given me more food for thought on the nature of regulatory reform, fiscal policy decisions by the U.S. government, global monetization policy, Fed monetary policy and the roots of economic booms and busts including our current fiscal crisis is the book Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan. You can also read Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips which helps to understand these fiscal issues too. Start there and use this as a guide so you can understand why jobs have been obliterated from the U.S economy. In short, our extreme financialization of phantom assets/equity, erroneous reactions from the Fed have severely hampered the U.S. economy, not to mention financial illiteracy by the general public. It’s not going to take half of a presidential term to get out of this. We are 3-4 presidential terms away from getting even close to fixing the fundamentals of the U.S. economy. If that. Jobs can only come from the efficient use of resources in the economy. I repeat, there is no political party that can get us out of this. Once we realize that we are all in this together, irrespective of party affiliation, things will start falling into place.

Books

• Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan
• Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

I’m going to be honest, understanding economic policy is as exciting as counting the amount of sand grains in the Sahara Desert. There is no way to make this field of finance as exciting as watching the latest “crash and burn” reality show or sucking up the latest tabloid. It’s unfortunate that the latest statements from Ben Bernanke, current Fed Reserve Chairmen on printing more money to “save” the economy, also known as “quantitative easing” gets as much attention as C-SPAN during the Super Bowl. The problem with this type of nonchalant attitude toward understanding monetary policy, is this quantitative easing and moving of the Feds funds rate has more impact on your livelihood than you might think. Your credit cards, the price of goods (inflation), jobs in the economy (or lack there of), housing, school loans, mortgages, U.S. treasuries and many other areas of your life.

Out of curiosity I took a look at Nielsen’s Top 20 Network and Cable shows. Quite sobering. The usual suspects are bringing in millions of eyeballs, Dancing with The Stars, Jersey Shore, Desperate Housewives, Keeping Up with the Kardashians, Hannah Montana Forever, etc. No shows from C-SPAN, No shows from CNBC, No shows from Bloomberg-TV, no shows from Book-TV, no BBC. The only news show that made the list was the The O’Reilly Factor. Need I continue? I’m not going to go any further with my “soap-boxy” rant but we need more balance. If we are going to know the in and outs of Snooki or the Kardashians life, we should at least know what quantitative easing is. If people are going to spend 20 hours a week listening to music, we should at least throw in a couple hours learning the impacts of U.S. economic policy. I get tons of invites on my FB to go to clubs and party all night (not that I even do these things), but can’t remember the last time I got an Invite for hundreds of people to sit in a room and discuss something serious. Where is the balance?

I get it. You’d rather run in shorts and a t-shirt through a car-wash on a winter day in Antarctica than read anything about monetary policy. The language the Fed uses is more foreign than Vulcan. I started reading up on this stuff because the decisions of the U.S. government and the Fed was severely impacting my bottom line. My dough, my cash, my duckets, my C.R.E.A.M, my clams, my dead presidents, I’m sure you get the picture. Once you mess with my money, now we got beef! I now love reading up on this stuff. I don’t think anyone needs to have such a wide appetite for this econ stuff, but we need to know the basics. Simply, you don’t have to be Mario Andretti if you want to drive a car. If you know the basics, you’ll be able to get from A to B.

Here’s the bottom line: This stuff is extremely important. I or anyone else in this country cannot afford to ignore this. If there was anything of significance which contributed to the 2008 Financial Crisis, it’s citizen apathy. It’s not just rogue banks or CDS (Credit Default Swaps), or CDO (Collateralized Debt Obligations, or Fannie Mae/Freedie Mac or irresponsible rating agencies (Moodys, Standard & Poor, etc), or just shadow banks that contributed to the current state of the economy. These different organizations knew we’d be sleeping at the wheel, so they did whatever they wanted. Government policy wonks knew we wouldn’t question the Fed, or question the backward policy of setting an arbitrary goal of who should own housing without looking at the underlying fundamentals of the economy (or those home buyers), or watching the 5 major banks push their capital requirement so low that a financial collapse was inevitable. Basically what I’m saying is we have a bunch of criminals running the government and if we don’t understand what these political thugs are doing, we are going to get robbed blind (again!). I’m not blaming the victim, I don’t want us to be victims again. If we really want to move this country in the right direction, we have to demand accountability from our government. If not, what will be left of this country?

Here are some resources to get you started:

Podcasts

• NPR:Planet Money
• Russ Robert’s EconTalk
• Bloomberg on the Economy

Online Media/Blogs

• VIDEO: Understanding Inflation in 13 minutes
• Gambling with Other People’s Money: How Perverted Incentives Caused the Financial Crisis
• NYTIMES BLOG: Economix: The Science of Everyday Life
• NYTIMES: Dismal Science, Dismally Taught by Robert H. Frank

Books

• Naked Economics: Undressing the Dismal Science by Charles Wheelan
• The Ascent of Money: A Financial History of the World by Niall Ferguson’s
• The Return of Depression Economics and the Crisis of 2008 by Paul Krugman
• End the Fed by Ron Paul
• Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas E Woods

Recently I’ve been reading a lot of articles on the housing market and how it’s been impacted by macro economic policy of the U.S. One article that stands out to clear the air on the roots of inflation and it’s so-called “archenemisis” deflation is Frank Shostak’s Is Deflation Really Bad for the Economy.

I spend a lot of time on mises.org. Not because all my ideas on economics fall in the so-called “Libertarian” camp, although I find many of my own views inline with many Libertarian views, but I can get straight non-partisan, non-baised information on what makes the global economy tick from the likes of mises.org.

It’s not for lack of trying to understand the “conventional” mainstream economic wisdom, but at some point you have to let go and look for greener pastures of understanding. So as we all know, the source of our economic woes was a huge bubble in real estate, prices soared beyond their intrinsic value, investors hedged their bets on those inflated prices and when the cheap credit and cash ran out, prices corrected themselves and we are now experiencing a dramatic price correction in the economy. Unfortunately we are experiencing a huge price correction on all areas of the economy because the real estate industry doesn’t happen in a vacuum. There are many industries that are tethered to real estate, so if real estate gets the “financial flu”, everyone else is going to get “financial pneumonia”.

As stated in the title of Shostaks’ article, “Is Deflation Really Bad for the Economy?”. Well..in the case of the U.S economy yes and no, but overall…No. It’s going to be bad for those individuals who were apart of those jobs in industries that experienced “bubble” prices. Meaning those prices weren’t real and any macroeconomic attempt by the Fed to prop up those inflated prices is a recipe for disaster. The prudent way to go is getting an asset back to it’s “real” price and not the fake “bubble” price. You can’t build off of something that was never supposed to be there in the first place. The “Great Recession” that you are seeing in the U.S. and other economies is a price correction. If there are pockets in the economy that are experiencing a value/price correction, then this is a good thing.

How is any economy going to experience any efficiency or proper recovery if you prop up areas of the economy that are correcting themselves? There are only x-amount of savings and investment resources in the economy and propping up “dead areas” of the economy will create artificial demand (i.e. housing) which is just another bubble. A bubble is just a misuse of resources, not something that is healthy for any economy.

I’ll close with Thomas Wood’s wonderful analogy from his book Meltdown: A Free Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. No better explanation can sum up the danger that lies ahead if we continue to artificially maintain areas of the economy that deserve a value correction:

Consider a circus that comes to town for a few weeks. A restaurant owner may expand his seating capacity in the false expectation that the circus and the related demand for his food that it brings in its wake will last forever. But when the circus leaves town, he’ll find he has “idle resources” on his hands. We should not want to put these idle resources to work. Doing so would only draw labor and other resources away from other sectors of the economy, where they are employed in the satisfaction of real consumer demand. The expansion of the restaurant should not have occurred in the first place. We should want this bubble activity to shrink back down to size, in order that other, non-bubble activities in the economy can be correspondingly strengthened.

In the wake of a previous, unsustainable boom brought about by the central bank’s credit expansion, the market economy and its price system, left to their own devices, will adopt another arrangement of resources that employs available factors in the service of producing goods and services that correspond to real consumer demand. During the bust, free individuals interacting within the market nexus sort out which projects and business ventures are healthy and sustainable, and which are bubble activities that cannot survive without a constant artificial increase in the money supply, and cannot (and should not) survive now that reality has reasserted itself.

• Tooth Fairy Economics by Thomas Woods
• Our Insane System of mortgage finance? by John Papola
• The Fed Can’t Solve Our Economic Woes by Gerald P O’Driscoll Jr.
• Is Deflation Really Bad for the Economy? by Frank Shostak

Hello Ladies and Gentlemen, Welcome to Part I: Renting vs Buying a Home of my 4 part series Economics made Simple by Malik. With my blogs, I always like to set the tone of the post so there is no misunderstandings about what this post is about. The series will cover the following topics:

1. Part I: Renting vs Buying a home
2. Part II: Why Can’t I Make Ends Meet?
   (How I found the Austrian School of Economics)
3. Part III: Saving Money vs Serfdom
4. Part IV: Casino Capitalism

There is a lot of information in this post so for the sake of time I’ve chopped up the blog into sections. Feel free to jump to any section you want. For you convinence I’ve added “back to top” links that will send you to the Table of Contents. Enjoy!

Table of Contents

1. Malik’s home buying story
2. What you need to buy a home
3. Why are we selling our home?
4. Conclusion
5. Home buying tools and resources to help you buy your house

What this ISN’T, plain and simple:

1. Some get rich quick scheme where after you read this blog series you will become a mega-quadrillionaire in 24 hours. (BTW, no matter what you see on the lackof-Infomericals at 2am, there is no program that will turn you into a millionaire without hard work, thinking rationally, and the proper financial plan.
2. A forum for me (Malik) to spew some ideological financially driven nonsense while making myself feel good
3. A place where you will learn how to build a particle transporter, find out if aliens really exist, or whether there was some hidden plot for the U.S to fake landing on the moon

However, what this IS about:

1. A place where you will get practical advice on day-to-day financial concerns.
2. A place that serves as a spring board into understanding more complicated financial matters, which you will inevitable encounter throughout your life. Consider this series the beginning of the ginger bread path.
3. Remove some of your fears about the word “economics”. Understand that the economic world around you has every bit to do with your own life.

So what is economics anyway? By definition it is the following:
The social science that deals with the production, distribution, and consumption of goods and services and with the theory and management of economies or economic systems.

For the sake of this discussion I would like to call this “Personal” or “Household” Economics. Envision yourself as a small country. Your house is the country, the people in your house are the citizens, and the companies (Supermarket, clothing stores, car companies, dry cleaners, banks, etc) are other countries that you do business with. Your job is what you export/produce, and what you buy (products that you haven’t created yourself) are your imports. The capital (salary) you bring into your home annually is your GDP (Gross Domestic Product). As you can clearly see, you are a microcosm of a large country or continent. Put together all those little personal economies and you have a nationally economy. All the decisions that we do on a day-to-day basis impact the overall performance of the economy.

Malik’s home buying story

So back in 2005 I was living in Brooklyn, Williamsburg to be exact. Now known as hipster/heroine capital of New York. At the time I was paying about $800 a month. Towards the end of 2005 I was ready to move out and a good friend of mine was selling the Coop that I live in now. He said to me, “Well bro, if you got 20K cash I can get you into the Coop. I’ll give it to you at a discount because I’m saving tons by not going through a real estate broker”. From my perspective the deal was perfect. I’ll be a home owner, no more throwing rent money out the window, and I can do whatever I feel like to the apartment (break walls down, add new appliances, redo the bathroom/kitchen, etc). Normally, the Coop organization will ask for about 20% down, but because I was a first time buyer, and my salary was pretty descent, I only had to put down 10% (Later on I realize this was somewhat of a mistake, but not a deal breaker. Should have put 20% down. I’ll explain why later)

Before I get into the crux of renting vs buying a home, I have to give you bit of background information. Presently, my wife and I own a 1 bedroom Coop (An apartment that is treated like a house with a mortgage) in the Bronx. The Coop was purchased in 2005 for $175,000. Today, the value of the Coop is roughly 250K or more. If you include the amount of equity (Amount of the value of the house in 2005 minus the remainder of the loan in 2009) we have in the house, we should walk away with roughly 100K or more. So that is an increase in house value of about 75K over 3 years and 8 months. If I calculate the yield that is roughly 10% a year. Pretty good, even for the NYC national house appreciation averages. Considering I bought a piece of real estate in one of the most inflated real estate markets in history, not to mention during one of the worst financial collapses in history, while walking away with a profit, is not that bad. At the same time, had I not gone through a hook-up, I would have overpaid for a similar 1 bedroom Coop by about 15-20K. For my financial circumstances and situation, it really was the deal of the century. I was able to get into the home ownership world with no red tape, no hassle, and minimum upfront expenses. All I had to pay was the lawyer and closing fees. In addition, I could stem the financial bleeding of rent. That is money out the window that I would never ever see again. Had I rented the $1000 a month 1 bedroom (this is what I was about to rent until my friend came to me) the total in lost savings from rent would have been $52840. Here is the breakdown of what I would have paid with assumed rent increases because the apartment was not rent stabilized:

$12000 $1000 (year 1)
$12840 $1070 (year 2)
$13560 $1130 (year 3)
$14400 $1200 (year 4)
————
$52800

I would have thrown away almost 53K out the window. Not so fast ladies and gentlemen. This is true but we are not done yet. I never calculated the cost of Coop maintenance which is the fee you pay to maintain the building roof, landscaping, certifications, lobby, super who manages the building, etc). That was $470 a month which brings my maintenance costs for 3 years and 8 months to about $20,680 dollars. Now I have to minus that from the potential 100k profit (the amount I should walk away with after I sell my house [including closing fees). Now I'm left with around 80K. yes when i sell the house I'll still walk away with roughly 100K but I'm trying to calculate my TRUE profit margin.

What you need to buy a home

Whew!, lots of numbers. Are you still with me? I hope so. Lets remember that buying a house CAN be an investment. It's no different than any other investment. You have to know how much money you are putting in and get a sense of what your potential return is. Clearly during the last 3 years. Americans have spent a substantial amount of effort turning their houses into big fat credit cards by squeezing equity out of their homes without re-investing that equity back into the house. Bad idea. I'm going to split this section into three areas.

1. Prerequisites for buying a home: 20-30-10 Rule
2. Descent credit
3. Steady income
4. Benefits of buying a home
5. Benefits of renting
6. Patience

Prerequisites for buying a home: 20-30-10 Rule

My 20-30-10 rule is 20% down, the mortgage (no interest) should be no more than 30% of your take home pay, and you should have at least 10% of the value of the house in cash in some bank account. Yes this is after you put the 20% down on the house. So one of the biggest prerequisites for buying a home is to have 20% down. As I sated earlier I put 10% down, because at the time I didn't have the 20% and it was not worth passing up on the opportunity to own a Coop that was marked down 15%. From my perspective I started with a bit of equity from the beginning by getting the Coop at a discount. In addition to that, I had a steady income and enough disposable income to make extra payments each year on my mortgage so I don't get hit with too much interest from the additional 10% that I didn't put down. I also did something that no financial adviser would suggest any of their clients doing which is borrowing from your 401K. You are allowed to borrow from your 401K to buy a home, but if you leave your job before you pay back the full amount, you have two options:

1. Pay back the full amount.
2. Pay taxes on the amount you borrowed come tax time.

Now keep in mind that the 20-30-10 rule is a GENERAL guide. Meaning you can be flexible on the rule, but don't be so flexible that you bend the branch so far that you snap it in two. In my conclusion I'll explain why I broke just about every rule in the book when it comes to buying a home but it's all about your situation. Everyone has different circumstances and what works for me, might not work for you. You have to be smart enough to weigh the pros, cons, and risks of your decisions. There is no book or personal finance guru that will be able to give you the exact answer to you home buying choices. In the end, its up to you to weigh all the pieces to your home buying puzzle and put them together.

Descent credit

What does it mean to have "descent credit" in regards to buying a home? Descent credit means a FICO score that is at least above 700. If you don't know what a FICO score is, then go here and here. This number will impact how much you are able to borrow and how likely (risky) a financial organization sees you in regards to your potential to pay back the organization.

Steady Income

Make sure you have a steady income. Don't do things like "hope for the best" or "hope for a raise" that is supposed to give you the financial wherewithal to buy a home. Buying a home is a huge responsibility. This is not a game. A home is not one big credit card or some asset that you can use to hypothetically create unrealistic lines of income. You should make enough that you can pay for the mortgage, utilities, other monthly expenses, and you better make sure you can SAVE at least 5% of your take home income. I'm really leaning on 5% as the "I don't have a choice in the matter", but you should be shooting for 10-15% of your take home pay.

Benefits of Buying a home

This is pretty easy. First off, you are not throwing money out the window like rent and every payment you make towards your mortgage is just building more equity into your house. Second, owning real estate is one of the fastest ways to increase your net worth and build up your credit rating. (of course that is assuming you pay your mortgage on time, make extra payments a year, and didn't pay too much for the house, and it is likely that the house will appreciate in value). Unlike renting, you can use the equity in your house to re-invest in other money increasing investments. Notice how I said "money increasing" investments. Not clothes, sending your kids to private school, buying a car, or a flat screen or some depreciating asset that will erode what you just borrowed which is the equity in your house.

Benefits of Renting

Most times if somebody is renting, it's not by choice, unless you are Peter Schiff. Peter Schiff mentions some good points. He basically saying that he can utilize the mortgage and associated costs of a house better, by investing that money. There is something to say for all the overhead the comes with buying a home, not to mention the ridiculous maintenance fees that come with buying a Condo or a Coop. In New York, the real estate market is way more stable than the rest of the country, not to mention it's one of the hottest real estate markets in the world, but it's the exception. Renting has many perks. One plus is piece of mind. All the maintenance of the building, including the room you are renting is taken care of by the owner. The only unfortunate part of renting is the money you pay is money lost, but it depends? When you think about how many people are going under in their own homes, it makes you wonder whether those individuals should have rented in the first place. Renting is also a good option, if not the only option to use when you don't have enough money to buy a home. I don't think it's wise to rent indefinitely but it serves as a good pit stop before you can sum up the courage to buy a home, if that is your plan.

Patience

Before you cut that check to buy your first home make sure you have spent the necessary time researching all your buying and renting options, that you understand what a mortgage is and your financial obligations towards that potential house. Too many people get bit by the "He or she has a house, why not I?" or "It's the American dream" bug and do very little research resulting in financial ruin and sometimes bankruptcy. I've said this over and over in this post, do the proper research so you know what you are doing. Walking into a contract that's hundreds of thousands of dollars is not a small thing. Weigh all your buying and renting options before you take the plunge.

Why are we selling our home?

This past April we had a son (Saud) which means we need more space. For the past 2 months we have been looking to buy a 2-3 bedroom house, but there are a whole host of circumstances that played into why I bought the first Coop in 2005.

One other very important reason that started the whole decision of looking for a new apartment (prior to Saud being born) was getting out of an interest bearing mortgage. In Islam, interest (usury) is prohibited. Whether you are taking it or paying for it. So the plan is to so sell the house, releasing us from the interest and use an Islamic bank. Now you are probably asking, "Um, how does the Islamic bank make money if there is no interest?". Well in Islam you cannot make money off of money. [Don't worry, I'll be short because I know you want to finish this blog post] Very similar to an interest bearing mortgage a non-Islamic and Islamic bank actually start off the same way. They both cut a check for what you are borrowing from the bank, but the difference with an Islamic bank is they buy the house then add their profit on top of the house which you pay for 15 to 30 years. Here is a simple scenario:

1. House is 200K
2. I put 20% down, 40K
3. Islamic bank buys the house for the remainder, 160K
4. Bank calculates what I should pay based on future appreciation values, the current housing market, etc.
5. They say, “Hey we will sell this house back to your for 280K.”
6. They chop up the 280K over 30 years and that would be my monthly mortgage. It doesn’t matter how much interest rate fluctuate because there is no interest, just fixed payments of the agreed upon amount.

Here is another scenario, know as Ijara with diminishing Musharaka:

1. House is 200K
2. I put 20% down, 40K
3. Islamic bank buys the remainding share of the house, 160K
4. Islamic bank now owns 80% and I own 20%
5. The Islamic bank chops up my 160K over 30 years.
6. As I pay down the mortgage I increase my share of ownership.
7. Let’s say 10 years go by, and I’ve paid 60K in payments which means there is 100K of value that I own and 100K from the bank.
8. So the shares have changed, it’s now 50% and 50%. Let say the value of the house is now 350K
9. If I sold today, me and bank would split the profit by 50%. The total profit is 150K. Each of us would get 75K out of the deal
10. As you can see the house is treated as a true partnership. As I buy more shares I get more profit.

Conclusion

As you can see in 2005 I pretty much broke every rule in the book, but rules are made to be broken ONLY if you know the amount of risk you expose yourself to when you break the rule. In 2005, from my perspective, all I needed was about 6 months more to cover the remainder of what I borrowed from my 401K. As I stated earlier, I made a descent amount of money so I could afford the risk. I knew I wasn’t going to be jobless in 6 months, so I was at least okay in regards to my 401K loan obligations. It was not worth passing up on home ownership because I did not have the 20% I would have liked to put down, not to mention the house was being sold at a 15%-20% discount, fully furnished too. The owner sold me everything, so I did not have to deal with the burden of buying new furniture, tvs, appliances, etc. All I had to do was literally move in. All I had was a room of stuff from my Brooklyn apartment. A bed, some bedroom furniture, my weight set, and some clothes.

In regards to my 30-20-10 rule I broke 2 out of 3 rules in 2005. I broke the 20% down rule and I broke the mortgage should be no more than 30% of your take home pay. I think it was somewhere around 35%-40% at the time. I put 10% instead of 20% down. So how is that I broke my own rules but yet remained on solid financial ground? Remember what I said earlier. These rules are flexible, as are many rules in life. I didn’t bend my financial branch so far that it snapped. I needed a bit more wiggle room and I used it to my advantage. An example of snapping the branch is someone who puts 5% down and the mortgage is 60%-70% of their take home pay with less than 5% saving of your take home pay. Not only would this person have snapped the branch in half but they put the branches in the fire never to be seen again.

If there is anything that you should get out of this post is this. There is no clear cut straight answer to most problems, especially home buying. You have to weigh your personal situation, preferences, willingness to compromise, financial intelligence, practicality, and common sense to know whether you can or should buy a home. As you can see there were a multitude of things that I had to take into an account. A lot of it had to do with my financial situation, but one nice benefit is the neighborhood I live in is nice and very quiet. Young aspiring families, multi-cultural with access to the city in less than 40 minutes. You can’t beat that. Good luck on you home buying /renting travels and if you have any questions hit me up on Facebook. Just search for Malik Oxford or go here

Tools and Resources

• Home affordability calculator:
  http://homeloans.bankofamerica.com/en/home-loan-experience.html
• Buying vs Renting calculator
  http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html
• Home appreciation calculator
  http://www.moneytoys.com/home-sellers-profit-calculator.php
• Time to tackle the real evil: too much debt
  http://www.ft.com/cms/s/0/4e02aeba-6fd8-11de-b835-00144feabdc0.html
• Jackson’s Money Woes Can Teach Us About the Dangers of Entitlement
  http://www.washingtonpost.com/wp-dyn/content/article/2009/07/01/AR2009070103640.html?nav=rss_opinion/columns
• Less pay, same mortgage payment
  http://money.cnn.com/2009/08/06/pf/pay_cut.moneymag/index.htm?section=money_pf
• Bakes hereself out of financial ruin
  http://www.huffingtonpost.com/2009/07/28/woman-bakes-herself-out-o_n_246417.html

If people thought the US economy was bad in 2007, the US economy has turned out even worse in 2008. The world will never forget 2008. There have been countless articles and videos from a variety of analyst, economist, financial advisers, and economic think tanks that have all thrown in their explanations on how and why the American economy imploded like a controlled demolition. I’ve spent a good portion of the last couple months seeking and searching the best of the best information (video or articles) that explains “What happened to the economy and how did we get here?”

To be honest, this really upsets me that the government was sleeping at the wheel, not to mention Americans thought they could keep spending with credit and home equity loans, while not saving a thing, and nothing would happen. This is the epitome of financial ignorance, greed, and malfeasance. We should also realize that every empire fell by overspending. Whether it was the British Empire, Rome, or some other ancient civilization. Every empire that over-extended itself financially fell like a house of cards.

I hope it’s not too late to salvage the American economy; we really did a number on the economy. This is the perfect storm of recessions. We have obligations everywhere. Military obligations overseas , health care obligations, saving the banking industry, saving the car industry, saving the housing market, revitalizing America’s infrastructure, revitalizing our energy infrastructure, not to mention encouraging the American people to spend, when they don’t have a dollar to spare. You couldn’t ask for a more challenging environment. Below, feel free to spend probably the most important 30 minutes you’ll ever spend in understanding the dire financial circumstances of the United States. If your interested in buying the full length documentary, you can go here

Nevertheless, I give you the Economic Meltdown’s Greatest Hits of 2008: