Punchinello’s Chronicles

September 22, 2009

The Great Consolidation Loan Fiasco

Filed under: Foolish Rants — Punchinello @ 4:40 pm
Tags: , ,

One of the most destructive solutions to debt problems is the consolidation loan. It’s similar to taking oxycontin as a solution to heroin addiction. It sounds like a good plan in theory, but never addresses the underlying addiction to spending and credit cards. That’s the thing: credit cards are financial heroin. A consolidation loan is a sure way to wipe out your finances.

Back when I actually had money, a steady income, and considered myself to be part of mainstream America, I thought credit cards would be a good idea. It made sense to a) have a quick way to cover unexpected purchases, and b) avoid having to carry around large wads of cash or a checkbook. Then there was the emerging concept of a “credit rating,” necessary for an increasing number of events in life.

The simple thing was to establish basic credit, get a couple of department store credit cards, then move up to bank cards like Mastercard. The rule-of-thumb was to only use the card for hard and tangible items, never for consumables. Don’t use the cards to buy food, use them to buy something of lasting value. Good idea, on the surface, and I certainly had no intention of using credit cards for much.

Like heroin, most addicts begin with the assumption that they’ll stop whenever they want. It’s no big deal, just a nice and quick way to take the edge off. The difference is that everyone knows heroin is addictive. Few people think credit cards are an addiction.

It didn’t take all that long before I was in over my head. I was paying the minimum balances, ignoring the fact that the balance would continue for the rest of my life. But because I was paying those balances on time, banks continued to raise my available-credit, and other banks continued to offer new cards. If I maxed out all my cards, some other card would show up in the mail. “Low, easy payments! Pay nothing for the first year! Zero percent finance charges! Act now!”

Then came the consolidation loan. Take one massive loan to pay off ALL the credit cards. That would make one, single payment on the loan, clean out all the debt, and produce a payment slightly lower than the combination of all minimum balances. So what if the consolidation loan was a single presentation of thousands of dollars of debt!

Of course the immediate problem was that in one fell swoop, all those credit cards became “open” again. Instantly! Instead of the natural limit to spending and buying, imposed by having no more available credit, now there was no limit at all. Every card was zeroed out, opening up their entire line of credit again.

Sound like the federal government yet?

Many years later, a bankruptcy, total failure in the financial system, and horrific pain and suffering, I’ve come to understand what should have happened. As soon as I signed off on the consolidation loan, I should have cut up every single credit card. I should have ignored the entire concept of “credit rating” totally. I should have gone to a cash-only basis. I should have stuck with a debit card. They didn’t have debit cards in those days.

We, the People, are now in exactly the same situation. On the micro level, individuals are paying their daily expenses with credit cards. They don’t have jobs, can’t get relief, have no cash, and need to eat and pay the rent. On the macro, federal and state level, there isn’t any new money coming in. Tax revenues are collapsing, and everyday expenses continue.

So we take consolidation loans. The federal government just prints more money, we individuals just get more credit cards. We consolidate all of them, and right away we have “new money!” Then we get more and more consolidation loans!

Who owns all those consolidation loans? Nobody. They might be sold as derivatives, something-backed securities, or held as “toxic assets.” But that doesn’t stop the phone calls, demand letters, and collection threats. At least, for individuals. For the federal government, there aren’t any collection letters. There aren’t any phone calls. There aren’t any threats. There isn’t any penalty or consequence at all. After all, the banks are “too big to fail,” and the primary debtor is the United States government!

There comes the inevitable time when the whole house of cards comes tumbling down. The money stops. When that happens, some people have their “stuff” repossessed. Other people get thrown out of their homes. Still others end up with liens on everything they own. One thing for sure, the debtor stops buying anything at all!

And so the problem of consumer spending “slowing” is everywhere. We hear it in the news. Fantasy stories of “the recovery” always include references that without a pickup in consumer spending there won’t be a recovery. And still the Federal Reserve, US Treasury, international banking community and the FDIC go for the consolidation loans.

This week, the Treasury will try to auction off more than $100-BILLION in monthly interest payments! I remember when I was making a low-middle-class income, and had thousands of dollars per month in interest payments. That “minimum monthly payment” thing, don’t’cha know.

Another story tells us that Congress expects to self-raise the absolute limit on borrowing higher than $12-TRILLION. They’ve raised their own credit-card limit four times in the past two years. Must be nice!

There’s only one thing that’s going to get us out of this financial depression: cash. And there’s only one thing that will build cash: producing something of value.

Instead of helping to build small businesses, new businesses, manufacturing, invention, creative products, the government we’ve elected is trying to shut it all down. Here’s a story about a carwash that’s about to be driven out of business by the IRS for no reason other than stupidity on the part of the government. This story is the microcosm.

Small-Business Owners Fret Over Large IRS Fines

Five years ago, car-wash owner Orman Wilson set up a pension plan for himself and six employees. For that, he may owe the IRS a $1.2 million tax penalty.

Mr. Wilson, the owner of 19 coin-operated car washes in Houston, says he relied on four advisers, including a certified public accountant, to set up a plan that received approval from the Internal Revenue Service. Then, in late 2007, the IRS found fault with the plan and assessed it $250,000 — plus special penalties of $1.2 million.

The penalties “would wipe us out,” Mr. Wilson says.

Orman Wilson, who owns coin-operated car washes in Houston, could face a $1.2 million fine for setting up a pension plan that was deemed an abusive tax shelter by the IRS.

Hundreds of small-business owners have been hit with similar penalties in connection with pension or benefit plans, says Alex Brucker of the Small Business Council of America, an association representing small firms on pension, tax and health-care issues. (Read full story…)

But instead, we all want that consolidation loan. We all believe that a “credit rating” matters more than financial well-being and common sense. We keep doing what we’re doing, hoping that we won’t keep getting what we’re getting. And that’s the simplistic definition of insanity.

In “Atlas Shrugged,” Ayn Rand’s novel about producers and competence, those people who actually make things and build things chose to quit and move to Colorado. In today’s world, those producers and builders are being driven out of business. It isn’t a choice, and there isn’t any hideaway in the mountains. People say that 5% of the population are the producers, driving the other 95% of the economy. All we have to do is wipe out that small group and the world comes to a grinding halt.

At least that’s the premise of the fictional story. Pretty soon we’ll get to see if that premise is real, or if it was all just a disturbing story dreamed up by a novelist nobody should take seriously.


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