Economists fear consumers may start spending within their means

Here's a depressing AP article about consumer borrowing habits. The Christmas shopping season is already upon us, with retailers begging you to come in and spend money you don't have. Home equity loans are dried up, leaving credit cards as the most accessible way to borrow your way into oblivion. As a result, revolving credit debt is up-up-up! That's not really what depresses me. What upsets me is that the "experts" out there, the economists, whoever they are, are completely happy with the outcome.

Now that Americans have sucked all the equity out of their home, they're diving right into higher-interest debt, with the credit card industry. It's kind of like jumping out of a pool with a couple sharks and into a pool with a dozen piranhas.

During the housing boom, when home sales were hitting records for five consecutive years and prices were soaring, many homeowners tapped the rising value of their homes to finance increased spending by taking out home equity lines of credit.

However, now that home sales are plunging and double-digit increases in housing costs are a thing of the past, home equity lines of credit have become less available. That has pushed consumers back to credit cards to finance their spending.

Hey, heaven forbid people start spending within their means. Let's increase spending even though we aren't increasing income. Let's fuel big companies by borrowing more money. Here's a question, brilliant economists: What are we supposed to do after the home equity has dried up and the credit cards are maxed out? How exactly will we still be fueling economy when we're all freaking broke and three-quarters of our paychecks are getting sucked up by interest charges?

Analysts are watching closely to see if the steepest slump in housing in 16 years could have a more serious impact on the economy through the wealth effect

I had no idea what the wealth effect was so I looked it up.

One problem, home values don't make you more or less wealthy unless you plan on selling the house and living on the street. Instead we get this "perception" of wealth by letting people take out loans.

the fear is that falling home values could cause consumers to cut back on their purchases. Since consumer spending accounts for two-thirds of total economic activity, any serious cutback in spending could lead to much slower economic growth.

GOOD! Fear? Are these experts idiots? How does it help our economy if we're all broke! People need to start paying off their debts and living within their means. Then when they have real capital they can go spend it.

FRB G.19 Release

Sitting on a patent should have no reward

More news about ebay and their "Buy it Now" patent violation. The patent is idiotic. Basically, a patent on the idea of selling a product for a fixed price while it is in auction - which clearly shows our patent/copyright/property laws are seriously messed up. This is nothing unique or revolutionary, it's pretty common sense. At any time during an auction if you reach a desired amount you can cancel the auction and just sell it.

The problem is that this company, MercExchange, is a patent troll. It buys up "ideas", sits on them, and waits for some other company to use a similar idea and then it sues. It is a company based entirely on filing lawsuits for profit against other companies. They produce nothing, offer nothing, and do nothing. They are, in my opinion, leaches on the economy and anti-capitalistic mongers wasting time with frivolous lawsuits designed to earn them a buck for doing nothing at all.

Another example is the MS suit against Linux for hundreds of patent violations, most of which boil down to basic intuitive user interfaces. It's like if I patented a simple way of picking up a pencil, and sued anyone who picked up pencils that way without giving me money. Ridiculous.

Thanks, MercExchange, for being a filthy greedy leach and driving up eBay's fees with your garbage business model.

On credit cards and debit cards...

Kilpinger's got a couple interesting articles. This one on credit disclosure reform greatly interested me because I'd been waiting to hear some updates on this particular topic. Here's the official press release from the Federal Reserve. The skinny is that regulators want more information on credit card statements and applications.

Some I am pleased with, others seem like a waste. Forcing them to give 45 days notice, instead of the current 15, before making term changes is pretty important in my opinion. For anyone who carries a balance, 15 days (where the changes would likely take effect the next billing cycle basically) isn't much time to reject the changes and move their debt somewhere else. Disclosing the amount it could cost you if you make only minimum payments (check out the proposed formats here and here) seem a little overboard. I suppose it is necessary for some people, but I want my statement (and my terms) to be simpler and easier to read, not more complex.

Taking out the fictitious "fixed rate" I can get on board with! Okay, give the consumer a penalty rate if they are late or don't pay the minimum. But please, a fixed rate should not be able to be changed just because I start putting smiley faces on the checks I write to you. They can change the rate for any reason, usually determined by some computer that figures out who might show indications of giving them less money (like they did to me, for paying off all my balances). What I also want to see is FULL DISCLOSURE of all terms, especially rewards terms. None of this "further terms will be mailed to you after you have received your card" garbage.

On debit cards, I'm a big fan. I use debit almost exclusively from cash (though I don't spend much because I'm broke). I'm not a fan of the new rewards debit cards because as far as I can see, just about all rewards cards are a complete joke. Their terms are ridiculous and complex and it's usually not worth my time trying to figure out how to maximize them.

Finally, they mention interchange fees. Did you know the fees the merchant is charged is lower if you use debit (pin) rather than credit? I disagree with this:

PIN or pen? Debit-card users are caught in the crossfire between merchants and card companies...From your point of view, it generally boils down to personal preference. To get cash back, you must punch in a PIN.

No, interchange fees are indirectly paid by us, the consumers. If we as consumers use debit more instead of credit, the merchant makes more profit and can lower its prices. See? It's not personal preference, it is better to use debit to purchase goods. Rewards and purchase protections aside, of course.

Are pawn shops really that bad?

MSN clearly doesn't like pawn shops. I say, "What's the big deal?"

Pawnshops really are just loan companies that take small items as collateral. It is a competitive industry, so annual interest these days is usually around 22%.

People who put their stuff up for collateral at a pawn shop probably don't have great credit, so 22% is likely better than the rate on their credit card. Are there pawn shops that charge more? Sure, but as they say it's a "competitive industry" so you can just go to another pawn shop that charges less.

these days, planners see more people using pawnshops who don't appear to be traditional customers. One of them is Monica Martinez. A computer programmer, the Raleigh resident had always stayed away from "seedy" stores but has become a regular customer at Capital Cash, where she's selling off a stash of jewelry to pay a hefty tax bill. "It's either this or leave the country," she says.

I'm glad to know that Monica thinks leaving the country to avoid paying taxes is a viable solution, but anyway, is it so bad that she puts up her stuff as collateral for a loan? Every time you finance a car, your car is collateral, and if you have bad credit, your auto loan rate can easily approach 20%. What's the difference?

Flat wages and mounting debt are problems that drive even socialites in Beverly Hills, Calif., to pawn their Pradas.

Forgive me if I don't feel too sorry for someone pawning a Prada bag. Flat wages and mounting debts don't happen overnight. If you have a flat wage and a lot of debt, you need to be changing your lifestyle and spending less than you make, not buying Prada bags with your credit card. If you really are in such a bad situation, SELL your purse. I bet you get a lot more for it from eBay than the Pawnorama.

I remember a couple years ago my local news station did a piece on pawn shops and gas prices. A guy drove up in a newish Jaguar and said he was pawning his very expensive Rolex just to pay for gas. I guess it didn't occur to him that he had a gas guzzling luxury sedan.

So what about the other side of the coin? A pawn shop is like an air conditioned garage sale. People sold their stuff for cash and now the store is selling it to me for a little profit. Sounds like an honest transaction to me. Consumer needed money, sold stuff to pawn shop, I go in and buy it. Is it so wrong?

Maximize your odds of business failure

The rate of failure for any startup business is pretty high. It takes a lot of hard work, countless hours, more money than most people have, and produces a ton of stress. If you'd like to increase your odds of failure and toss your dreams of business ownership into the trash, here's a sure fire way to do it: open a video store. Better yet, open a VHS-only video store.

Two things are guaranteed to happen when you open a video store. First, you are going to have very few customers and will not see an actual profit until you are drowning in debt. Second, as soon as you start turning a profit, Blockbuster is going to move in next door.

A video store near me ended up moving to a better location after many years of business. Blockbuster opened up across the street and you can imagine what happened. They didn't last more than a couple of months. I don't particularly like Blockbuster, so I went into the independent shop once. All they rented were in VHS format. I understand trying to establish a niche market, but this one just isn't there. There's a reason Hollywood Video started selling their VHS tapes at $0.50 a piece instead of renting them; those rentals weren't providing any profit.

I wanted to rent there, but could not see renting a VHS over a DVD. To be perfectly honest, the only redeeming feature about my VHS player is that it has a clock on the front that sets itself. Since it has a clock, and I don't want to buy another clock, I have yet to throw it away. I don't actually have any VHS movies, nor a desire to acquire any, but I just can't justify throwing away a perfectly good no-maintenance clock.

Anyway, another entrepreneur decides that after watching the independent video store go down in flames and Blockbuster take over, it would be a great idea to open his own VHS-only store right down the street. I'm not really sure what this person was thinking, but within 3 months the new video store had a "For Lease" sign out front.

If you are thinking about opening a video store, don't.