Lifestyles of the Rich on Welfare

Today we have a special treat. Our favorite newspapers columnist, Thomas L. Friedman, has taken time out from his busy schedule of talking to nitwits and hawking his moronic book to pen a little remark for our dear readers.

Whenever we read a piece by Friedman, we always have the feeling that the man suffers from some brain defect yet to be discovered by medical science. We have spent hours trying to figure out what it is. Along with co-author Lila Rajiva, we turn it over and examine it in our latest book. Still, the nature of the malfunction remains unknown, unclassified, and unbelievable.

The whole Friedman phenomenon haunts our sleep, like a childhood nightmare we haven’t been able to outgrow. By the light of day, we look at his essays and commentaries and laugh out loud. “How could anyone be so simple-minded?” we guffaw.

But in the dark of night, we begin to toss and sweat. Friedman is one of the most-read and most popular of American journalists. It is he – not The Daily Reckoning – that interprets the world for the masses. Many, many people think Friedman is right – about everything. Woe, woe…woe to a world that takes Friedman seriously, we worry.

Finally, we couldn’t stand it any longer. We decided to put the question to the man directly:

“How can a puerile jackass like you have such a following?” we asked him. “How is it possible for an intelligent person to write such claptrap? C’mon, you can level with us. Mano a mano…writer to writer…aren’t you putting us all on? You don’t really believe what you write, do you?”

Today’s guest editorial is an answer to our questions.

As a result of the housing slump, says Reuters, more than a million people will lose jobs in or related to the construction industry.

Of course, they don’t have to worry. There are many ‘safety nets’ to cushion their fall.

Governments used to talk of providing ‘safety nets’ for citizens in trouble. That meant offering assistance to people on the margins of society. A man who lost his job would get unemployment compensation. One who was injured would get workman’s comp. Poor people were offered food stamps…and surplus food from government farm support programs.

Now, the feds offer a safety net for people with money – a kind of rich man’s Marxism – in the form of protection against financial losses.

On August 17th, U.S. stocks were selling at just 8.25% below their all-time high. Yet, the rich were already bellowing for a bailout. And along came the Fed with a cut in the discount rate. According to Fortune Magazine, the Fed also bent its rules to help two major banks – Citigroup (NYSE:C) and Bank of America (NYSE:BAC).

So great was investors’ confidence in these rescue efforts that it was soon back business as usual on Wall Street. Stocks seemed to be on the road to recovery last week – with another solid increase on Friday. The yield on the 30-year Treasury bond is back at 4.89%. Gold has returned to $677. The dollar is falling again.

We can now announce with confidence that ‘all is well.’

The logic of the safety net – whether used to catch a poor man or a rich one – is that whatever mess you’ve gotten yourself into, someone else pays for it. You forget to save money…you lose your job; bingo…someone else provides emergency assistance. During the ’70s and ’80s, Americans began to realize that providing unlimited assistance to the poor had its drawbacks; many people actually seemed to prefer a life of easy poverty to a life of hard work. Many were ‘hooked’ on public assistance, with several generations of welfare recipients in a single family. We recall, in the early ’80s, asking a young woman in the ghetto of Baltimore what she did for a living.

“I get a check,” was her reply.

Poor thing. She never knew the pleasure and pride of a job well done. She never enjoyed the boost to her confidence and self-esteem that minimum wage employment can give.

Later, the Reagan administration reformed the welfare system. We don’t know if it did any good or not; but people stopped getting so many checks…and stopped talking about it. Now what they are talking about is the safety nets for the rich – and everyone is in favor of them. So far, we’ve seen the central bank act with remarkable speed to help bankers, speculators and hedge fund managers. Stockholders have been given a boost too. And if the housing slump worsens, government will probably rush out some safety nets for homeowners.

Now, capitalists, proles, and the bourgeoisie all get checks. Is that progress…or what?

“The whole secret to the rental business is getting good tenants,” said a man sitting opposite us on Saturday night. The affair was a celebration of a neighbor’s 40th wedding anniversary. He invited about 100 people to dinner to mark the occasion.

“I was a car salesman,” continued our dinner companion. “Actually, I worked my way up so that I was in charge of marketing Renault cars in Toulouse. It was a good job. I loved it. And I was very good at it. So I won about a dozen trips. You know, incentive bonuses. On one of them I got a trip to Florida. What a great time! We went to Cape Canaveral…and toured around the whole state.

“But when I was 55, Renault decided to cut back its sales staff; so they offered me such a nice early retirement, I couldn’t refuse. And then, I began to buy up houses in the Toulouse area. It’s a great city…the center of research and the aeronautical industry in France. And the second biggest student population after Paris.

“I realized that you had to get good tenants. Otherwise, they damage your place…or they miss payments. All it takes is one missed payment per year and your revenue goes from plus to minus. Each month’s rent is 8% of annual revenue. So if you’re running at 8% positive yield and a renter misses a payment, your profit for the year is erased.

“Obviously, you try to build a few missed payments – and vacancies – into your figures. But if you can eliminate them…with no vacancies…and no problems from tenants…then you can operate more efficiently and more profitably…and you can acquire more property.

“So, all I did was to ask more questions. I want to see bank statements. I want guarantees. I want cancelled checks. I want tax returns. I check references. I always meet the people. And if I don’t like them, I don’t rent to them.

“It’s work…but I’m retired. I enjoy it. And it pays off…

“Well…it paid off so well that the French tax authorities came after me. They’re awful. I think they monitor my bank accounts, because they seem to know a lot more than they should. And they tax me so heavily that I wonder why I bother. Now, at my age, all I’m trying to do is to build up some wealth so I can pass it on to my children. But it’s very hard to do. They take so much away…

“I let my daughter live in one of my apartments, for example. They claimed that I would have to pay tax on the amount of money that the apartment should rent for. I told them to ‘drop dead.’ But of course, they always have the last word.

“I think France is headed for ruin. People with ambition…rich people…and young people…are all leaving the country. And I’d leave too if I were younger.”

That’s all for today,

Bill Bonner
The Daily Reckoning
August 27, 2007

P.S. Incredibly…at this family affair in the heart of rural France…another diner turned out to be a Daily Reckoning reader! There are dear readers everywhere…and many of them have bought our latest book, written with Lila Rajiva, called Mobs, Messiahs and Markets. It has reached as high as #4 on – let’s see how much higher we can push it. Get your copy here:

Mobs, Messiahs and Markets

And now…

…over to Short Fuse in Los Angeles…


Views from the Fuse:

*** Stocks were down at market open today, on shaky housing data. Data from the National Association of REALTORS show that the existing home sales number continues to drop and inventories of unsold homes are up – at a 16-year high, in fact. One economist noted that foreclosures might be increasing inventories by 5% to 7%.

Wow. Imagine how many unsold homes will be sitting on the market in October when the ARM rates reset. And think of all the innocent homeowners that make their mortgage payments on time…perhaps have already paid off their mortgage…but whose neighbor’s negligence has affected the value of their home.

In some cases, it’s as simple as your neighbor’s house being foreclosed upon because, as rates rise, they lack the funds to make their mortgage payments. But for many homeowners, the problem in their neighborhood was due to house flippers, or those taking advantage of a 100% financing ‘deal’ with no money down and limited documentation. Most of these people ‘purchased’ the home with no intention of ever living there, or taking care of the property – and now these scammers and flippers have disappeared, leaving housing developments and neighborhoods in shambles.

No matter what the circumstances surrounding the foreclosure was, it still brings the value of the houses in the neighborhood down – by around $20,000.

*** Uh-oh…looks like the home ATM is tapped out. Home lending has down-shifted in the past few months, and more and more homeowners are finding it near impossible to use their home equity line of credit to pay for their credit card bill, a practice that has become widespread in the past few years of EZ credit and low interest rates.

But times, they are a-changing and, “You’re not going to be able to get that mortgage loan. You’ll be stuck with the higher interest credit card debt,” warns Carl Steidtmann, chief economist with Deloitte Research. “We will have to live within our means. I know it’s a troubling phenomenon. But we’re not going to be able to spend at levels well above our income levels.”

What do you mean ‘live within our means’? Isn’t living outside our means the American way?

Here we are reminded of a Saturday Night Live skit that we are licensing for use in our upcoming documentary. In the sketch, Steve Martin and Amy Poehler play a married couple visited by a credit counselor of sorts, who is trying to advise them on how to NOT buy stuff they can’t afford.

*** Las Vegas, one of the nation’s fastest growing cities, is feeling the effects of a multi-year Western drought. The population of America’s adult playground is up 50% since 1999 – and shows no signs of waning.

“Las Vegas is growing too fast for its water resources, not, unfortunately, unlike many other Western cities,” said Peter Gleick, co-founder of the Pacific Institute for Studies in Development, Environment, and Security in Oakland, California.

“Las Vegas is a special case for two reasons: it is growing very rapidly and the second is they are really constrained on water supply.”

Another booming desert city that is in a similar pickle is Phoenix, Arizona. Phoenix and Vegas are neck-and-neck in the race for America’s fastest growing city (in terms of population) and limited water resources is obviously a big issue here, as well.

“The key source of water out west is the Colorado River,” Chris Mayer tells us. “The Colorado River Compact governs how the Western U.S. shares the river. The way I understand it, if there is some sort of crisis, Arizona is at the back of the line. In olden days, when cities sprung up around strategically useful locations along riverbanks or ports or spread in fertile valleys, it would be inconceivable that a city of Phoenix’s size would sprout in the desert.

“But modern technology makes these things possible, for good or ill. A city like Phoenix survives by importing water.”

And in Vegas, the water crunch is being managed by attempting to use available water supplies more conservatively; and a $2.5 to $3 billion dollar pipeline is in the works to bring aquifer water from a remote part of Nevada by 2015.

Demand for what many call ‘blue gold’ is only getting stronger – which means there is money to be made in water infrastructure. We’ll keep you posted…

Until tomorrow,

Short Fuse
The Daily Reckoning