Monday, February 22, 2016

Paving Paradise

California is suffering a nasty drought and with water becoming more and more expensive, the leaders of many companies and households are choosing to pave over their lawns with gravel or concrete. I feel incredibly sad to see it.

Then I learned that my own family is considering paving over the lawn of our home in Morro Bay to 'save water' and create a patio for a deck+chairs.

I wrote this note below in support of a different plan.

On the possibility of turning lawn into concrete at the Morro Bay house:

I've heard a few reasons for paving over the front lawn with concrete:
  1. Save money on watering costs.
  2. Reduce water use generally (i.e. 'save the environment')
  3. The concrete would make a patio we could place chairs and a table on
Let's consider an alternate proposal and see how it meets our needs:

Rather than pave the lawn, let's plant large areas of it with native, low-water-consuming plants such as cactuses as well as with healthy groundcover and flowering plants. We would reserve an area with grass or low groundcover, such as clover, where we could put a table and chairs as we feel the desire.

The short-term benefits of this alternative plan:
  • the greater diversity of plants supports a richer soil and more soil life, making the whole mini-ecosystem less dependent on human care (and human expense)
  • the greater diversity of plants provides habitat for more soil critters and other insects, which then feed the birds that Grandma loves so much
  • the flowers would feed the butterflies and pollinators, like bees, which we, especially farmers, depend on so much. Pollinators like bees are under severe threat from environmental toxins currently.
  • the greater root density and root depth of the various plants would trap more water each time it rains, reducing the need for watering.
  • cactuses and possibly other plants, if we choose the plants wisely, can provide tasty, healthy human food, reducing our need to consume food from far away and our current need to pay large corporations for the privilege of eating
  • the scent of the flowers would invite us outside
  • the soft touch of rich soil and healthy plants (especially the groundcover) invites us to play on it in a way concrete does not. This is especially true of children and adults who've remembered how to play as children do.
  • We could do the gardening ourselves. Whether we go into the woods to find the plants or go to a nursery, the total cost would be quite low - less than $200 easily compared to $thousands for concrete. 

Now let's consider the long-term effects of each plan.

Paving over living soil with concrete creates a permanent desert. Any future rainfall not only fails to support life in that space, it rushes off the flat paved surface and creates erosion further downhill, damaging other planted spaces as well. Concrete guarantees there will be no rich soil, no habitat for insects, soil critters, and plants. Thus paving guarantees there will be no habitat for pollinators, butterflies, birds.

Concrete is death. Rich soil is the foundation for life. Why would we pay thousands of dollars to bring death when we already have life for free, and when we could bring much richer life easily and for minimal cost? We might think we're "saving" water by not watering, but I disagree. Water does not fall in deserts, including concrete deserts. Nor will rivers run in concrete deserts, with no plant roots to trap rainfall and slowly release the water over time in streams. Plants invite rainfall which supports plant life in a virtuous cycle. Likewise, deserts invite no rainfall and support minimal life, in a sad cycle of their own. Which do we want?

A tradition among the native Iroquois was to think 7 generations into the future when making any decision. Will our great-great-great great-great grandchildren be grateful we paved? Will they be grateful for a world with even more concrete, or will they be grateful that we preserved living space for them to garden, explore, and play in? More than any material gift, the richness and cleanliness of the environment we pass on to descendents will define our legacy. How happy would you have been growing up on concrete instead of the soil of the farms, gardens, woods, lawns, and grassy fields?

Joni Mitchell in the 1970s sang about how we "Pave over paradise to put up a parking lot." Let's not make that mistake. We can do better!

Friday, February 19, 2016

Why did you sell your home?

A few days ago, a friend told me she is considering buying a home and wanted to know why I sold mine and whether I'd buy a home again. I wrote this in response.

I bought a home in December 2009 after several years of intensive searching and saving. I had a 15-year loan, steady work which paid enough that I could save and invest each month while paying down the mortgage, and I invited in renters who paid some of the cost and were good company. I loved hosting friends and being able to walk to and from work.

The night before I bought the home, I read an essay explaining how owning a home is a poor financial decision for most people. It made sense, but I was committed emotionally and financially to buying the home. The next day, I bought the home, put the saddening ideas out of my mind, and enjoyed the benefits of home ownership.

In 2011 or so I read a short 5-part series I just looked up for you here: The Growth Ponzi Scheme.

It was my first introduction to, well, the sad situation surrounding housing, debt, infrastructure, ugly inhuman communities, fraud, and more. Municipal budgets interact with taxpayers, states, and fed gov't in such a way that requires growth in order to balance the budget; current infrastructure rarely pays for itself, especially in suburbs. Thus, new (and subsidized) infrastructure that invites new taxpayers is required to pay for maintenance on current infrastructure. The series goes into compelling, visual detail; I highly recommend it. Short version: no house has any value if the roads, electricity, plumbing, or other infrastructure fail; further, the same local governments that cannot maintain that infrastructure long-term (or even short-term) are also reducing fire, police, school, etc budgets as the growth-based economy runs up against various limits to exponential growth people had assumed would never end. All these issues reduce the value of the house in financial and non-financial terms and destroyed my hope of using the house as an investment vehicle, or at least life-long savings preserver. No one's buying a home in Flint, Michigan with their lead-water problem right now, and lots and lots of communities look like Flint but don't get in the news!

Ultimately, along with other research, I got to understand the crash of 2008 in some detail and it impacted my expectations for housing values as well as society in general. Here's a short version of my understanding: Ideally and slightly simplified, house values rise and fall with people's ability and desire to pay for available houses. However, starting in the 70s-ish, income for the bottom 90-95% flat-lined as the rich effectively retained all income gains, but house prices kept going up, starting to skyrocket in the late 90s and then reeeeeally going up in the early 2000s. This was totally unsustainable; people simply didn't have the money to pay for the houses, but it was extremely profitable for the banks to give mortgages and support house flipping, as they made a fee on every sale. The financial sector collectively engaged in 3 major frauds in order to keep the profitable housing boom going a few more years.  (summarized here:

  • appraisal fraud: the banks encouraged massive appraisal fraud, blacklisting appraisers who did not give appraisals they liked - high ones! 
  • underwriting fraud: "ninja" loans were common: no income, no job, no assets, etc. Only a bank that was willing to tolerate massive defaults would give out such loans, and they did this in droves.
  • fraudulent resale of these bundled mortgages to pensions and other investors by lying about the quality of borrowers whose mortgages were bundled. You may have heard of 'mortgage backed securities' or 'MBS' or 'collateralized debt obligations' or 'CDS'. The reason the market for gajillions of dollars of these securities evaporated was that all of a sudden everyone realized the crash was going to be worse than expected and given all the lies, no one knew how to value the securities, and no one wanted to touch them with a ten-foot pole. Hence the major banks' investment portfolios going from many billions to, um, much less over a few weeks :(

To these three frauds described in the link above, I would also add rating agency fraud, where the banks would pay the agencies to rate their securities, steering rating work to agencies that would give high ratings. You could also add political fraud, where the FBI publicly warned in about 2004 that they were understaffed compared to the amount of finance fraud going on after Bush had reassigned massive numbers of FBI staff from white collar-work to 'anti-terrorism'. [Which brings up an interesting question: if the 9/11 terrorists' goal was to damage the US, and their attack encouraged or gave political cover for the US leadership to turn a blind eye to massive fraud and waste causing trillions of dollars in losses as well as loss of faith in the US gov't, then did the terrorists succeed? And who let them succeed?]

I learned about all this largely from Bill Black and the Naked Capitalism blog, though I read a bunch of others' work too, such as Matt Taibbi's. Black was an excellent regulator/lawyer who fought savings and loan fraud in the 80s and wrote a book called "The Best Way to Rob a Bank is to Own One". The executives of these banks would have preferred legal profits, but the public couldn't afford that, so the bank executives made decisions that guaranteed short-term profit and guaranteed long-term loss, maximizing personal profit at the expense of certain corporate insolvency someday. They made the calculated political decision that they would not suffer for this decision. When Obama and his team came into office, bailing out the banks and prosecuting none of the executives who did this, he showed they financial executives had gambled well, becoming massively wealthy as they wasted huge national wealth and committed truly epic crimes.

Rather than fix the economy by prosecuting the elite criminals, removing moral hazard, reducing inequality, reducing the finance sector's control of politics, etc, the administration bailed out the rich but not the poor. To 'save homeowners' (in reality, the banks), the gov't/Fed did everything possible to raise house prices, including taking interest rates to 0% for years which has really screwed up pension funds, savers, and others, encouraging wildly irresponsible investing in a desperate search for 7-8% returns that investment managers expect and used to get relatively easily. There are a lot of other counter-productive aspects of the government response, but to list a few: risk is now more concentrated in fewer highly leveraged financial institutions, these criminal executives KNOW they are above prosecution and thus free to engage in all manner of fraudulent and risky behavior, inequality has skyrocketed, the job situation is worse (ignore the official unemployment number; look instead at employment a percentage of working-age people, which still ignore underemployment), income is STILL flat, and... house prices have recovered to the old bubble peak in many markets. The problem of overindebtedness was solved with - you guessed it! - more debt, not increased capacity to pay debt (i.e. many people having higher paying jobs).

Now in 2016, with interest rates already at or near 0% and no political will for bailouts, we see a multitude of issues as folks prepare for the next crash, two of which being:
  • the possibility for negative interest rates, where you pay the bank to hold your money. These exist in Europe already; in one country (Denmark?) people actually have negative rate mortgages. Lots of rich people are publishing editorials saying we need to ban cash, meaning you can't get your money out of the financial system, meaning you can't escape negative interest rates where you pay the bank to hold your money, meaning you have a constant drain on all savings. Bloomberg just had such an editorial a few days ago.
  • bail-ins, where insolvent banks get bailed-in by the depositors losing their deposits (as opposed to 'bailed out' by governments). The US FDIC and others have already prepared for this. If you read about Cyprus in 2013, you know this has already been done in a European country. This would lead to a widespread unhappiness, I expect.
It seems clear that there were meaningful ultimate and proximate causes to the '08 crisis, and not only were those not addressed, they were vastly worsened by the government/corporate response. If you're wondering how this happened, I suggest you review ex-Attorney General Eric Holder's current employment. After 6 years leading the department of (in)justice under Obama, he's making millions of dollars each year at a law firm serving the banks whom he ought to have been prosecuting while in office, but didn't. Others from the (in)justice department and other government institutions, such as the SEC, followed the same path. Plenty of books and blog posts, very well researched, document all this fraud and corruption in gory detail if you have the time and energy.

I'm avoiding discussing the environmental and resource constraints to our society and financial situation, focusing on the narrower social/political/financial perspective of the housing bust. I'm also ignoring all manner of other frauds and immoral behavior I learned about which changed my feelings about the culture I was born into. I'll just say that all this research lead to my belief that the problems are systemic and not likely to change anytime soon, and that I didn't want to be part of and dependent on such a culture. Selling the home was the first, most obvious step for achieving this!

Back to Strong Towns: Other articles from the Strong Towns site are great; in 2011 I started  obsessively reading everything they wrote along with the work of other researchers, verifying things as I could. The Strong Towns group describes insane tax breaks major corporations get in terms of tax-per-square foot, infrastructure subsidies (like large highways going to a Walmart, or counties paying road maintenance for frackers whose trucks are terrible for roads), regulatory bias (such as requiring parking or construction elements that only large corporations can afford), etc. If you wondered why shitty chains dominate retail and restaurants in the US, now you know. Furthermore, the way suburbia and most towns are designed makes actual human community - you know, face-to-face time to have fun, get to know each other, and make important decisions together - well, suburbia and almost all town/city design makes that very hard and very rare. No wonder when you walk along a street, you can see all the TVs flickering through the curtains - often on the same channel!

In the end, I started learning a lot of other stuff that made me seek out real, profoundly meaningful human community with deep love, intimate connection to our sustenance and wilderness, and other qualities I value. But it started with reading that series I linked above.

Phew! So that's why I sold the house. Basically I feel free of decades of poor financial, ecological, and social decisions made by others. Understanding these left me feeling trapped when I owned the home. Now I feel free of a criminal financial system that maintains housing prices
fraudulently, and I feel free of lots of other things too. It feels good!

To answer your last question more specifically: I will own a home again. I do not expect to 'own' the land, but I will have a beautiful dwelling made by hand by my friends and me with healthy local materials and integrated beautifully into the landscape. I will not care about the financial value of the building, only its utility, aesthetics, and impact on the land around me.

One more P.S. There's so much propaganda around 'The American Dream' and 'Owning Your Own Home'. Combine this with home owners' emotional and financial investment in their home and in the financial and infrastructure systems undergirding its value, and, based on my experience, you're unlikely to find many good conversation partners on the issues I discussed above. I had nobody at all I could talk to in order to come to a decision. Then, I had nobody that emotionally supported me in the decision to sell and the process of prepping, showing, and selling the house, including my two renters and close family. In the end, I just had to do what I felt was right. And that was good practice for future decisions ;)

Monday, February 15, 2016

I wouldn't have believed it

If anyone had told me they could write a 2-3 page essay with succinct explanations of both mass schooling and the 'war on drugs', I wouldn't have believed them.

I found this pretty compelling: What Sort of Person Does Evil or Stands By While Evil Is Done?

Friday, February 12, 2016

Adventures in Peer-to-Peer Lending

The peer-to-peer lending industry is having some major problems. Since I used to actively invest in peer-to-peer (P2P) loans, I'd like to share some of my experience and why I got really far away as fast as possible a few years ago.

Peer-to-peer (P2P) lending is where a company sets up a website and invites people on who either a) need to borrow money or b) have money to lend. The borrowers go through a vetting process of some sort, including a credit check, perhaps income verification, and perhaps other checks depending on the company. They state why they want the loan and how much and the term. Then the company lists their loan request on its website and invites lenders to browse all the available loan requests and pledge money to whichever ones they want to fund.

The lender - me - can offer as little as $25 or as much as the whole requested amount. Thus, if a borrower requests a loan of $25,000, it can be fulfilled by 1,000 lenders contributing $25 apiece, or a smaller number of lenders pledging a larger amount on average. The company that coordinates this takes a cut, the lenders get to diversify their investments across tons of borrowers, and ideally since the company's take is so much smaller than the bank that would normally provide the loan, everyone comes out ahead.

I found this pretty attractive and pitched in a few thousand dollars back in 2010 or 2011 with a company called LendingClub.

The most compelling aspect of this system for me was that as a lender, I got to converse directly with the borrowers. I skipped all the wedding loans, vacation loans, and others where the loan wouldn't generate any income, and focused on the loans for refinancing credit cards or other bank debt. Replacing a 20% loan with an 8% loan is free money, assuming the borrower has a plan in place (and the emotional strength) to stop being debt-dependent by reducing expenses, getting a new job, or something else.

I would browse the list of refi loan applications and ask each borrower a standard set of questions that I hoped would help me do the following:
  1. ensure the borrower plans to use the loan for the stated purpose, not as a scam
  2. ensure the borrower will actually change whatever aspects of their lives got them into this debt so that
  3. the loan results in net debt reduction, not net increase
If all those held, I felt comfortable investing. And so I got pretty particular with my questions. I don't have the list I used to use, but it was something like this:
  1. Please list all the credit cards, their interest rates and balances, as well as all other loans, their rates, terms, and balances.
  2. Please share your monthly budget, including all income and expenses. Describe how you're changing your budget in order to reduce debt dependence.
  3. Do you have a spouse? If so, how do you coordinate your budgeting with them?
  4. Please describe what lessons you've learned from getting into this debt and how you'll avoid relapsing into debt in the future
Believe it or not, I actually ended up having conversations with borrower applicants where they'd present all this information! They'd share conversations they'd had with their spouses on the forum, or budget problems they faced, or whatever. Quite often, they'd also show they had no budget and no concept of how to budget. A few times I tried to help teach the borrower what a proper budget looks like but I quickly learned it wasn't worth my time and just decided not to invest in those loans. I know a person could lie to me about all this and there'd be no way for me to find out, but I figured a real conversation with lots of faked budget and loan information would be more work than a scammer would bother with, so if I got a good feeling from the conversation on the forum, I usually pitched in $25 or occasionally $50.

On top of this, I got to see all the questions posed by other lenders and the borrowers responses, so between my conversation and the others, I often felt like I could make a decent enough decision - especially given that I was only talking about $25 or $50.

I can't really know how badly I got scammed, but I can say that after 5 years my yearly return is 9.3%, so I didn't do too badly. I got to diversify over a few hundred loans by contributing $25-$75 per loan, and it was fun sometimes chatting with borrowers and getting to know people's situations.

I never invested much with LendingClub, but I found it fun and interesting, and I felt like I could protect meself from being fleeced. I expected to invest more and more as I got more comfortable with the system and saw that it worked as advertised, hopefully making it a significant investment someday.

But sadly, this was not to be.

From my perspective, the downhill trend started when Lending Club forbade the conversations I had. I could no longer ask free-form questions.  If I wanted, I could select pre-set questions to submit to the borrower, who could respond or not. I couldn't follow up to the borrower's response either, so we couldn't have a conversation. If s/he responded, that was it - I couldn't challenge the response or bring follow up questions! No conversation, nada.

After Lending Club's changes, I noticed other new problems. I began to notice that people were requesting loans of $25k or $35k without answering ANY questions from lenders. The loan application would be practically empty, with just a credit score, loan amount, and a few other data points, but unverified income, unverified job, and not so much as a paragraph about the loan purpose, the borrower's life situation, or anything else. Within a few days, enough lenders had pledged enough money to meet the whole $25k or $35k loan request!

A few times I tried to submit the pre-set questions, but the loan would get fulfilled before the borrower answered my questions. Talk about frustrating - how on earth am I supposed to protect meself from getting fleeced? It's like the other lenders' standards just fell through the floor, and I could either loan money with no insight at all about the borrower, or I could not loan money at all.

On a different note, I was learning more and more about the financial fraud which had occurred in the years leading up to the '08 crash and how it was (mis)handled afterwards by the government. I saw that the rich were able to protect themselves at the expense of the poor, how we're seeing a massive increase in inequality as the rich take all income gains, how infrastructure and other public goods are losing value all the time - the list goes on (and perhaps I'll describe this learning process in a post soon), but the pattern is that the poor and middle-tier folk ain't doing so well, and that was just the group I was lending money to! Lending Club bragged about how great the ROI was for lending on their platform, but they pretty much started after the '08 crash, so I couldn't trust that the returns I'd expected (7-10%) would hold up across the next major downturn.

So back in 2012 or 2013, I stopped transferring money into Lending Club and started transferring money out, hoping that the outstanding loans would wrap up before the next crash. I just took out another $150 or so, and with ~$350 left in outstanding loans, I'll soon be all done.

Of course, I'm now less interested in accumulating dollars and more interested in other pursuits, but it's interesting to reflect on my own personal experience in a credit cycle and watch the lending standards plummet just like I read happened in the housing market in the lead up to the '08 crash. When I tell people that bankers sometimes knowingly make bad loans, they give me a look like I'm crazy. If only it weren't so!