Do Vitamins Work?

I've been thinking about vitamins this morning. I take one every day and haven't been sick in about a year and a half. Although correlation does not equal causation, I feel somewhat vindicated in my vitamin intake. With some doubt, I decided to do some research.

I simply searched Google for articles related to the benefits, or drawbacks, to taking vitamins. I found some interesting information.

An article written by Katherine Hobson for USNews.com outlines this subject fairly well. There's a link here. She talks about how multivitamins, like I take every day are a good insurance policy and potential catch all for supplementing nutrients people may be lacking in their every day diet.

The point I found the most useful was that people who take vitamins tend to be they type that exercise, eat more healthy, and avoid unhealthy behavior to begin with. I make an attempt at all the above. The cause of the health may have more to do with lifestyle than popping a pill every morning. Just as "researchers" concluded, I feel the same. Lifestyle has more to do with health, especially long term, than simply taking a multivitamin.

How Much Time Does Madoff Deserve?

I've been thinking about this for a while too. How do you equivocate a $50 Billion dollar scheme into other crimes that happen everyday? I don't think white collar crimes are looked at heavily enough. Consider this viewpoint from Scott Burns in a recent article he wrote:

We may soon have a financial "equivalency" for murder. People feel it isn't right a man can get five or 10 years in prison for robbing a 7-Eleven, when a white-collar crime can be more devastating to more people, but get a lighter sentence. As reader G.C. wrote: "You can kill someone in one of three ways: physically, emotionally, or financially. But only one is punishable by death."

We'll be a long time figuring out the equivalences, but if employers can talk in terms of "full-time equivalents" for jobs, it isn't far-fetched to imagine that white-collar crime may soon be seen as a new form of mass murder.

Some will think this is an extreme statement, so let me explain. The highest figure I could find for the value of a human life was the average amount paid to families that suffered a loss from the 9/11 terrorist attacks, $3.1 million. Yet even using this gigantic figure, the $50 billion fraud is the financial equivalent of destroying 16,100 lives.

Thoughts on How to Fix Our EconomyI

I've thought a lot about our new President recently. You've gotta give it to the guy. He assumed his office in the middle of the worst economic crisis in a long, long time. He has taken immediate action to attempt an economic rescue of unprecedented magnitude. He's got vision. He isn't afraid of work. You have got to give it to him for that. But, with all the billions and billions being spent, I can't help but wonder if it's going to the right places. I wonder how much of a difference it will actually make.

The first bailout plan mounted a whopping $700 Billion. Soon after the plan was released I heard critics from all over the place trying to help people understand exactly how much $700 Billion actually is. For most of us that amount of money is far beyond our comprehension. Then Obama added another $787 Billion. What in the world does our government plan on doing with an extra $1.487 Trillion?!? Let's do some math.

According to a count by the Census Bureau in July of 2008, there are an estimated 303,824,640 People in the United States. Simple math tells us the combined debt the US Government just gave every single American, including men, women, children, mounts to $4,894.27. Think about that for a second. If McDonalds apple pies are two for a dollar, that's 9,788 apple pies for every single American. It's more than $247 for every person in the entire world. I can't fathom what our government could possibly be doing with that kind of money.

Wherever it is going, it's obvious there are very few programs in the bill aimed at directly helping to cure the problem at hand. Where did it start? The cure to the problem must circle back to where it started. Sub-prime mortgages. Bad lending practices. Banks lending money they should have never give out. Now that the banks are in trouble, because of their own decisions, they punish everyone else. They reduce the amount of credit granted to upstanding and dependable businesses and individuals. Credit has become and integral part of our society. Many businesses and people can't function without it.

So banks reduce their lending. They reduce existing credit lines. They deny applications today that would have been approved six months ago. Why? Because they are strapped for cash. Why don't they have cash? Because they approved loans years ago they shouldn't have. They made decisions to give people money who claimed to be able to pay it back on word alone. As a business, this is what they do. They get deposits from bank accounts. They take that money and lend it out. That's what a bank does. They make money on our deposits. The problems started when they made bad choices with the money you and I deposited into their vaults. Now they are punishing everyone for their decisions.

I don't know about you, but I would rather have almost $5,000 more in my pocket than letting the government all but socialize another company. It's a joke to think AIG will ever re-pay the US Government all the money they have been given. To date, they have been give $180 Billion "capital infusion." In 2006, a great year for banking, AIG posted a record $14 Billion Net Income. At this rate, it would take AIG almost 13 years to repay the government. Granted a lot of the cash has been given in exchange for ownership and shares, but you get the picture.

In the end, I'd rather have the cash in hand. What about you?

Economic Issues - Part III

Current Conditions

Current market conditions can be described by a fairly simple demonstration of supply and demand. Supply (the number of homes on the market) conditions are being influenced by the increasing amount of foreclosures and defaults, new construction, natural home sales (not attributed to default), and a slowing purchasing rate.

Demand factors (the number of buyers consuming the supply) include low interest rates, home price depreciation, a borrower’s ability to obtain a loan, unemployment rates, income levels, and perception of market conditions.

Low interest rates typically increase demand. The Fed has been consistently dropping its target rate since September 2007. Although rates are low and money is cheap, this is having very little effect on demand due to liquidity problems. Banks are simply unwilling to take on risk by lending out cash. Banks are utilizing all the liquidity they can get their hands on to cover losses from poor lending decisions in the past. This increases the gap between the target fed funds rate and the actual lending rates. As banks are forced to raise their lending standards the pool of qualified buyers significantly decreases, further decreasing demand. The same problem exists with decline in home prices. Other macroeconomic factors such as unemployment and perception further decrease the pool of potential borrowers.

Foreclosures from sub-prime and option ARM borrowers are flooding the housing market with new inventory every day. Just a small amount of new home construction contributes to building inventories, currently at a seasonally adjusted rate of just 625,000. This indicator is at its lowest level since the US Census Bureau started tracking it in 1959. Inventories are building as demand continues to plummet.

The problem continues to grow. The current situation is bad. Adding in the potential $600 billion, or more, defaults yet to come has the potential to throw our economy into the worst depression it has ever seen.

Buyers and sellers are failing to come together in a way that makes the home purchasing transaction possible. Sellers can’t afford to take the loss of making up the difference between a realistic selling price and the value of their home, so they walk away and let the bank take care of it. Potential buyers can’t qualify for a loan because banks are simply unwilling to take more than a small risk in lending. Although the prospect for a resolution seems minute, there is a solution.

My View On Today's Economic Issues - Part II

A minimum payment of $1,666.26 on a $500,000 mortgage does not even cover the interest. Every month the interest is capitalized into the amount of the loan. With this loan borrowers would be deferring over $850 in interest every month, which is capitalized to the amount of the loan. If at any point, as defined in the fine print, the balance of the loan became more than a certain amount the loan would automatically reset. Even worse, most option ARM loans have a condition in the fine print known as an early payoff penalty. If a borrower chooses to refinance before the early payoff term expires they face fees in the range of $10-20k, on top of additional broker and bank fees for the refinance.

With mortgage brokers heavily commissioned on these loans, they made a lot of money marketing and selling option ARMs. Borrowers already locked into a 5.25% fixed were lured into a 5/1 option ARM with a teaser rate of 1%, but the teaser rate only lasts so long. The rate always resets during the first repayment period to a higher adjustable rate.

Many borrowers who refinanced into these loans found themselves paying an adjustable rate higher than their original loan, which they refinanced out of, only a year earlier. Unable to afford to pay all the fees to refinance again, they either squeeze their budgets or foreclose before the first term even expires.

The second time bomb in these loans depended on an upward swinging market to keep a borrowers head above water. In a market decline, as we have seen over the past 36 months, the loan balance is growing while home values are dropping. In 2005 we saw the first wave of option ARMs reset. Millions of homeowners realized they could no longer afford to live in the home they had been paying on for the past few years. They put their homes up for sale at record rates. The lucky ones got out early and even cashed out at the top of the market. Those that couldn’t sell started to foreclose, at record rates.

According to Fitch Ratings, up to 45% of option ARM borrowers whom originated their loans from 2004-2007 are expected to default. The worst is yet to come. Business Week magazine estimates the sum of these loans resetting during the next one to four years to be as much as $500 billion. If these loans default at the rate estimated by Fitch Ratings, we will see another $225 billion in defaults from these products alone. Piling another $225 billion of defaulted properties and write downs into the market, on top of existing unsold inventory and foreclosures from non option ARM products, will be catastrophic.

Prime loans are the next wave of defaults to hit the market. According to a NY Times article the prime loan market accounts for approximately $12 trillion in assets. The latest figures put the increasing default rate for prime loans at 2.7 percent, or $324 billion. Sum the Option ARM, Alt-A, and prime defaults together and we are likely to see an additional $600 billion in mortgage defaults in the next two to three years.