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February 28, 2005

Hotel "Debt" California
by Richard Benson

The song "Hotel California" by the Eagles is a haunting reminder of what could be in store for the Baby Boom generation. The song's lyrics set the tone:

Mirrors on the ceiling
Pink champagne on ice
And she said
We are all just prisoners here
Of our own device
And in the master's chambers
They gathered for the feast
They stab it with their steely knives
But they just can't kill the beast
Last thing I remember
I was running for the door
I had to find the passage back to the place I was before
Relax said the night man
We are programmed to receive
You can check out any time you like
But you can never leave....

With a slight change in lyrics, the perfect theme song for Baby Boomers - who have illusions about being able to retire - could be called "Hotel Debt California", with the lyrics........."you can buy, but you can never own." In the new "Ownership Society" that our government is marketing, black is called white and freedom is clearly defined as freedom from real choice. Indeed, given the way ownership operates in practice, George Orwell would feel right at home in today's world.

Why have Americans chosen to accumulate so much debt? Why have lenders and the Federal Reserve made it so easy to go into debt? Are car manufacturers, who give you cash back to buy a car and drive it away, to be held accountable?

Or, perhaps, we can blame the mortgage lenders who allow you to borrow more money and offer interest-only, low teaser rates and negative amortization loans. Are they being irresponsible?

Consumers are paying so much for real estate these days that the thought of actually paying off their mortgage, and owning the home outright, is almost jokingly surreal. When there is a correction in the housing market, many people will find they have negative equity; in other words, they own nothing, but they owe quite a bit!

Americans are headed into Debt Slavery, one credit card and one house at a time. To make sure they get there, Congress is rushing though a major reform of the Federal Bankruptcy Law. Since banks have been posting record profits, one must wonder why there is such a rush to prevent the little guy from getting a "clean slate" in Chapter 7. Indeed, when sophisticated lenders, with millions of clients and infinite amounts of cash, continue to offer credit cards and increased credit lines, why is it that they are shocked when someone can't afford to pay the interest or late charges on their credit card bill due to illness or loss of a job. Even with bankruptcy filings - over 1.5 million a year - the banks claim to be totally caught off-guard. The banks claim they need protection from sophisticated deadbeats and can afford to pay for protection by contributing to Political Action Committees. Moreover, even though the banks know how to price risk, and charge double-digit interest rates, they're livid when people who fall on hard times can get away with not paying them back with interest.

Congress seems determined to make sure that individuals enter the world of Debt Slavery and want the courts to be the collection agency. Bankruptcy reform means many a poor soul will be hounded for years through a Chapter 13 filing, instead of being given a fresh start in a Chapter 7 filing. If you file Chapter 13, any cash you make will be "sucked out" of your paycheck and go towards your debts for many years to come. You can forget about paying off a mortgage or saving for retirement. (Surprisingly, these new bankruptcy laws will still allow corporations to stiff their creditors. Indeed, how could "The Donald" afford to buy and/or maintain his mansions without stuffing his junk bond holders with his casinos in Atlantic City?) Debt Slavery is a cornerstone of the Ownership Society. Why? Because now the bank owns you!

Congress has also passed new legislation that moves class-action lawsuits to the Federal courts, effectively making it more difficult to sue a large powerful corporation, such as Wal-Mart. The press recently reported that when employees at a particular Wal-Mart store had unionized because they were being treated like dirt, Wal-Mart simply closed the store. In the past, the press has reported other unfair labor practices by Wal-Mart, such as how they avoid paying their employees their full earned wages, and how some employees are forced to work off the clock and were even "locked in" at night by a night manager. In seems that in today's world, it's important for corporations to "own" their employees without having to pay for their pensions, healthcare or insurance. This first round of legislation to protect big business from legal liability is certainly not the last we've seen.

So, who really owns us and our property? In an Ownership Society, the employer owns the workers, and the bank owns the house and the car. If you have a credit card, not only do you work for the bank, but you can't quit work! If you don't like the system, your job will either be shipped overseas, or an illegal immigrant will grab it. The irony of all this, of course, is that our government still allows illegal immigrants - who are willing to risk their lives for a chance to be a Debt Slave in America - to flood our borders and become "workers" in America. Meanwhile, large corporations, our legal system, and government are working hard to make George Orwell's "Big Brother" a reality.

If there is a silver lining to this world that Kafka described so well, it was so succinctly stated by our President in his State of The Union Address, whereby he said, and I quote, "in the future, if people retire at the age of 65, there just won't be enough working people to take care of them." What better way to solve this tragic problem then to turn baby boomers into Debt Slaves today, with a debt burden so high they will never be able to make ends meet unless they work until they are truly disabled.

Don't get me wrong. I hate socialism and love freedom. In a socialist country, the government owns everything and everyone is a slave. In our society, you don't have to borrow but we do because it's so easy and seductive. Under capitalism, Debt Slavery is purely voluntary.

Our fear is that the average American doesn't truly understand the extent to which he is in hock, or how much the federal government may need to rely on us in the future for today's deficits because our country owes so much to foreign creditors.

If the middle class ever wakes up in America - it might if the Hockey, Football and Baseball seasons are all canceled in the same year - there would be a great demand for the "repudiation of old debt". When that occurs, you may not wish to be an Asian investor holding a FNMA security, let alone a Russian or Korean Central Bank with too many dollars.

With a Debt Slavery society wishing to break free, the easy and perhaps only way out may be inflation and the continued debasement of the currency. We are saddened about the path our leaders have taken us down. Where is the freedom that our parents had (and their parents before them) because without freedom from debt, we're really not free at all! Welcome to Debt California.

Richard Benson
Benson's Economic & Market Trends
Specialty Finance Group, LLC

Prior to founding the Specialty Finance Group in 1989, Mr. Benson acted as a trading desk economist for Chase Manhattan Bank in the early 1980's and started in the securitization business in 1983 at Bear Stearns, and helped build the early securitization businesses at Citibank and E.F. Hutton.

Mr. Benson graduated from the University of Wisconsin in 1970 in the Honors Program in Math, and did his doctoral work in Economics at Harvard University. Mr. Benson is a member of the Harvard Club of New York and Palm Beach.

The Specialty Finance Group, LLC is a Florida Limited Liability Company and is registered with the NASD/SIPC as a Broker/Dealer.