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Why is it a Weird and Unfair World? – Stan

“Dear Steve,

Which gets me to my conclusion that this recession has dented the faith by creditors that bankrupts can recover and make car payments once relieved by debt. It used to be that creditors were in two groups: Those that condemned and punished and those that saw an opportunity in a clean potential debtor that can’t go bankrupt again for 7 years. Do you think that the “opportunistic” creditors are disappearing?

Personally, I see cracks in the Fair Issacs empire. One credit reporting agency bailed and started their own rating system. And there has been some criticism that FICO is flawed and responsible for some of the financial crisis.

So many people will have ruined credit in this crisis that I believe that some creditor will see an opportunity to lend to the credit scarred. That’s because FICO is a violation of the classic 4 “Cs” of credit underwriting. FICO is based on bill-paying. I think that we will see a reinstitution of credit mamagers that look at income, education, job stability, and net worth, factors that FICO doesn’t consider. Just making an algorithm based on what’s on a credit report is blown way out of proportion to what it is worth. FICO has oversold their concept for too long. I believe that their star will fade in the future. Or be ignored.

Although I am very conservative, I think Wall Street has damaged the country and capitalism in a dire way. With Goldman Sachs practically running the country and their people in various positions in the Fed and Treasury, they are basically “rubbing it in” that Wall Street has had control for decades. The public will remember that while millions are left homeless, Merrill Lyncha nd GS are paying billions in bonuses. Crooks like Chris Dodd, Barney Frank and Joseph Cassano walk the streets like nothing happened. At the same time, the middle class sinks into 10-13 dollar an hour jobs. The people will hopefully remember that Congress passed the new bankruptcy laws and repealed the Glass-Steagal Act as foundations for the present crisis. As you know, many more people who would have gone Chapter 7 now have to do a 13 now, and credit recovery is prolonged for years instead of months.

What are your thoughts on future? The middle class, the direction of the economy?

I was hoping on inflation, which would diminish debt load and bring up real estate values. Evidently, the Fed has figured out a way to print money and keep it out of circulation and avoid obvious inflation. I still think the govt will hit the wall on refinancing the debt in afew months. Then interest rates will rise and that will sink the real estate market. It’s precarious now as all real estate agents do now is wait for the banks to release REOs or approve short sales, which can take many months. Both situations are controlled by Wall Street – the banks again.

Have you read any of the books about the crash-books like “Sellout” or “Too Big to Fail”. Investigative writer Matt Tiabbi at www.rollingstone.com has written many articles about Goldman-Sachs. He claims that GS is financing Cap and Trade and thus pushing the issue.
My point here is that all those people that write you for advice are all players in this huge Wall Street/Govt scenario but in the pawn position. I try to see the big picture.

I believe that your advice to go BK is appropriate. Unfortunately, it won’t hurt Wall Street like it should. The govt is allowing them to establish commercial banks, borrow from the feds at an 8:1 reserve ratio and less than 1 percent interest on the rest, dabble in currency trades and speculate, and pocket billions to pay obscene bonuses. They could hardly care about millions losing their homes.

After this mess is over, I predict the middle class will shrink to the lowest level since WWll. Then the class war will really begin. A recent article in the news pointed out that the “tipping point’ has been reached. That means more people are on the government payroll than on private enterprise. We all know this is unsustainable. Huge pensions and benefits and a ridiculous retirement age will eventually bankrupt every govt entity and pit normal citizens against the machine that taxes them endlessly to support it. The average govt worker makes 71k for the same job that private enterprise pays 41k. We all can’t work for a govt entity. What I see is that by and large, the people who write you don’t have the guaranteed govt life. It was never meant that a school teacher would make more than an entrepreneur because govt employees trade security for risk. Now people don’t want to take risk. Here, thousands of guys line up for a fireman’s job. Retire at 50 on some contrived disability and end up taking care of your motorhome. What a life.

Just my thoughts, Steve. It’s a wierd, unfair world.

Steve”

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The Answer

Dear Stan,

Well, thank you for your email and points of view.

I think my point of view will surprise you. Even though I deal with financial problems all day long and lived through my own financial problems I’m really not sanguine about the future. In fact I think opportunity for people looks good.

As I write this the country has been through an economic downturn and unemployment is high. The news has not been rosy and fingers are point all over on who is to blame for the mess.

But quietly the economy is coming back to life after a valiant attempt to prevent it from slipping into an abyss. I’ve been around long enough now to have lived through several of these economic cycles. And that’s just what they are, cycles.

Some of the pain experienced by some is the result of just bad luck and living in the wrong place at the wrong time. For example, in my recent travels around the country I’ve seen small towns that look like they need to be bulldozed and others that are growing and vibrant with all sorts of new growth.

Now to your specific questions.

1. Do I think opportunistic creditors are disappearing? While some of the big name banks have pulled back from sub-prime car lending, others haven’t and those that have will be salivating to get back into that market. If risk is managed properly by the lender the sub-prime market is a vast source of profits.

2. You ask if I think the FICO system of credit scoring is flawed and cracked. I don’t think we will see a return to manual credit evaluation. It doesn’t really matter who calculates the score, the score is used to gage risk in order to make as many credit evaluations as possible in the shortest period of time. That’s pretty attractive to avoid.

The old days of assessing credit had their own problems. While a local creditor might be able to keep a file, much of that information was based on rumors and whispers. Credit bureau staff actually used to go out an interview your neighbors about what kind of person you were. I’m not sure any of us would want to return to a period where that became standard practice again.

The downfall of credit scoring really has less to do with the score itself than with how the score is implemented. If banks had been less willing to have such large pools of debt at risk in case of a souring of the economy we would not have been faced with as much bank trouble. But many community and small town banks didn’t have hardly any losses at all during these rough times. They managed to balance their lending and while they took some chances, they took wise ones.

3. Do I think the country has been ruined by Wall Street? Actually I don’t. I think what we just lived through was a correction and the lack of oversight and regulation did not exist to keep the system in check. Think about it like this, if you build a big boiler to produce and sell steam and the demand for the steam is greater and greater but the boiler has no pressure gage on it to moderate how it is working, it can develop a leak or even explode. And that’s kind of what happened with the economy.

Before the start of the meltdown to many it was very apparent that there were big problems with the frenetic pace at which crazy term mortgages were being given out. People inside the industry who were originating those mortgages were loving it and getting rich. The panic of riches was apparent and not hidden at all. A housing bubble was common knowledge and much was discussed about it. That’s why I sold my old house before it burst and I’m glad I did.

4. Many more people are forced into Chapter 13 bankruptcy than Chapter 7. Yes, you can thank the Bush administration for finally falling to the will of the creditors over that mess. The bankruptcy reform that finally became law in 2005 had been percolating for many years before that but a different administration made it very clear it would not be signed into law. Bankruptcy reform was legislation that was bought and paid for by creditors to prevent people from being able to reach Chapter 7 bankruptcy while they quickly handed out all sorts of easy credit that eventually blew up in the banks face. Consumers lost because there was never a lobby strong enough to stand up for consumer rights. Right now there are cries for a consumer protection agency to assist consumers with financial protection but it is being labeled by those more conservative as unnecessary and big government. Really? Have we not learned anything from this recent mess?

5. You make the claim the middle class is ruined with low paying jobs. Wages have remained flat or rolled back but in part that’s a function of relative worth of the work being performed. If we had more innovation and cutting edge fields which required higher education and greater expertise then wages in those fields would be rising dramatically. I believe if we had a work force that was constantly working to gain new skills and learn that our workforce would continue to at the top of the charts.

However, jobs that can be performed elsewhere for less will be outsourced. They always have and they always will. Outsourcing those jobs isn’t much different than looking for the least expensive place to purchase office supplies. It’s all about the underlying cost of the product being created and the parts that go into it.

I’ve used outsourced computer programming labor myself. I found it to be extremely cost effective and best yet, problems identified during our workday were sent to the programmers and fixed while we slept. It created greater efficiency and at a lower cost.

I see opportunity as aligning the components to be most favorable to the individual. For example, if someone lives in a declining part of the country with steep losses in real estate value and they can’t find a job in their field with there set of skills, something is going to need to change in that equation. If that person is willing to invest time and energy to either advance their education or job skills, was willing to relocate and take the difficult steps necessary to deal with the problem debt, well then the situation has changed from one of dark desperation to great opportunity and hope.

Bottom line is we are not entitled to anything, not even our next breath. The best we can do is set ourselves up for future success with hard work, education and a little luck.

Why is it a Weird and Unfair World?   Stan
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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