No. 528



Several years ago, Smith Barney had a commercial on television that said, "We make money the old fashioned way, we earn it." There are several different aspects of this statement, and I have never been exactly sure what they meant by that, especially in light of the fact that companies who manage other people's money are not earning it by splitting wood, pouring concrete or doing some other form of physical labor. While I have never had anyone explain it to me, I believe this commercial was touting the fact that Smith Barney was doing the research, making wise decisions, investing in solid companies and building a base of financial wealth for their clients, slowly over time.
With that said as prologue, I want to share a concept with you that is taken for granted by the majority of people in our country. This is the concept of "ownership," which means in our free country we have the right to own property, buildings, material possessions and all the various forms of wealth, including money, which is really a medium of exchange. Have you ever thought about the fact that the majority of people in other countries do not have this right, and if they did, other than raw land, there is very little wealth for them to own. We are certainly blessed with opportunity here in America, but in recent years we have seen an erosion of this basic concept of "ownership" that will cause us even more serious problems down the road.
One of the best examples I have discovered to illustrate what I am saying is the emergence of something called Interest Only Home Loans. For the most part, this type of loan has not made it to our part of the country, because the average cost of a home is still within reach of most working people with an equity-based loan. This is a loan where a portion of the monthly payment goes to pay on the principal, in addition to the interest. But take Southern California, for example, where the average cost of a home is around $600,000. Even a person earning $100,000 per year would be hard pressed to make a monthly payment on a home like this, with an interest rate of 6 percent to 9 percent.
So what is the solution? It's a product like I just mentioned, an Interest Only Loan where the homeowner just pays the interest each month and pays nothing on the principal. There were two questions that came to my mind as I thought about this, so I called a banker friend and asked him to explain it to me. The questions were: Who actually owns the home and who gets the profit when it is sold, if it has increased in value? He said the homeowner owns it and keeps the profit when it's sold. Now that sounds pretty good, but there are sure a lot of downsides to a real estate deal like that. Incidentally, the real winner here is the real estate agent, because she gets her commission on the front end.
The downside is trying to find another affordable home when it's sold, or being unable to make even the interest payments and having to go through foreclosure and bankruptcy. However, here is the real point of this column and why individual "ownership" is in real danger. What has caused the average price of a home in Southern California to go up to $600,000? Is it supply and demand, inflation or a combination of both? Or is it reckless spending by our government that has created a national debt, including borrowing from other countries, that is so high that interest payments on this money is depleting money for all other types of loans?
We are literally choking on pork. Billions of dollars added to spending bills in Congress is simply a way for politicians to look good back home and to reinsure their reelection. We should never forget that it's our own money they are giving back to us, and operating on the theory that we only have to give a little to get a lot back is not a sound way to insure the concept of "ownership" will be there for our children and grandchildren.
(EDITOR'S NOTE: Jim Davidson is a motivational speaker and syndicated columnist. You may contact him at 2 Bentley Drive, Conway, AR 72034.)