In this video, a new couple describe their experience. The now hubby turns out to be the one with ideas about savings and personal finance. That’s probably a good thing since his stated career is “professional poker player.”

Although banks are able to capture 200 risk-free basis points for simply providing their underwriting services for the loans, banks have claimed that it’s not been worth their trouble. Since the 10,000 loans were already a meager offering by the government from the start, the fact that the 10,000 loan allotment has not been met strikes me as a singular failure and further proof that the Obama administration seems not to have its eye on the economy. As a Democrat worried about the criticism around the corner for the mid-term elections, I fear that the criticism simply rings true. To state the obvious again, someone somewhere needs to start lending to small businesses again if we are to expect the economy ever to turn around again.

And who can blame the banks for not wanting to work for their money. Compared to the other hand-outs that many banks are now getting right now from the Fed — primary dealers are essentially arbitraging the difference between the borrow at the discount window of 0.25% and short-term treasuries paying 2% — why would they want to be working so hard for measly $400 or so per loan.  (Note that the $700 must be discounted back to its present value.)  On this nearly identical spread, these large institutions are capturing the same risk-free profits in much, much larger sums without having to do any actual work.

On perhaps a somewhat different plane, it strikes me as quite significant that George Soros, the noted investor who rarely ever gets macroeconomic trends wrong, revealed in his most recent filings with the SEC a loss of faith of the US economic recovery and the fear of inflation. Another investing guru, Warren Buffett, has predicted the same. Again this simply recounts what struggling families already know: these are difficult times.

One issue that repeatedly recurs when families are having a difficult time meeting their monthly bills is that they must sometimes choose which bills to pay. One mistake families often make is trying to stay current on their credit card payments while giving up on their mortgage. While I do not want to suggest that there is a hard and fast rule here. That is, it may sometimes be the best decision to pay credit cards ahead of your mortgage. In most cases, it is not the right decision at all. One reason here is that if a family is struggling under a debt burden and is headed for a consumer bankruptcy filing, that bankruptcy would likely redress the unsecured credit card debt, but not other forms of secured debt, such as a mortgage. Another reason is that if there is equity in the home that equity may be exempt from your creditors from the state homestead exemption. The logic that many use of attempting to avoid stepped up interest payments is certainly sound. However, it is simply not necessarily a goal to be had at the expense of missing mortgage payments.

What is most important here is to be realistic. If you are in a home that you cannot afford, you are better off coming to the realization earlier rather than later. If you are grappling with credit card payments that you cannot afford, you are better off seeking to discharge them before you have run through all of your assets.

Not only are card companies facing losses from the increased number of bankruptcy filings, the recent legislation aimed at capping fees has left the companies scrambling to make up for lost revenues.

Given today’s headline regarding 27% drop in the sales of US homes for July from last month following the expiration of the $8000 tax credit, a fifteen year low, and the difficult to avoid conclusion that housing prices are still a long way from their eventual bottom, the more pressing question in consumer bankruptcy is why there have been so few to file. The easy answer, suggested by a recent study that suggested that baby boomers have filed consumer bankruptcy in far greater numbers than their Generation X and Y counterparts, would that the younger generations have held off from filing, perhaps more than they should.

An unfortunate aspect of my practice is that I see many clients who have taken irrational steps in the management of their debt by not earlier on considering consumer bankruptcy. Apropos the opening point regarding steps that banks have taken to offset recent losses resulting from federal action this year to cap various fees, it should be clear that the banks have many cards up their sleeves yet to play. In that case, the banks have responded by increasing rates and adding new fees to certain transactions, like overseas purchases.

In the context of California mortgage law, many borrowers who have lost their homes, many are likely falsely secure of their circumstance by virtue of the fact that their lenders have not yet chosen to go after them. However, borrowers should be aware that many are not protected by the ordinary non-recourse nature of first deeds of trust. For instance, many who have refinanced their homes may find that later, when and if their economic health recovers, that they will owe money from any balance owing on an earlier foreclosure.

Unfortunately, there has been much too little about this story. Much like the case of mortgage lending that occurred before people actually began defaulting on their notes, there is hardly any coverage of the problem in the media. Today’s NY Times article is a wonderful exception. Unfortunately, it’s not news until people actually default. And with student loans, the loans can be deferred for a number of years before a default actually occurs.

The central problem is the same as that which happened with the mortgage crisis: deregulation! The reason that it is much much worse for consumers is that unlike other forms of debt, borrowers cannot discharge student loans except in exceptional circumstances. The Brunner test is so exacting that most bankruptcy attorneys don’t even bother.

Make yourself aware of this problem. And don’t let any college students you know take on too much debt. Even to go to Harvard, it’s simply not worth it.

Background:

This may be a little bit mathy. If so, my advance apologies. Encryption has long been one of my interests.

Public-key encryption, the one most commonly used in commerce is called RSA encryption, works by having two keys — one to encode and one to decode. Essentially, you have part of the cipher — the public key that you give to the public at large.  Then anyone can encode a message and send it to you. The neat thing is that no one can take your public key and then decrypt any of your messages. For that, they would need the private key, which you keep to yourself.  This kind of encryption is at work any time you look at your browser and see that little lock in the bottom right corner. It is used in nearly all Internet transactions.

The big idea behind this kind of encryption is that factoring, or breaking a number down into its prime divisors is difficult and time-consuming. While there are a few shortcuts, mostly the method to determine prime divisors is simply to try them one by one. Because its so time-consuming, to crack the encryption on your web browser would take modern computers longer than the life of the universe and certainly longer than any human life.

There has always been two big potential monkey wrenches here. One is the possibility that some crazy mathematicians figures a way around the supposedly hard problem of prime factorization. (There is no theorem that it’s got to stay a hard problem.) Two is that the computer power surges past the computations that would be necessary to crunch the numbers in a reasonable amount of time. Something of a hybrid of the two seems to have gotten it done.

Why You Might Not Want To Send Private Information Online For The Next Year Or More:

A couple of electrical engineers working on an entirely other problem have figured out that if you vary the voltage on the machine sending or receiving the encrypted message there will be errors, then if you examine the kind of errors that has occurred, you can figure out the private key in far less time. In this case, they were able to crack the RSA cypher in 10 days.

This should be huge news! Personally, I’d advise that you be cautious until the remedies can be implemented. The proposed remedies — that errors be purposefully included in all encrypted messages might work. (It’s still unclear if that doesn’t simply create a new much easier problem than the problem of factoring.) Until then, every rogue hacker has a blueprint of how to get into your private information over the Internet. There are a lot of people who have the skills to capitalize on this development before an effective remedy can be developed.

Evidently, prior administrations — Dem and GOP — took the position that derivative contracts needed a special set of rules and considerations in bankruptcy. Their chief fear seems to be that not doing treating them as having special considerations might rattle derivatives markets. Strange!

Now President Obama does not want to sign any new financial reform legislation that does not include some regulation of the derivatives market. This is evidently so important that he has threatened to veto any legislation that does not include provisions accomplishing as much.

President Obama forever the seeker of compromise has now evidently found a cause that he believes in. And this time, he’s flat wrong! Presumably prior administrations were eager to go along with bad policy because they were worried that the derivatives market was sufficiently complex that there was much that they did not understand. Most people’s eyes glaze over when the Black-Scholes equation and all of that icky math enters the picture. Finally, President Obama shows a spine, but it’s on an issue where he gets it exactly wrong!

The missing fact that President Obama is ignoring is that the majority of the derivatives market is compromised of individualized contracts between two parties that are peculiar to the situation and so cannot regulated as if they were traded on an exchange. Moreover, he fails to recognize that trading risk in this fashion accomplishes a good. Namely, risk is spread throughout the system. The dispersion of risk throughout the economy, when it is not in the exceptional circumstance of placing the entire economic order at risk of collapse, is a public good and needs to be encouraged by the government and not discouraged.

This couple evidently had already done the estate planning to prepare themselves for such an event. Worse still, these ugly acts were committed by county employees under the color of law. It shows in yet another glaring fashion why prohibiting gay marriage is wrong.