October, 2007:

This is the first of several essays I intend to write on a subject near and dear to everyone: money.

They do not teach you about money in school. Oh, they have some courses that deal at the fringe. In college, they call it economics. Believe me, I have taken more economics courses than I am willing to admit -- and not because I wanted to. In the college of business, they draw complicated graphs and talk about statistics... numbers. That's where they go wrong. Gees, if I had a dime for every non-linear, quadratic equation I memorized in those ridiculous economics classes...

In some of the common-sense colleges, they teach economics in the social studies department. That's smart. Because money is about behavior more than numbers. In order to understand money in our lives, you need to understand incentive. So that's where I am going to begin.

Incentive

Humor me for a moment here. Suppose that the world were a whole lot different. Just for the sake of discussion, suppose that food tasted good, but there was no such thing as hunger. You might eat when you wanted to, but you never got hungry. Never.

Given that, how often would you sit down and eat a good meal? Three times a day? Once a day? I doubt it. How long would it be before we all starved to death? (Don't go the wrong direction here. If you never got hungry, would Al Gore have invented pizza?)

Another example: Please bear with me; this may get... uncomfortable, but it is a good example. Suppose that we all had the normal... ah, body elimination function requirements; put bluntly: you had to go... or else. But supposing you never felt that... well, you know how it feels. Suppose that you had to go, you should go; but if you didn't go, nothing bad happened -- not in the short term. Would you go 4-5 times a day just because you knew you were supposed to? How long would it be before we all died of.... well, whatever that horrible "or else" thing is? One more quick one, then I'll bring it together. Suppose you knew that you were not supposed to pick up that hot pan on the stove with your bare hands. But you had no pain receptors on your hands. You knew that picking up the hot pan might injure your hand, but you might get away with it. And besides, there was no sudden pain if you skipped the potholder. How long would it be before your hand caught on fire like the Scarecrow in the "Wizard of Oz"?

The obvious conclusion here is that, as human beings, we need incentives to guide us to behave properly... in what is ultimately our own best interest. It applies to the refrigerator, the bathroom, the stove... in fact, it applies to the entire world -- especially when it comes to money. That is why there are laws... and jails.

But we need to go beyond laws and jails in order to provide the proper incentive when it comes to money.

The Mortgage "Crisis"

I am not completely up to speed on the present mortgage "crisis," so I going to cut right to the chase. A few years ago, financial institutions had a lot of money to lend. So they offered very low-rate loans for the purchase of houses. Millions of people signed up for low-interest, or no-interest loans in order to buy a new or larger home. It was a great deal for many people. But those loans were variable-interest loans; the interest rate would go up after a few years. Nothing wrong with that... legally. It was all legit. It's part of the deal.

Well, a few years have passed, and guess what? The interest rates are going up. Many of those people cannot afford the much higher monthly payments and they are going to lose their homes to the mortgage company. The mortgage lenders do not want the homes; they are going to have to dump them. And in the process, hundreds of financial institutions are going to go under.

Ouch!

Duh! Why didn't they see this coming? They are not stupid.

Well, speaking of stupid, along comes the federal government. The Bush administration and Congress want to bail out these homeowners and the financial institutions with loan guarantees. In other words, the taxpayer (read: you and I -- those of us who are current and healthy with our mortgages) will pick up the slack to help everybody stay afloat.

[2011 update: The Obama administration has done the same thing... to a greater degree. It has gotten worse since I wrote this, not better.]

Awwwww, how compassionate; oh, how wonderful! This is what the government is supposed to do! It is supposed to help people. (It says so, right here in Article..... ah, in the Constitution... right here in Section.... hamma-na, hamma-na, hamma-na, hamma-na, something-or-other.) Kanye West was wrong; George Bush DOES care about black people! But here's the problem with that, my ugly, racist, inner-self says. If the government bails out people when they can't make their mortgage payments, where is the incentive for people to act responsibly and NOT get into a situation where they might lose their home? If government bails out the mortgage lenders, where is the incentive for the lenders NOT to offer loans that they know would otherwise get them in trouble? Where is the incentive?

The government did it once; they'll do it again. If a racist, hate-monger Republican president will do it, then certainly a loving, compassionate, nanny-state Democratic president will do it... in spades. God love Hillary Clinton! In fact, when the government bails out these people and these financial institutions, they are providing the incentive for them to continue their imprudent behavior. How is that helpful to our society? Where is the incentive for people to behave responsibly with money, when the people know that the government will bail them out time after time? It's all about incentive.

And how long will it be before the government (read: you and I) is no longer able to bail them out? How long will it be before we end up like... like... well, like when you should go, but there is no incentive to go?

How long?

That is why we have to allow these people to be forced to find some other place to live; we have to allow these financial institutions to fail. Because if we bail them out, there is no incentive for them to behave properly.

That is why the marketplace -- free people, doing business without false intervention -- is the perfect incentive mechanism.

It really is miraculous, and we should all be eternally grateful that Al Gore invented it.

I know that it feels good to bail out these poor people who, through absolutely no fault of their own (yeah, right), got in over their heads. But in the long run, it would make us all wish that constipation were our worst problem.

Incentive.

Money: acquiring, keeping, spending, saving... it's not about statistics and non-linear equations. It's about incentive.

This may not be pleasant; but it is simple.

If you do not understand incentive, then you cannot understand money management. And you sure as heck should not be making decisions about money that affect millions of people.

One More (No Bathroom Humor, I Promise)

Oh, while we are on the subject of incentive and money... what incentive is there to prevent Congress from confiscating an endless amount of our money and using it to build their own empires and expand their own power? Where is the incentive?

Ah, another topic; another day; another essay.

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