Latest / Words & Numbers / Episode 471: 50 Years a Mortgage Slave

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Episode 471: 50 Years a Mortgage Slave · Words & Numbers

• 0:00
  Today on words and numbers visas.
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  Artificial intelligence and legislation. $2000 checks for
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  everybody. Well, almost.
• 0:07
  And A50. Year mortgage, all this and more
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  on words and numbers. Coming up next, we are a civil
• 0:13
  original production. Check us out at civil.com.
• 0:15
  That's C ivl.com. Hi, I'm James.
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  And I'm Anthony. And this is words and numbers.
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  Aunt's new and exciting in your world this week.
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  I ran across a joke, oh, I don't know, maybe a year or more ago
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  as AI was just a thing. Yeah, I, are you going to tell
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  it? I have, I have a friend who's
• 0:39
  who's a specialist in humor, in advertising.
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  And he said that there's two types of people, the consumers
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  of of humor and the generators of humor.
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  I'm clearly a consumer. I can't remember if you saved my
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  life. This is why we get along so
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  well. But in in this joke, it's a one
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  of your one of these cartoon things.
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  You've got a person in an office writing bullet points.
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  Then he gives it to the AI and tells the AI to craft an e-mail
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  based on these bullet points, sends the e-mail.
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  Then you see another guy in the office received an e-mail and
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  cutting pasting it into an AI saying summarize this and bulla
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  pull. This Whites police champion.
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  Right. That reminded that came to mind
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  as I was having a conversation with some people that are in the
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  industry that I am in currently and they were having a problem
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  with their state legislature considering a bill that was
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  going to impact them. And the bill apparently was very
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  complicated, involved lots of things and so forth.
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  And somebody said in passing, well, you know, we can just take
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  the bill and put it into AI and ask AI to summarize it.
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  And a couple of the guys there said, oh, yeah, of course you
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  can. And a couple of guys said, oh,
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  my God, can you really do that? And so it was an interesting
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  thing. And as I'm listening to them
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  talk about this, it occurred to me that on the one hand, you can
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  certainly use AI to summarize legislation.
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  I'm thinking back to Nancy Pelosi and the.
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  Right, we've got to pass the bill to see what's in it.
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  Yeah, the Affordable Care Act, where she said, in all
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  seriousness that they have to pass the bill in order to figure
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  out what's in the bill. What's in the bill?
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  And it turns out, just by the by, that it did not make
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  healthcare affordable. No, it it did all very pretty
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  much everything it promised to do, it did not do.
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  It did. The opposite of the opposite is
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  the opposite, and if, if only a couple of guys could have
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  predicted exactly that. Oh, oh wait, it was us.
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  Check the link in the show notes for our op-ed.
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  But in Nancy's case, she what she was saying in, in a sense
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  made sense that the bill was so complicated they they didn't
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  know what it would do until it was implemented and you could
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  see all of the pieces working. Of course, that's a horrible way
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  to legislate. We should, we should stop for a
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  minute and explain why that is. You've got a bunch of people in
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  Congress, in their committees, what have you, everybody angling
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  to get a certain bit of text into the bill, and all those
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  bits of text add up and before you know it you've got 3000
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  pages. Oh, it's even worse.
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  They don't just add up, they interact.
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  They way to anticipate. That's right.
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  There are always these sorts of consequences, but it it's
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  obvious how this happens, right? You put 435 people in a room and
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  say come up with something. Well, God help us all.
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  They do. And they all come up with
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  different things and they all add together, and then you end
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  up with literally 3000 pages. And then that comes to a vote
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  without giving enough time for human beings to read 3000 pages.
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  That's why, that's why Nancy Pelosi said we have to pass it
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  to see what's in it, because there was literally no time for
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  anybody to read it beyond the bits they stuck in themselves.
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  And that's where to find out that this fails.
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  Should should confound no one. That's where the interaction of
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  the various pieces matters. Because you could imagine, OK,
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  you've got congressional staff, so you get this 3000 page
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  document. You got 30 staffers divided up,
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  whatever that is, 100 pages per staffer.
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  You guys go read this, come back to me.
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  And the problem is even if each one of them understands the 100
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  pages they've been given, they, they don't know what the other
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  pages say. And so they miss all the
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  potential interactions. So, So in any event, this brings
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  us back to to AI. And yeah, you could use AI to
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  summarize the legislature, feed the whole thing to AI and you
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  can have it come back and say, OK, here's the major bullet
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  points. You can even do better than that
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  if you like is don't have it summarize it.
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  Just ask it questions. What's this going to do to my
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  healthcare premiums or whatever it is?
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  And as I'm thinking about this, listening to this conversation
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  go on, it occurs to me that the mere fact that we can do that is
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  going to create an incentive to, to, for legislators to produce
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  longer legislation because it becomes easier to deal with long
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  legislation because you've got AI.
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  So why 10 thousand 2000 pages? Don't stop at that.
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  Give us 10,000 pages. AI can digest that just as
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  easily. And then that led me to my next
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  thought, which really disturbed me.
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  When the document gets that large, it's easy enough already
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  to hide stuff in there. I mean, that's, you know, with
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  the 2000 pages, you don't know what's in there.
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  You could hide things in there that that are handouts to your
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  constituents and you're hoping nobody else notices it.
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  Of course, with AI, it's easier to notice it because AI can look
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  for these things. But I went to AI itself and I
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  asked, suppose I'm writing a piece of legislation and I know
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  that this legislation, when completed, will be given to an
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  AI and the AI will be asked to summarize it.
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  There are portions of the legislation I don't want anyone
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  to notice. How can I craft the wording so
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  that the AI that scans it does not pick up and therefore
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  summarize the passages that I want to hide?
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  And as you might imagine, the AI comes back to me and says, well,
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  that's unethical and I can't comment on that and blah, blah,
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  blah. To which I said, all right, cut
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  it out. This is a hypothetical.
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  I'm interested in this as a thought experiment.
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  So I had to beat on it a little bit.
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  But finally it comes back and says, yes, indeed, this is
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  possible. And here's how you do it and
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  starts to describe this that you've, you, you write the
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  passages as you, you couch them in phrases that make it look
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  like this is an incidental, it's a parenthetical.
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  It doesn't matter. Oh, by the way, this, but the,
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  this is the important thing. But you say, oh, by the way, and
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  the AI is going to ignore it. So this I project is the future
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  of legislation in the age of AI. Hundreds of thousands of pages
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  of legislation with this this ongoing battle of the one side
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  using AI to try and ferret out what's actually in the bill, and
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  the other side using AI to try and hide what they're putting in
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  it. So, as usual, we're left with
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  the observation that politicians make everything worse.
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  Oh, and on AI, it's like steroids, right?
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  They're really going to make it worse.
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  This is just their new tool to make it worse.
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  But they're the, they're the problem.
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  I've got something I don't think I can say a little smaller for
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  reasons that will become obvious in a moment.
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  But the Trump administration, and I guess today we're going to
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  be feeding our critics who call us, who refer to us as having
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  Trump, Trump Derangement Syndrome, 'cause he's going to
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  come up. And fire up that e-mail.
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  James needs a good e-mail. Get the e-mail roll.
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  And I have been bored lately, but the, the administration has
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  put out some new regulations about who is and who is not
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  allowed to have a visa to travel into the United States.
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  And it's, it's largely quite reasonable, right, when you read
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  through it and there's people with this health condition or
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  that, right? And you know, you don't want
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  people with the bubonic plague or whatever travelling into the
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  country. So that all seems reasonable
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  enough. But at the bottom of the list of
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  people who you can legitimately turn away when applying for a
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  visa are the obese. Really.
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  The obese. Yeah, we don't want fat people
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  coming to visit. I think we got a pot calling the
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  kettle black here or something. Well, that yes, that are.
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  We are we considered the most obese people on the planet.
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  I don't know if that holds anymore.
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  I mean, oh really, we're way up there.
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  But other places have gotten quite large over the years.
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  And you know, interesting quick story.
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  An Iraqi student came to visit me once in the early twenty 10's
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  and I took her to a Walmart and she asked what are those
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  pointing to those carts that the big fat people ride on when they
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  get there? And she said, let me get this
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  straight, people are so fat here that they need a cart to ride
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  through the store to buy more food.
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  And I said yes, I'm afraid that's correct.
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  And she shook her head like somebody from a third world
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  country would. And about 7 or 8 years later I
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  got a message from her saying our grocery stores are getting
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  those carts now. Yeah.
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  Yep. Right.
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  So it's even in the third world or the developing world, the,
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  the term we're supposed to use. Now you find the same thing.
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  But the, the administration, England has gotten quite large
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  as well. They used to make fun of us for
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  being a gigantic people, and now they're every bit as gigantic.
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  And, you know, look, we all know this.
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  When you and I were children, if you met somebody that weighed
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  200 and 8300 lbs, that was the fattest man you ever met in your
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  whole life. Oh yeah, yeah, yeah, I know.
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  Dozens. Of people who weigh 300 lbs now,
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  dozens. Dozens.
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  So you know, things have changed.
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  But the reason why they don't want the the obese to come visit
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  is because they might have to go to the hospital and gobble up
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  all of our valuable healthcare. I just OK I I I can see the
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  argument but. It's an interesting thing that I
• 11:11
  saw in the news that I never expected I would see in the
• 11:14
  news. We're happy to announce that
• 11:16
  Civil members can join me and James for a new lecture series,
• 11:20
  Words and Numbers Live. Words and Numbers Live is a
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  Subscribe to Civil for $5 a month or $50.00 for an annual
• 12:12
  subscription. Which brings us to the
• 12:14
  foolishness of the week. And this is so foolish that I
• 12:18
  actually gave Anthony some math homework so we could talk about
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  it like rational people. Well, it's and it, it's, it's so
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  in depth. I thought it was the main
• 12:27
  episode until just a moment ago. You said it's the police mess.
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  Yeah, no, this will just take about a minute and then there
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  will be more foolishness in the main episode.
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  Not for it without question, but Donald Trump just recently and
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  you might be able to spot this one a mile away.
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  And but he got it in his heart to start telling people that
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  tariffs are so great. And, and as we speak, the
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  Supreme Court heard the tariff case just a couple of days ago
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  and it did not go well for the administration.
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  So take everything he says with a grain of salt because he
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  probably, if he's a reasonable human being, he knows that the
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  tariffs are about to be declared unconstitutional.
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  That's my prediction from what I've been able to glean from the
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  court case. And I suspect it's six to three
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  or seven to two. I don't, I don't think it's
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  going to be a particularly close decision.
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  And so, OK, he comes out on true social and he says tariffs are
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  so great and if you don't love tariffs, you're a fool.
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  He says, and because tariffs are so great, we're going to send
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  everybody except the filthy rich, of course.
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  We're going to send everybody a check for $2000.
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  So my first question was to Anthony, how much is that going
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  to cost? And then my second question to
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  Anthony was, OK, go figure out how much we've taken in on the
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  tariffs. OK, aunt, the floor is yours.
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  What we've what we took it in fiscal year 2025, which the
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  government's fiscal year ends September 30.
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  So from you know when the tariff started till September thirty,
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  195 billion. However, it's once they ramped
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  up, they were the tariff revenue was coming in at about 30
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  billion a year. So if they continued, it would
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  be $360 billion a year. It's a lot of 60 billion, yeah.
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  And then again, it isn't. Well, yeah, right.
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  Where the government's concerned, it's not, but
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  there's, there's a lot of footnotes here. 1 footnote is
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  that estimates are the consumers pay at least half of those
• 14:46
  tariffs, at least half. So that means that, you know, on
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  the one hand he's saying, OK, we're we're collecting $360
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  billion. On the other hand, half of that
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  180 billion is coming out of the pockets of consumers in the form
• 14:59
  of higher prices. And then roughly 40% estimated
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  of course, is being paid by companies in the form of U.S.
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  companies in the form of lower profits.
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  So it's 90% being paid by Americans, either Americans at
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  the point of sale when you buy the thing, or in terms of lesser
• 15:19
  returns on your savings investment because the companies
• 15:23
  you're invested in are earning less.
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  So 90% of the tariff is being paid by Americans.
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  Well, but we we told everybody that was going to happen and it
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  did. There's no surprise.
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  There, yeah, But where the where the the check comes in, things
• 15:38
  start to get kind of interesting.
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  So he says cut everybody a $2000 check.
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  And that statement is not as clear as it might seem, and I
• 15:49
  couldn't find an answer to it. Because when he says cut every
• 15:54
  American $2000 check, does he really mean every American
• 15:57
  because there are 340 million of us?
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  Or does he mean every household because there's 130 million of
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  those? Or does he mean every taxpayer
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  because some households have more than one taxpayer?
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  There's 160 million of those. I assumed that he meant
• 16:13
  taxpayer. So take that.
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  I don't know and and the only thing I have to go by here is
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  how we went about sending out checks roughly the same amount
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  as memory if memory serves during COVID.
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  You think it's going to be per person?
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  I, I, that's the vibe I look, I think it's never going to happen
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  because once the Supreme Court intervenes, all the tariffs have
• 16:36
  to be returned, which is going to be a fiasco to end all
• 16:40
  Fiasco's. But working, working with what
• 16:44
  we've got in front of us. I think the only way to read it
• 16:47
  is every person. And I, I think you might have to
• 16:51
  read it as every adult person. You might read it as every
• 16:56
  taxpayer. But he said everybody.
• 16:58
  But then he said not the. Rich, not the rich, right?
• 17:02
  So let's the way the numbers breakdown because you want to
• 17:07
  take the rich off the table. And even then it's unclear.
• 17:10
  What does he mean by the rich? Does he mean the millionaire,
• 17:12
  the top 1%, the top 20%? I would assume that what we're
• 17:16
  looking at here is everybody through the upper middle class,
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  upper middle class. OK, so let's say.
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  So that would be 4/4 percent, 4 quintiles.
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  Oh, you want to take? You want to take.
• 17:30
  I want to remove. One the middle class, the upper
• 17:33
  middle class. OK, so you want the middle
• 17:35
  class, the next one down, the next one down.
• 17:38
  So the Top 40% out is no. More the top, No, I, I think the
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  top 20% out. OK.
• 17:45
  That's what I had. Yeah, it top 20% out and going
• 17:52
  by going by number of taxpayers well that that.
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  Well, that that's what. People.
• 18:03
  I can do, people. I, I don't, I don't know, right,
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  because my, my, my knee jerk reaction is well, everybody on
• 18:10
  Social Security is going to have a problem.
• 18:12
  But then they are taxpayers, right?
• 18:14
  They pay tax on their Social Security.
• 18:16
  So. That takes care of that.
• 18:18
  I mean, what's happening here, and this will become clear in a
• 18:21
  moment, is this is basically angels dancing on the head to
• 18:24
  pin and we're dating. Whether they should hop on one
• 18:27
  foot or they can use two feet, it doesn't matter.
• 18:30
  Go ahead, do your math thing. But roughly speaking, roughly
• 18:34
  speaking, the $2000 check to all of the people, however you
• 18:39
  define that, and however you define all roughly plus or minus
• 18:43
  some, it comes out to be about what the government would
• 18:45
  collect annually, the 360 billion, which means at the end
• 18:49
  of the day, the only thing that's happened is the
• 18:52
  government has collected a bunch of money through tariffs, and
• 18:56
  the government's going to turn around and hand it all back out
• 18:58
  again. Yeah.
• 19:00
  So we're getting back all of our money except that the government
• 19:04
  was in the middle of the whole transaction.
• 19:06
  It's a redistribution of the money if there is some
• 19:10
  redistribution granted. So there, there's that and then
• 19:13
  there's the government control. And this is clearly for the
• 19:16
  buying of votes later. That makes me very nervous.
• 19:20
  Just like the in the Biden years, they were talking about
• 19:24
  student loan forgiveness and we this time, this is a this is a
• 19:28
  clear buy off of college students.
• 19:31
  We're just going to take money from taxpayers, hand it to
• 19:33
  college students so they vote for us.
• 19:36
  And that's exactly what would have happened.
• 19:39
  Yeah, except they lost the election.
• 19:41
  I I submit, however, there's a there's a political gambit here.
• 19:46
  I think as strange as some of President Trump's ideas are, I
• 19:53
  think that there's a lot more thought behind them than we
• 19:57
  might, we might think at first. I submit that this is a
• 20:02
  political political gambit. To pressure the Supreme Court.
• 20:07
  Oh, I think it's clearly that. Yeah, because if the Supreme
• 20:11
  Court rules that the tariffs are indeed unconstitutional, Trump
• 20:16
  says. Well, you know those $2000
• 20:18
  checks, the Supreme Court just shot you in the foot.
• 20:20
  Now everybody's mad, and the Supreme Court knows.
• 20:22
  This. Well, yeah.
• 20:24
  But here's the thing that those tariffs are going to have to be
• 20:26
  returned. Oh, if yes, if the if the
• 20:31
  tariffs are found to be unconstitutional, that will
• 20:34
  likely have to be returned. Of course, I would imagine
• 20:36
  there's another court case that's involved and.
• 20:38
  How in God's name are you going to accomplish that?
• 20:42
  Oh see, that's the weirdness. They will get returned to the
• 20:47
  not to the entities that actually paid them, but to the
• 20:50
  to the vendors they were. Collected.
• 20:52
  They were collected. So that means the corporations
• 20:55
  are going to get money back. Yeah.
• 20:58
  No, I think that as far as Trump goes, this is very shrewd
• 21:03
  politics, very shrewd. And he gets to walk away the
• 21:07
  hero, literally, no matter what the outcome.
• 21:11
  Yeah. Yeah.
• 21:13
  And that's, that's pretty smart. I did think there were a couple
• 21:17
  things I thought were really funny that came out of this.
• 21:19
  One was the Treasury Secretary apparently tripping over himself
• 21:23
  to walk back this whole thing. It was in him saying, well,
• 21:26
  there are lots of ways you might pay a dividend.
• 21:30
  Yo, Treasury Secretary, imagining paying a $2000 check
• 21:33
  to every American. Well, so I mean, look you, you
• 21:36
  saw how difficult it is to figure out what that even means.
• 21:40
  Right. Yes, yeah.
• 21:41
  Look, we we kind of do this for a living and we can't figure out
• 21:45
  what that means. And you brought up the COVID
• 21:50
  checks, which is a, which is an interesting thing.
• 21:53
  If you recall in the age of COVID when they were cutting
• 21:57
  checks of the giving out money to businesses and all of that,
• 22:01
  it got so complicated because they're giving to everybody that
• 22:05
  basically they're just giving money.
• 22:07
  You can walk up and say, look, I haven't got my money yet.
• 22:09
  And they say here, have some money and off you go.
• 22:12
  There's tremendous wastage. We predicted at the time that
• 22:15
  that would yield tremendous inflation and everybody said
• 22:19
  it'll be it'll be fine. Right.
• 22:21
  The MMM tears were all out saying where's the inflation?
• 22:24
  Where's the inflation? And then 2022 hit and the MMM
• 22:28
  tears are all gone. And I want to now.
• 22:30
  I want to know where the MMM tiers are.
• 22:32
  Right, right. But I'm not done poking fun.
• 22:36
  One of the things that I believe the president said is that, you
• 22:41
  know, with all this tariff revenue, we can pay down the
• 22:43
  debt. Well, apparently not.
• 22:46
  It does not come close to being enough money to do that.
• 22:51
  Oh, if even if they didn't cut a $2000 check to every taxpayer in
• 22:57
  the United States and instead kept that money in the
• 23:02
  government coffers, the the budget would not be balanced.
• 23:06
  Oh, right. The the tariff revenue needs to
• 23:09
  be about 6 times what it currently is just just to get us
• 23:16
  to a balanced budget and from that point forward then you can
• 23:20
  start paying down the debt. Never going to happen.
• 23:23
  Yeah, so it's it's 1/6 the size what's necessary to get us to 0.
• 23:27
  Forget about paying down any debts.
• 23:29
  And I don't and I don't think people will fully comprehend
• 23:33
  what 1/6 actually means. Can you explain that a little
• 23:36
  bit? Yeah.
• 23:37
  So the annual tariff revenue on an annualized basis, $360
• 23:43
  billion. The deficit this year I believe
• 23:47
  is 2.1 trillion or ballpark 2 trillion.
• 23:52
  You're using numbers they're not going to get if they went out to
• 23:55
  buy a car. Oh would what would it mean
• 23:58
  then? What would it mean to buy
• 24:00
  groceries? Do you mean in in terms of what?
• 24:04
  Oh, you mean you want me to scale this down to like the size
• 24:06
  of a house? Which is?
• 24:08
  Yeah, but but I want to hear what 6 sixths looks like at the
• 24:13
  ground level. The 360 billion.
• 24:16
  Oh no. The the 2 trillion.
• 24:18
  Get look, if, if we have to have six, if we're only collecting
• 24:24
  1/6 now and we all know that prices have gone up
• 24:28
  tremendously. Oh, as a result.
• 24:30
  Oh, I see. What would prices look like if
• 24:33
  it went up to the six sixths that would be necessary to
• 24:36
  balance the budget? Oh.
• 24:38
  In other words, what would happen if the?
• 24:40
  What would what would be required for the tariff revenue
• 24:44
  to be the full 2 trillion? That's right.
• 24:47
  What would it? Cost regular, yeah, basically
• 24:50
  Infinity because you can't Jack the tariff rates that high.
• 24:56
  At some point the tariff rate becomes so high that we just
• 25:00
  give up buying things from foreigners entirely and there is
• 25:03
  no tariff revenue. So no matter what that that.
• 25:06
  Point's going to come before we ever get to the 2 trillion that
• 25:10
  we need to balance the budget so.
• 25:12
  No matter what, it's not going to work.
• 25:15
  But ain't happening. But if we But if we tried to
• 25:18
  make it work every time you walked into a grocery store, you
• 25:22
  would only find products that were grown in the United States,
• 25:26
  Yes. Right, right.
• 25:28
  All foreign things would be and not, not just products are only
• 25:31
  grown in the United States. You would only find products
• 25:34
  whose inputs were grown or manufactured in the United
• 25:38
  States. So if you need a a combine to
• 25:44
  harvest your wheat, but the combine is made in Brazil, no
• 25:49
  wheat for you. No.
• 25:50
  Wheat for you? Yeah.
• 25:52
  So people would literally starve.
• 25:55
  That's how well tariffs work. Yeah.
• 25:57
  Now let me say, because people have said to me before, yeah.
• 26:01
  But Once Upon a time, the United States, the federal government
• 26:05
  survived on on tariffs and states.
• 26:09
  In fact, Once Upon a time, the United States survived on United
• 26:13
  States farmers alone, except at the time there were probably,
• 26:21
  I'm guessing, 1% of the number of Americans that there are
• 26:24
  today. That's about right.
• 26:26
  Actually the best estimates and they are only estimates, but the
• 26:29
  the best estimates prior to the census of 1790 were that there
• 26:34
  are about 3 1/2 million people. Yeah, 110th about what we have
• 26:38
  or 100th of what we have now. And, and if you remember when we
• 26:43
  had Phil Magnuson to talk about tariffs when they first became a
• 26:47
  political hot potato, he said something that resonated with me
• 26:52
  and that I repeat a lot now, tariffs are great if you're a
• 26:57
  small nation and you have a lot of coastline because your trade
• 27:02
  comes in and you could tax it at the point where it enters.
• 27:07
  And then you don't have to have a gigantic administration to tax
• 27:10
  literally anything else. So if if you're Jamaica, tariffs
• 27:16
  might work just fine, right? But if you're Canada or the
• 27:21
  United States or Mexico, oh God, come on.
• 27:26
  Not no, it's not going to be fine, right?
• 27:28
  And it gets way more complicated the bigger you get and the more
• 27:32
  interconnected your economies get.
• 27:35
  And people now say idiotic things like globalism is a bad
• 27:39
  thing and we have to rely only upon ourselves.
• 27:43
  Oh my God, globalism made all of our lives so much better.
• 27:46
  It did, you know, and I used when I first started doing
• 27:50
  public speaking back in the early 2000s, globalization was
• 27:56
  that was like the buzzword. And everyone was so excited
• 27:59
  because countries that had been, for as long as humans have
• 28:03
  existed, underdeveloped countries, all of a sudden,
• 28:07
  through globalization, were becoming modernized.
• 28:10
  Yep, and we don't want that apparently.
• 28:13
  Yeah. Well, all right, well, let's
• 28:15
  move on to something that we do want.
• 28:18
  And and this could have easily been the foolishness of the week
• 28:21
  itself, I think. But we're we're going back to
• 28:25
  our commander in chief who has decided that the answer to what
• 28:31
  is, I think a pretty vexing problem.
• 28:33
  The, the fact that young people, and it's not even really young
• 28:38
  people, but people in their mid to late 30s even cannot afford
• 28:43
  to purchase a home because they've gotten so expensive.
• 28:47
  And rather than, I mean, look, any economist will tell you if
• 28:52
  houses are too expensive, if rent is too high, your problem
• 28:58
  is that you don't have enough supply, build more.
• 29:05
  But but then people say no, no, no, no, no, you can build more,
• 29:09
  just not here. And well, OK, you've decided you
• 29:14
  don't want more, which means the ones you have will all cost
• 29:18
  more. This is very simple basic econ
• 29:23
  one O 1 right? You learn this your first week
• 29:26
  of economics. And here's a general rule I use
• 29:30
  with politicians. Whenever a politician comes
• 29:32
  along and says, look, here's an idea that's going to make
• 29:36
  everybody better off, when the idea has something involving the
• 29:40
  economy, take a deep breath. Because if this idea really were
• 29:47
  as good as a politician thinks and practicable, and by that I
• 29:52
  mean that whatever frictions are involved are small enough versus
• 29:56
  the benefit that people are better off.
• 29:58
  If indeed that's the case, the market will have already come up
• 30:01
  with it. The fact that the market hasn't
• 30:03
  come up with it tells me that there's some there's something
• 30:07
  else. Either the politicians
• 30:08
  overlooked some problem that indeed exists, or alternatively,
• 30:13
  the politician himself is the not that himself, but the
• 30:16
  government itself is the problem by preventing the market from
• 30:20
  doing this thing. And it's almost always that
• 30:23
  second thing. Yeah, off.
• 30:25
  Often it is. And I've often recommended that
• 30:30
  that people who are serious about policy solutions to
• 30:34
  things, that the first place you should look when you see a
• 30:37
  problem is not not to what the government can do to solve the
• 30:42
  problem, but to what the government can stop doing that's
• 30:45
  contributing to the problem. Well, so right now with housing,
• 30:50
  we've got a couple of different problems, right?
• 30:52
  The, the first one is obvious. It's price, prices on houses
• 30:57
  have gone up considerably and very recently.
• 31:01
  I think if you look at the price of housing over the the mid to
• 31:06
  long term, it's pretty linear. You can kind of predict it.
• 31:10
  But if you look at it just in the last 6-8 years, we've had a
• 31:13
  bit of a run up in terms of prices.
• 31:16
  All right, set that to the side and now we've got a problem
• 31:20
  because mortgage rates are very high.
• 31:23
  Right. Right.
• 31:24
  We're looking at 7 to 8% and that makes a gigantic difference
• 31:31
  regarding the monthly payment, right?
• 31:35
  Can you do some quick math on let's call it a $400,000 house,
• 31:40
  a 30 year mortgage, fixed rate 6.5%?
• 31:43
  6.5 you want I do 6.5% four 400,000 which is about as I
• 31:50
  recall, that's about the median. Price Median ish.
• 31:54
  Yeah, yeah. And I don't even and that's for
• 31:57
  a new home. I think that's just the average
• 31:59
  home that's. Meat that's median ish and 6.5
• 32:03
  right now would be a pretty good rate if you could get it.
• 32:06
  Yeah, your payment there. And bear in mind this is only
• 32:10
  the mortgage payment. It doesn't include the the what
• 32:14
  do you call that PMI mortgage insurance.
• 32:16
  The mortgage insurance doesn't include home insurance.
• 32:19
  Home insurance the. Whole bit.
• 32:22
  Yeah, none of that stuff, but just to pay mortgage payment
• 32:25
  $2500 a month and. That 30 year, a lot a month,
• 32:29
  that's a lot of money, yeah. Yeah.
• 32:31
  So if you take the median household, I believe is making
• 32:36
  85,000, so take 85,000, let's assume that 20% taxes, so at
• 32:45
  least net of 68,000 and those payments are running, Wolf, the
• 32:53
  payments are almost they're 45% of the take home pay, 45% of
• 33:00
  your take home pay would go just to the mortgage.
• 33:04
  Yeah, and there was, there was a time out when if you walked into
• 33:08
  a bank and that was the reality, no bank would give you a
• 33:12
  mortgage, right. Well the the the rule of thumb
• 33:18
  for years and years and years was 25% of your gross. 25 per
• 33:23
  the mortgage payment had to be 25% of gross.
• 33:25
  I see 25. Percent of your gross.
• 33:27
  Yeah, but you know what was also a thing for many years and it it
• 33:31
  started to stop being a thing when I bought my first house and
• 33:37
  that is the down payment. It was the case.
• 33:40
  You know my parents time and earlier that a bank wouldn't
• 33:43
  even talk to you if you didn't have at least 20% cash in hand
• 33:48
  to put down on the thing. 20% is still the magic number that gets
• 33:53
  you out of mortgage insurance. So if you put down 20%, you
• 33:59
  don't have to pay mortgage insurance.
• 34:01
  Yeah, but I wonder how I don't know what the numbers are.
• 34:03
  I wonder how many people actually do that anymore.
• 34:06
  I I have been pulling Realtors lately on exactly this and the
• 34:13
  answer to the 20% question is approaching 0.
• 34:17
  Yes, that's what I would figure. Vanishingly, vanishingly small.
• 34:21
  Yeah, they, they tell me that most people barely put down 5%.
• 34:25
  Yep, that that squares with my experience.
• 34:28
  So Donald Trump has inserted himself into this set of
• 34:32
  circumstances. And remember, one of his goals
• 34:36
  is to get the Fed to lower interest rates that that's
• 34:40
  always working in the background, right?
• 34:42
  Because the higher interest rates go, the more the
• 34:45
  government has to pay on the interest on the debt, the, the
• 34:49
  less it has to pay anything else.
• 34:52
  So interest rates are exceedingly important to
• 34:57
  politicians. And everybody in an executive
• 35:01
  function would want them to be 0%, right?
• 35:06
  That would be ideal for them. Now, markets don't particularly
• 35:10
  care for 0% because you don't make a lot of money on 0% loans.
• 35:15
  But you, you understand the larger point here.
• 35:17
  Politicians want it to be as small as it can possibly be,
• 35:21
  regardless of what market forces would dictate.
• 35:25
  Yeah, and they don't. It's not that they want it to be
• 35:27
  lower because it would be good for the voters.
• 35:30
  They want it to be lower because it would be good for the federal
• 35:32
  government. Good for them.
• 35:35
  Yeah. So lurking behind any
• 35:37
  conversation about mortgages and interest rates is the other goal
• 35:44
  of getting the Fed to lower interest rates.
• 35:47
  Yeah, which which would ultimately trickle into the
• 35:50
  mortgage industry. But that's neither here nor
• 35:53
  there for the conversation we're about to have because right now
• 35:58
  the, the standard for buying a house is a 30 year fixed
• 36:03
  mortgage. That's what you aim for fixed,
• 36:07
  meaning the, the, the percentage does does never change.
• 36:11
  If you get a 5% loan, it's fixed.
• 36:14
  It does, it stays 5% for the life of the loan.
• 36:17
  You can get an adjustable rate loan, which typically is a cup a
• 36:21
  point or two lower, but it has a lot of volatility built into it.
• 36:26
  Yeah. And I'll, I'll tell people and
• 36:29
  I'll preface it by saying I'm not a financial advisor.
• 36:32
  So take do with this what you will, but an adjustable rate
• 36:37
  loan is not a good idea unless you are very confident that
• 36:43
  you'll be selling the house within five years.
• 36:48
  Yeah, just just a little bit or if you happen to know with
• 36:53
  relative certainty that you've got a lot of money coming in
• 36:57
  soon, right. If you want to just buy the
• 37:00
  house now and pay it off in a year when all your contracts or
• 37:05
  or or some such thing get paid OK, then take the lower rate,
• 37:10
  keep it for a year and pay it off.
• 37:12
  Because I've heard, I've heard horror stories of horror stories
• 37:16
  relatively, you know, intelligent people who just
• 37:18
  don't understand the finance getting an adjustable rate
• 37:22
  mortgage because it's a much lower rate and lower monthly
• 37:25
  payments. And all of this not realizing
• 37:27
  that five years down the road it adjusts and it's going likely
• 37:31
  going to adjust high and all of a sudden you're stuck with
• 37:34
  mortgage payments you can't afford.
• 37:37
  And to give you an idea of what you can face, five years ago you
• 37:41
  could have gotten a 2.8% loan, which means, which means an
• 37:46
  adjustable loan was probably under 2, but now it's over 7.
• 37:56
  And the difference there might be the difference of living in a
• 38:01
  house and having it foreclosed. That's how people lose.
• 38:04
  That's how people lose houses. They they make bad decisions and
• 38:08
  they can't follow through on the financing.
• 38:11
  Let's go back to the 50 year mortgage.
• 38:14
  Well, I don't think we even talked about it yet.
• 38:16
  Oh, you. I'm sorry we I said it as the
• 38:20
  title of the episode it. Slipped.
• 38:23
  My mind, you haven't said anything about it.
• 38:24
  This is the new answer, right, that that Trump is pushing and,
• 38:29
  and we'll see how far it gets. We'll see what kind of traction
• 38:32
  he gets with this. But he's saying what we could do
• 38:37
  to get more young people to the point where they can afford
• 38:40
  homes is to stretch the mortgage from 30 to 50 years.
• 38:45
  Now, 50 years on a loan is a very, very long time.
• 38:50
  And let me remind everybody that if this were a good idea, banks
• 38:54
  would already be doing it. That they're not What tells me
• 38:57
  there's something here that's that we're missing or that.
• 39:03
  When I when I did the the mortgage on the House I'm in
• 39:06
  right now, my goal was to get a 15 year.
• 39:11
  Right. Yeah.
• 39:12
  Right, because the, the payments are a bit higher, but the rate
• 39:15
  is much lower. And I, I just couldn't pull it
• 39:18
  off. I, I needed it to be the
• 39:19
  standard 30 and a lot of people end up falling into that
• 39:23
  category, right? That you can.
• 39:25
  When you look at what you can accomplish, 30 years is about
• 39:29
  what you need to do. Yeah, because when you start
• 39:32
  talking about 50 years, your, you know, unless you're, unless
• 39:37
  you're buying the house when you're 20 years old, you're
• 39:40
  going to be still making mortgage payments well into
• 39:43
  retirement. Yeah, and and I've got a, I've
• 39:46
  got a graphic that will throw up that'll shed a little bit of
• 39:50
  light on this. It's not as good as you might
• 39:53
  think it. Well, let me rephrase that.
• 39:56
  It doesn't make as big a difference on your monthly
• 40:00
  payment as you might think. Yes, and and you can run the
• 40:05
  numbers your yourself amp, but the graphic that I've got
• 40:08
  compares a 30 year mortgage including the monthly payment
• 40:12
  and the P and I payment and the 30 year is $24163 and the 50
• 40:18
  year is $21180. Yeah, that's ballpark what I'm
• 40:22
  looking at here. You're saving about $285.
• 40:27
  Yeah, I have leaving PMI out of it.
• 40:29
  I have a saving. I have your payments being about
• 40:32
  11% less 11%. But interestingly, that's at a
• 40:38
  6.5% mortgage rate. If the mortgage rate were 5%,
• 40:44
  your payments go down by 15%. If it was 3%, your payments are
• 40:49
  down by 20, almost 25%. So the higher the interest rate
• 40:54
  is, the worse of a deal. The 50 year mortgages.
• 40:59
  Yeah, I mean, it's not a great deal no matter what.
• 41:03
  For one very simple reason, most people who would be inclined to
• 41:09
  sign that deal are likely not going to live until the end of
• 41:13
  it. Right.
• 41:15
  There, there is going to be a substantial risk on the lender
• 41:20
  side and you, it might be risk of a sort that you have to have
• 41:26
  mortgage insurance for a 50 year mortgage for all 50 years, which
• 41:32
  would drive the price up. That's something that hasn't
• 41:35
  been fleshed out in the market yet, but it will be because if
• 41:40
  you're taking loans and look, man, I, I took out a mortgage
• 41:44
  that I will clearly not live to the end of this, this term that
• 41:50
  I have in this house. I clearly won't.
• 41:52
  And everybody knew it the day I signed it.
• 41:55
  So the the market has figured out that that's not exactly a
• 41:58
  problem, but maybe it's a problem if everybody gets a 50
• 42:02
  year mortgage. Yeah, well, part, part of what's
• 42:04
  going through the banker's mind is that regardless of how long
• 42:08
  you live, they're banking on you selling the house.
• 42:11
  That's right. And that it will appreciate it
• 42:13
  over the over time or in my estate, right, something like
• 42:17
  that. But, but let me let me point out
• 42:20
  here, people complain about, well, they don't want to play,
• 42:24
  they want to pay rent. They want to own the house.
• 42:27
  Well, at a 50 year mortgage, you might as well, you're paying
• 42:31
  rent. You're yeah, you're going to be
• 42:32
  paying your entire life. Not only are you paying rent,
• 42:35
  you're, you're fixing everything that goes wrong, which is, which
• 42:39
  is one of the reasons to rent, right.
• 42:41
  Over 50 years, you're going to put up, if you live in Arizona,
• 42:45
  8 new roofs. The sun beats down hard on the
• 42:50
  roofs here and they have to be recoded every couple of years.
• 42:54
  Ouch, who knew Air conditioners are way more expensive than I
• 42:58
  thought would even be possible, but try to live here without
• 43:02
  them. Yeah.
• 43:05
  Good luck with that. And and you know, if you, if
• 43:08
  you're renting, you don't pay any of this.
• 43:09
  I mean, you do, it's just kind of hidden in your rent.
• 43:12
  Right. It's hidden in your rent, and
• 43:14
  the thing you get with rent is the ability to walk away at a
• 43:18
  moment's notice that. And predictability.
• 43:22
  Redictability. What, what, what renters often I
• 43:26
  find don't appreciate is the, is the frictional cost of buying a
• 43:31
  house that any time you buy or sell a house, you've got, yes,
• 43:35
  of course, the price of the house and all of that.
• 43:37
  But then there's the brokerage fee and the banks fees and the
• 43:41
  lending fee, all this stuff. So when you're done, it's that
• 43:44
  those fees will eat like 3 or 4 years worth of principal
• 43:48
  payments. Well, here's the thing, I I
• 43:50
  talked to a realtor about this recently and I said just off the
• 43:55
  top of your head, what percentage of the sale price
• 44:00
  does the seller not get? And he said, oh, about 7%
• 44:05
  Between all the closing costs, all the various fees, you're
• 44:09
  going to lose 7%. That's a colossal amount of
• 44:13
  money on a house. Yeah.
• 44:16
  Colossal. It means most people who sell
• 44:19
  their house are going to break even on a good day.
• 44:22
  If you held the house for 20 years and are appreciated, OK 7%
• 44:26
  hit isn't that bad. But if you just bought the thing
• 44:29
  five years ago, they have a problem, yeah.
• 44:32
  Yeah, that's painful. James and I are delighted to be
• 44:35
  working with Sybil. For years we have been pushing
• 44:38
  people to think about how we can make the world a better place.
• 44:41
  Sybil's mission of upgrading society fits exactly with what
• 44:45
  James and I have been talking about for years.
• 44:48
  Civil helps us by allowing us to do what we do best, which is
• 44:51
  researching topics that are important in communicating these
• 44:55
  to our listeners in ways that we hope they find enjoyable to see.
• 44:59
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• 45:02
  Words and Numbers and our new lecture series, Words and
• 45:05
  Numbers Live. Visit civil.com.civl.com.
• 45:10
  I want to talk about the interest for a minute.
• 45:13
  Let's go back to your example of the $400,000 house at 6.5%
• 45:18
  interest, 30 years versus 50 years.
• 45:21
  And on the one hand, in terms of the payment, I have monthly
• 45:25
  payment $2500 for the 30 year mortgage, 2300 for the 50 year
• 45:31
  mortgage. So you said $200 difference,
• 45:33
  that's about a couple. 100 bucks, yeah.
• 45:35
  Not a big deal. Here's where the big deal comes
• 45:37
  in. Over the life of the loan that
• 45:42
  30 year loan you will have paid a total of $500,000 in interest
• 45:48
  for the 30 year loan. For that 50 year loan, let's
• 45:51
  let's stop and take a breath. That's a lot of money.
• 45:55
  Oh yeah, no, it's spread over 30 years and you know, it's in the.
• 45:59
  Future but it's that but the but it's.
• 46:01
  Half a million. Dollars.
• 46:02
  The interest is worth more than the house itself was the day you
• 46:07
  bought it. Yeah, yes, yes.
• 46:10
  You pay $500,000 interest and $400,000 principal, which means
• 46:16
  your $400,000 house just cost you 900 something $1000.
• 46:20
  And to people who, and I've seen this say, well, look at this is
• 46:25
  a racket, why I bought a $500,000 house, How come I have
• 46:28
  500 thousand $400,000 house? How come I have $500,000 in
• 46:32
  interest? And the answer is because you
• 46:33
  got the house now instead of waiting 30 years.
• 46:37
  That's what the interest is paying for.
• 46:39
  And after we're done going through the 500 the, the, the 50
• 46:44
  year mortgage, I've got something to say on that point,
• 46:46
  but what's the interest look like on the.
• 46:49
  Back to the interest 30 year mortgage total interest half a
• 46:52
  million dollars 500,000 for the 50 year mortgage total interest
• 46:58
  950,000 almost 90% more interest for the 50 year mortgage versus
• 47:07
  the 30 year. My goodness.
• 47:10
  Yeah. I mean on that, on that delta of
• 47:12
  400,000, I mean you could almost retire on that if you'd put it
• 47:16
  into your portfolio if. If you had it.
• 47:20
  Right. Yeah, you.
• 47:22
  Wouldn't you might not have a place to live if you did that?
• 47:24
  Right. And, and this makes me wonder if
• 47:27
  again, this is a this is a political gambit because it
• 47:32
  looks so good on the front end. You don't realize until decades
• 47:38
  down the road what a bad deal this is.
• 47:41
  Well, of course, down the road, current politicians will be
• 47:44
  gone. Anybody.
• 47:45
  Should be able to look at the 2 deals and say why would I add 20
• 47:50
  years to the payments to save $200 a month?
• 47:55
  Right. Right, that's just the the
• 47:57
  simplicity of it all. But, and this is what makes me
• 48:01
  so mad that I've seen it, I've seen it.
• 48:05
  I have seen it with mortgage, with real estate people.
• 48:08
  I see a lot more with car dealers, cars, Yep, cars you
• 48:12
  walk in and they immediately go to how much do you want to pay a
• 48:16
  month? How much can you afford?
• 48:17
  That is the exact. Wrong question.
• 48:19
  You should never, and if you're out buying a car you shouldn't
• 48:23
  answer that question. The only thing that matters is
• 48:26
  the cost of the car. The rest is a shell game.
• 48:31
  Well, yeah, in fact, let me say it there.
• 48:33
  It's a 2 step process. Step number one, settle on the
• 48:36
  price of the car. The price of the car.
• 48:39
  Yep. Step number two, once you got
• 48:41
  the price, now let's negotiate financing and that's when you
• 48:45
  start asking and how much you want to pay a month.
• 48:48
  And you can, and little known fact, you don't have to get your
• 48:51
  financing at the car dealership. Right.
• 48:54
  Yeah. Go to your, go to your credit.
• 48:56
  Union and see what they can do. You might get a much better
• 48:59
  deal. Yeah, they certainly won't take
• 49:02
  advantage of you like a car dealer would.
• 49:04
  But anyway, the more interesting thing here, Aunt, is when we
• 49:08
  were young, right up until about, I don't know, 10 years
• 49:12
  ago, you bought a car and you spaced it out over five years
• 49:16
  generally, right? A car loan was always figured at
• 49:20
  five years, right? They're up to 7.
• 49:24
  Yeah, see that's. 72 months on a car and cars don't last seven
• 49:31
  years. Right.
• 49:32
  So you can end up still owing money on nothing.
• 49:36
  There's nothing there and you owe money are.
• 49:38
  You're not driving and, and people, they get all excited and
• 49:42
  puffy chested saying look at my new car.
• 49:46
  And they get these, you know, the, the ginormous pickup trucks
• 49:50
  and with all the bells and whistles, do you know that you
• 49:54
  could spend $110,000 on a, on what I would consider a
• 49:57
  run-of-the-mill pickup truck? Yeah.
• 50:00
  And you could finance it over 7 years.
• 50:05
  Good luck to you. Yeah.
• 50:07
  Good luck because payments add up in a life.
• 50:11
  If you have two car payments, you going to add a mortgage
• 50:14
  payment to that? What other things do you pay for
• 50:16
  every month? Because as a homeowner you're
• 50:18
  going to have other monthly bills.
• 50:20
  You know, electricity and water and all things like this that
• 50:26
  turn out to be really good ideas.
• 50:28
  Yeah, before you ever get to Netflix.
• 50:30
  That, that's right. That last $12.00 or whatever
• 50:33
  Netflix costs now, I don't know, because we cancelled it, right?
• 50:39
  If you're not watching it, why do you have it?
• 50:41
  And we said, yeah, Netflix can go, but I can't do that with the
• 50:45
  electric bill, certainly can't do it with the water bill.
• 50:49
  And when you start looking at committing yourself to something
• 50:53
  for 50 years, I would be very reticent to do it.
• 50:57
  Now. Let's take a giant step
• 51:00
  backwards. If the interest rate you can get
• 51:05
  on the loan is something that is so low that you can do better in
• 51:11
  a money market account or some such thing, you should take that
• 51:15
  loan out every day of the week. You, you should.
• 51:18
  I agree with you 100%. But I warn people.
• 51:21
  Let's suppose there's a $400,000 house you're looking at and you
• 51:25
  can get it. Instead of 6.5%, which is $2500
• 51:30
  a month, we'll give you 3%, which is $1600 a month.
• 51:36
  You're $1000 a month better off now.
• 51:38
  Yep, there, there you go. You're absolutely right.
• 51:42
  You take that 3%, finance, the whole thing, and that extra
• 51:45
  $1000 a month, you put it into stocks, you put it into bonds.
• 51:50
  You could put problems here into a high rent savings account and
• 51:53
  do better than 3% the. Problem here is what people
• 51:56
  often do is they'll Jack up the house.
• 52:00
  Well now I can afford 4 bedrooms instead of three in the pool and
• 52:04
  before you know it you're back up to $2500 a month.
• 52:07
  It's just on a bigger house. On a bigger house, that's right.
• 52:10
  And This is why when markets get like they are right now, where
• 52:14
  prices are high and interest rates are high, people are
• 52:18
  looking at much smaller homes. Right.
• 52:22
  Because that's all they can afford.
• 52:25
  And politicians know that and they know that it's upsetting to
• 52:29
  people when that's all they can afford.
• 52:31
  They all, everybody wants to live in a house better than the
• 52:34
  one they grew up in. And and that's been occurring
• 52:38
  generation after generation in the US since probably throughout
• 52:42
  our entire history. And we finally reached a tipping
• 52:45
  point on that. And we've got generations now
• 52:48
  that are downsizing instead of upsizing.
• 52:51
  And it's it's, it's making them angry.
• 52:54
  And I understand 50 years isn't the answer.
• 52:57
  Whatever happened to the tiny house movement?
• 52:59
  I thought that was so cool but they seem to but it turn turns.
• 53:03
  Out. Nobody.
• 53:03
  Nobody wants to live in those damn things.
• 53:07
  I mean, look, I want one, but I want to turn it into my office,
• 53:13
  right? It's great for something like
• 53:14
  that. It's great to have as an adjunct
• 53:18
  to your house when people come to visit for three weeks.
• 53:22
  Mm. Hmm.
• 53:23
  And you could say, you know, go, go in the back now we've had
• 53:27
  dinner, get out. But I mean, do you really want
• 53:31
  to live in 600 square feet? Yeah, see that's the thing.
• 53:34
  It seems so cozy 400 on YouTube but if during a day after day
• 53:39
  I'm sure it becomes annoying. It given the choice, I would
• 53:42
  rather live in a warehouse than a tiny house.
• 53:46
  If I had to pick one or the other, I'm going warehouse every
• 53:50
  time, aesthetics be damned. Look, the the $2000 check thing
• 53:56
  earlier, that was fun because you and I both know it's not
• 53:59
  going to happen. There's there's going to be an
• 54:02
  intervening variable there that keeps that from occurring.
• 54:06
  That's not to say that they won't find some other way to get
• 54:10
  $2000 checks out to buy more votes later.
• 54:13
  That's what politicians do. This is just a particularly
• 54:16
  brazen version of that. This actually the 50 year
• 54:20
  mortgage might happen. I don't know what politicians
• 54:24
  would do to make it happen because banks banks could go
• 54:27
  ahead and offer 50 year mortgages now.
• 54:30
  Well, they could regulate it into existence.
• 54:33
  They could require it. That's right.
• 54:35
  Yeah. See, now there's a problem.
• 54:37
  Because if they're going to require it, that means that that
• 54:40
  there's some the cost that's being imposed.
• 54:44
  That's correct, because otherwise the bank is offering
• 54:46
  on their own then will be reflected in the interest rates
• 54:50
  that get offered not only at the 50 year level, but at every
• 54:54
  level because it's increased risk to the lender, right.
• 54:59
  And that that always yields higher interest rates.
• 55:03
  That's what interest rates are. It's an assessment of the risk
• 55:06
  of the loan. And Speaking of which, that
• 55:10
  always that annoyed me from the time I bought my first house
• 55:14
  that, you know, we got this little thing in the hills of
• 55:16
  West Virginia, you know, as much as you could scrape together on
• 55:19
  a assistant professor's salary. And we got, we had to get
• 55:26
  mortgage insurance on the thing. And so I'm asking, well, what is
• 55:30
  this thing, the mortgage insurance?
• 55:31
  And they said, well, of course. Well, if you, you know, don't
• 55:33
  make the the payments the bank repossesses or what have you,
• 55:38
  the mortgage insurance insures the bank so it gets its money
• 55:40
  back. I didn't know enough about the
• 55:43
  world to understand what mortgage insurance was until
• 55:47
  they told me. But I did know enough about
• 55:49
  economics to know what a riskless interest rate is.
• 55:53
  And it seemed to me that the PMI, the the mortgage insurance,
• 55:58
  made the loan riskless to the bank.
• 56:01
  If that was the case, how come I wasn't paying Treasury rates on
• 56:06
  this thing, The same interest rate that the government pays
• 56:10
  for its riskless debt? Because the bank had to make a
• 56:13
  profit on you or. Maybe that's it.
• 56:15
  The bank had to make a profit, right?
• 56:17
  Yeah, yeah. There's always that, right?
• 56:19
  Look, banks aren't doing a public service by offering
• 56:24
  mortgages. They're they're selling a
• 56:25
  product. Yeah, and you just.
• 56:28
  I'm so glad you said that because I have a note here and I
• 56:30
  forgot about it. That's something that I've seen
• 56:34
  way too many intelligent people get wrong.
• 56:37
  They think that they're buying, that they're borrowing money
• 56:40
  from the bank, and the bank is being evil because it wants all
• 56:44
  this interest. You are not by borrowing money
• 56:46
  from the bank, you're borrowing money from other people in your
• 56:50
  community who have put their savings into the bank.
• 56:53
  It's the savings that's being loaned to you, the bank simply a
• 56:57
  middle man. And if, if you can't grasp this
• 57:01
  intuitively, go watch It's a Wonderful Life.
• 57:03
  We're getting to Christmas time. It'll be on.
• 57:06
  It'll be on TV. The last scene explains exactly
• 57:11
  this in graphic detail. Yep, in, in in a very.
• 57:15
  Entertaining. Way, which seems impossible
• 57:18
  given the the topic at hand, but I want to go a step further and
• 57:23
  talk about what mortgages and loans more generally allow
• 57:29
  because most people in the United States could not conceive
• 57:33
  of a life without the product loans in the form of auto loans
• 57:40
  in the form of home loans, whatever they allow you to, for
• 57:46
  lack of a better word, mortgage. Your future, right?
• 57:49
  You're, you're looking at what you will be able to afford over
• 57:53
  time, not what you can afford today.
• 57:57
  Because outside of misusing a credit card, people don't take
• 58:02
  out loans to buy the week's groceries.
• 58:06
  You just go and you buy them. They're inexpensive.
• 58:09
  It's in the grand scheme of things.
• 58:11
  It's not something you have to sit and plan the same way you
• 58:14
  have to plan a home or a car. You need a home one way or the
• 58:19
  other, if they have a roof over your head or you will die.
• 58:22
  Generally speaking, you also need a an automobile of some
• 58:27
  sort to get from where you sleep at night to where you work
• 58:31
  during the day. But at most points in your life,
• 58:35
  you can't pay cash for these things, right?
• 58:38
  They're they're expensive. Now you can pay more or less,
• 58:43
  but you probably can't just afford to walk out and say today
• 58:50
  I'm going to buy a house here, take all this money.
• 58:52
  Yeah. And let let me Polish that a
• 58:54
  little bit. You, you can afford it in the
• 58:57
  sense that you could save up your money and pay for it.
• 59:00
  But the problem is that where do I, where do I sleep in the
• 59:03
  meantime? How do I get to work in the
• 59:05
  meantime? And there are places like this
• 59:09
  because where where I lived in Iraq, you weren't going to get a
• 59:12
  mortgage. Every home was purchased with
• 59:15
  cash. What's the unintended
• 59:18
  consequence of that? People stay in the family home
• 59:22
  for a very long time. You know.
• 59:25
  And you get multi generational families living in the same
• 59:28
  structure. Do you want to live with three
• 59:31
  generations of your family or do you want to buy a house today?
• 59:35
  That's the freedom that alone offers you, and you could take
• 59:40
  it or leave it. There's no rule that says you
• 59:43
  must go take a mortgage out. Stay in your familiar, familiar
• 59:48
  familial home if that's what you prefer.
• 59:51
  Think about what life would look like if every time you needed a
• 59:55
  new car, you had to pay cash for it.
• 59:59
  I lived in a place where that was true.
• 1:00:00
  A lot of people didn't have cars.
• 1:00:04
  Most families had at most one. Because that's really a, a, a
• 1:00:09
  hell of a cost to bear all at all at once.
• 1:00:12
  So, you know, it seems to me that and, and that we haven't
• 1:00:17
  even gotten to business loans. Can you get into business
• 1:00:21
  without a loan? Not in many cases.
• 1:00:23
  So the Western world, once it figured out how to finance risk,
• 1:00:30
  which is what loans do, exploded.
• 1:00:34
  Yeah, because it's a really good thing.
• 1:00:36
  And it works, it works remarkably well.
• 1:00:40
  It provides the consumer of the loan with the lowest possible
• 1:00:45
  rate and the offer of the loan with the highest possible
• 1:00:49
  return. Right, because there there are
• 1:00:53
  forces that work in both directions.
• 1:00:55
  And what you're literally doing is tapping into your future
• 1:00:59
  earnings. That's right.
• 1:01:00
  That's exactly what you're doing.
• 1:01:02
  And you're, you might say as many people do, OK, I can just
• 1:01:07
  about afford this house right now.
• 1:01:10
  OK, let's go ahead. And what you're really saying is
• 1:01:13
  I bet I get a number of raises at work that make this very
• 1:01:18
  affordable over the long term. And that's generally what
• 1:01:23
  happens for people generally. You can't take all the risk out
• 1:01:27
  of anything. Yeah, but how many people do you
• 1:01:31
  personally know, aunt, who have lost their homes, been
• 1:01:34
  foreclosed on? Yeah, I I know some.
• 1:01:38
  Not very very few, but some. And, and I don't know any.
• 1:01:43
  So it's kind of like when we talk about car safety and we say
• 1:01:48
  a long time ago we all knew people who died in car accidents
• 1:01:51
  and now we don't. Well.
• 1:01:54
  A long time ago, people lost their homes all the time.
• 1:01:57
  Right. Yes.
• 1:01:58
  And now not so much, not so much.
• 1:02:03
  And that generally speaking, I think shows that the system as
• 1:02:07
  it sits works pretty well. And yet we're left with the
• 1:02:11
  reality that right now younger people, because of the price of
• 1:02:16
  the house on the one hand and the price of the loan on the
• 1:02:19
  other, just can't pull it off it.
• 1:02:22
  It's very, very difficult for a group of people.
• 1:02:25
  And, and I'm, I feel for them. I really do.
• 1:02:28
  I remember when I moved to the town we lived in together,
• 1:02:32
  interest rates were kind of high at the time.
• 1:02:35
  And I, I I was paying over 5 on on that.
• 1:02:37
  House. Yep, me too.
• 1:02:39
  And that was, that was painful. I remember when I went out
• 1:02:42
  looking at houses on a a lousy assistant professor.
• 1:02:47
  Sorry, people don't know how little professors make actually.
• 1:02:51
  But I, I was barely getting by and we had to have a hard stop
• 1:02:55
  at $200,000. There was no way.
• 1:03:00
  And after the episode is over, I will tell you the story of when
• 1:03:04
  I got that mortgage because it's hilarious.
• 1:03:07
  But there, there was a hard cap there.
• 1:03:10
  And that 200,000 was generally defined in no small part by the
• 1:03:15
  cost of the interest on the loan.
• 1:03:17
  Because once you get the price, now you have to figure out what
• 1:03:20
  the financing looks like, just like with the car.
• 1:03:23
  And there you were. So what?
• 1:03:24
  What's your prediction that you think this 50 year business is
• 1:03:27
  going to A happen and B take off?
• 1:03:30
  If I had to guess, I would say the most likely thing is it
• 1:03:34
  happens and there's a hue and cry about the banks gouging
• 1:03:43
  people because of the premium, because of the 50 year thing.
• 1:03:47
  And you know there's A to do about that.
• 1:03:51
  And then slowly it just fades away because everyone realizes
• 1:03:54
  this wasn't wasn't a good idea in the 1st place.
• 1:03:56
  If it had been, we would have had it.
• 1:03:59
  Yeah, no. And I think it is a profoundly
• 1:04:01
  bad idea, which is why I think politicians will probably
• 1:04:06
  require it and then banks will offer it because they have to
• 1:04:11
  and smart people won't take it. What's $200 a month?
• 1:04:18
  Right. To add 20 years to a mortgage
• 1:04:21
  for $200? That's craziness, $200 a month
• 1:04:25
  sounds good when you're young and you could really use that
• 1:04:29
  extra $200 a month. And you don't realize until
• 1:04:33
  you're 30 years down the road that you could have been out
• 1:04:36
  from under this mortgage now, but you got another. 2020 years.
• 1:04:40
  Decades to go. And not not only that, but
• 1:04:42
  you're going to pay almost $1,000,000 in financing fees.
• 1:04:45
  Yeah. On a $400,000 house.
• 1:04:49
  Ouch. Well, strange times we live in,
• 1:04:52
  so I'm interested to see what happens next.
• 1:04:55
  People are going, people may come back and say yes, but
• 1:04:58
  you're not taking to account that the the value of the house
• 1:05:02
  will appreciate overtime. And two things here.
• 1:05:05
  First, appreciating overtime doesn't change anything.
• 1:05:10
  We've said it makes the numbers different, but the principles
• 1:05:14
  that we've described here are all the same. 2 I would not bank
• 1:05:19
  on housing prices continuing to rise that much.
• 1:05:22
  No, I think they're already not rising and I think they're going
• 1:05:25
  to tumble. Yeah, well, I don't know about
• 1:05:28
  tumble, but but what was driving housing prices was the increase
• 1:05:33
  in the population. Over the course of my life, the
• 1:05:37
  number of Americans has doubled. And of course, they all need
• 1:05:40
  places to live. And so of course, housing prices
• 1:05:43
  go up. Our population is topping out.
• 1:05:45
  We're not going to see a doubling over the next.
• 1:05:48
  Generation and so you're not going to see housing prices
• 1:05:50
  continue to rise and as prices are high demands goes lower,
• 1:05:55
  which feed is downward pressure on the entire market anyway.
• 1:05:58
  What can you do is, is really where where you're left here
• 1:06:01
  and, and people will buy houses to the degree that they're
• 1:06:05
  comfortable with the package that they're offered.
• 1:06:09
  And people aren't terribly comfortable with an 8% package.
• 1:06:14
  People were incredibly comfortable five years ago with
• 1:06:18
  2.8%, right And somewhere in between 2.8.
• 1:06:24
  Wait, I think it was 2.85 is the low point.
• 1:06:27
  Might have gotten to 2.7 for a day and 1/2 or it's something
• 1:06:30
  like that. Between 2.7 say and eight
• 1:06:35
  Somewhere in the middle there probably more to the left than
• 1:06:38
  to the right. People are going to find a
• 1:06:41
  comfort zone again and when rates get there they'll start
• 1:06:44
  buying houses again. Yep.
• 1:06:47
  And and if rates ever do get back, I don't think they will.
• 1:06:51
  If they ever do get back to 2.8%, there's a different story
• 1:06:56
  here. This, I mean, again, the
• 1:06:57
  principle remains the same, but the numbers move enough that
• 1:07:01
  maybe it starts to look a little bit attractive.
• 1:07:05
  Oh, and by the way, 'cause I just what remind me of this is
• 1:07:09
  my saying that I don't think you're ever going to see 2.8
• 1:07:12
  interest, 2.8% interest again, which made me think of
• 1:07:15
  inflation. Isn't that one of the things
• 1:07:18
  that President Trump said about this $2000 check thing in his
• 1:07:22
  tariffs that oh, he said inflation is inflation is under
• 1:07:26
  control or inflation is net is, is falling.
• 1:07:29
  I forget what it was. Inflation falling is worth about
• 1:07:31
  inflation. Inflation is is falling is
• 1:07:34
  that's the the happy spin to put on it.
• 1:07:37
  Yeah. And the truth is inflation is
• 1:07:40
  falling, but it's, I mean that's in from June 2022 when it it
• 1:07:47
  peaked on a month over month basis at 17% month over month.
• 1:07:52
  So falling isn't, you know, that great shakes, given that where
• 1:07:56
  you came from. Oh, and take It could fall to
• 1:07:58
  zero and we're all still paying too much for everything.
• 1:08:01
  Well, yeah, but the problem here is that there's every indication
• 1:08:06
  that inflation's going to settle about a percentage point higher
• 1:08:09
  than what we had prior to COVID. Yeah, no, every, everybody seems
• 1:08:13
  to be saying 33.5. That's the best case scenario.
• 1:08:16
  Prior to COVID it was 1.5. 2/2 for decades.
• 1:08:22
  And that was the Fed's goal, to keep it at 2:00.
• 1:08:24
  Yep, now the Fed can't keep it at 2:00 because the money, the
• 1:08:29
  money supply increased so much that it's not possible.
• 1:08:34
  And where that connects to mortgages is if your inflation
• 1:08:38
  rate is going to settle about a percentage point higher, then
• 1:08:42
  expect mortgage rates to settle at about a percentage point
• 1:08:46
  higher. So 2.8 was as good as it got
• 1:08:48
  before, 3.8 is going to be as good as it gets now.
• 1:08:52
  But also expect the cost of the house to go up because every
• 1:08:57
  piece of raw material that makes the house has been inflated.
• 1:09:01
  Right. Yeah, Yeah.
• 1:09:02
  The price, not just the mortgage rate, but the price, the
• 1:09:05
  purchase price of the house is going to be going up, yeah.
• 1:09:07
  And there, and there's literally no way around that.
• 1:09:10
  The contractors have to make a living.
• 1:09:12
  Sorry. And it's true.
• 1:09:14
  Anyway, I guess that's not a particularly uplifting note to
• 1:09:19
  end on, but so it is let. Me give, let me give an up
• 1:09:24
  uplifting note that I don't think people appreciate.
• 1:09:28
  You touched on it earlier when you talked about mortgages and
• 1:09:34
  lending as being. I described them as inventions
• 1:09:36
  because they actually are inventions, humans.
• 1:09:38
  Came up. Yeah, that's perfectly.
• 1:09:39
  Fair, perfectly fair. They make our lives so much
• 1:09:43
  better. And like any tool, they can be
• 1:09:45
  abused, right? But by and large, they really
• 1:09:49
  make our lives so much better. They make things possible that
• 1:09:52
  simply weren't possible before. I one of my favorite books by
• 1:09:58
  Ken Follett, he writes a lot about life in medieval villages
• 1:10:05
  before the invention of things like loans.
• 1:10:09
  And you had a, you know, villager who's trying to save up
• 1:10:12
  for a business, and he's got to work for 30 years as an
• 1:10:15
  apprentice until he can save enough money to buy his
• 1:10:19
  equipment because there's no such thing as a loan.
• 1:10:21
  And maybe if if it all works out, he can leave a struggling
• 1:10:25
  business to his son. Right.
• 1:10:28
  Yes, exactly. That's the best you can do.
• 1:10:31
  Yep. Yeah.
• 1:10:32
  Which is, you know, not. Particularly heart warming.
• 1:10:36
  Well, the heart warming part is we live in a time when we have
• 1:10:40
  these wonderful inventions of, you know, loans and, and all of
• 1:10:44
  the things that go with them that people, people give a bad
• 1:10:48
  rap, I think to things like options and futures contracts
• 1:10:52
  and all of it. But all that stuff is are the
• 1:10:55
  the machinery behind the financial industry that makes
• 1:11:00
  everything. Possible, yeah.
• 1:11:02
  And as long as it's done right and well, there will never be a
• 1:11:06
  problem. But we all remember 2008 when it
• 1:11:10
  was done incorrectly and poorly and, and all kinds of problems
• 1:11:16
  emerged. And, and I, I would encourage
• 1:11:18
  you to go watch the movie The Big Short if you don't really
• 1:11:21
  have a grasp of what happened there.
• 1:11:23
  And I suspect it's going to happen again.
• 1:11:26
  But you know, we'll find out when, not if.
• 1:11:29
  I I endorse the the music, the movie, The big.
• 1:11:32
  Short, but but watch there's there's one giant caveat.
• 1:11:38
  The. Very last sentence.
• 1:11:41
  So he he sets out beautifully this what was going on with the
• 1:11:44
  financial crisis, but he doesn't hit the core of what the real
• 1:11:48
  problem was until the very last sentence of the movie.
• 1:11:51
  Yeah, it too long. Didn't read.
• 1:11:54
  It's the government's fault. Yeah, yeah.
• 1:11:57
  And it only it only that only comes up in one sentence in the
• 1:12:00
  entire movie. I I think as well, if I remember
• 1:12:03
  you had a maybe to it like well. Maybe the Fed was.
• 1:12:07
  Could have done something differently.
• 1:12:09
  So, you know, you should watch it knowing that they're not
• 1:12:12
  going to cover that appropriately.
• 1:12:13
  But they do a remarkable job making a very complex time,
• 1:12:19
  relatively simple and straightforward.
• 1:12:21
  Great storytelling. That's just great.
• 1:12:24
  Anyway, that is a more uplifting note.
• 1:12:26
  So we'll, we'll end it there and I'll, I'll see you next next
• 1:12:30
  time. And until then, be nice to each
• 1:12:34
  other. At Words and Numbers, we spend a
• 1:12:36
  lot of time talking about what's going on in the economy and the
• 1:12:39
  government. But fundamentally, all of this
• 1:12:41
  boils down to one thing. The greatest threat facing
• 1:12:44
  modern society is a lack of respect, that people who
• 1:12:48
  disagree somehow find it difficult, if not impossible, to
• 1:12:51
  discuss their differences in a civil manner.
• 1:12:54
  We as civil, are interested in upgrading civilization by
• 1:12:57
  encouraging people to engage with new ideas and ultimately
• 1:13:01
  engage civilly with each other. If you share this idea, please
• 1:13:05
  joinusbysubscribing@sybil.com.civl.com. And now that we're alone, I can
• 1:13:13
  tell you the story. And aunt, you've already heard
• 1:13:15
  this story, so you're just going to have to hear it again.
• 1:13:18
  I love your story, James. Well.
• 1:13:20
  This isn't well, that. That's great.
• 1:13:22
  That's just great. This is an interesting one
• 1:13:25
  because this happened when I moved to Pennsylvania and I
• 1:13:29
  moved to Pennsylvania in 2005 and I, I moved there on a very
• 1:13:34
  low assistant professor salary. Like I said, the main episode,
• 1:13:37
  and we had decided $200,000 was the outside limit of what we
• 1:13:43
  could afford. And even that was going to be
• 1:13:46
  pretty tough for a while. I was going to have to become
• 1:13:49
  creative and entrepreneurial and figure out how to bring more
• 1:13:52
  money into the house than simply my salary.
• 1:13:55
  But I'm I in order to get all this moving, you got to find a
• 1:14:00
  house and you got a bid on a house.
• 1:14:02
  But before you can do that, you have to talk to the bankers and
• 1:14:05
  get pre approved for the mortgage.
• 1:14:07
  This is not the mortgage process.
• 1:14:10
  You can still be denied. I I later found out you could
• 1:14:13
  still be denied a mortgage after you were pre approved.
• 1:14:15
  So really pre approved? What is the point?
• 1:14:18
  Being pre approved. Then it doesn't seem to mean a
• 1:14:20
  damn thing. Anyway, I got pre approved for
• 1:14:24
  $200,000 because that's what I asked for.
• 1:14:27
  And I, I walked in and the guy said, all right, give me your
• 1:14:30
  papers. And there was a number of
• 1:14:31
  different things and I laid them all over his desk and he kind of
• 1:14:34
  sat back in his chair and just looked at them and said, OK.
• 1:14:40
  And I said, OK, what? He said you're pre approved.
• 1:14:44
  I said, oh, well that was easy. He said yeah.
• 1:14:48
  And I said, do I get a letter? And he said, Yep, have it
• 1:14:52
  drafted before you leave. And I said, well, great, I guess
• 1:14:55
  that's all we need. And then I got this crazy idea
• 1:14:58
  and I said, tell, tell me something.
• 1:15:00
  I'm not asking for anything other than just two guys
• 1:15:04
  talking. What would you have approved me
• 1:15:09
  for? I only asked for two.
• 1:15:11
  What would you have given me? And he looked at the papers and
• 1:15:14
  he hadn't any hard for a minute. And he said 450.
• 1:15:21
  And I said, I said, and I quote, 'cause remember, I'm, I'm
• 1:15:26
  looking for a house in August. I said I would be homeless by
• 1:15:31
  Christmas. And he looked back at me and he
• 1:15:35
  said, and I quote, that wouldn't be my problem.
• 1:15:40
  Yep. And I've just given you the the
• 1:15:43
  entire plot of The Big Short. Let me let me go 1 addition that
• 1:15:49
  it wouldn't be my problem. What he means is the bank would
• 1:15:53
  loan you the money and then the bank would sell your mortgage to
• 1:15:57
  the government and it will become the government's problem.
• 1:15:59
  But that is the exact thing that's going on with higher
• 1:16:03
  education right now, where schools or universities are
• 1:16:08
  happy to admit you. And you might say to the
• 1:16:12
  admissions counselor, what happens if when I'm done and
• 1:16:16
  I've got $80,000 in debt in this degree and I can't get a job?
• 1:16:21
  The correct answer is it's not my problem.
• 1:16:23
  My problem and I'll now I'll go you one further.
• 1:16:28
  When I was working at your alma mater, Saint Vincent College in
• 1:16:33
  Latrobe, PA. Lest there be any doubt who,
• 1:16:37
  what or where? James is mad.
• 1:16:40
  I am I am mad name. Initially and and you will be
• 1:16:44
  angry too, if now you would have been if you didn't already know
• 1:16:48
  this. The SAT was the standard we used
• 1:16:53
  at Saint Vincent College for admission.
• 1:16:55
  And I'm here to tell you the SAT is a very good predictor of
• 1:17:00
  whether you will finish your first year of college.
• 1:17:04
  Not finish the first year. Just the first year.
• 1:17:07
  That's about what it's good for. And if you score under 800, and
• 1:17:13
  remember, there were only two sections of the SAT back then,
• 1:17:17
  math and and such and verbal and such, If you scored under 800,
• 1:17:23
  there was virtually no way in hell you were going to finish
• 1:17:28
  out your first year of college successfully.
• 1:17:31
  Almost none, unless there was pressure from the administration
• 1:17:38
  never to fail anybody. And then all of a sudden people
• 1:17:43
  who can't read or do math do finish their first year of
• 1:17:48
  college. Then they finish their second
• 1:17:50
  year, their third year, and their fourth year because the
• 1:17:54
  administration deems it necessary for the survival of
• 1:17:58
  the college. And then make those.
• 1:18:01
  And understand what that means because I voted the exact
• 1:18:04
  situation at another college. The Dean.
• 1:18:08
  The Deans will put pressure on you and if you don't buckle,
• 1:18:11
  they will fire you. That is, I can tell you with
• 1:18:15
  100% certainty that that is absolutely correct.
• 1:18:21
  Anyway, don't forget that these dim witted students are now
• 1:18:26
  $100,000 in debt, have no career skills whatsoever, and go out
• 1:18:33
  onto a job market and end up making the same minimum wage
• 1:18:36
  they could have made four years earlier.
• 1:18:38
  Mm hmm. There's college for you.
• 1:18:40
  Now, am I saying that nobody should go to college?
• 1:18:42
  No, absolutely not. There are all kinds of people
• 1:18:45
  who should go to college. Should everybody go to?
• 1:18:49
  No, No, everybody should not. And we've lost that lesson over
• 1:18:53
  the years. The the.
• 1:18:54
  The fundamental problem here and we should do an episode again on
• 1:18:58
  this topic. The fundamental problem is is 1
• 1:19:01
  of incentives. That the.
• 1:19:02
  Yeah, the. College has no incentive to make
• 1:19:06
  sure that the student. Has marketable skills because
• 1:19:10
  the students paying upfront and then leaves.
• 1:19:13
  And just as the banks aren't offering mortgages as a public
• 1:19:19
  service, so two colleges are not offering their product as a
• 1:19:24
  public service. On the one hand, private
• 1:19:27
  colleges are private. They're yeah on the and they're
• 1:19:32
  all non profits. And that doesn't mean a damn
• 1:19:34
  thing. And then the public schools are
• 1:19:37
  bureaucracies that take on lives of their own.
• 1:19:40
  Nowhere do you find anybody operating with the purest of
• 1:19:46
  intentions. It it doesn't work out that way
• 1:19:49
  in reality, ever. You, you might at a place like
• 1:19:54
  St. John's College in Annapolis or
• 1:19:56
  Santa Fe, you might find a glimmer of hope, right?
• 1:19:59
  Or at what's the Catholic one? St.
• 1:20:03
  Thomas More, right? California, right?
• 1:20:07
  You know, there are some shining stars out there.
• 1:20:11
  There are almost no shining stars out there.
• 1:20:15
  And that's a lawyer almost. And I'll say this as well.
• 1:20:19
  Parents ask me from time to time.
• 1:20:21
  OK, given all that you've said, how do I, how do I figure out
• 1:20:28
  which colleges are putting pressure on their faculty to
• 1:20:31
  just pass students? They all are.
• 1:20:34
  And I well, they all are, but to a greater or lesser degree.
• 1:20:37
  I find a decent rule of thumb is look at the endowment.
• 1:20:42
  Because the endowment's published it's public
• 1:20:44
  information endowment per student.
• 1:20:47
  The higher that number, let me say it the other way, the lower
• 1:20:50
  that number is, the more the institution depends on that
• 1:20:54
  tuition and the more pressure administration will put on
• 1:20:57
  faculty to pass students who shouldn't be passing.
• 1:21:01
  Yep, that is absolutely correct. And I get I get questioned by
• 1:21:05
  parents from time to time too. Not nearly as much as I once
• 1:21:08
  did, but but still often enough. And all I'll say is this, your
• 1:21:14
  children might not belong at college and that is not an
• 1:21:17
  insult, right? A welder is going to make more
• 1:21:20
  than an English major. So I'm, I'm not saying anything
• 1:21:26
  other than your specific child might not belong at college, but
• 1:21:30
  I'll tell you what I did with mine.
• 1:21:31
  And like every other parent, I think my children are quite
• 1:21:34
  special. But Aunt, you've met my, my 2
• 1:21:37
  girls. They really are really, they are
• 1:21:40
  really smart, right? And I sent their asses to public
• 1:21:44
  school here in Arizona just as fast as I could because it was
• 1:21:48
  cheap and an undergraduate education isn't worth what most
• 1:21:55
  undergraduate institutions charge.
• 1:21:58
  Even after the financial aid package.
• 1:22:00
  It's not even close to worth it. So I told my girls, well, you
• 1:22:04
  can go here or I'll give you the same amount you can go anywhere
• 1:22:08
  else you want and you pay the difference.
• 1:22:10
  And they both looked at me like I was the worst person.
• 1:22:13
  In the world. But you know, sometimes you have
• 1:22:17
  to say, I know what I'm talking about here and and, and you
• 1:22:21
  don't. And both of them later in their
• 1:22:24
  college careers thanked me for making this the rule of the
• 1:22:28
  house because they graduated with no loan.
• 1:22:32
  What, no debt whatsoever. And that was such a head start
• 1:22:37
  compared to their friends. I mean, you want to say you
• 1:22:41
  can't put a price on that, but you can.
• 1:22:42
  And it it costs zero, It's it's. Remarkable.
• 1:22:46
  Right. And they got great educations.
• 1:22:49
  They're smarter now than they were going in, which is what you
• 1:22:51
  want. They're more mature and and the
• 1:22:53
  whatnot. I myself went to state school.
• 1:22:57
  I would take advantage of it every time.
• 1:23:00
  It's where the bargain is to be found, but it's also where a
• 1:23:04
  bunch of lousy students are to be found.
• 1:23:07
  Yeah, if you. Go to state school.
• 1:23:08
  You have to steal a good education once you get there.
• 1:23:12
  Yeah, it but it matters so much more what you do when you get to
• 1:23:16
  the school then what's true it is you go to That's right.
• 1:23:19
  I had I had the same experience You you said it to parents that
• 1:23:24
  maybe your kid doesn't belong here.
• 1:23:25
  I actually said it to the student my first year of
• 1:23:28
  teaching out of Graduate School and I was at a small College in
• 1:23:32
  West Virginia and teaching an MBA class.
• 1:23:36
  These are masters students, right?
• 1:23:38
  And they could not operate on the same level as the freshman
• 1:23:42
  business majors. And I know this.
• 1:23:44
  I gave I gave first day of class, I gave multiple choice
• 1:23:48
  tests. So I haven't done anything to
• 1:23:49
  them yet. Give multiple choice tests, same
• 1:23:51
  one. And the undergraduate freshman
• 1:23:54
  did way better than the MBA students.
• 1:23:56
  That's just it. There's a student there that was
• 1:24:00
  just having problems and problems and problems, I mean
• 1:24:02
  serious problems. And I took the student aside and
• 1:24:05
  I said, look, you really need to think about that college might
• 1:24:09
  not be the right place for you, that your your skill sets are
• 1:24:14
  pointed elsewhere. And next thing I know, I'm
• 1:24:18
  getting called down to the Dean's office.
• 1:24:20
  Yeah, you're going to get in trouble for that.
• 1:24:22
  Yeah, and the Dean says the student can make it here.
• 1:24:27
  We know that because we admitted the student.
• 1:24:29
  I didn't want to point out the circularity of the argument at
• 1:24:32
  that point, right? That's but the message was very
• 1:24:35
  clear past this student. That's literally what begging
• 1:24:39
  the question is when, Right. Yeah.
• 1:24:41
  Say when people say, well, that begs the question that that's
• 1:24:45
  not what that means. You you think begging the
• 1:24:47
  question is exactly what Ant just did.
• 1:24:50
  And they did it at Saint Vincent College too, when I was there,
• 1:24:53
  because I remember learning about the 800 SAT and how
• 1:24:57
  they're all going to fail out. And I went to the Provost and I
• 1:25:02
  said, well, if this is true and it is, why do we admit so many
• 1:25:08
  of them? Because every year I would get a
• 1:25:10
  spreadsheet with all the admittees with all of their
• 1:25:13
  standardized test scores and I could get you a percentage of
• 1:25:17
  the population at the school that was sub 800.
• 1:25:22
  They should never have been admitted.
• 1:25:25
  Not only there anywhere, right? That's what the test gets.
• 1:25:30
  It tells you that no, these people are not going to survive
• 1:25:33
  in this environment. And he said, I know every.
• 1:25:38
  I know what you're saying. And I said, well, what the hell
• 1:25:42
  does that mean? You said it means what it means.
• 1:25:45
  You're right. And I said, Oh my God, they're
• 1:25:49
  making you do it. Wow.
• 1:25:51
  The Provost and Provost, For those of you aren't in academic
• 1:25:56
  circles, Provost is like the number two guy.
• 1:25:58
  He's right below the president. Yeah, that's St.
• 1:26:01
  Peter, right? Yeah, that's right.
• 1:26:03
  Yeah. Yeah.
• 1:26:04
  And. And he quit soon thereafter,
• 1:26:09
  Yeah, and went somewhere else. Yep.
• 1:26:13
  I don't know if they did it there as well.
• 1:26:15
  I referred to it as theft because you're just stealing
• 1:26:19
  money from those people. You're you're much more polite.
• 1:26:22
  I refer to it as fraud. Yeah, that's right.
• 1:26:26
  At another place I worked, we, I'm not going to mention the
• 1:26:30
  name of this place, it was the Institute for Humane Studies.
• 1:26:34
  What we used to say things like. What's that word fraud?
• 1:26:39
  Is that the IT? I can't quite remember.
• 1:26:43
  There is little by way of ethics anywhere you go.
• 1:26:47
  Anyway, I will name more names next week.
• 1:26:50
  All right. Thank you for the story, James.
• 1:26:53
  Yeah, you have A and look, that's how I knew 2008 was
• 1:26:56
  coming. And I'm noticing the same sorts
• 1:26:59
  of warning signs right now. Mm.
• 1:27:00
  Hmm. It's only anecdotal.
• 1:27:02
  I can't prove it, but it smells to me like we're walking down
• 1:27:06
  the same road again. We'll see.
• 1:27:10
  I'll catch you next time. Yet.
• 1:27:11
  We'll see you next time I have some.
• 1:27:12
  We'll think of something more uplifting to talk about next
• 1:27:14
  time. Have a good.
• 1:27:15
  Have a good couple of days. See ya.