Cash

A few days after taking our eleven lambs to the butcher shop, I got an interesting phone call from the owner. He’d nearly finished processing them, and said they’d be ready for pickup in two days. The call came fairly late in the evening, after the shop’s closing time, and I could hear plenty of activity in the background. It sounded like they were indeed swamped with work, and I was thankful they’d been able to work our eleven lambs into their schedule.

He then told me what the total price was going to be. The standard charge would be $55 per lamb, or $605 altogether. (I usually put that on a credit card.) However, he continued, if I wanted to pay cash…he would drop the total to $500.

Needless to say, that’s a pretty substantial discount. Some readers may suspect that cash payments are merely a way for a shopkeeper to evade taxes; I can’t speak to that…what I do know is that the guy who runs this shop strikes me as a very honest and upstanding person. And I will say this: credit card companies can charge some fairly steep transaction fees, especially for merchants with relatively lower sales volume. For the savings he was offering, I was perfectly happy to go to the ATM and withdraw what was needed (though, being a hard core Casablanca fan, I must confess that I couldn’t stop thinking about this classic scene the whole time I was doing it — the key clip comes at about 1:15 on the linked video).

Given current economic conditions, and that all of us are looking for ways to save some money, I wonder if we will see “cash discounts” become more widespread. I like using credit cards for the convenience, the “float” on the use of the money, and the rewards benefits. (We pay in full each month, so there are no finance charges.) But if merchants are willing to offer a lower price for the use of cash, so they can avoid the CC fees, I’ll leave the credit card in my wallet and pay with cash.

Is anyone else out there starting to see more “cash discounts” being offered? I’m starting to think it might even be worth asking merchants straight out, especially smaller shops and tradespeople, what kind of discount they would be willing to offer if we pay in cash.

Going Down

It’s official: I’m losing my internet service later today, due to the switch from landline to mobile phone. In fact, our (landline) home phone number started ringing on our cell phone today — but for the moment, we still have a dial tone on the landline. AT&T assures me that the dial tone will be gone soon, and with it our DSL internet. However, they’re now saying it will take until next Wednesday to reestablish internet service. This is a switch from the “single day” interruption they told me earlier.

Bottom line: I won’t be posting much over the next several days. I will be driving in to a WiFi hotspot to get coffee and check email each day, but blog posts are unlikely.

I’ll give a review of our “cutting the cord” experience once we’ve lived for a few weeks without landline service. With the cost savings ($40/month in our case, even after the cost of adding a third cell phone and $10 more for internet), this is a move that others out there might want to seriously consider.

Cutting the Cord

One of the few positive things about an economic downturn / recession is that it exposes and leads people to eliminate unnecessary expenditures from their lives. By analogy, a leaky faucet, which we may have once tolerated and put off repairing in normal times, will quickly find itself getting fixed when there is a drought and water is rationed. In a recession, many of the “leaking faucets” in our budgets are now coming under closer scrutiny. I’m not a trained economist, but my hope is that, as we all work to eliminate those expenditures, the system as a whole will become more efficient.

Here on the farm, we’ve begun going after our own “leaking faucets.” One small one: I realized that every broadcast television program I want to watch is now streamed over the internet. There was no longer any reason to pay Dish Network $5.99/month for local channels, so I ditched those this week. And when our contract with Dish is up later this summer, I will quite likely cancel that whole service.

A bigger leaking faucet, that we’re eliminating today, is landline phone service. At $60 per month for local and unlimited long distance (more like $67 after all the taxes and fees), this didn’t seem like a bad deal when we moved here. But Mrs Yeoman Farmer and I both have cell phones, with plenty of “family share” minutes and unlimited mobile-to-mobile calling. For the last several months, as I’ve written my check to AT&T, I’ve grown to increasingly view the landline as a redundancy.

MYF and I did our homework, thought the decision through, and concluded that we should add a third cell phone to our plan, so we could always have one parked in the house — and we would transfer our existing home phone number to that phone. Cost for that third line is $10/month. And without a landline, AT&T will charge us an extra $10/month for high speed internet. But that still puts us ahead by $47/month.

We’ll be making that transition today, and the internet will be disrupted for a day or two as AT&T adjusts our service. Blog posting will therefore be sparse for awhile, and there may be a delay in my moderating any comments you post.

One interesting thing about planning for this transition: I hadn’t stopped to think lately about how dependent I am on internet service, and how much anxiety I’d feel about being deprived of it for even two days. Fortunately, I was able to identify a couple of days where I wouldn’t need it for work. I will be able to drive in to a WiFi cafe to check email during the day, but that is quite some distance from our house and I won’t be going often. I’m trying to see the break in internet connectivity as an opportunity to (1) examine and reflect upon my degree of attachment to the service; and (2) get outside and take care of some projects on the farm.

Both of which are pretty good. And maybe I’ll identify a few more leaking faucets while I’m at it. How about the rest of you? What have kinds of budgetary leaking faucets have you eliminated over these last several months?

UPDATE: When I made the call to pull the trigger on porting our landline over to the new cell phone, they gave approval…but said it will take until May 28th to actually go through. So, it looks like I’ll have uninterrupted internet service until then. There is no technological reason why AT&T couldn’t release the old landline number to my new Sprint cell phone today. They’re simply trying to milk eight additional days of landline service out of me. And, yes, this makes me all the more glad about my decision to dump them.

AIG Mess

With every member of Congress now posturing and trying to outdo one another in expressing outrage over retention bonuses paid to AIG executives, it didn’t surprise me to receive an email tonight from Senator Debbie Stabenow. I guess I got on her mailing list last fall, when I wrote asking her to oppose the $800 billion financial bailout (which she did, and for which I give her enormous credit).

Anyway, this is the text of the message she sent tonight:

This morning, Senator Stabenow went to the Senate floor to speak about the outrageous bonuses being lavished on employees at AIG. She spoke about the outrageous double standard between Wall Street and America’s automakers, who have submitted their management plans to the auto task force and are renegotiating contracts with their workers, who have already taken cuts. Our families are struggling, and those who got us into this mess should not be rewarded for their failure.

Here is the link to Senator Stabenow’s speech:

http://www.youtube.com/watch?v=5Td2ya5z1Y8

I do agree with the Senator that those who got us into this mess should not be rewarded for their failure — and, as I said above, I credit Senator Stabenow for opposing the original TARP legislation, out of whose funds AIG was bailed out. That said, this was my reply to Senator Stabenow:

Didn’t you vote for the “stimulus” bill which included an amendment explicitly protecting these bonuses? I’m assuming you were not aware of that amendment, given the short amount of time available to review the conference report. But had you been aware of that amendment, would you have voted differently on the bill?

Naturally, every member of Congress will now purport to oppose that provision. But just how much do they really mean what they say? Given that the amendment was indeed part of the final stimulus bill, do they oppose the bonuses enough to have voted against the stimulus?

My larger question, directed at the Senator’s colleagues (including the current President), who did vote for TARP and are now expressing outrage, is this: If you really wanted fundamental change in the way these financial institutions do business, including the way they compensate their employees who “got us into this mess,” shouldn’t you have let those institutions fail and be liquidated? Or at least written your mandated compensation changes in to the original bailout agreement? By continuing to prop them up with $173 billion of no-strings-attached taxpayer dollars, why are you surprised that they continue to operate their business as they have in the past?

Personally, I’m more outraged by the $173 billion that was “loaned” or otherwise entrusted to this failed monstrosity than I am by the way that company spent $165 million compensating the employees which the government’s bailout package enabled them to retain.

Prairie Fire

No doubt many of you have already seen the video of Rick Santelli’s “Rant of the Year” on CNBC yesterday morning. The thing has gone completely viral, getting hundreds of thousands of views on the web — not to mention getting played all over talk radio yesterday. Santelli, who is a floor reporter at the Chicago Board of Trade, is discussing the President’s recent housing bailout proposal:

Based on what I’m hearing and picking up, I think it’s fair to say that Santelli’s rant is igniting what may grow into a prairie fire of backlash against housing bailouts (no matter what these bailouts are euphamistically called). While the floor traders who applaud him in the video may not be a representative cross-section of the American public, the sentiments he expresses (and the sentiments they are cheering) most certainly are. It’s dawning on people that — the President’s assurances aside — those who made some of the most irresponsible decisions about housing, and who contributed the most to the current difficulties, are about to get shielded from the consequences of their choices. It’s as if the old story of the Grasshopper and the Ant has been updated, and the grasshopper is poised to end up with the ant’s house.

I can only share our own family’s experience, but I don’t think we’re atypical. We lived in rental housing, and then a mobile home, the first few years we were married. With Mrs Yeoman Farmer home full time, we lived on what I could earn working part-time for a research firm and part-time as a graduate teaching assistant. We had one car. Extra money we could scrape together went toward paying off MYF’s law school loans and saving for the down payment on a house.

In early 1999, MYF (now five or six months pregnant with our second child), had had enough of living in a mobile home in the San Fernando Valley. She insisted we find something with a yard, where our firstborn (then aged two-and-a-half) could burn off more of his toddler energy. I began searching housing listings, and contacting Realtors, but everything in the area seemed priced far beyond our reach. Our bank confirmed this, telling me we qualified for a mortgage of no more than $130,000. There was nothing with a yard in any SF Valley neighborhood for less than $200,000 at that time.

Someone suggested we widen our scope, and look at the Antelope Valley communities of Lancaster and Palmdale. We quickly discovered that this extreme north, high desert portion of Los Angeles County was one of the few remaining enclaves of affordable housing within 75 miles of the UCLA campus. As we began working with a realtor, we learned the reason for all the good deals (and this is very important): there had been a housing boom throughout the 1980s, which peaked around 1990. Prices had skyrocketed, and then supply outstripped demand. In the early-to-mid 1990s, prices tumbled. People got underwater on their mortgages, and many homeowners walked away (does this sound familiar?). Banks foreclosed. And now, lots of those foreclosed homes were on the market at prices that even families like ours could afford.

Like I said, the bank pre-approved us for a $130,000 mortgage. We saw lots of really nice houses in the $110-$120k range, and thought about buying one. And then we thought some more…especially about our monthly payments. So we looked some more, and found that $65k was roughly the tipping point: even in the Antelope Valley, houses under that figure were either (1) in bad neighborhoods or (2) in need of more work than I could perform.

We ended up buying a 1400sf, 4 bed, 2 bath, foreclosed tract house for $72,000. When it had been built, in 1990, it had sold for about $115k. Apart from being filled with foreclosed “cookie-cutter” stucco homes on slab foundations, and on the northern edge of civilization, the neighborhood wasn’t bad. Our yard wasn’t huge, but it was a yard. And the house was in excellent shape, so we were able to move in the week after Baby #2 was born.

If memory serves, we made a 5% down payment, so had to pay PMI, but we got a 15 year fixed mortgage so we could build equity faster. I think our monthly payment was less than $600. But there were two important things our bank made us do before we could get that mortgage: (1) prove my income, by submitting tax returns and pay stubs, and (2) clear up a blemish on MYF’s credit report. We had taken very good care of our credit, paying everything on time and paying off our credit cards in full every month. But way back in law school, MYF and her roommates had been in a dispute with their landlord; the landlord had lied and deceived them about the terms of the rental contract, and while the students were away for the summer got a court to issue a default judgment against them. MYF was not even aware of this judgment; the first she learned of it was when, eight years later, our bank pulled her credit report to approve the mortgage. The amount owed wasn’t huge, but our bank would not lend to us until we resolved it. MYF tracked down the collection agency to whom the judgment had been turned over, we paid what they wanted, and got the credit report cleared up. And only then were able to get our mortgage.

We made every mortgage payment on time, maintained our excellent credit, and watched as the neighborhood filled up (and housing prices slowly increased). In the spring of 2001, for various reasons, we decided to make our move to the country and become Yeoman Farmers. We were able to sell our house for about $110,000. After deducting what we spent on new carpets and paint, and real estate commissions, and moving expenses, we walked away with just enough cash to put a 20% down payment on our Illinois property. Again we opted for a 15 year fixed mortgage, to build equity faster. Again, we took good care of our credit. And as a result, when we decided to move to Michigan a year and a half ago, we were able to do so.

All of this behavior I have described is called “playing by the rules.” Nothing that we did was particularly heroic or extraordinary. None of it required luck, or special consideration. I’d contend that there are tens of millions of families in this country with experiences more or less like ours: we saved, started with what we could, and with patience got to where we wanted to be. We didn’t splurge and buy more house than we could comfortably afford, even when the bank offered it. We had to prove our income. We had to clean up our credit. And it infuriates me that so many others got away with doing otherwise for so long.

To the banks and financial institutions which made loans without verifying income, or demanding good credit, I say: you deserve to fail, and responsible lenders like ours deserve to fill the vacuum that your demise leaves in the marketplace.

To those who bought more house than they could comfortably afford, and treated their houses like virtual ATMs (cashing out equity to put in swimming pools and dream kitchens): you do not deserve to stay in those houses. Your houses need to go back on the market at reasonable prices that purchasers are willing to pay. Many of those houses will become homes for families like ours was, circa 1999, who would otherwise be locked out of the market if governments were to prop up those inflated prices by trying to provide people like you with the “soft landing” to which you are not entitled.

And, above all, to Rick Santelli, I say: Thank you, sir, for giving us a voice! And if you do decide to have that “Chicago Tea Party” this summer, I will make sure I have a reason for being in town.

Small Town Banking

From the NY Times comes a remarkable look at the “other side” of the banking industry: a small town bank in Nebraska, which is only in the news because it was recently robbed for the first time in half a century.

Yes, institutions like this one still exist in America. They may not have economies of scale going for them, but they are well-managed and in the closest possible contact with their customers. And they are most certainly not lining up for federal bailout dollars.

Its one-story brick building, built as a bank more than 100 years ago, has remained a local fixture while most buildings in downtown Carleton, such as it is, are bricked up or closed up: the old Weddel’s grocery store; the old post office that partially caved in a few years ago; the old Little Café, where Thelma and Shirley sold fresh pies of apple and cherry.

Just outside the bank, a Cargill grain operation grinds away. Truckloads of soybeans and corn are weighed and dumped with a sound like a sigh into the mammoth grain elevators looming over the empty storefronts. Every few minutes, another long Union Pacific freight train loudly announces itself.

Inside the bank, Mr. Van Cleef, 46, is usually helping local farmers figure out how to finance the fertilizer, chemicals, machinery, fuel and irrigation needed to grow their crops, all while guessing what beans and corn will go for.

There is no online banking here. It’s all face-to-face, how are you, Mike, see you later down at TJ’s for a burger.

The Van Cleef business has not exactly followed the Wharton School model. Mr. Van Cleef’s father, Lloyd, 72, was a Navy veteran working as a meter reader for a gas company in Fairbury, about 40 miles away, when a local banker offered him a career change. He worked his way up the banking ranks and then, in 1975, decided to buy the Citizens State Bank in Carleton.

His teenage son, Michael, did not appreciate moving from a town with a Pizza Hut and a movie theater to a town where the passing trains served as entertainment. But he started working in the bank after high school, attended banking seminars instead of attending college, set aside aspirations of law school and eventually became a bank president without pinstripes.

“You do loans, you do deposits,” he says. “You scrape the snow outside. You change the light bulbs.”

Go read the whole thing. And admit it: you want to live in this town and do business with this bank.

TurboTax Tim

As of a week or two ago, I wasn’t going to publish a post about Tim Geithner, the new President’s nominee for Secretary of the Treasury. It annoyed me that Geithner had neglected to pay some taxes in past years, but the initial consensus seemed to be that Geithner had made an “honest” mistake or “common” mistake. (Rush Limbaugh put together a very funny montage of at least a dozen mainstream media commentators all using these same words.)

The more I have read and heard this week, however, the more I’ve wondered just how “honest” or “common” this mistake really was. And the longer his hearings continued, the more troubled I’ve grown about seeing this man entrusted with the massive new authority and discretion that has been granted to the Treasury secretary in recent months. Given the appalling lack of transparency that has accompanied the TARP program thus far, the Treasury secretary must be more than a person with a brilliant intellect or financial understanding. Now, more than ever, that position must be filled with an individual of unquestioned honesty and integrity, who has never tried to evade the law for personal gain. The more I learn about the circumstances surrounding Geithner’s tax returns, the harder it is to imagine entrusting him with that authority.

What was the nature of Geithner’s “honest” mistake? Because his employer, the International Monetary Fund (IMF) was a foreign entity, the employer did not withhold payroll taxes (the “FICA” you see on your paycheck) for the IRS. Unlike employees of American firms, Geithner and his American colleagues got to keep their entire paychecks. But those FICA taxes still needed to be paid. Geithner’s explanation is that when he entered his W-2 form into Turbo Tax, the software didn’t compute the FICA taxes due — only the income taxes. He paid what Turbo Tax said he owed, and the discrepancy wasn’t caught until he was audited a few years later. The auditor realized the FICA taxes had never been paid, and Geithner was charged (and paid) the appropriate amount. A good early overview of the story can be found here.

Of course, it turns out that there is more to the story. The IMF clearly explained the FICA withholding issue to its employees— in writing. And instructed them that they needed to pay the FICA taxes when they filed their 1040. And had each American employee sign a statement affirming that he had satisfied his tax obligations. Does this sound “honest” to you? Read this report and decide for yourself:

The IMF did not withhold state and federal income taxes or self-employment taxes — Social Security and Medicare — from its employees’ paychecks. But the IMF took great care to explain to those employees, in detail and frequently, what their tax responsibilities were. First, each employee was given the IMF Employee Tax Manual. Then, employees were given quarterly wage statements for the specific purpose of calculating taxes. Then, they were given year-end wage statements. And then, each IMF employee was required to file what was known as an Annual Tax Allowance Request. Geithner received all those documents.

The tax allowance has turned out to be a key part of the Geithner situation. This is how it worked. IMF employees were expected to pay their taxes out of their own money. But the IMF then gave them an extra allowance, known as a “gross-up,” to cover those tax payments. This was done in the Annual Tax Allowance Request, in which the employee filled out some basic information — marital status, dependent children, etc. — and the IMF then estimated the amount of taxes the employee would owe and gave the employee a corresponding allowance.

At the end of the tax allowance form were the words, “I hereby certify that all the information contained herein is true to the best of my knowledge and belief and that I will pay the taxes for which I have received tax allowance payments from the Fund.” Geithner signed the form. He accepted the allowance payment. He didn’t pay the tax. For several years in a row.

Question 18 that the Senate Finance Committee submitted to Geithner puts all this together: You provided the Finance Committee with statements from the IMF breaking your tax allowance down into amounts for “Federal Tax Allowance,”” State Tax Allowance,” and “SE Tax Allowance.” These statements show that your tax allowance was deposited into a checking account. You also provided the Committee with copies of checks made out to State and Federal revenue authorities for the exact same amounts as noted on the statement from the IMF for make state and federal estimated tax payments. Did you ever question what your “SE Tax Allowance” was for? When you were writing checks to cover the “Federal Tax Allowance” and “State Tax Allowance,” did you ever think “SE Tax Allowance” was given to you to pay a tax you owed?

Read Geithner’s answer and decide for yourself whether you believe him…and, if you do believe him, whether he is the “financial genius” who is the only man qualified to run the Treasury Department today: Looking back now, it is clear to me that the IMF statements to which you refer should have prompted me to realize that it was necessary for me to file a form SE and pay selfemployment taxes. I did not realize this and regret the error.

This story has a particular resonance for me because I am self-employed and have considerable experience preparing my own tax returns. Coincidentally, I have also been using Turbo Tax, and think it is outstanding. Over the years, I have become familiar with the various reportings that my clients are supposed to make to the IRS, using Form 1099, and the taxes I must pay — even when the client, for whatever reason, fails to report the income to the IRS. I still have a moral obligation to pay those taxes, and have always paid those taxes, even when the IRS doesn’t know about the income.

And that’s what is so frustrating about the Geithner situation, and why it has struck such a chord with all of us who are self-employed and have diligently reported and paid taxes on all of our income. Given all the warnings and notices that Geithner’s employer gave him, it seems he simply couldn’t have not known he owed the FICA taxes. It’s hard to escape the conclusion that he saw an opportunity to keep for himself tens of thousands of dollars, banking on the odds that he wouldn’t be audited. Does this sound like the sort of man who ought to be entrusted with overseeing the IRS — not to mention being entrusted with disbursing hundreds of billions of dollars’ worth of TARP funds?

I don’t expect perfection or sanctity from our government officials, but there ought to be some threshold of behavior which, once crossed, disqualifies a person from receiving the public trust. Would we tolerate an Agriculture Secretary nominee who had illegally obtained food stamps for his family four separate times, even if he reimbursed the program once he was caught? Or a state insurance commissioner who padded four different casualty insurance claims, even if he later reimbursed the insurance companies once he decided to run for insurance commissioner?