Jim Randel

In this past Saturday's New York Times, writer Joe Nocera (Pulitzer prize finalist) writes about standing in line on Thursday, March 12 to see Bernie Madoff plead guilty... speaking with victims of Madoff's chicanery. In Nocera's unscientific survey of victims, he found that many of them want "justice" - in the form of government assistance (e.g. tax breaks) or legal recourse against the SEC for not catching Bernie in the act. Nocera admits that he is not very sympathetic.

I feel terrible for Madoff's victims but I do not feel that they should receive any special breaks from the legal system or the government to compensate them for their losses.
In fact, in some respects I feel that this very expectation is one of the roots of the economic meltdown.

The United States (and most of the rest of the world save perhaps China and India) is in trouble today as the result of a negligence of responsibility. Too many of us made stupid decisions (buying too much house, borrowing too much money, overusing credit cards) thinking that some event or situation would make everything work out. In the housing world, for example, many just assumed that "inevitable" price increases would provide the opportunity to sell to a higher bidder, or refinance whenever one needed to pay debt coming due. In short, we abdicated the most basic responsibility of thinking for ourselves:

How can prices of anything always increase?
Why buy a house that will cost me more than I can comfortably afford?
Should not I learn a little bit about the terms of this mortgage?

I am sure Madoff was a very smooth sales guy. He understood the human psyche and suckered people in with his "exclusivity" illusion. But that does not forgive those who:

Violated the rule of diversification.
Invested in a product they did not understand.
Or worse yet, had a sense that something fishy was going on but as long as they were making great returns, figured "so what?" and kept sending Madoff money.

No matter how much government regulation springs up in the next few years - and there will undoubtedly be a lot - ultimately we have to look to ourselves for protection from the Madoff's of the world. Yes, government agencies like the SEC should keep bad guys out of business. But the truth is that bad guys will always overwhelm the government.

Ultimately, our only protection is our own sense of judgment and self-control.

Jim Randel is the founder and co-author of the skinny on™ series. His most recent book The Skinny On Credit Cards: How to Master the Credit Card Game is available at www.JimRandel.com.

Last week’s blog entry was about the mindset and strategies we all need to bring to the economic crisis, the goals being both survival and prosperity.

I would be remiss in discussing any challenge without focusing on the subject of persistence. In both good times and bad, an unwillingness to give in to circumstance is critical for success in any endeavor. But, let’s take a deeper look at persistence and analyze what it is and why it is so critical.

Persistence is not the doing of the same thing over and over and hoping for a better result. In fact, that is one definition of insanity. Rather persistence is an adaptive refusal to quit in pursuit of a goal, the operative word being “adaptive.”

Are you a golfer? Have you ever noticed that when you hit a bad shot and then drop a ball to take a second swing, the second shot is better. That is not an accident. The fact is that most of us who take that second shot factor in what we learned from the first (oftentimes subconsciously) and thereby improve on the result. It is said that one of the keys to Jack Nicklaus’ greatness is that he could remember every shot he ever took on a golf course so that every shot he took was essentially a “second” shot.

Here’s another example: have you ever written something that you put aside and then reread? Are you sometimes amazed when what seemed like good writing on day #1 required (and benefitted from) a rewrite on day #2? That is because you are seeing your work with a new set of eyes, influenced by whatever stimuli you are experiencing on day #2. You are factoring in a new perspective and improving on the first try.

I could give many more examples but let me use a metaphor that I recently read in an excellent book titled Talent is Overrated: What Really Separates World-Class Performers from Everybody Else by Jeffrey Colvin (which I will refer to again in coming weeks). Colvin talks about the benefits of “deliberate practice” - a conscious, incremental approach to improvement that focuses on areas of weakness.

Colvin tells the story of Shizuka Arakawa, the gold medalist in figure skating in the 2006 Winter Olympics. Arakawa’s specialty was a move called the “Ina Bauer” that involved skating while bending backwards leading into three jumps. This move was so difficult that Arakawa fell many many times trying to perfect the move. In fact, Colvin extrapolated from her training schedule that she fell on her butt at least 20,000 times learning the “Ina Bauer.” But, of course she kept getting up - trying again and again after factoring in what she did wrong on the preceding butt flop.

Life can be a series of many butt flops - especially during tough times. But, it is those who keep getting up, not afraid of falling again, adjusting their approach over and over and over, who eventually prosper by surmounting whatever slips they encounter.

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Also, if you or anyone you know has issues with credit cards and would like to further educate yourself, check out my latest book The Skinny on Credit Cards here at www.theskinnymedia.com.

No one knows when the meltdown is going to end. I am predicting 24 months. My guess is as good as anyone else's. However, after studying successful people for 30+ years, I do feel I have insight into the approaches of those who will survive and prosper during and after the meltdown. Here are four of my top ten (more to follow):

1. Yesterday is yesterday's news ... whatever your business was may no longer be relevant. The world is changing amazingly quickly. Major institutions that existed for more than one hundred years have failed or are failing. Bear Stearns and Lehman Brothers. Circuit City and Linens and Things. The United States automobile industry. Established communications products: newspapers and magazines are dying, DVD's aren't selling, network TV is losing viewers in droves. And so on.

Those who survive and prosper understand that yesterday is irrelevant. The question we all need to be asking is: What should I do with my career or business today to make it a desirable commodity for tomorrow?

Charles Darwin said that it is not the strongest who survive. Not even the most intelligent. It is "the most adaptable." Those people who are able to move on quickly, forget the past and look for opportunities in the future, will survive and prosper.

2. No ego ... those who survive and prosper in the coming years cannot have an ego. Those who are not willing to do ____ because they are 50 years old, or a former banker, or used to make $X ... get over yourselves. The game now is economic survival and those who are willing to do whatever it takes to make a living will, in my judgment, be those who are most likely to prosper going forward.

3. Information gluttony ... I believe that those who are most willing to invest the time to learn increase their prospect for prosperity. Whatever your background, career or business, do whatever you can to acquire information about trends, protocols, people and ideas that may help you. Read and network. Read and network. The information is out there for you to find a path from where you are to where you want to be. In other words, for each of us there is a map that can take us from difficulty to survival to prosperity. The map however is hidden behind lots and lots of irrelevant material and noise. The more time you invest in learning about your business, career or aspiration, the greater the prospect for future success.

4. There will be a tomorrow ... those who ignore the most basic principles of customer service, added value and decency - in order to make money today - will be left behind sooner rather than later. Many of us are struggling to make ends meet right now. During this stress there is a human tendency to cut corners, to operate under the table and to ignore that most basic ethos of all careers and businesses - give people good value for your product or service and you will do fine. Those who play today as if there is no tomorrow will fall by the wayside very quickly.

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Also check out my new book series the skinny on™ which consists of a comprehensive analysis of topical subjects, told in an entertaining story format.

Since I hold myself out as a real-estate expert, the question that people are always asking me is “how much lower?” In other words, how much lower will housing prices go before they hit bottom?

Well, of course, I don’t know but the chart below, produced by economist Robert Shiller and excerpted from his book, Irrational Exuberance (Doubleday, 2d Edition, 2005) shows you what many economists think.

Here is what this chart tells us: that from 1890 through 1950, excepting the World War I and II periods, housing prices stayed within a fairly narrow range (adjusted for inflation). As you can see, in the year 2000 housing values were only about 10% above Shiller’s benchmark (1890 values). But then look at what happened in 2000!!

In just a few five years or so, prices doubled - fueled as we all know by a nasty cocktail of greed, bad lending, hyper-low interest rates, and unquestioning belief in the premise that housing prices always go up.

So where are housing prices headed?? Well the dotted line on this chart shows you one interpretation of how much further prices have to fall: another 30% or so before they reach year 2000 levels and a point of seeming equilibrium (based on a 110-year history).

Don’t ruin your day by looking at the graph’s location in the “Great Depression” period (1920 – 1940). I would argue that stretch is an aberration. From 1950 – 2000, housing prices were pretty stable.

By the way, here is how Shiller describes what happened between 2000 – 2006 … sound familiar??

“Irrational exuberance is the psychological basis of a speculative bubble … a situation in which news of prices increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the prices increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others successes and partly through a gambler’s excitement.”

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There is so much going on these days that I am touching on a couple of topics today...

Will the McMansion become a dinosaur? The National Association of Homebuilders reports that after years of growth, new home sizes are shrinking. This is a reflection of what home buyers want today. Some believe that large houses (say anything over 6,000 sf ) especially when oversized to a lot, are going to be hard to sell in the years ahead.

Is there another "subprime" crisis around the bend? It appears that Option ARMS could be the next shoe to drop in the housing and mortgage world. These products allowed a borrower to pick the size of his monthly mortgage payment. In many cases the payment was less than what was "owed" (what the loan rate required), and the result was negative amortization, i.e. the mortgage got bigger instead of smaller.

The Option ARM loan portfolio, $750 billion issued between 2004 - 2007, is not as large as subprime ($1.9 trillion in the same period). But, we certainly don't need more problems and, as of December, 2008, 28% of Option ARMS were delinquent or in foreclosure. If home prices continue to fall, this number will spike upward and banks could incur tens of billions of dollars of additional losses.

Store Closings. Last week both Starbucks and Home Depot announced store closings. Starbucks is closing 300 more stores (in addition to the 600 it closed last year) and Home Depot is closing 34 stores (in addition to the 15 it closed last year). Just five years ago, any real estate owner or developer would move mountains to make a Starbucks or Depot deal, the presumption being they were long-term annuities.

Barney Frank. Last week the Wall Street Journal reported that Congressman Barney Frank, Chairman of the House Financial Services Committee, admitted to pushing the Treasury Department to use $12 million of TARP bailout money to help a bank in his district. In October, 2008 this bank had been slapped with a cease-and-desist order by the FDIC alleging poor lending practices and executive-compensation abuses, including maintaining a Porsche for management to use.
Guys like Frank need to be beyond reproach. He is an aggressive interrogator when his committee subpoenas executives from the business world. He has complained about the Treasury Department not putting restrictions on the recipients of TARP money. How can he then push to help a local bank (his constituents) which was most likely not a candidate for taxpayer moneys? This stuff feels like the height of hypocrisy to me.

Jim Randel is the author of the stick people books ™ series and is about to release his latest book, The Skinny on Credit Cards: How to Win the Credit Card Game. (Clover Leaf, 2009).

You can purchase Jim's stick people books™ here http://www.stickpeoplebooks.com and visit http://www.jimrandel.com and sign up for his free newsletter.