The Stink Test

Pulling up next to a red, jacked up Hummer2 yesterday, it was hard not to think that there is a fundamental disconnect between the thought processes of common people, such as the gentleman driving this vehicle, and those of today's economists.

After having just waded through a number of EconoBlogs in an ongoing attempt to further enlighten my engineering mind, the sight of many bold decals plastered over all sides of this monstrous vehicle, advertising the driver's home loan business, momentarily overloaded my sensory system. There quickly ensued a failed attempt to capture this spectacle using a powered off camera phone as the light turned green.

It was quite a spectacle and spoke volumes about today's economy.

Macroeconomics

As an engineer whose parents were educators in the public school system, who stressed the liberal arts and humanities as their son gravitated toward the cold and calculated field of science and engineering, macroeconomics has become a great fascination in recent years.

Fascinating because of the charts and numbers as well as for the human behavior driving the charts and numbers.

Just the absurdity of it all since the late 1990s - trying to explain what just happened, and what might happen next in a financial world that seems to spin faster and faster - much more interesting than engineering.

After quickly learning that CNBC economists are not to be trusted, a few macroeconomics programs on PBS were found, and these have been helpful. But when graphs about aggregate global demand are shown, thoughts of empty shipping containers on their way back to China quickly come to mind, followed by images of newly unemployed textile workers in the Carolinas.

The PBS economist seemed to be so fascinated by the charts and the numbers that maybe he was missing things that are equally important. Things that don't lend themselves to charts and numbers - people. Maybe he should watch this PBS documentary, or look into the eyes of an unemployed Carolina textile worker who just wants to have what their parents had - a decent job, an uncomplicated life, and the hope of a brighter future for their children.

Despite the charts and numbers used by today's economists, and conclusions which are drawn from them, there appears to be something that is not quite right about the guy in the Hummer and the Carolina textile worker. Things just don't add up.

Despite what many economists say, this economy just doesn't pass the stink test.

More Discussion

It is nice to see more discussion about the state of today's economy - beyond the headline numbers and the combined spin from the financial media and the government. Blogs are helpful in this regard. On Wednesday, first quarter final GDP came in at 3.8% - tops in the western world. But, Barry Rithholtz over at The Big Picture questions that number.

He thinks something smells funny.

And, yesterday the Fed Policy statement said, "Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually." But, really, how firm can this expansion or labor market be when so much of it is based on the real estate madness now infesting almost every burgh in the country - when almost half of all new jobs nationwide are real estate related, and when home-equity financed consumer spending drives domestic growth.

That's got a bit of a smell to it, doesn't it?

At least more interesting questions are being asked these days. In Backstopping the Economy Too Well, Nell Henderson wonders if risky overconfidence is the result of having too much faith in Alan Greenspan:

For many home buyers, it's the sense that house prices will keep going higher in a U.S. economy blessed with healthy growth, low interest rates and tame inflation -- thanks in part to Fed policies under Chairman Alan Greenspan.

For many lenders, it's the assumption that borrowers in the stable, vibrant Greenspan Economy will have no trouble repaying increasingly risky home mortgage and home-equity loans.

But according to some Fed observers, this confidence is a worrisome legacy after Greenspan's nearly 18 years helping to steer the economy through a variety of storms. As Greenspan prepares to step down early next year, they say, he leaves behind a widespread perception that people can take bigger financial risks because the chairman can and will save them if their bets go sour.

But to this economist, it's all Phillip's curves and Taylor rules. There are people in this story - people buying overpriced homes and borrowing against these overpriced homes to buy more overpriced homes. And these people believe that nothing bad will happen because of the faith they have in the world's chief economist, Alan Greenspan.

In Alan Greenspan, Wizard or Villain?, BusinessWeek economics editor Christopher Farrell questions monetary policy under the Greenspan Fed:

Still, Greenspan's most vehement critics go a lot further than this. They're convinced he has made a fundamental error as a monetary economist. Call it the hairshirt economists vs. the cheerleaders for growth-is-good. The hairshirts believe that for the health of the economy to be restored, the inevitable bust that follows a boom must be at least as great as the boom. Growth proponents -- and there's none greater than Greenspan -- believe that it's better to limit the fallout of a bust and get the economy growing again as quickly as possible.

Shortly after its publication, there quickly ensued an EconoBlog Ph.D. free-for-all here, here, and here.

While it's not clear if anything was resolved, it is indicative of how economists view the world. A world full of charts and numbers and theories - but very few people. To common people the economy might smell foul, but economists apparently have an entirely different sense of smell. And, policy decisions are made based on what economists smell, not what ordinary people smell.

That stinks.

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Too Much Time Left on the Clock

As we await today's monetary policy decision from the Federal Reserve, we ponder the motivation behind what board members say and do ...

Do Federal Reserve Board members really not know what is going on in the world today or are they just unable to say what's really on their minds in fear of spooking the markets and starting a panic?

Is Alan Greenspan like the elder George Bush in the 1992 checkout scanner incident (so far removed from the lives of ordinary people that he was unfamiliar with grocery store checkout scanners), or is he all too aware of the impact his words have on public confidence, and therefore chooses to measure these words carefully?

Probably somewhere between the two extremes.

Closer to one extreme than the other? Probably.

Which extreme? Who knows?

One thing is a good bet though - Mr. Greenspan is not stupid. He knows that the U.S. and the rest of the global economy are in uncharted territory - he must have read something that Paul Volcker, Warren Buffet, Bill Gross, or Stephen Roach have written over the last few years.

He must realize that at this point in the game, small shocks could have big consequences. With retirement looming, the less change that is forced upon the U.S. and the world's economies, the better.

At this point in the game, if he really had a choice, surely he would prefer to just "run out the clock". That is, to continue raising rates in quarter point increments with no changes to the policy statement until his term expires in January. This seems to have worked well for the last year - nothing has imploded, no major mishaps.

Unfortunately, it appears there is just "too much time left on the clock".

Meetings in June, August, September, October, and December with no change to policy or language would take the Fed Funds rate from the current 3.0% to 4.25% with an expected rise to 4.5% at the end of January, just as the retirement festivities are in full swing.

Historically, short term rates such as these would not be cause for alarm - in fact 4.5% is a full point below the average Fed Funds rate of the last fifty years. From a historical perspective there should be nothing wrong with raising rates to these levels. But, could the economy handle short rates like these?

What would happen to stocks, bonds, commodities, hedge funds, and the real estate market if short-term rates rose to these levels? What would happen if rates stop rising?

We'll find out soon enough.

Today, everyone expects the Federal Reserve to raise the Fed Funds rate from 3.00% to 3.25% - the only uncertainties are whether the wording of the policy statement will change or if there will be another mix-up like last month when a sentence about long-term inflation expectations was misplaced.

It is unlikely that there will be any substantive changes to the policy statement or that there will be any mix-ups this month, but sometime between now and next January something is bound to change.

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If There's a Crisis ...

If there's a crisis, we'll all get together and solve it - or hopefully solve it.
Alan Greenspan, June 23, 2005

During last week's Senate Finance Committee Hearing on U.S.-China Trade Relations, there were a few interesting exchanges between Senator Max Baucus (D - Montana) and Alan Greenspan. Yes, this hearing is old news by now, but some of this discussion really is worth a closer look, even belatedly. The complete hearing is still available at CPAN via this link, and there is some additional coverage here and here.

It is becoming clear that when Alan Greenspan goes to Capitol Hill, the Q&A session following the prepared remarks is much more interesting than any of the prepared remarks. While the mainstream financial media does cover both, they seem to miss some of the real gems within the Q&A session.

Speaking of real gems, Treasury Secretary Snow was also present for this segment of the hearing. Come next January, he' going to be the government's highest profile guy on the U.S. economy - that's a scary thought. It took the panel about a half hour to ask Snow his first question, and they probably regretted doing so - on a few occasions, when the CSPAN cameras panned back to the committee table while Snow spoke, Senators could be seen rolling their eyes.

The contrast of alternatively listening to Snow and Greenspan was fairly remarkable - Snow sounds like he's still giving his social security stump speech, picking a few phrases and just repeating them over and over. Can you imagine what former Treasury Secretary Robert Rubin must think when he hears Snow talk?

Anyway, back to Max Baucus and Alan Greenspan - this exchange is about efforts to get China to revalue their currency:

Baucus: There may be some sort of general discussion, but I don't know if there's much action. Back in the late nineties, there was massive intervention. I mean banks, you were part of it, Secretary Rubin was part of it, Larry Summers was part of it. There was a coordinated response to deal with the Asian currency crisis - very coordinated, and very aggressive. And it worked pretty well. And part of the problem too is that a lot of those Asian countries - it was a capital flow problem. Perhaps they opened up too quickly, so capital flowed in when things were going well - the trouble is the capital all left when things weren't going too well. We've got two choices here - we try or we do nothing. I understand all the technical problems, but there's got to be some attempt here, some way, to sit down with the relevant countries and get some order here, because we all know that by and large, we are all better off the more there is some stability in currency markets, when we're all pretty much working off the same game plan, rather than if not.

Greenspan: Actually Senator, I think that the very fact that there is this very major set of discussions that are involved in the international financial arena, is leading us in that direction. Because remember we all are groping as to what the appropriate balances are because we are dealing with something we have never seen before. We have never seen the extent of dispersion of current account balances worldwide, with the implicit very large capital flows that we are observing. We have never experienced this before. We are learning how it is working, and I think as a consequence, we are gradually approaching the point of addressing the types of issues as you place them. There is no crisis at this particular stage.

Baucus: No, we're trying to avoid one.

Greenspan: Look, if there's a crisis, we'll all get together and solve it - or hopefully solve it. But that's what we're trying to avoid. And one of the ways you avoid it is not introducing the types of actions which are actions based on frustration, which don't address the real serious problems.

Baucus: If I might Mr. Chairman, it just seems to me that we run the risk of too many of these decision makers trying to address some of these subjects in private. It's legislation, Senator Schumer's, or whoever it is, it's proposals by the administration, it's getting this a lot more out in the open. Because I firmly believe that the more it is in the open, the more we'll have a better solution. And I firmly believe that the administration is not doing enough yet, out in the open, and bringing more people in, bringing the congress in, on an honest basis, because we risk real peril her if we don't.

It should be pretty clear that the central banks of the world and the IMF don't need or want any help from Congress on this issue. If anything bad happens, they can always print up more money - that seems to have worked for the last twenty years.

This segment is a bit long, but it does, in a round-about way, cover Greenspan's view toward the U.S. economy and it's place in the global economy. Senator Baucus asks a very good question, and after an apparent filibuster attempt, demands an answer:

Baucus: Mr. Chairman, it has often been stated by the Federal Reserve that increased flexibility of the American economy will likely facilitate any adjustment without any significant consequences - you know better than I about the huge current account deficit we are projected to face at the end of the year - I figure it is about $780 billion - which we'll need about $3 billion daily to finance. At the same time our economy appears increasingly dependent upon cheap credit to fund consumer spending and there are certain segments of our housing sector that have bubble like appearances. My question really is - shouldn't we do more than just let the quote "free market" take care of it? By definition, market flexibility will correct it. By definition. The trouble is that there are very significant adverse consequences for a lot of Americans when that happens. For example, people dislocated from jobs. There are some that can adapt to market flexibility a lot more easily than can others. So, don't you really think that we need stronger policy options to minimize the adverse consequences of free market flexibility, that by definition will correct some of this?

Greenspan: Senator, let me just preface my remarks by suggesting that what we are confronted with is the consequences of an extraordinary change in globalization in recent years which is, augmented trade and current account balances throughout the world - at the same time that process has created an increasing rate of growth and economic activity virtually world wide and has redounded very specifically to the benefit of the United States economy. We are looking at the extension of what has gone on in our economy when we moved from local markets to national markets. What we are observing now, and very specifically in the last decade or so, is the emergence of national economies, spilling over sovereign borders and in the process creating a much broader global market system, the statistics of which will begin to show very significant increases in the dispersion of current account balances, and trade balances, in the same way that had we in the United States been measuring trade imbalances amongst the 50 states, we would have found a very large increase in the dispersion of trade surplus and trade deficit within the United States. So this is a process really, which reflects a broadening of globalization which is, in my judgment, something of some significant positive force for world economic growth and prosperity.

Baucus: If I could remind you again Mr. Chairman, because our time is so limited here.

Greenspan: I was going to get to your question.

Baucus: Up to now ... well there's still a little time here.

Greenspan: In the process you create a very significant amount of winners and losers, and the basic problem that we confront is, given that the advantages are so much greater than the deficits, how do we take care of those who are on the wrong side of this process. And I do emphasize that what our international trade policy should be focusing on, is how we put resources, basically the resources that we gain from globalization, to assist those who are on the wrong side of the adjustment to retrain, come back, and if necessary, at least get a means of redress which recognizes that there are very significant problems in any competitive, any advance in economic activity. Indeed you can not have an advance in economic activity, unless you have obsolescent industries and cash flow move in to finance the cutting edge types of capital investments which we are engaged in, in the United States. It would be nice if it were different, but the world only gives us the choice of stagnation or advance, and if we choose advance, it occurs only in the context of moving capital from older industries to newer industries with the consequences that that clearly has - it's that process problem which I think we should direct our efforts to adjust.

Baucus: Well, you're very good at using my time. Mr. Chairman, you've been around. Mr. Chairman, the problem is this. I don't see a plan. I don't see a plan in the United States. I think frankly too much burden is on your shoulders. Too many people in this country think, "well the Fed will take care of it". It's all monetary policy. The administration, the congress, the free market era - we don't have to do anything. And I think that philosophy is controlling too much. Our country is great because of free markets. It is the strongest country in the world because of the free market system in our country. But at the same time there are huge dislocations. And increasingly fewer and fewer people are able to adapt to those dislocations. And you yourself said that we need some kind of a readjustment plan of some kind in this country in education. I don't see one. I don't see one. I don't see the administration proposing any plan that addresses that and I don't see the congress coming up with anything significant that addresses that, and I also do believe, and I'll give you a chance to respond, if you think this country should or should not spend comparatively more time on legislative policy and fiscal policy to take some of the burden away from the Federal Reserve which is trying to account for some of this with monetary policy.

Greenspan: I think the critical problem, as you point out Senator, is the issue of education. The problem as I have emphasized, and I don't want to go over it in detail at the moment but, where the real adjustment process is going to be required, where the retraining and the like, rests in the problems that are associated with our inability to move our children sufficiently through primary and secondary education, into college and beyond, to create an adequate level of skilled workers to staff the ever increasing...

Baucus: Do you see that in this country? Do you see the United States sufficiently addressing that?

Greenspan: I do not.

Baucus: I thank you. I don't either. I think that's a huge problem.

Greenspan: If we do not, whatever else we do, is not going to be helpful. If we do, nothing else will be necessary.

As in last month's congressional testimony, Mr. Greenspan once again stresses that the solution to our job/trade problems lies in bettering our educational system so as to better compete globally - currency adjustments will not do much to save jobs and trade barriers would be a disaster.

This seems like an all too convenient answer - really a cop-out when you think about it - especially when espoused by someone who has been instrumental in creating an entire generation of crazed consumers and speculators with the easy money policies of the last fifteen years.

Why be better educated when you can day-trade or flip condos?

This is the "we'll innovate our way out of our problems" approach to combatting the problem of losing jobs to cheap overseas labor - you'd think with all the visits to the White House over the last few years, the Bush Administration would be on board with this assessment and working towards this goal, if it is realistic at all.

Education will save us? That's an all too convenient answer for someone who is retiring in six months.

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Valuable Lessons About Debt

Since credit cards were first issued and automobiles were first financed, bankers and car salesman have been more than happy to assist individuals in realizing their full borrowing potential. Realizing their full potential, that is, by borrowing more money than they really should.

For young adults, perhaps living independently and with their first full-time job, this could lead to important life lessons about managing debt and living within their means. After many months or years of credit card and automobile payments, the initial thrill having long since worn off leaving only the payments, valuable lessons about borrowing too much money have often been learned - lessons that are not quickly forgotten.

When purchasing homes, on the other hand, it used to be quite difficult to take on more debt than would seem reasonable - there, the bar was set higher. Years ago, couples would walk out of their mortgage broker's office disappointed and dejected because their dreams had been thwarted by a loan officer without a heart.

These too were valuable lessons about debt.

Maybe it seemed unfair, but someone who was presumably older and wiser had determined that the dream home so coveted by the young couple was simply beyond their means. Maybe when the couple later reflected on their denied attempt to purchase their dream home, they realized that the lender probably knew best.

But, the financing of real estate purchases has changed dramatically in recent years. Now that home financing has become as easy as getting a credit card or buying a car, valuable lessons about debt learned early on, are being unlearned later in life - this is probably not a good thing.

Credit Cards

Everyone has stories of their first credit cards or a friend’s initial experience with credit cards. It is probably still fairly common for young adults to get a new VISA or MasterCard with a $1000 credit limit, immediately go out and spend the $1000, then begin paying $20 per month to service this debt. Of course the debt never seems to get paid down - but, initially at least, it is easily serviced.

After a while a new credit card would be acquired - You're Pre-Approved!

The process would then be repeated. Another $1000 in debt and another $20 debt service. Many young adults have ended up going back to their parents when this process had been repeated many more times - when the debt service rose much more rapidly than their income and the funds to service the debt began coming up short at the end of the month.

The debt service payment had been multiplying along with the number of credit cards, and was now in the hundreds of dollars per month. Then an emergency arose, and it was game-over - back to the parents, a little groveling, some stern warnings, a few promises, and problem solved.

A valuable lesson was learned.

Automobiles

The purchase of a first automobile can result in a similar learning experience. This one, however can be much more personal - the memory of the car salesman may accompany the monthly payments. Many years ago, a roommate car salesman would occasionally come home and announce, "We buried this guy!” This was invariably a reference to some poor schmuck that came in off the street, and despite his best effort to resist, ended up driving off the lot with a car that he really couldn't afford.

Apparently, there is something both magical and legal about driving the vehicle off the dealer's lot - even if the paperwork was not quite right or the loan wasn't quite approved, you just bought a car - one way or another. You've just made a multi-year commitment to repay many thousands of dollars in both principle and interest in return for that shiny new car that maybe you really can't afford.

Missing too many car payments carries serious consequences - this could be an excellent learning experience if a new car owner needs to be taught this lesson. However, most borrowers who buy more car than they should just live with the strain of seemingly never ending monthly payments until the loan is paid in full. Then they can look back and reconsider the decision that was made on that fateful day. Was it a good decision? Was it worth it?

Another lesson was learned.

[Unfortunately, automobile leases today have given many people the impression that it is completely normal to make car payments forever. Individuals who will never experience the joy of owning automobiles outright and not having any car payments - these people do not know what they are missing.]

Houses

That brings us to today's wild world of home mortgage finance and housing appreciation. If either of the above two lessons about debt were learned earlier in life, it is understandable how they may be quickly forgotten when confronted with a force as powerful as today's global real estate boom.

With lending standards relaxed and home prices rising, debt has taken on an entirely new character - monthly payments now have a much friendlier air about them. Much friendlier in that the underlying asset seems to rise in value at a rate many times the debt service payment.

That never happened with credit cards or automobiles!

If you pay $2000 per month in debt service, and the home value rises by $5000 or $10,000 during that month, and this gets repeated month after month, and you also get a nice place to live in - this seems like an excellent kind of debt.

What lessons are there to learn here? Maybe the lesson is that more debt would be better.

But we are reminded that these are not normal times. We are living in what The Economist magazine calls "the biggest financial bubble in history" - the global real estate bubble. What happens if current trends do not continue? What happens when real estate appreciation regresses to the mean - slowly with stagnating prices or quickly with price declines?

Would there perhaps be some valuable lesson about debt to be learned at that time?

Is the entire Anglo Saxon world about to be taught a valuable lesson about debt?

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A Policy Blunder of Monumental Proportions

Every once in a while, when the name of this blog starts to look stupid to its creator, Stephen Roach is there to center me - to refocus my attention on the task at hand, that of affixing blame for a problem which most people do not yet see.

Perhaps it works the other way as well. Perhaps Mr. Roach looks back on his previous writings and thinks to himself, "I've been saying the same thing for the last three years, but things just keep getting more and more unbalanced, and nobody wants to do anything about it". Perhaps he is an active reader of this blog and similarly draws strength from the views expressed here - naaahhh, probably not.

In addition to having a cool last name, Mr. Roach is the Chief Economist and Director of Global Economic Analysis at Morgan Stanley. He has been the subject of several previous posts here, most recently being referred to as the Energizer Bunny - but, in a good way.

In last Friday's From Bubble to Bubble, we are reminded once again that, by largely ignoring asset inflation over the last ten years (first equities, then real estate) the Federal Reserve may have committed "a policy blunder of monumental proportions", which gives rise to an intriguing possibility for a new blog:

The Policy Blunder Of Monumental Proportions That Greenspan Made

Uh, maybe not.

Looking back at the way people rationalized the equity bubble in 2000 (new era productivity, earnings potential), and how there are eerily similar rationalizations for today's property bubble (immigration, low unemployment, real estate is "local") he notes:

This is rubbish -- five years ago and, again, today. In March 2000, not all stocks had risen to dot-com excesses. But enough of them did to take the overall S&P 500 index down by 49% in the bubble carnage that followed over the next two and a half years. Today, nationwide US house-price inflation is at a 25-year high in real terms... In 25 of the top 100 metropolitan areas, the rate of home price appreciation was at least 20%... Something else must at work.

That something else is a bubble. Residential property has become the asset of choice for investors in a low-return world awash in liquidity... America’s equity and property bubbles have one key ingredient in common: The principal blame for both bubbles, in my view, lies with the Federal Reserve.

While it is not the Federal Reserve that is making interest only and option-ARM loans to unwitting consumers, the Federal Reserve has facilitated and encouraged these sorts of excesses, as noted on several occasions here - most notably, encouraging homeowners to take on variable rate loans and marvelling at the rise in sub-prime lending.

It seems that after ten years, when the real problem has evolved into too much liquidity, more liquidity is no longer a viable solution. When this point is reached all that is left is a "serial bubble-blowing strategy" to try to keep the whole thing from collapsing.

To counter post-equity bubble aftershocks, the Fed slashed its policy rate by 550 basis points to 1% -- vowing that it had learned the tough lessons of Japan... It pushed the real federal funds rate into negative territory for three years (2002-04) before finally taking it up to the zero threshold, where it remains today.

Out of this same mania, the property bubble was borne... The home became the cash machine -- the manna from heaven that drew its sustenance from rock-bottom interest rates. And it became contagious -- as most bubbles do. The more consumers succeeded in extracting purchasing power from their assets, the greater the demand for the asset. Once borne out of a legitimate effort at post-bubble life-style defense, the asset-based consumption mindset took on a life of its own. Like the carry trade in fixed income, this phenomenon created an artificial demand for the underlying asset. We now call it a property bubble.

Many in this country, and around the world, are quite pleased with where we find ourselves today - never before have so many people acquired so much wealth in such a short period of time. It almost seems too good to be true, doesn't it?

One of the great mysteries of asset bubbles is what causes them to pop. Yale professor Robert Shiller has long argued that asset bubbles invariably implode under their own weight... We all hope for the benign endgame. But the bigger the bubble and its associated imbalances, the less likely that becomes.

Don’t kid yourself. America’s property bubble didn’t just appear out of thin air. It is traceable directly to the equity bubble of the Roaring 1990s -- and to a central bank that remains steeped in denial. The real lesson of Japan is that there may well be no easy way out.

Easy way out? Who says things have to change? As time goes by, it becomes increasingly strange that nothing bad happens, but more and more time passes without a crisis. What if there never is one? With hedge funds, exchange rates, China, Iraq, oil prices, home prices, and so on, you'd think that something bad would have happened by now - but it hasn't.

What happens then? The U.S. consumer slowly chokes on his debt? That sounds like fun.

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Why is This Couple So Happy?

Click to enlarge

This couple is so happy because, on the advice of Money Magazine, they have opened up a home equity line of credit - they have done the number one "smartest thing" that they could do with their money.

Of the many "smart" things they could do with their money, the smartest things (according to Money Magazine) have to do with real estate - this is clear from the online version of this article. Right there at the top of the list is real estate - two steps above saving.

Of all the smart real estate related things to do with your money, in both the print and online versions, the "smartest thing" is:

Do: Open a home-equity line of credit and use it for the right reasons: to tap as a rainy-day fund, to finance college for your kids or yourself, or to pay down credit-card debt.
Don't: Raid your home's equity to fund vacations, plasma TVs and that Beemer you can't afford.

This is Money Magazine mind control at it's best. This home equity - these tens or hundreds of thousands of dollars of asset inflation - this is YOUR MONEY. It's not just the increased value of an inflated asset that could continue to go up, or ... oh my! reverse course and go down - this is YOUR MONEY.

What's a little strange about this kind of money is that it has to be paid back. If you were to sell your house, you could get this money in cash - then it would be like other more traditional forms of money, like money in a savings account - money with no strings attached. But as home equity, this money has to be borrowed - but still this is YOUR MONEY.

[Actually, at a recent seminar, a Citibank mortgage representative referred to untapped home equity as "dead money" - money that is just sitting there "dead" - money that should be put to work - like for real estate investment property. This view seems to be institutionalized today - at least by lenders.]

While the obligatory warnings are offered - for the right reasons, rainy-day fund, college, pay down credit-card debt - we all know how this works. Shortly after this credit line is set up, it starts calling like a siren, beckoning to come and have some fun - come on, take a little and blow it on something, you know you want to.

Sometime after it is first tapped, there is a discernable change in one's standard of living. This can happen fast, or this can happen gradually - paying down credit card debt is so easy with a home equity line of credit. Running the balances back up only to have to pay them down again is easy too!

Even the warning, if parsed carefully, seems bent on influencing reader behaviour - don't "raid your home's equity", as if something short of a "raid" is OK. And don't spend this money on "vacations, plasma TVs, and that Beemer" - all things that people do anyway, knowing full well that it is wrong, maybe in defiance of authority, or maybe just because they are stupid.

Identified elsewhere in this article are many other genuinely smart things to do with your money - it is a shame that they have to start the discussion as they have, immediately recommending a home equity line of credit, something so easily abused, as the "smartest thing".

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