So the whole world is flipped upside-down a la Will Smith in Fresh Prince about what is supposedly a questionable business model.

The business model in question is a product of H&R Block, Jackson Hewitt, and their little friend—the refund anticipation banker.

What’s a RAL?

What’s a refund anticipation loan, you ask? Pfft, only about the most profitable loan in the history of man-kind.

Basically the tax compliance companies allow their customers to receive a loan as an advance against a future tax refund. In return for a flat-rate fee, a bank writes a check to the tax filer in the amount of the expected refund from the US Treasury. The fee? $100. The advantage? Oh, you get your refund today instead of a week from now as you would with an ordinary e-file and bank wire c-c-c-combo.

Some say this business model is predatory. It is. They charge $100 for a loan on $2,150 for a period of exactly one week. And you know what? Good. I don’t have a single problem with it!

But what about the children!

Refund anticipation programs belong up there with in-store extended warranties and bumper-to-bumper warranties peddled by hair gel clad used car salesmen—they suck. It is true, the people who accept these loans get ripped off.

You know why I don’t care? Because stupid taxes are a good thing.

Plenty of people consider the lottery to be a horrible investment, a true stupid tax. Since there is no possibility of an expected positive return, the average lottery player will, on average, “win” far less than they “lose.” Thus, the lottery is a stupid tax.

In my view, it’s actually a smart tax. Not only is it levied on only those who agree voluntarily to play the lotto, it affords excellent public services. Here in Indiana it was used to cover a massive gap in the state budget. Win-win!

These refund anticipation loans are a win-win, as well. See, for each dimwit dumb enough to pay a $100 flat fee for a $2000 advance, I pay less to file my taxes. But it’s not just me, many millions of people are going to file their taxes this year at rates practically subsidized by financial irresponsibility and recklessness—I’m cool with that.

I Can Protect Myself from Myself Just Fine, Thanks

This “whole protecting the public” thing is the reason I pay indirectly a pharmacist to count to 30 and a doctor a hundred dollars to give me a sample of his poorest quality penmanship.

It’s the reason why lighters give me blisters, and I have to show my ID to buy white-out at Wal-Mart.
I bend over backwards every day, of every month, of every year for stupid laws, policies, and “protections” intended to keep me safe from myself.

If I ever want to borrow money at an effective APR of 160% per year…well, then I damn well better have the right to do so.

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I had one of those moments the other day—you know, where a light bulb ignites with color and an idea comes to life?  They’re awesome, no doubt.

I was sitting in my economics class when my professor offered up an explanation to an idea I had myself, but one that I could just not explain.  His very simple words were “rational isn’t always reasonable.”

“Aha,” I thought, “That’s it!”

Was I on to the next big breakthrough? No, but those four words provided an excellent start to concept that I, until that class, couldn’t explain—the difference of rational and reasonable.

That’s it? Seriously?

Uh…yeah, that’s pretty much it—he said four words.  Doh!

No, really though, the light bulb moment came from the concept.

You see, in economics, anything you do is said to be “rational” because you, as a thinking human being weigh the pros and cons of each decision (even if you don’t notice it) and then select the choice that best fits you.  That is the definition of rationality.  We think (some of us more than others 😉 ) then we act—simple stuff.

However, our rationality leads us to many decisions that are not reasonable, and in many cases, actions that aren’t very sensible.  We weigh the perceived pros and cons, but then we make a decision that does not provide the best outcome, and do so rationally.

Take, for example, a drug addict.  Addiction does not come as a result of thinking sensibly nor reasonably, but it is a rational decision.

Pre-addiction, the addict did decide to do/use X substance rationally, knowing most of the pros and cons, as well as the inherent risk.  During addiction, the addict continues to use, a rational decision, because the uncomfortable action of quitting is not seen to be worth the benefit of quitting.

Is it a reasonable decision?  Of course not, but it is rational.  The addict says that addiction is more comfortable, the benefits plenty and the costs justifiable, but only after considering the alternative, of course.

Meshing with Market Failure

So you’ve probably heard the term “market failure” before—it was used all the time during the health care debate—right?

Market failure: when the actions of all market actors create a negative outcome, or fail to supply enough of a certain good, service.

There are many different things people perceive to be market failures—pollution, poor resource allocation, etc.  These many things, though, aren’t exactly market failures.

Everything that is on this earth…well, most everything is a by-product or a direct product of the human consciousness.  Every man-made thing came to being as a result of human action and decision-making.

Are dolphins being killed by floating 6 pack can holders because of the market, the economy?  Or is it because the perceived benefit of plastic holders outweighs the value we believe dolphins are worth?

Is China polluted because of a market failure, or is it because Americans, most of whom will never see first-hand the carnage of manufactured plight, value inexpensive goods higher than a healthy eco-system halfway around the world?

You know, the market can’t fail on its own.  And market failures don’t happen as a result of stupidity, or even recklessness; instead, these problems happen as a result of a rational thought process.

Go back to the drug addict.  When we looked at the addict, his or her decisions were unintelligible!  How could he or she have ever decided to become an addict.  They didn’t.

Just like you didn’t choose to strangle Dolphins, you just wanted a cold six pack.

Does it mean you, him, her or the next person are all bad people? No, of course not.  But it does mean that maybe we should consider better the inevitable from each of our decisions.

What’s the Takeaway?

Every day the world’s dumbest decisions, errors, and critical oversights are made by the most rational people in the world. You and I are two of them. 😉

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Risk vs. Reward

by JT McGee

“No way! I knew I remembered you from somewhere!”

A few months ago, somewhere between the fifth or sixth pitcher of beer I was sharing with a friend, we got to talking about the bad jobs we’ve had over our short lives with a friendly stranger.

As it turns out, this stranger wasn’t a stranger at all. He and I had worked at the same golf course together in high school. It was closing down, but not because of the reason you might think. Attendance had been relatively good – there isn’t much to do in my small hometown – but bad management squandered the place.

The golf course was owned by the pro who worked on site. He acquired it on a lengthy mortgage that spanned 25 years.

At some point, the new owner saw an opportunity to cut costs. The groundskeeper who had kept the grass vibrant for several years was a significant and unfortunate fixed expense. The owner quickly fired the veteran and made a new, less expensive hire.

Just weeks later, this new hire started the process of fertilizing the course’s many acres of pristine grass. He’d be back in the morning to start the sprinklers, fulfilling a requirement that the heavily-fertilized grass is watered on a strict schedule.

Except he didn’t go straight home to get some rest for what would be a very busy day. He went to the local bar, and in Midwest fashion, drank more than he could handle. His drive home would end abruptly at the hands of a sheriff, who arrested him on sight, clearly too drunk to drive.

The next day, the golf course’s owner and my new bar pal sat in the proshop looking over the course. Neither person had seen the groundskeeper that day, but both assumed he was busy at work finishing the job he started the day before.

By noon, the grass was slowly changing colors. By the afternoon, it was brown. By night, it would be dead.

They called the groundskeeper’s cell phone. No answer. Then they started calling anyone they could think of, until one of them had the bright idea to call the local jail. They found him, and the owner quickly rushed to bail him out.

Unfortunately, it was too late. Emergency action to solve a day of inaction yielded nothing. In just one day, the golf course experienced its worst day in history – a $3 million loss due to the death of every square inch of grass.

Ultimately, in an effort to save an estimated $20,000 in annual operating expenses, the new owner lost the entirety of his investment in the golf course. The previous owner, who had a clause that would allow him to take over the course due to mismanagement, similarly lost a fortune.

To the best of my knowledge, the course is slated to be sliced and diced into a number of lots for future home construction. Families who paid a premium for a home located on a golf course now own homes that are located in a construction zone for at least a few more years.

It’s a really unfortunate thing, but a really good lesson in risk management. Some risks just aren’t worth taking.

I took a cab home that night.

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This is a chart of charge-offs on agricultural production loans, which have exceeded 1% in only two of the last 28 years since the “Farm Crisis” of the 1980s. (Click to see a larger image.)

This is a chart of charge-offs on single-family mortgages, which never rose to more than 1% for 17 years from 1991 to 2008. (Click to see a larger image.)

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