Difficult to Refinance
You know the credit market is tight when the former Chair of the Federal Reserve can’t even refinance his mortgage. 😛 If that’s of interest to you, you’re not a loan. 😀 Ben Bernanke graduated with a Bachelor of Arts in economics in 1975 from Harvard University. He later received his Ph.D. in economics at The Massachusetts Institute of Technology (MIT.) Bernanke once even taught as a professor at Princeton University. He was also the chairman of the Department of Economics there from 1996 to 2002. But perhaps he is most notably known as serving 2 full terms as chairman of the central bank of the United States. He had control over the monetary policy of the world’s largest reserve currency. In other words he was arguably the most powerful and financially influential person on the planet.
So imagine everyone’s surprise when his request to refinance his mortgage was denied. 😯 As the Chair of the FOMC his salary was nearly $200,000 a year. However since he no longer has an impressive W-2 (T4 slip in Canada) he does not meet the requirements anymore of someone with a “stable income.” Nevermind he now makes $200,000 each time he presents a speech. Or that he currently has a $1 million book contract. Or that his net worth is over $2 million. All the bank sees is a person who was working over the last 11 years, and is now unemployed. The metrics by which financial institutions decide who to give loans to is flawed to say the least. Anyway the balance on Ben Bernanke’s mortgage back in 2011 was $672,000. It was a 30 year fixed-rate loan at 4.25% interest rate.
Many financial news sites have already discussed this story. However hardly anyone is talking about the most important question. Does it seem strange that a multi millionaire, who has always made a lot of money, still have a $672,000 mortgage at age 61???
Perhaps it shouldn’t. 🙂
The reason why Ben Bernanke likes to stay in debt
My investment strategy has always been to follow what the top 1% of the richest are doing with their money. Ben Bernanke’s behaviour of using leverage is perfectly in line with other like minded individuals.
Here’s why it makes sense to take on debt, even when he could pay off his mortgage at any time if he wanted to. It’s because interest rates are at rock bottom. 🙂 He printed a lot of money during his position of power that insured rates will continue to stay low for years to come. Every dollar that the Fed creates out of thin air becomes a dollar of DEBT that the United States people have to bear. The only reason the economy is still holding itself together is because the cost to service debt (the interest rate) is low. Rates have been so low for so long that people and government alike have become addicted to cheap money. With a record amount of debt the country simply can’t afford the cost of those debts to increase any time soon.
Ben Bernanke bought his house on Capital Hill in 2004. Today his home has appreciated in value by $126,468, and the stock market has gone up by nearly 100%. This means by using the bank’s money to buy a property he was able to free up his own savings to invest in the profitable stock market.
Plus, by flooding the banks with so much money, Ben Bernanke made sure that the U.S. will have positive inflation. Most people don’t like inflation because it eats away at the value of their savings. But this same reason is precisely why it helps those who have debt. Inflation in the U.S. is currently at 2% a year. This means 2% of Ben’s mortgage balance of $672,000 will be paid off automatically by this time next year. That’s $13,400 of real wealth gain, created passively and discreetly thanks to the monetary policy that he purposefully designed, which is an environment of low interest rates with modest inflation. Inflation is created to help the U.S. government pay down its massive $17.8 Trillion national debt. However it benefits personal debts as well.
Printing money also has the effect of propping up the financial markets because: a.) it creates more financial transactions and activities. And b.) the market needs to build in future inflationary pressure. And using leverage in a rising stock market can multiply the returns! Furthermore. borrowing money to invest means the interest that one pays on the loan is tax deductible. 🙂
If Ben had paid for his house in cash (used no debt) then he probably couldn’t have bought one nearly as expensive. A smaller, cheaper home would not have appreciated as much as his actual, larger home did. So he would have missed out on part of that $126,468 tax free gain from his appreciating residence. Not to mention all the stock market gains he would have missed out on too.
In other words Ben has brilliantly engineered the financial system to reward those who use leverage and debt to build up their financial assets. His successor to the Fed, Janet Yellen, is most likely going to continue the monetary policy that Ben had put in place. So far Yellen has done nothing but print even more money on top of the balance sheet that Ben left behind.
Following in the footsteps of Ben Bernanke
Despite popular beliefs saving up for a large down payment, paying down debt, and having a large savings account are not great ways to build wealth. So how can we become rich like Mr. Bernanke? It’s pretty simple. Just do what Ben and all his rich friends are doing. 🙂 Step 1. Borrow money at cheap rates. Step 2. Invest in a diversified portfolio to minimize risk but can still expect 6% to 8% return in the long run. Step 3: Wait and profit! 😀
I started this blog and my net worth updates in 2010. Back then I only had about $200,000 of debt. My net worth grew by $32,000 in 2010. But a couple years later in 2012 my debt grew to $350,000. My net worth increased $40,000 that year. And today in 2014, during the lowest interest rate period, my debt has ballooned to over $500,000. So far this year my net worth has grown by about $100,000. The pattern is as clear as sapphire glass. More leverage equals higher net worth growth. Keep in mind my salary has been relatively unchanged throughout these last 4 years at between $40K to $50K per year pre-tax. Which means the changes to the growth rate of my net worth can only be explained by leverage, monetary policy, and the asset bubbles that cheap money creates thanks to the Fed. 🙂
Here in Canada we have even more reason to use Ben’s strategy because our housing market is arguably more resilient with less mortgage defaults. And we hardly have any sub-prime lending. Our borrowing rates against real estate is also cheaper. A mortgage is typically under 3% today and a HELOC is 3.5%. Which are both lower compared to Ben’s U.S. mortgage rate of 4.25%. Currently commodity prices are in the middle of a bear market causing weakness in the resource and mining sectors, which means it’s a great time to be buying the S&P/TSX Composite at a discount. 🙂 I plan to continue using leverage to expand my asset column, write off investment loan interest, and let inflation slowly take care of my debt balances. 😉
Some people think leverage is risky. But Ben Bernanke, with his impressive background, chooses to finance a hefty mortgage, at least for now, rather than become debt free. Betting against his financial strategy would involve undermining his vast wealth of knowledge and experience, which requires a claim to understand money better than he does. And I personally think there is more risk in doing that than using leverage in a controlled and balanced approach. I have been suggesting for years to carry a mortgage for as long as possible. Now I’m even more confident that I’m doing the right thing. 🙂 So the next time someone asks you when you plan to pay off your mortgage you can tell them “maybe never!” thanks to Ben Bernanke. 🙂
Random Useless Fact:
The continent with the highest average education level is Antarctica.
Reason: Because most of the people there are scientists 😀