From the Archives - Going Broke at College

Introduction

It’s hard to imagine saving for retirement when I have two kids to put through college. The way tuition costs are rising, it seems impossible now for anybody to earn a degree without becoming mired in debt. Gone, it seems, are the days when a kid could scrape by, work summers, and come out of college without a lot of loans to pay off. But some twenty years ago, I myself managed to get my degree without ever getting financial aid or a scholarship. My parents helped, to the tune of $400 a month, but for the most part I was on my own. Looking back, the amounts of money involved in my college education seem now like a joke, but it didn’t feel that way at the time.

So how broke was I? I have a distinct memory of going to an ATM and depositing the last cash I had in my wallet, something like $10, into my checking account to keep a check from bouncing. I had thought that was the worst of it, until I came across this old essay from my archives that shows a low point I must have subconsciously repressed.

Going Broke at College - February 27, 1989

I was leafing through the UCSB school paper, the Daily Nexus, the other day, and spotted an ad offering “FREE MONEY FOR SCHOOL.” Ha! Free money! Seeing this, I recalled how back in high school I’d once pulled a flyer off my mom’s car windshield that said, “Earn X‑tra income! $600‑$1200 per month. Small time commitment!” Short of dealing drugs or selling off body parts, I couldn’t think of how this “X‑tra income” could be possible. I called up the number and said, “Yes, I think I’d like to earn $600‑$1200 X‑tra per month. What do I do?” The operator asked for my name and address. I envisioned a massive mailing list of people labeled not as “homeowners” or “environmentalists,” but “suckers.” It would be the worst possible mailing list you could possibly be on—nothing but the most offensive junk mail on earth. So I refused to surrender my identity: “Well, wait. Before I give you my name, I’d like to know just what line of work this is.” The operator retorted, “I can’t tell you until you give me your name and address. Then I’ll tell you.” I imagined that as soon as she had my address, she would say, “Ha ha, you fool!” and hang up on me, and then sign me up to receive flyers about how to make a fortune breeding penguins in my garage. I asked her, “Is this opportunity to earn an X‑tra $1200 a month drug related?” This really got her riled up. “Now look here, we are a multi-million dollar corporation and are completely legitimate. Just give me your name and address!” Puzzled, I asked, “If you’re such a great company, then why do you recruit your employees by blanketing parking lots with flyers?” She hung up.

I assumed that the ad in the Daily Nexus was a similarly stupid scam, but when I investigated it, it turned out to be a pretty compelling idea: this company helps students get scholarships or financial aid, much of which actually goes unclaimed every year. I’ve been promising myself for months that I would investigate this, so I sent away for this company’s brochure. These guys have a computer program which processes student questionnaires to determine which private sector scholarships a student should apply for. Then, the student applies for these and gets thousands of dollars towards his education. Naturally, there is a fee involved, which is refundable if the student doesn’t end up receiving any aid. I decided I couldn’t really lose, except that I had to have the application in by February 28—and I didn’t have enough in my checking account to cover the $45 fee. But I had two checks to deposit, which I figured would clear quickly. So I went ahead and mailed the check, and then immediately set out to deposit the necessary funds in my account. This meant a trek to the neighboring town of Goleta, which had the closest Wells Fargo Automated Teller Machine.

I always take my road bike to Goleta, because it’s really a dismal ride. Maybe there’s a way to get to El Camino Real without a lot of highways and frontage roads, but I haven’t figured it out. So I’m just duking it out with all these cars, so I want to go as fast as possible … you know, get in, take care of business, and get out before the depression sets in. On this day, I even used my race wheels, since I needed to make sure they were working well for the upcoming weekend’s races. I hate riding on my race wheels, though, because I’m worried about getting a flat. When you ride on $50 Vittoria CX tubular tires, see, you don’t bring a pump or tool kit along; you bring a pocketknife. If you get a flat, you just commit suicide.

At the ATM, I checked my balance before depositing money. I wasn’t worried; I had kept close track of my financial situation, and knew I had a full six dollars in my checking account. (Sadly, the savings account died of malnutrition last month.) The machine casually told me that my balance was at ‑$75.00 (that’s negative seventy five dollars)! My first reaction was denial. No, the machine didn’t just tell me that. No, I have six whole dollars! I canceled the transaction, withdrew my card, put it back in, punched up the balance again, and got the same horrid figure. The second phase of response towards a loss of this kind is anger. Just before I might have ripped the control console out of the wall, the third reaction — severe depression — hit me. How could this have happened?

I immediately deposited two checks--all the money I had in the world—totaling $140, which brought my balance up to a whopping $63.81, according to the ATM. My records, which I still believed were correct, showed that I had $146.40, so now my checkbook has two balances: the actual balance and the theoretical balance. Of course I had to trust the bank’s total, but at least I had enough to cover the $45 check I’d just written.

Unfortunately, the financial aid service ended being a bit of a scam. I got back this massive document listing hundreds of “really good leads,” all of which were based on my dad being a war veteran. I suppose I’d indicated somewhere that he’d been in the Navy, but of course that was an ROTC thing he did for college, and he never actually fought in a war. To get the aid they were talking about, I think he had to have seen combat and had some body part blown off. So there was no way I’d be getting any of that money. But could I get the refund of my $45 fee, since this was obviously a bust? Nope … not unless I sent them proof that I ran down every one of the hundreds of useless leads they’d sent me. (That fine print is a bitch!) So, as broke as I’d been, I was now $45 broker. And it suddenly dawned on me that all my rushing around was a joke, too … surely that February 28 deadline was purely fictitious.

Suddenly it all seemed so futile. College wasn’t working. Back in high school I was smart enough to spot a scam, but now I’d become the kind of chump who throws away $45 when it’s almost three fourths of his entire net worth.

But this story has a happy ending. That thick stack of useless financial aid leads wasn’t all that had arrived in the mail. I also got a check for … well, actually, not a check. A statement. A BA/RC statement, to be precise. Nobody knows what BA/RC stands for, but it should be BA/RF. It’s the quarterly tuition bill from the university: $510.49 in tuition and fees. More money I didn’t have.

I’m sorry, did I say this story has a happy ending? My mistake. What I meant to say is that it has a sad ending: I’m flat broke.

Bitcoin Explained!

Introduction

On  the face of it, I’m not the ideal person to explain Bitcoin to you.  As far as you know, I don’t work in the financial industry.   Why shouldn’t you just look at, say, Wikipedia to finally understand what Bitcoin is? 

The answer is, you’re too impatient.  Who wouldn’t be?  This is the kind of topic it’s hard to dabble in.  Ten words of the techie mumbo-jumbo and your eyes start to roll and your brain browns out.  So, you should read my explanation because I feel your pain.  I am writing from a perspective comprising equal parts curiosity and impatience.  Plus, I’ll work hard to understand a related question, which is “What’s so funny about  Bitcoin?”

Basic explanation

Wikipedia says that Bitcoin is “a cryptocurrency, so-called because it uses cryptography to control the creation and transfer of money,” and that “Bitcoins are created by a process called mining, in which computer network participants, i.e. users who provide their computing power, verify and record payments into a public ledger in exchange for transaction fees and newly minted bitcoins.”  Got that?  You “mine” them by doing something with a computer that rewards you with “newly minted bitcoins.”  Who minted them?  Well, that’s where it gets confusing.  So I’ll use an analogy to help clarify.

Suppose you’re playing with your children, making play money out of construction paper.  Of course this paper will never give you actual buying power, because no government stands behind it guaranteeing that it isn’t counterfeit.  For it to be legitimate, the currency must be produced by the government mint.  But, if you take the letters that spell out “TEN DOLLARS” and rearrange them to spell “DLTN ELOSRA,” and write this on the paper and have your child bring it to her mother, there’s a pretty good chance her mother will let her “buy” lemonade with it.  The act of encryption generates the lemonade-buying wealth pretty much out of thin air.  (This isn’t a perfect analogy, because anagrams are not really encryption, but you get the idea.)

Why does this work?  Well, in the olden days, people made coins out of pure gold, and the rarity of that metal gave the gold value.  Then they started using coins and paper markers that only represented gold, but for every bit of currency minted, there was a corresponding amount of gold, most of it (or at least most of ours) stored in Fort Knox.  If anybody got nervous about the actual value of his currency he could exchange it for gold, no questions asked.  (In practice nobody did this because gold is so heavy.)  Eventually, there wasn’t enough gold to back the currency, and many feared the whole system would collapse.  But governments kept right on minting currency, with no gold behind it, and nothing bad happened.  Money went on working simply because people continued to believe in it.

So why don’t governments just print more and more money, and give it as handouts?  Well, smart governments, like ours, know that would be killing the goose that lays the golden eggs.  As with diamonds, the money supply must be artificially suppressed so the value doesn’t diminish.  (Some of the more stupid governments get this wrong somehow, and their currency tanks.)

But there’s no government behind Bitcoin!  No obvious mechanism to keep it from being produced ad infinitum, willy-nilly!  So how does it work?  This is the wrong question.  The right question is, does Bitcoin work?

Does Bitcoin work?

The answer is, Bitcoin sort of works, kind of in the way that Ross Perot’s campaign sort of worked.  Yes, some people believe in Bitcoin, so it’s possible to buy stuff with it, and it’s even possible to steal it.

Steal it?  You mean, the way you can steal credit card numbers?  Well, not exactly.  Stealing credit card numbers is stealing information of a very useful nature.  That information represents an established form of payment that everybody believes in.  By putting that information to work—i.e., stealing the access it gives to somebody’s real credit account—you can buy stuff.  But a Bitcoin isn’t really information.  It’s a notion, and an encrypted one at that.

Still confused?  Let’s go with another analogy.  Remember the story “Stone Soup?”  A penniless traveler picks up a stone on the way into a town, where he asks people for food and is turned down.  So he gets somebody to loan him a cauldron, builds a fire, and starts boiling the stone in water, saying it’s soup.  In return for throwing vegetables and stuff in there, people get to share the soup with him.  By the end he’s had a full meal based solely on the stone he’s contributed, which of course he then pitches.  In like fashion, Bitcoin is the idea of money, and so long as people pony up actual money for bitcoins, or accept bitcoins as payment, they’re as real as that stone.

So all that Bitcoin is missing is that ubiquitous acceptance.  The problem is, anytime your average joe comes across a matter involving arcane abstractions like public/private key exchanges, digital cryptography, and the sliding scale of the value of a currency, he’s going to rightly feel out of his depth, and will generally look to somebody else, somebody in a position of authority, to validate the thing for him so he can know whether to accept it or not.  (This isn’t a bad explanation of some people’s approach to religion, actually, but I digress.)  Where Bitcoin is concerned, the question is:  in the absence of a government and a grandfathered-in acceptance of a currency once backed by gold, who will step up and vouch for it?

Who will validate Bitcoin?

Alas, many governments are unfriendly to Bitcoin and warn their people that it lacks consumer protections.  Economists, unsurprisingly, cannot agree on whether Bitcoin is legit.  (I say “unsurprisingly” because no two economists ever agreed on anything, except for one pair of mental lightweights I’ve already excoriated in these pages).  It doesn’t help that the most prominent Bitcoin exchange, Mt. Gox, collapsed recently and filed for bankruptcy. It also doesn’t help that “Mt. Gox” sounds like something straight out of Dr. Seuss.

However, it does help that some merchants have started accepting bitcoins as payment for actual goods.  Some prominent examples:  the Sacramento Kings, Clearly Canadian, University of Nicosia, Zynga, Overstock.com and most recently the faux-British department store Lord & Taylor.

There are some caveats with these.  The Sacramento Kings is a pro sports team, which means you’re paying to see a bunch of doped-up cheaters—so the game is a sham anyway.  Meanwhile, Clearly Canadian is basically flavored water sold at the price of something legitimately nutritive.  Zynga is a video game, which—unlike productivity software—can be given away widely without costing the supplier anything, nor providing users with anything of value.  The University of Nicosia is in Greece, whose economy is so bad you could probably get anything you want there just by asking nicely.  And the last two retailers, Overstock.com and Lord & Taylor, while perfectly valid retailers, accept bitcoins with a very large asterisk.

The asterisk is that these retailers convert the bitcoins to something legit at the last second, so they’re not really accepting bitcoins at all.  According to Digital Transactions magazine, “Overstock tempers its currency risk by having Coinbase convert its Bitcoins instantly into dollars” and “Lord & Taylor will not accept Bitcoin directly from customers.  Instead, customers will use the Pounce app, from Israeli technology company BuyCode Inc.”

So, the validation Bitcoin gets from being accepted by two major brand-name retailers must be tempered by the fact that they’re actually transferring all the risk to more companies you’ve never heard of.  It’s tempting to call this “lipstick on a pig,” but it’s actually called “reintermediation.”  Whether or not this fancy label restores your faith in Bitcoin is your business, but I for one am not impressed. 

Now, you may accuse me of cherry-picking examples of unimpressive merchant acceptance of Bitcoin, so I guess should fess up:  I left out TigerDirect.  They’re a pretty sizeable retailer, who have been mired in various controversies such as being investigated and ruled against by the Fair Trade Commission; being sued by Dell; being sued by the State of Florida; and being investigated by the SEC.

Restoring faith

After the Mt. Gox disaster, Bitcoin is on shaky ground and badly needs to be propped up.  And, to renew faith in the population at large, the Bitcoin folks need to restore our nation’s faith in electronic commerce in general, thanks to the Target breach, which by some measures has directly affected one in three Americans.  And going back a bit further, I think we’re all a little more wary these days of the financial genius types that broke all the rules around subprime mortgages and various overly complicated financial instruments and caused the great economic meltdown of 2008.

Well, guess what:  we have the answer!  All we have to do, apparently, is lock up our bitcoins in big vaults.  According to a “Wall Street Journal” article, “a Silicon Valley startup called Xapo is among a handful of young companies trying to become the Fort Knox of bitcoin, building secret bank vaults deep in the earth that would safely store millions of dollars worth of bitcoin on computer drives.”  Xapo has raised $20 million in venture capital for this effort.  (Needless to say, “Xapo”—one of those names you can’t even pronounce—is, from a psychological perspective, the polar opposite of “Lloyd’s of London.”)

Now, I know I’m just a simple caveman and everything, but aren’t we missing something here—namely, the fact that the Mt. Gox theft was not of the hands-on, grab-and-dash type?   Nobody held up Mt. Gox at gunpoint or burgled it in the dead of night.  The Mt. Gox bitcoin theft was termed a “malleability-related theft.”  For my money, Bitcoin needs to fix its malleability problem.  How does Xapo intend to do this with vaults, video surveillance, and armed guards?  To think of it another way, how did Target incur $61 million in losses through its data breach:  by having its stores and headquarters overrun with Ninjas or bandits?  No!  The thieves were all the way over in Russia.  They almost literally “phoned in” the theft.

Perhaps the $20 million in venture capital is itself supposed to buoy up Bitcoin:  the idea that if this venture capital firm, run by geniuses, has that much faith in Xapo and Bitcoin, that we should, too.  The problem is, these venture capitalists have flamed out before:  we all watched the dot-com bubble burst.  (I myself saw $20,000 of my on-paper profits—that is, my pretend Internet money—evaporate almost overnight.)

Why should we care?

Okay, I guess it’s pretty obvious by now that I think you’d have to be crazy to mess around with Bitcoin.  But aren’t there all kinds of investment schemes to avoid, like swampland in Florida and Internet-sourced Nigerian inheritances?  Why bother writing about this one?  Well, the reason I care about Bitcoin is that I’m afraid if it gets popular, and then goes supernova, it’ll take the rest of the financial world with it, throwing the world into utter anarchy.  Because frankly, I’m already nervous about the traditional notion of money.

Why?  Well, let’s do a thought exercise.  I derive a lot of comfort from the protections available with conventional finance.  For example, when I discovered that a clothing company in China, from whom I made a legitimate purchase in January, had mysteriously dinged my credit card again in March, I didn’t freak out.  I know I can call my bank and say, “This charge is bogus, make it go away” and they’ll say, “Right away, sir!”  But what would happen if you logged into your online banking account and found it almost completely depleted but for no clear reason?  Whom would you call then?  Imagine your reaction if you complained to your bank and they retorted, “I don’t know what you’re talking about.  You never had that much money.  Go away, kid, ya bother me.” 

Sure, you’d probably have some recourse, but it wouldn’t be easy.  We take it for granted that our money, which exists electronically as a data point in some unseen database, won’t just go away.  Our entire system is already founded on trust, and on the universal agreement that this unseen money—not hard currency or gold, but numbers represented electronically by zeroes and ones—is real.  With this much riding on blind faith, the last thing we need is a Bitcoin bubble.

But you shouldn’t take my word for it—I’m no expert.  You’re probably better off listening to the financial gurus who live and breathe this stuff.  Take the 40-year-old CEO of Xapo:  the son of Patagonian sheep ranchers in Argentina, he got educated and “developed Patagon, one of Argentina’s first online financial-services firms … [and] also founded Banco Lemon, a Brazilian bank for the underbanked.”

What’s that?  You’ve never heard of the underbanked?  Well, I must confess, I hadn’t either.  And, after spending all this time thinking about Bitcoin, Mt. Gox, Xapo, and financial malleability, I’m starting to feel a bit overbanked.  In fact, I’m strongly considering turning some of my liquid assets into expensive bicycle wheels that can’t just vanish like a puff of smoke.

2010 Holiday Newsletter

NOTE: This post is rated PG-13 for mild mature content.

Introduction

Every year I write a Holiday Newsletter and send it with my holiday cards. As newsletters go, mine isn’t very useful; it doesn’t, for example, describe the highlights of the year. It’s actually more likely to focus on a single low point of my year, just to counter-balance all the highlights you’ll read about in other people’s newsletters. Or it’s simply random—the “secret Santa” of holiday newsletters, you might say.

In keeping with the tradition I started last year, I’ve decided to extend my Holiday Newsletter to my extended blog “family.” Enjoy.

Note: please do NOT read this newsletter aloud to your kids!

Seasons Greetings!

Before I get to the standard good tidings, I’d like to make a humble request of all my friends and family: please don’t tell your kids that Santa doesn’t exist! This is the time of year when I get really nervous that somebody’s going to spill the beans. I was at the library with my kids recently and saw a book was on display titled The Truth About Santa Claus. Seeing this, I felt the same kind of panic as a teenager whose mom has walked into his room before he can hide his “Playboy” magazines. What if my kid saw that book? The title alone suggests treachery.

Why, you might ask, should we perpetuate this Santa myth? Well, for one thing, it is charming to watch our benighted children participate in it. I’ve loved reading Alexa’s letters to Santa over the years, asking for mundane or impossible things (a “new live rabbit” and “more aquafresh” one year; aquafresh and “miny piano” the next).

A couple of years ago on Christmas eve, right after her goodnight hug, Alexa suddenly assumed a panicked expression, like someone who just realized she left her purse in the train station, and said, “Wait! We have to put out some cookies for Santa!” Last year she left him meticulous instructions: “To tell the stockings apart, look at the license plates with our names on them in the loop on the top of our stocking.”

The myth is good for adults, too. It keeps us on our toes. For example, Alexa and Lindsay have somehow arranged with Erin and me that every year they get to sleep under the Christmas tree for the last three nights before Christmas. This makes it a bit tricky when it’s time to fill the stockings and deposit the presents. It’s fun going around like a cat burglar, stuffing a stocking right above their sleeping heads.

The whole Santa mythology also opens the door for useful discussions with our kids. I appreciate the chance to dispel my daughters’ natural skepticism even while encourage critical thinking. For example, they asked how a bunch of little elves could make enough toys for all the children in the world. “Oh, believe me, they don’t,” I replied. “How could they? Santa outsources most of his production, just like most corporations. I mean, think about it—would elves really make Aquafresh?”

When the kids asked about the whole “he knows when you’ve been bad or good” bit, I became indignant. “That’s just a myth that parents came up with to try to trick their kids into behaving. I won’t lie to you: Santa doesn’t know what you do and he doesn’t care. Every kid gets presents, even the ones who are little monsters all year. But you should be good for its own sake.” With this lecture I hoped to instill the impulse to question authority—but within bounds.

Another reason I’m opposed to exposing the Santa myth is that, even if your kid is ready for the truth, his younger sibling probably isn’t, and there’s no chance of the older one keeping a secret. Decades ago when my older brothers learned the truth, they wasted no time in breaking the news to me. They couldn’t wait to watch me cry, and they weren’t disappointed. Meanwhile, once a younger sibling learns the awful truth, he tells everyone in his class. Some of those kids will tell their even younger siblings, and now you’ve just trashed the whole holiday. Meanwhile, we can’t really expose the Santa myth without giving up the Tooth Fairy too. After all, once our kids realize we’re capable of lying to them consistently and repeatedly, their skepticism will naturally increase.

Ah, now you want me to defend the Tooth Fairy myth! Fair enough. Frankly, the Santa legend is fun and all, but the Tooth Fairy is something we need. Why? Imagine the alternative, which is presenting the losing-teeth business straight: “Here’s the deal, kid. One by one your teeth will get loose. Your tongue will get tired as it pushes that tooth around, until the tooth is hanging on by one little strand, at which point you’ll taste blood. Eventually you’ll yank the tooth out, which will hurt, and then you’ll have this funny-looking gap in your mouth. The next tooth that comes in will be oversized and as this process repeats you’ll get uglier and uglier until you get braces, which are truly hideous, and which will hurt all the time. Sorry, but that’s just the way it goes. Life’s a bitch.”

Compared to that, giving up a few coins or bills each time to create goodwill is a great bargain. For trivial amounts of money these kids will actually look forward to all this unpleasantness. Almost four months before she lost her first tooth, Alexa said something so interesting I wrote it down: “I wish my teeth would fall out so I would get money from the tooth fairy and I wouldn’t have to earn it.” I asked her what she would buy with the money. She replied, “A gallon of milk for Lindsay.” That’s not even a real expenditure, since we’d buy milk anyway. It’s a zero-sum game that makes it fun to lose teeth!

Here is Alexa with her first lost tooth (July ’07):

Here is Lindsay with her first lost tooth (November ’09):

Awhile back we had a close call with the Tooth Fairy myth. I was loading groceries into the back of the car when Alexa suddenly asked me straight out if the Tooth Fairy really exists. It seems one of Alexa’s classmates was spreading the evil truth about this myth. “Don’t listen to kids, they make stuff up,” I told her. She said the kid’s mother had told it to him. Man. I’d love to get an audience with that mother and excoriate her for turning her kid into a merciless little killjoy, running around the playground sharing the bad news. I’d give that woman a taste of her own medicine: “Ah, so Truth is that important to you, eh? Well then you’ll be happy to know I just told the whole PTA how you paid for your Prius—that is, with a stock portfolio comprising equal parts Monsanto, Phillip-Morris, Halliburton, and bundled credit default swap instruments!”

We had another close call with Lindsay’s last lost tooth: I simply forgot to swap the tooth for the money during the night. I sneaked into the kids’ bedroom in the morning with a $5 bill (the smallest thing I could find), and climbed into Lindsay’s bed as if to snuggle. I reached under pillow, extracted the tooth from the special Tooth Fairy purse she’d put it in, palmed the tooth with two fingers while using other two to insert the bill in the purse, and pulled my arm out just as she woke up. She immediately checked the purse and found the money. It was unbelievably close, like the action movie cliché of people running and diving for cover mere seconds before something explodes. Which, in fact, Alexa did when she saw the five-spot. She found it totally unfair that she had never gotten that much. She was in tears. I had to scramble and explain that the Tooth Fairy pays a flat rate, based on the prime lending rate set by the government. I acknowledged that there are regional variances, of course; that in the Bay Area the tooth rate would be a bit higher than, say, a third world country. During the ensuing discussion Alexa seemed to forget all about the $5. These kinds of trial-under-fire give me some of my finest parenting moments.

So you may be wondering, when is it time to reveal the truth about Santa and the Tooth Fairy? The answer is: never. Let the kids find out on their own, or—and this is the best case scenario—let the truth dawn on them so gradually that they go from believing the myth to helping to perpetuate it without even realizing it. This will prepare them for adulthood, when they go along with the greatest mass-delusion of all: money.

Well, I was hoping to give you all kinds of updates about the Albert family, but I see I’m out of room. Have a great holiday!

Love,

dana albert blog