Greedy Goblin

Thursday, October 15, 2009


Do you know the origin of the gaming term "pwned"? Who is literally pawned? Well, it originally came from a typo, "owned" was mistyped "pwned" since "o" is next to "p".

However let me give a more entertaining definition: "A pawnbroker (or pawnshop) is an individual or business that offers secured loans to people, with items of personal property used as collateral. The word pawn is derived from the Latin pignus, for pledge, and the items having been pawned to the broker are themselves called pledges or pawns, or simply the collateral." (by Wikipedia)

The pawnshop is typically the last step in loans (before filing for bankruptcy). The guy usually has so bad credit report that no one wants to give him more loan. As long as he posses items usable as collateral, he is loan-capable at the pawnshop. Being pwned means being deeply in debt (to the one who did the pwnage), without much hope of repaying and most probably losing everything to him.

I found an interesting article in the Wall Street Journal. The strange thing is the chart below:

It says that the lower income someone has, the higher chance is that he can't repay his loans. It's not obvious or intuitive. I mean people with smaller income get smaller loans. If you have to pay 10% of your income to loans, it doesn't really matter if that 10% is $3000 or $30000.

However the article also shows that debt amounts increased in the low-income segment more than in the high-income segments. I mean in the last years the poor man increased his loan more than a rich.

That's not OK. I mean why do this segment of people take too much loans? The model-person of the article lists some strange behaviors that poke my eye instantly:
  • "I would start paying it, and then my sister almost got evicted from her old apartment, or my grandfather decided he couldn't pay the rent. They needed help," ... "$400 a month she contributes to the rent on her grandfather"
  • "wanting to buy gifts for her mother and sister and clothes for a young niece, she applied for credit"
  • "I kept up a busy social life, eating out several times a week and going to movies -- even as the collectors called"
Helping others when she has more loans than income/year?! Buying gifts from loans?! Hanging out with friends in expensive places when she has delinquent loan?! I mean what the hell is wrong with this girl?

She tells it with her own words: "I was a social person. I had interest in a lot of things, I had dreams. Now I'm just paying off the past."

Yep. She did not take loans to start a business. Neither to get her first home or car that she needs for simply living. She wasted it for social things: helping, gifts, hanging out with friends. Things that cost money but give no meaningful rewards. They won't make you more rich, more effective, more healthy, more wise, they contribute your life in no way. They just feel good.

It is the big difference between the middle class and the poor. The first can cut back on social things when he can't afford them, the latter can not. The poor more often have parties, show off to friends, follow fashions. The middle class, who can't do it is often pictured "boring" or "without style". However it's just clever spending.

The "heartless" middle class wouldn't help others when already in bad situation. The "good heart" poor will share his last slice of bread with his fellow man... oh wait, he shares the last slice of bread of his creditor.

Getting loans for social reasons is the highway to be poor, to be literally pwned!

PS: the only valid reason to get a loan is to buy something that pays you more money than you pay for interest. If you want to start a business, that's an example. If you want to buy a used car to skip taxi fees, or to not waste time (time x your hourly pay = money) on the public transport. Getting loan for "fun" things or to enable socializing is a terrible idea.

PS2: please spare me from the "life has fixed costs and the poor simply can't decrease its spending". You can live in a decent home from low money if you live with roommates. I started my life with my GF in a 28m2 one-room flat. Now my bedroom is larger than that. It's not miracle, simple clever spending and avoiding pawnage.


Smeg said...

wikipedia can be written by anyone. treat it more as a starting platform for research than as holy writ.

Anonymous said...

Pretty sure pwned comes from the word owned from mistypes in first person shooters

Anonymous said...

Sorry Gevlon,

You fail with this post. The word "pwn3d" originally comes from the word owned. In the early 90's hackers would use the term owned to describe a successful attack. Eventually, the "o" got changed to a "p" and the term stuck.

Pawnbrokers and pwnage have nothing to do with each other. Pawn shops have been around for centuries and there is no written evidence to support a link between the two. So nice try but your theory is invalidated.

(On a side note the pawnshop symbol (3 spheres) comes from the Medici family and many places in Europe call the shops "Lombards" after the Lombard family.)


Wildhorn said...

Yeah, Gevlon. Pwned come from Owned, which is when you were killing someone. Why the O got replaced by a P? Because P is right next to O on the keyboard and typing fast would just make you type "pwned" instead of "owned" and people thought it was cool, so they started to use "pwned" over "owned".

But I still like your thesis.

Anonymous said...

The issue of low-income people having larger loans is being blamed on the banks who gave out "easy money" to unsophisticated people. If your logic is correct, low-income people would be easy marks for this type of thing (it plays right into their lifestyle). They were sitting ducks, as they say.

Anonymous said...

Average car lona 40 000 dollars.

a guy making 100 000 a year will still likely buy a car about 40 000 dollars.

A guy make 35 000 a year will still likely buy a car about that price.

Of course the guy making less money has a better chance of defaulting on his payments.

Anonymous said...

Is this a troll post? It seems as such. I can`t imagine that this is a serious attempt to make social = defaulting failure in life.

Seriously, go read an econ book. Your graph (shoddy as it is) is an excellent representation of a fixed cost or fixed expense model. It doesn`t have anything to do with `being social`, quite traipsing around trying to blame people for having friends and enjoying life. We understand that you enjoy being a miserly, constantly analytical fun vaccum, but that doesn`t mean that everyone else has to be in order to be `viably profitable` in life. People can get rich without being a goblin.

What this shows is that there is a certain baseline for acceptable standards of living in the U.S. and that standard according to this graph lies around 30,000 dollars (though this is an absurd number, giving cost of living across various locals). Unsurprisingly, people who earn around this level or less default more often than those who who make around this level or higher, it`s actually amazingly intuitive. But let`s look at why the graph drops off so exponentially.

Prudent, conservative financial planning suggests that housing account for no more than 25% of your monthly take home income, so applying that to a yearly scale we see that someone making $30,000 a year should have a housing budget of $7,500 a year.. or $625 a month.. Already we see a problem starting to arise. $625 a month won`t get you a single room flat in a bad part of town in NYC, even in my native hometown $625 is pushing it for a `decent` place (`decent` equating to safe and serves the bare necessities of housing, no regards to frills or frivolous needs, just safe, and protects from elements), so because these people`s income falls below the `floor` for decent housing, they`re forced to increase their housing budgets to say... 30-35% of their income..

The same happens in other sectors.. Car notes, healthcare, food, transportation costs.. that`s a long way to stretch a $30,000 a year budget.. And often the biggest bill is the hardest to make, for obvious reasons.

Now let`s look at the rich man. let`s say he makes $200,000 a year, his housing budget can, for the sake of prudence, go as high as $50,000 annually, or $4166.00 a month.. I don`t know about you, but $4,000 a month will get you a place just about anywhere you want where I live. Similarly, the rich man can opt to use less of his salary on a place that suits his needs and preferences, but is less than his allotted budget, say he is happy with a $3,000 a month loft/house in the suburbs. He is now less burdened and has either a safety cushion or excess resources to spend frivolously as he wishes. However, the $30,000 earner does not have this option, as it takes all of his 25-30% budget to reach the baseline cost for an acceptable place. He does not have the option of living in a cheaper place (let`s say government housing isn`t an option, as it rarely meets the standards for `decent`) and often must increase his budget in order to have a place to live.

Think of it like gearing and heroics. A freshly dinged 80 in quest blues must play much tighter than a player running in t9 epics and steamrolling the instance. The t9 healer can afford to waste mana DPSing the boss since he has both a larger mana pool and faster mana restoration as well as more powerful healing spells with which to ensure that the group doesn`t fail. The newly dinged 80 in quest blues is OOMing every boss fight just keeping everyone alive, DPS is out of the question for him and in fact, there is a real risk of failure because he is floating around the fixed gear level of the instance rather than surpassing it by a good bit.

Anonymous said...

People with lower incomes float around the fixed costs of housing and cannot spend on superfluous items, just as the fresh 80 in blues must play more correctly, so must the lower earner spend more conservatively in order to avoid defaulting. Whereas the high earner can drop a few thousand in a charity bucket come xmas time and still make the rent (something I`m sure you consider an infinite waste). It doesn`t have anything with being social, it has to do with spending habits and outgrowing your fixed costs by substantial amounts.

stick to economics, not sociology

Korzik said...

I have to say. This is the first thing you have said that I agree 100% absolutely completely with.

I don't care about the details of how you started this post. This comment is for the meaning of the blog. Getting loans to pay for 'fun' activities will only hurt you in the long run.

I love the blog, keep it up.

Klepsacovic said...

All levels of income are capable of wasteful spending and irrational decisions. Some of those levels are more able to survive them. I've seen plenty of poor people throw no parties. I've seen plenty of unemployed middle class throw rich parties.

I won't pretend that the poor are all doing the best they can. Many are not. Majority or minority, I cannot say. But either way, you're grasping at flaws here, attempting to paint blame across a very wide range of people.

It's really quite M&S to overgeneralize (and yet still rely on very specific examples) to such an extent than any conclusions you reach are invalid. That is a habit of very young children: taking the specific and treating all like it.

Klepsacovic said...

Be careful with English. I'm fairly certain it's not your native tongue, so be aware that we do not use our words sensibly. The origins of words may be strange, everything from persistent typos by rushed gamers to blatant theft from other languages. Don't assume that similar words have similar meanings.

Especially be careful with Wikipedia. Check the source if you have the slightest doubt.

Anonymous said...

While the origin of the word is wrong as already pointed out, I still believe the original post is right.

When I was a youngster, just moved in my own apartment, I spend alot of money I didn't have. The bank just let me do it, and offered me loan after loan after loan.
In the end I loaned 10.000$, while my monthly income wasn't even a 1.000$.
I know I was stupid at that time, but the bank wasn't really any help either.

Anyways, now I have an under average income because im still studying, but I have a sparetime job and I make okay money, but my old loan is still tearing up alot of my money.

So young people who read this blog, if you want to loan money, make sure you read this blog entry first.

Dick said...

pwned is just a mistyping of owned that frag kiddies picked up on and ran with. nothing more than that.

not sure why it would surprise any one that people with lower income would have more problems. when you have a society built around consumerism, where people are taught to buy, buy, buy, it shouldn't be shocking. society needs to changes it's ways to prevent this from continuing, but then that would be admitting capitalism is highly flawed, which it is.

Antonio said...


Yes capitalism push you to buy buy buy. That's what keeps it running. People buy products and they create jobs, it's that easy, that's also the cause of recesions, people get scared (or unemployed) and stops buying and starts saving, so products don't sell and more people get´s unemployed. How do you think an economy that teaches you not to buy??

The problem with capitalism is not that it teaches you to buy, it's that it doesn't teach you you to buy smart.

Vyr said...

Actually the origins of pwn were even older than the fps games. It started from a game in which the developer were supposed to use the word owned in it. But due to typo, it got released as pwned. And the word caught on in the fps and rts world and evolved to the word we know now.

Tobold said...

Guess Gevlon got pwned over the origin of the word pwned here. :)

I would like to point out that it DOES matter whether you own 10% of a $3,000 or a $30,000 income. Because what counts is not income, but disposable income, which is income minus cost of living. The guy with 10 times more income does NOT have a 10 times higher cost of living, so proportionally a higher percentage of his income is disposable, and can be used to pay back loans.

DarkKnight said...

Uhm... I could be seeing things, but I think you all are getting "pwned" as the first paragraph is literally:
"Do you know the origin of the gaming term "pwned"? Who is literally pawned? Well, it originally came from a typo, "owned" was mistyped "pwned" since "o" is next to "p"."

So, why do you lot keep moaning about where it comes from?

And then he says WHY he makes pwned to pawned:
"However let me give a more entertaining definition:"

Notice the 'entertaining' in there. So please, stop commenting and read the post properly first.

Anyways, back on topic:
I wonder whether that Anonymous in the middle is right about the costs to live in the US of A are just higher than what lowest incomes earn.
All I know that, that is not completely applicable to the Netherlands, simply because you CAN live of the social security. Not luxurious, I know, but you can. Although I agree that with children etc it might be very tricky, still it 'should' be possible.

Yaggle said...

I think if you could survey people's intelligence, the income-debt chart would look similar to the income-intelligence chart. Stupid people tend to make less money, and also tend to take out loans that are too large and keep spending their money on foolish things when they are in debt. Yes, part of the problem was lack of regulation of the loans. The lender has to be more careful who they lend money to, because, leaving that decision to morons, yes, isn't it obvious that morons tend to make less money and morons will take more loans if offered? Some people say that you should not protect morons from themselves. I guess I am a socialist because I think you should. The resulting financial catastrophe has ended up hurting everybody.

Everblue said...

Some other points -

One of the causes of the recent increase in debt default is that the agents who arranged loans (who advertised the loans, who lured in customers, who arranged the loan with the loan provider) were incentivised based on the number and size of the loans they arranged. They were not penalised if the loans went bad. It was therefore in the interests of these loan agents to convince lower paid individuals to take on loans that they could not afford. This was a mistake made by the loan provider (mortgage houses, banks etc) in the terms of their contracts with the loan agents, for which they are now paying (or rather, taxpayers are now paying since many of those institutions are considered to be too big to fail).

The point has validly been made above that there are fixed costs - the cost of buying enough bread to eat, the cost of heating your house in the winter etc - that do not decrease for people on lower wages. Those fixed costs may in fact increase - insurance costs will be higher in poor areas, medical bills will be higher if your employer does not provide insurance and you do not live in one of the lucky European countries with "socialised" medicine. Thus when (for example) global wheat and rice costs increase as they did this year, a larger proportion of your income goes on costs which you cannot simply cut back on. You therefore make a reasoned decision to default on the loan.

I agree absolutely that the "model person" in your survey was an idiot. I would not however consider it reasonable to extrapolate from her to everyone else on a similar income.

Anonymous said...

Thank you DarkKnight. I was going crazy with how many people didn't closely read Gevlon's article and jumped at the chance to call him an idiot when he explained that he was inventing a fake definition.

As to the point of the post, although the wealthier classes can get away with wasteful stupid spending, it is absolutely CRIMINAL to pretend that social spending is a fixed cost.

Gevlon is pointing out that in the article, the debtors seem to have a sense of entitlement about "going out to professional basketball games" and being "awash in debt, from medical expenses and a bad shopping habit." Gee, you think shopping might have to do with her medical debt?

People can cut down on their costs, they just whine and complain and quote a made up poverty line or average cost of living and use it as an excuse not to be frugal. The main problem are things like free emergency room care, food stamps, and government intervention in banking. Eliminate these things and dumb banks (and people) will (un)magically disappear.

Okrane S. said...

There are other letters next to "O". So any typo would have catched on.
iwned, lwned, 0wned, 9wned, etc...

pwned caught on and started being used, simply because of its resemblance with pawned which means something. So I do not believe Gevlon is wrong about the link between the two.

for some of you who play DotA, for example, you might notice the "X pwned Y's head for 100gold"... clearly the intent is there.

About the topic itself, I believe it's true. Lots of the poor friends I have spend irrationally. Lots of them even got loans to buy expensive vanity stuff even if they can't afford it. It is irrational.

Anonymous said...

I was told that Pwned expression came from a mix of "Pummel" and "Owned", that takes it's origin in Quake game.

The pummel is the melee range weapon, and you got a "humiliation" voice sound when you frag someone with it.

Anonymous said...

like true goblins, succesfull people dont run around in expensive clothings and shit or waste their money on things they dont need (well atleast they buy once quality stuff that least very long), thats what keeps em rich....the normal people with less income are those who waste all their money on quantaty things they dont i agree this post.

Wildhorn said...

@Okrane S.

Yes, but you need to factor in that it is the right hand that write the O and it is coming from the mouse. So the first letter in the path is the P.

Anonymous said...

i thought pwned came from fps game as "pistol owned" like the headshot ownage

Daniel said...

There is part of social spending that must be considered fixed cost, because you need those things in order to be able to interact properly.

You must be bathed,shaved,have your hair being clean and styled(we man have it easy here - military style haircut is cheap and universally acceptable). You need clean clothes that are somewhat official. You need mobile phone, internet access and so on. They are not a substantial sum but they do exist.

And for loans - poor are sitting ducks for a lot of reasons. And there is one simple solution - bring financial education in the early grades, so kids are comfortable with money and can get well on their own. so anyone that takes negative arm mortgage is indeed a moron or rising business star and not some blue collar worker that was tricked into it by a broker because monthly payments were affordable and market always goes up.

Chris said...

If you guys really MUST know the definition of 'pwned', it started out as a way of making fun of people. It came from chatting in FPS games and on IRC, where speed in typing was crucial to get your point across and no one corrected their spelling. If someone 'pwned' someone, it was an embarrassment to all involved, both the pwney and pwner.

If you REALLY took someone down, you 'raped them' or 'owned them'. If you're a moron and managed to kill them, you 'pwned' them.

It had nothing to do with pawn shops, or the pummeler or anything, it was making fun of retards who cant spell. And then everyone picked it up and started using it, which just makes us old timers laugh.

Anonymous said...

" Already we see a problem starting to arise. $625 a month won`t get you a single room flat in a bad part of town in NYC, even in my native hometown $625 is pushing it for a `decent` place (`decent` equating to safe and serves the bare necessities of housing, no regards to frills or frivolous needs, just safe, and protects from elements), so because these people`s income falls below the `floor` for decent housing, they`re forced to increase their housing budgets to say... 30-35% of their income..

This seems to be a misconception among many people. Housing costs are extremely variable based on geographical location. Of course NYC is amongst one of the most expensive places in the US to live, depending on neighborhood.

That same 625/mo spent on a small apartment in NY will rent an entire house in a more rural area.
I rent such a home, and pay nowhere near that amount.

Folks you have to put the proper perspective on things. Do you need a car to live? NO, but it does make life easier. Do you need the internet to live? NO, but it makes it more enjoyable. Do you need to have the latest style in clothing? NO, jeans and a clean t-shirt are usually acceptable in most establishments.

What happens is that people often confuse what is necessary to live with what are actually luxuries, they've been brainwashed by society and media to think of luxury as things like yachts/fancy nightclubs/multi-million dollar estates. These things ARE luxuries, but luxury items are only items which you do not require to continue existing. (I'm certain there are some who think life without the internet is impossible)

The secret to financial success is no different in the real world than it is in a MMO, spend less than you make. You don't need a 40000 dollar car anymore than you need a mammoth mount. You don't need a large apartment in a high cost area anymore than you need to max out fishing. Sure they're great things to do or have, but only once you've gotten the basics in place, and are confident that you're spending less than you make.

Anonymous said...

I understand this post as a rebuke of those people who justify poor decisions based on "social" reasons. Why take a unskilled, under geared friend who will inevitably drag the whole raid down anyway, and leave everyone frustrated and angry with each other. Sounds like a recipe to lose friends than it does trying to keep them. Not to mention you could be doing much better for yourself and in a better position to help those in need. You could finish your raid in record time with a group of skilled individuals and then go back and help your friend get better at tanking, or healing, or whatever, in a different instance.

The same is true in real life as well. Try to be successful and only help others when you can afford to. And don't reward people for being leaches, teach them to be independent.

Xyras said...

well like the last commenter said... if you give some leech 100$ hes gonna spend them and he is gonna be broke again the next day... if u teach him to make some professional work(plumber, electrician... anything that needs some education) or if u teach him to make his own firm he is gonna have income...but ofc u need to teach him to not spent money on luxuries and t spend it wisely after that is done he is going to make his living...

as they used to say in the past
give man a fish and hes gonna have food for one day
teach a man how to catch fish and hes gonna have food for whole life

Anonymous said...

The secret to financial success is no different in the real world than it is in a MMO, spend less than you make.

100% this.and from time to time you can do the real great things like the goblin raiding thing.

Anonymous said...

I find it interesting that it seems there are more people commenting on the use of the word "pwned" than on the rest of the post!
Anyway... this post is interesting to me because it reminds me of a report a TV channel here in Portugal did about poor/in need people. One of the couples interviewed had a child, and a combined income of around 1000€/month. They claimed to have to go eat at their parents' houses for half the month because they didn't have enough money for food. The wife at some point listed their expenses, including 74€ on cable tv (subscriptions to all encoded sports and movies channels I assume, basic cable is around 20€). I guess watching your favorite football club is of far more importance than feeding your child huh?
It's not that people shouldn't have fun. It's that people shouldn't have fun when they CAN'T AFFORD IT (tip: find cheaper fun).
Taking loans you can't really repay, for anything vanity is plain stupid. There's no two ways about it.

Roy said...

*If* in fact the world is to end in December 2012, then I could support taking out a loan to be social and do fun things. Otherwise I would have to agree that it is just a bad idea...

Forreststump said...

@Anonymous (15 October, 2009 07:46):

I didn't realize the Wall Street Journal was in the business of producing "shoddy graphs">

Aside from that...

Two words:


Morrissimo said...

The secret to financial success is no different in the real world than it is in a MMO, spend less than you make.

And has been amply addressed already: borrowing to spend on consumption -- e.g, things that won't at least return the value of the original investment -- is insanity.

You might be able to make it work for a while, especially if you can convince the lenders that you're more responsible than you are ...even in the face of overwhelming evidence to the contrary.

Exhibit A for how this "kicking of the can" can be made to work for quite a while would be, ah, the federal government of the United States. Followed closely by the state government of California, and then New York, and then Washington (state)...

Jeff said...

Scanning the first three posters show they didn't read clearly, He goes into the etymology of pwned in the firs two lines.

Now the comment:

I worked as a collector to pay my way through college. It is good money for easy work. Yes I also lack a soul. It has less to do with being able to avoid the judgment of others, plenty of people with money are like that, than it does with generally foolish spending.

One of my favorites was "I can't pay my car note this month because I had to take a week off of work because my COUSIN was in the hospital five hundred miles away" (emphasis mine)

When my cousin is in the hospital, I call, I send a card, I drop in when I am not working if we are really close, and I don't need to drive too far. But five hundred miles? I'll send flowers too.

It is not that they are dumb or lack life skills, but they do lack the ability to differentiate between important and not important. Is your mother on her death bed? Then travel the 500 miles. Your cousin has an ingrown toenail? Send a freaking card

duncan said...

A True goblin doesn't get more than he Needs to live in. If you could live in 28x28m house then you should still be.

Iiene of Kul Tiras said...

Stop commenting on teh pwned origin, peeps. (Yes, I meant to use 'teh', not 'the'.)

Solid article, Gevlon. However, I would expand on a point.

And just for fun? I'm going to make up terms and play it fast and loose! Try to keep up.

People that take out excessive loans for 'Immediate needs' are the issue, not 'immediate needs' as in the context of "I need to start a business immediately!" but for purely personal needs that have immediacy only in their own minds.

This mindset focuses on fulfilling
the immediate need, long term needs come later.

This is juxtaposed to the person who was taught as a child (or learned later) to put long term needs first,

Immediate needs people are in all walks of life: poor, middle class, or rich. Their 'Immediate need' may be an addiction, a need to impress people with the illusion of wealth, a need to impress people with the illusion of altruism, or even just to buy things to make themselves feel better. There are even some that have the immediate need to start business just to pwn other businesses.

"Goblins" are no better than anyone else, they can be 'immediate need driven' or 'Long term need driven'. They can be poor, middle class, or rich.

Chris said...

@duncan that assumes his needs have changed. There are psychological reasons to reward oneself for success.
Overextending yourself just isnt a reward in the long run, which is the point Gevlon is making. If the social activities come directly out of money budgeted for them and dont impact the true necessities than it isnt any more or less 'goblin' to want/have them. Goblinism isnt an end unto itself, its a means to simplify and achieve ones goals.

Matthew said...


Remember that unlike most 'unnecessary expenditures'--cars, gaming consoles, RayBan glasses, etc.--homes and land INCREASE in value. Almost everything else DECREASES in value (unless it's particularly rare and desired by a collector), but it's very rare for either a well-cared-for home or land to lose value (barring any kind of utter disaster).

A wise 'goblin' then could very well upgrade to a larger home which could gain more value, and would very likely sell for a profit just a few years later.

duncan said...

Mathew, i had completely overlooked that. It's true!
However, a wise goblin, according to this blog's definition would be investing in things with the most profitable outcomes, completely disregarding 'social' things such as comfort and happiness.
To truly embrace this view on life, basic living standards would be met, but housing would not be the most profitable investment and thus a true goblin would not bother with it's intangible values.

Chris said...


So your view of a goblin is more like the unibomber than of Donald Trump? Whos sole goal is the accumulation of wealth, with no other ambitions? In my mind its perfectly goblinish to want to own, and thus purchase, the biggest house on the block, as long as you pay for it out of profit and not debt financed.

duncan said...

Oh no, i agree with you.
But, i don't believe that Gelvon's dismissal of the intangible fits in his new house, so to speak.

Jiminimonk said...

You are missing the point of the post when you start babbling about the origins of pwned (which he correctly stated comes from typo Owned). Anonymouse Morons - go and actually READ the post then make some comments.

Anonymous said...

I've worked in quantitive finance at leading global hedge funds for over 7 years.

This is the real story of the graph:

Lower income people were given huge loans without proper credit review that were then packaged into incorrectly rated/modeled credit bundles sold or pawned off to institutional investors and banks. This happened over a period from 2004-2007.

Not surprisingly the banks, insurers, pension plans eventually blew up because, holy cow, an individual making 30k cannot pay off a 500k loan!

All this graph shows is that if you don't have a good credit model and offer the same loans to everyone (which is what happened) the lower income group will have a higher default rate.

This is not shocking. But this is why banks blew up last year.

Who's to blame? Those that defaulted really are not that much worse off, some still live in homes they don't pay for because banks' foreclosure staff is too small to handle all of them. The bankruptcy laws are very forgiving. Meanwhile, the banks are being saved by inflationary monetary policy and direct business subsidies from the US govt.

Here is a very good podcast accessible to every listener:

Anonymous said...

To DarkKnight and everyone else... The post has been edited since this morning. It did say pwned means pawned, Gevlon's been sneaky and edited it to what is now written.

I don't understand why though. Gevlon's been enough man to say when he's been wrong before, why not now too?

Gnome of Zurich said...

Other commenters have pointed out that it is difficult to find a non-rat-infested place to live in much of the US without pushing your prudent real estate percentage of income when you make less than 30,000/yr. And the same ideas apply with cars and many other things (education for children) that are perfectlyl legitimate *investment* expenses, and not random crap.

But beyond that, people's incomes change, for various reasons, but debt is forever, until you pay it off.

When you make 35,000 one year, and then make 70,000 the next (big promotion, small business grows, whatever), you won't likely have any problem paying the bills you accumulated while you were making 35,000 last year.

On the other hand, if you made 70,000 last year, got layed off in the current recession, and after 6 months of uemployment, were forced to take a job making 35,000, suddenly that car payment and mortgage that looked perfectly prudent when you were making 70,000 are looking like a huge albatross around your neck. No problem in normal times (well no more problem than getting a 50% paycut is bound to be), you simply put your house on the market, take a hit and pay off the mortgage, move to a smaller house or apartment. Except, oops, *this* recession is deflationary, and there's this big housing crash which means that even though we had a 20% cushion when we bought the house, if we were to sell it now, we probably wouldn't raise enough to pay off the mortgage --> default if we don't have enough savings still (after 6 months of unemployment) to make up the difference.

Thing is, this is *exactly* what's happening right now. When we are in a recession people default. They usually default, because they lose their jobs, or their businesses are hurting, which has a tendency to put exactly those people near the low end of the income charts.

By looking at the lower income segemnt, you are disproportionately looking at the very people who have been hardest hit by the recession -- of course they will have more defaults. Yes, some of the people making 200,000 made 1million last year, but most of them are people who did not just take a gigantic income hit.

Joshua said...

"If you have to pay 10% of your income to loans, it doesn't really matter if that 10% is $3000 or $30000."

This comment bothers me, in that it is wrong. While its true that 10% is 10% no matter what the cost of living for both those individuals is the same (technically). You can reason that every human in a region has a bear minimum cost to survive while adhering to social norms (like not living in a tent or running around naked). This cost is the SAME for everyone. If you are rich you don't have to live in a big house.

Taking that into account we can say the annual min. cost of living for a human is about $9,360 if living alone and taking public transportation in southwestern US. That means the true income of the two individuals is $20,640 and $290,640. The true % of the loans becomes 14% and 10.3%. Big difference? With that in mind you can see how any loan of any amount for a poor person is far more costly than to a wealthier person.

Matt said...

Taking out a loan that you can't pay is always your fault. There are varying degrees of fault, but blame always rests on the individual for actions that individual takes. When you go to buy a big home, you have the responsibility to assess whether you are going to be able to make that payment next month, next year and 20 years after that. Paying the market price for a home that is increasing rapidly in value is just like buying a stock, you're making an investment and are at risk to lose that investment with an unwise choice.

A big part of the problem is that we try to eliminate the need for educated consumers via regulation, which significantly meddles with how a free market works efficiently. When you think the government has your back, eliminating the need for you to understand what an ARM is, you'll make dumber decisions.

Also a friendly reminder for those who lack the ability to think logically. Identifying the individual as being the one to blame doesn't mean that no other party shares that blame, only that blame can't be entirely deflected. Therefore, if an individual can completely control their potential risk, it is incumbent upon them to do so and not expect a 3rd party to be diligent on their behalf.

Additionally, I love the people who fixed cost models to explain the higher default rates. Someone making 30k a year may have many of the same costs as someone making 300k, but they can significantly reduce their share of those costs. They could live in a studio apartment with 3 roommates, bike/walk/bus, eat ramen, skip the cellphone etc. Most are unwilling to do that because it "isn't fun", but they apparently then feel entitled to complain when they live well outside of their means and collapse their life around them while doing it.

Ratshag said...

"you have the responsibility to assess whether you are going to be able to make that payment next month, next year and 20 years after that."

Wow, I'd sure like to get in on some of that crystal ball action you've got going there. Considering that in the past year we've gotten to hear such noted M&S's as Alan Greenspan say "um, oops? I guess markets don't work quite the way I thought they did...", it's absurd to claim that lower middle class people should be able to predict when a recession will hit and housing values will drop.

"They could live in a studio apartment with 3 roommates, bike/walk/bus, eat ramen, skip the cellphone etc."

May work fine when you're 22 and single, but when you're 26, married, have one kid and a second on the way that ain't going to cut it. Or are we now going to argue that only people above the median income should be allowed to have families?

Matthew said...


You wrote, 'May work fine when you're 22 and single, but when you're 26, married, have one kid and a second on the way that ain't going to cut it. Or are we now going to argue that only people above the median income should be allowed to have families?'

To that I must respond: someone shouldn't be putting together a family / having children / taking care of sick uncles (or whatever else) if their finances are not in order. It's perfectly all right to wait till the 30s (or later, even) before having children. Spitting out children during a young age when income is low and living costs are high is frankly stupid and can cause serious problems for the children as they age (with all of this expense flying around so early, good luck funding their university educations and other costs!).

Bell said...

@Matthew - you completely skipped over the "crystal ball" argument; a person could be doing well within their means and yet not have been able to predict an economic downturn, especially when noted and proclaimed experts can't even do it well. You can't travel into the past and decide not to have a kid or two.

Dahkeus said...

Honestly, I don't think "social" has anything to do with this. I know you love to criticize people for being social, but you're really stretchin it here bud.

There are tons of loans to low income people because people that don't make a lot of money *gasp* tend not to have strong financial skill. Some people are gifted at math, some people are gifted at art, some people are gifted at much, others gifted at little. It's a broad range, but regardless, those bad at math tend to handle money less effectively.

In any case, one of the biggest reasons for our financial crisis is banks giving out tons of loans to people that shouldn't be qualified for them. These people that don't understand the loan they are getting is something they can't pay back take the loan and thus we get this condition

Anonymous said...

For all those that claim Gev is giving a false origin for Pwned....


I am one of the first people that posted. Early this morning when I logged on and checked the site he did NOT have the same beginning on his blog post.

He had nothing there that references the typo of the word owned.

MomentEye said...

The graph is misleading.
It presents low income people as much more likely to be in debt.

Consider the difference in economic power between someone of the top two brackets. They are more or less identical.

Whereas the bottom two differ in real terms by 25%.

It would be more appropriate to graph the incomes exponentially.

eg Up to $30k. 31-60, 61-120 and 121-240

Suddenly your graph looks quite flat.

Which I would interpret to show that debt is a consistent phenomenon across income groups.
Or alternately that there are just as many rich M&S as poor

Vyr said...

Since I assume most people reading the blog and comments were also interested in their own personal finances. I would like to bring attention to a book which I am sure some of you have already read it. "The millionaire next door"

In this book, they did a survey and studied the spending habits and values of millionaire household and realised that the millionaires were people who spend well below their means. Most only tailor 1 suit in their entire lives, shop at discount shops and drives cheap car.

I recommend those interested to pick up that book.

Forreststump said...

Ratshag said...
"Or are we now going to argue that only people above the median income should be allowed to have families?

Actually... YES! OK, maybe not median income. But please justify why anyone at/below the poverty line (let's try that boundary) should have children when they CANNOT AFFORD THEM. While it is our human right to procreate as we see fit (unless you live in China) - it doesn't make it RESPONSIBLE.

(My definition of 'child affordability': If you could afford to pay COMPLETELY OUT OF POCKET for the birth of a child, you can afford it.)

mel said...

What we are really discussing here is the social classifications... What gevlon would define as a "Social" socioligists would classify as "Lower Class"

Social Classes are defined by 7 things of which i cant really remeber all of them :) But Wealth was only one of the minors,
Values was a bigger one by far.

Lower Class values things above all else, things define who they are, i have a bigger tv then you, i have more monster trucks. A person could be rolling in dough and if his values are collecting monster trucks he would more fit into the lower class.

Your middle class (a dying breed) values education and professions as a token of their sucess, MD, PHD, they like letters after their names, Many of them insist on being formally addressed so.

Gibbiex said...

I agree that people should live within their means, but things are tough right now, and normal people are getting hit hard. For example, my brother bought a 'good deal' house. He was in the building industry. In one of the most high-flying markets around. You can guess what happened. His company collapsed, he finally lost his job (was one of the last to be let go), and now can't make h is mortgage payment, which btw is about double what the house is selling for now. So yeah, maybe he shouldn't have got that house, but it was a good deal at the time. He didn't overpay. He had a good job. He just didn't think everything would collapse as it did. I think life doesn't really fit in with your black and white view, unfortunately.

Matt said...

@Ratshag: The crystal ball comment is typical of someone lacking the ability to evaluate things rationally. Remember, the person doesn't "need" a crystal ball. They only create the need to reasonably predict the future when they enter into a contract that obligates them to make a payment for 30 years. If they lack the ability to plan that far in the future, perhaps they shouldn't get a loan. I realize this applies to the vast majority of borrowers out there today, but I think we'd be in a much more balanced position today if fewer people borrowed on their future only to turn around when the future come knocking and say "How was I supposed to know this would happen!"

Anonymous said...

doesn't bankruptcy skew the default rate?

I think that would explain it better than poor people default. poor people can't afford a bankruptcy lawyer.

I know a lot of people that surrendered all of their other loans than their house.

Not everyone is poor in this mess. One family bought a 400k house and they make only around 160k/year. It was the same rules that allow a person with no money to buy a house.

Just because you want to blame it on the poor it doesn't make it so.

Everyone was doing it. Watch HGTV a lot of those shows now are showing people that bought 500k homes that are now worth 300k. And they weren't poor.

Nick S. said...

I spent too many years in school, and I learned something. Not from school, but from the low wages I earned during school.

When you are very poor, you are up against costs which are similar to your earnings. You spend little, and save nothing. If an unexpected expense crops up, you are FUCKED.

Your second addendum seems to be an attempt to refute that logic. But in real, truthful seriousness, poverty is a shockingly expensive way to live. You spend more for less at the bottom of the bracket than you'd believe.

Grayz said...

Another interesting post.

A principle that i like is, spend less than you earn to increase your savings.

Brian Tracy (Eat that frog) speaks of Parkinson's Law: Which says that expenses rises to meet income. So the more you earn, the more you spend generally speaking. But the people that manage their money well, go against this law actively and thus earn more in the long run since they spend more at a slower rate than their earnings rate.

The "Richest man in babylon" is a great book about saving and investing.