Confidence, Flubs and 8 More Thoughts 13 comments
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1) Do you need new investment ideas? John Dorfman’s column at Bloomberg is back. There are some good ideas in the second column. I always liked it in the past, and so I recommend it to you. They don’t have a page for him yet, so perhaps this link will help if you want to see his ideas in 2009.
2) I have never read Atlas Shrugged. I have better things to do. But, I still believe that much of what the government is doing will cause more harm than good, because they are delaying the reconciliation of bad debts.
3) We must restore confidence! But what is confidence? Are we talking about some loony Keynesian idea like “animal spirits?” (We are sentient men, not animals, and have our own unique follies.)
When am I confident about my economic status? I am confident when I think my goods and services have adequate demand, and my assets are going to throw off cash flow because the economic processes they depend on have adequate demand. But that is a bicycle stability answer. What if I am in debt, and most of my economic contacts are in debt, and many of our assets rely on the repayment of debt that is coming from assets with impaired prospects?
Confident men are willing to take on debt; they are so confident that they are willing to take some risk of a large loss from borrowing. Men who are frightened try to preserve some subset of what they have.
My point is this: In the bust phase of the economic cycle, it is normal for those that have not planned prudently, keeping debts down, and leaving enough in reserve, to be scared. Given the foolish nature of our government to encourage, rather than discourage debt, it has left us all less confident in the future. 1984-2007 was one incredible bull phase, and it will be followed by a similarly large bust phase, as debts will have to be reconciled.
Instead, our dear government layers on more debt to try to solve the problem, risking the national credit for political gains. Some of the debt proceeds are used to buy up other bad debts, others are used to recapitalize marginal institutions. Nothing much happens, and the big risk - that needed change has been postponed through government intervention - appears slowly, leaving a larger problem to solve later.
4) Are Defined Contribution [DC] plans fatally flawed? No more so than Defined Benefit [DB] plans. From the article:
The most obvious pitfall is that 401(k) plans shift all retirement-planning risks — not saving enough, making poor investment choices, outliving savings — to untrained individuals, who often don’t have the time, inclination or know-how to manage them. But even when workers make good choices, a market meltdown near the end of their working careers can still blow their savings to smithereens.
“That seems like such a fundamental flaw,” says Alicia Munnell, director of Boston College’s Center for Retirement Research. “It’s so crazy to have a system where people can lose half their assets right before they retire.”
Uh, many of the same flaws apply to DB plans, which are also under stress now. After large market losses, DB plans will look for ways to reduce their liabilities. There’s no magic here. When the market goes down, everyone gets hurt, and corporations do not want to contribute more to their DB plans — they would rather terminate them, or shed them to the PBGC after bankruptcy.
5) As an example, consider the pensions of the automakers. I was somewhat skeptical about the health of their DB plans, partly because GM had contributed a big slug of its own common stock as an asset in the past. Where was the PBGC when the bailout discussion was active? They could have derailed the talks by pointing out the underfunding. Oh, wait. They want more money to go to the automakers because it might minimize their liabilities.
6) What GSE (government sponsored enterprise) sounds like a mistake? The Federal Home Loan Banks [FHLBs, pronounced "flubs."] They lurk behind the banks that own them, and provide credit to their owners. As it is now, a large portion of the FHLBs may no longer deserve their AAA ratings because of the losses they may take from risky mortgage assets.
If the Treasury has to rescue the FHLBs, we are truly in sad shape. They have operated behind the scenes for so long that few know about them. Better that the owners bail out the FHLBs than the taxpayers. As it is, the owners are already taking pain.
7) Do you need a free reading on your credit score? Consult quizzle.com. I tried it and found it to be free and safe.
8 ) Need some productivity enhancement tools? Jack Ciesielski provides a year end list at his blog.
9) I was unimpressed to say the least with this piece by Dean Baker on Social Security. If all that he is saying is that some benefits will be paid in some form for some time, then I have no argument. But if he is saying there is no plausible scenario where benefits will not be paid over the long term, then I disagree. Here’s my argument:
Consider my piece The Biggest, Baddest Bubble of Them All. The present value of the net liabilities of the US Government on a consolidated basis was $25 Trillion at fiscal year end 2002, $50 Trillion in 2007, and $53 trillion at the most recent reading. We are facing deficits verging on $1 Trillion for the near future, and on an accrual basis, those deficits are over $1 Trillion, as we take in more than we pay out on our social insurance programs.
To close annual gap of $1 trillion, or even $450 billion (most recent cash deficit) through tax increases and spending reductions will be painful. Much of the budget involves entitlement programs like Social Security that would be hard, but not impossible to change. As William Proxmire said back in the early 80s in this famous exchange:
Social Security Commissioner James Cardwell: “Today between 32 and 34 million.”
Proxmire: “I am a little high; 32 to 34 million people. Almost all of them, or many of them, are voters. In my state, I figure there are 600,000 voters that receive Social Security. Can you imagine a senator or congressman under those circumstances saying, ‘We are going to repudiate that high a proportion of the electorate?’ No.
Furthermore, we have the capacity under the Constitution, the Congress does, to coin money, as well as to regulate the value thereof. And therefore we have the power to provide that money. And we are going to do it. It may not be worth anything when the recipient gets it, but he is going to get his benefits paid.”
Cardwell: “I tend to agree.”
My point here is that benefits may get paid in dollars that aren’t worth that much. The cost of living adjustments will be limited or eliminated.
Increased means testing will eliminate benefits to those that are better off, and turn the program into an old age welfare program, which will bring back the stigma of receiving benefits, and reduce its political legitimacy, because it would no longer have the useful fiction of something that is everyone’s right. The “contributions” to Social Security are just another tax to support
Benefits will be cut, and taxes will be raised, to be sure. The point is that the government took the excess “contributions” and spent them on whatever the government needed at that time. There was little care for future generations — spend it now. Each succeeding generation gets a progressively worse deal from Social Security, paying in more relative to what will be received. (As an aside, I know of few that are more pessimistic about the situation than the actuaries I have met at the SSA.)
It is not impossible that younger generations might finally rebel against the burdens placed on themselves over which they have no say. Social Security could be dramatically scaled back in such a crisis, to the point where it no longer resembles the current program. At least that would be better than a failure of the nation as a whole. There is some level of indebtedness at which the US government would fail, whether through internal or external debt repudiation, or inflation. I guess we have to test how much US debt the rest of the world can take down before the door finally shuts to the US Government borrowing in its own currency.
10) On that note, I want to close by mentioning my friend Cody Willard’s new website SpokeUp.com. Cody has been amazed at the anger he has been hearing over the current crisis, and our government’s seemingly unfair methods of handing out relief. SpokeUp.com is an effort to enable people to connect over political issues, and possibly organize to effect political change.
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This article has 13 comments:
Paulson and Bernanke are a bit confused this time as they may have thought that they'd only need to get through a rough quarter or two and the hype from places like CNBC, Bloomberg, CNN-Money would set in and the investors would rush back into the markets. It's not happening. In fact, everyone is turned off at the hype.
Dave... On this:
10) On that note, I want to close by mentioning my friend Cody Willard’s new website SpokeUp.com. Cody has been amazed at the anger he has been hearing over the current crisis, and our government’s seemingly unfair methods of handing out relief. SpokeUp.com is an effort to enable people to connect over political issues, and possibly organize to effect political change.
Anger is not the word for what is going on. Consider it anger to the tenth power. Bernanke, when he needs to bailout his friends from the country club needs $billions yesterday to shore-up the insolvent banking system. When it comes to most Americans, however, we hear that Obama's plan will create 3 million jobs from 2010-2011. Well, that's going to help people who are worried about their jobs or who've just lost their job, isn't it?
I really think that the people of this country need to hear the TRUTH from someone in our government. Obama -- whoever. Even by the Federal Reserve's own admission, from Q4 2007 - Q3 2008 our nation lost about $8 trillion ONLY in the asset classes measured. This excludes one of the worst quarters - Q4 2008.
David, do you think $2 trillion in bailout money can stop this? $5 trillion? It can't. It won't. It would be nice, as our economy totally implodes, to have the knowledge that at least ONE leader in our country had the courage and the trust in us, as a people, to tell us the TRUTH.
When we know the truth, whatever it is, whatever may follow, only then will we have reached bottom and only then will the healing process begin.
Google "Ron Paul"
Republicans had a chance to vote for him in the primaries and overwhelmingly chose politics as usual (again).
As we sow, so shall we reap.
When we have a government that is again small and works on a balanced budget funded solely by consumptive taxation; when we have a justice system that does not grant bail to people like Bernie Madoff...then and only then will we have "confidence" in our leadership and government.
Memo to Congress: GET THE HELL OUTTA MY POCKETS!!! CUT YOUR BLOODY BUDGET...END ENTITLEMENT PROGRAMS!!!
that means that we have a possibility of 70% less GDP. and that also means we could have fewer businesses too. and i suspect it would impact all of them not just some. as how many business that sell to other business only, don't have at least one customer of a customer (till the end product appears) isn't sold to consumers? the only other real customer is the government. who depends on consumers to pay taxes. so in reality there is only one. now i hear all sorts of folks who say just don't do any thing. which i think we tried before September of last year. see how well that worked out for you? it also like the driver who sees a car in front of them pull out, and decides they won';t use that brake or try and steer around them, lets just plow right on into them after its their fault we are going to have this wreck. i am sure you can see how that works out. we also tried to give tax cuts using the instant rebate system. and we saw how well that worked out for us. I suspect the best that any of the decisions made so far are only going to give us a little bit of a cushion. instead of falling off a cliff.
and no body ever really has addressed the real problem. the one that has been growing for more than 20 years. and its not taxes.
its the collapse of wages. had wages just kept up with wages, consumers might not have had to easy credit to keep up the US standard of living.
but that is not going to be fixed now!
it will only get worse until some body really does address it though.
RE: <Confident men are willing to take on debt; they are so confident that they are willing to take some risk of a large loss from borrowing. Men who are frightened try to preserve some subset of what they have>.
Great article , good points . The US wages aren't going to go up . Just last week The IMF stated " within the next decade , worldwide wages will meet parity ! . That 's .33 cts /hr in China . 99 cents hr in Mexico . This a time of a total paradym shift from the west to China .They are having a rough time right now , as the rest of the world , but will come out of this the leader . They are NOT bailing out loser companies + deadbeat debtors !
On Jan 13 08:15 PM Lin wrote:
> Re
>
> Great article , good points . The US wages aren't going to go up
> . Just last week The IMF stated " within the next decade , worldwide
> wages will meet parity ! . That 's .33 cts /hr in China . 99 cents
> hr in Mexico . This a time of a total paradym shift from the west
> to China .They are having a rough time right now , as the rest of
> the world , but will come out of this the leader . They are NOT bailing
> out loser companies + deadbeat debtors !
Here we have Timothy Geithner, Obama's pick for Secretary of the Treasury not paying his taxes due from 2001-2004, so I guess we should all follow his example. Right? Oh! Just so happens that he also emplyed an illegial alien...
But who cares? You see, in this sham of a democracy, some are more equal than others.
Speaking of Timothy Geithner... Obama wants to bring "transparency" to government, yet Timothy Geithner, as the New York Fed, had rates at zero (below the then Fed target of 1.0), with not so much as a press relase that they were doing it.
When the crowds surround these people, I really wonder if they'll get it, even then.
Managing the political fallout from devalued Social Security benefits combined with paltry DB plan payouts will be a big challenge in about 5-10 years.
"My point here is that benefits may get paid in dollars that aren’t worth that much. The cost of living adjustments will be limited or eliminated."
**********************...
The problem is a matter of priorities and demographics: people now live a long time and consume a lot of expensive health care resources.. The arbitrary number of 65 years for retirement was set at a time when a 65 year old could only expect to live another year or two, and when available medical treatments were inexpensive, and ineffective at extending life.
The hard truth that we don't want to account for is that if we live longer, and use more medical care as we do so, we are necessarily poorer in each of those years. There are a very few medical treatments that add to overall national wealth -- they tend to be cheap, and to apply to younger folks ( childhood vaccinations would be an example ).
Most of the %17 or so of our GDP that we spend on healthcare improves neither national health nor national wealth. We may decide that we want gold-plated medicine for everyone in their senior years, or we may decide that we have other priorities . . . but pretending that this vast expenditure isn't there is a mistake.