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The Wars Withing By: Charles Payne

The winner of the 2009 Nobel Peace Prize came out firing on the financial industry in his latest push to create an omnipotent beast to monitor all aspects of the financial industry. While saying that the goal is to close loopholes that help the financial industry game the system, the President is willing to create new loopholes that could leave any variety of industries vulnerable to heavy-handed government rules and regulations. Sure, butchers don't sell financial products, but they would be under the auspices (technically) of the agency President Obama wants. What the President is working on is akin to a lumbering monster not unlike the one Dr. Frankenstein cobbled together while stripping existing agencies with experience of their power. Just imagine taking the parts from the Federal Reserve, Office of Thrift Supervision, Federal insurance Deposit Corporation, and Comptroller of the Currency.

This is yet another power grab along the lines of czars and draconian regulations in many industries.

There is no doubt that consumers need protection from bait-and-switch products, credit card fees that balloon from out of left field, and mortgages that go from affordable to unaffordable overnight. But, this new agency could be so imposing with powers for public questioning of business practices, subpoenas, and leveling fines the financial industry will be intimidated. It would stand to reason that real financial service providers would need to reserve funds in case they are summoned to defend themselves. Moreover, it stands to reason that this would all result in higher fees. When the President talks about deceptive or dangerous mortgages he's on point with the former, but misses the point on the latter. The fact is that it's the borrower that makes a mortgage dangerous.

The rhetoric continues to suggest that borrowers and consumers were simply babes in the woods and not people that went in over their heads. It's classic divide and conquer, making one group victims and another villains. It's designed to fan the flames of existing anger, and generate fresh anger as well. I don't get why powers at existing agencies can't be tuned up or better defined. I don't understand why the idea of an oversight committee forwarded by prominent Democrats isn't more appealing than an uber regulator. Of course, it's all about power and the elimination of checks and balances. I think that's why astute politicians like Barney Frank and Christopher Dodd haven't been completely on the same page as the White House. In fact, Congressman Frank has already shot down one key component of the desired White house plan.

The White House wanted all financial products to be "plain vanilla" one page documents that were easy to understand, even 30-year mortgages. Plus, President Obama wanted financial businesses to make sure borrowers understood the products. By virtue of signing off on mortgages and credit cards people are saying that they understand, so how the heck is anyone to really know if they understand? Talk about being set up for abuse; anyone could take out a loan and later say they didn't understand. Wait a minute...that already sounds familiar. The Administration took a hit earlier this year when the Senate voted down an effort to allow bankruptcy judges to modify mortgages.

So, just like in healthcare reform where the President and others continue to rip Republicans (on Friday, the Chamber of Commerce caught the full frontal assault), it's really prominent Democrats they are trying to motivate.

By the way, consumer credit is freefalling already. Down seven months in a row (a record), it's a reflection of a lack of demand and tighter lending standards. I don't think that one giant regulator that casts a massive shadow over the financial industry will create more opportunities for consumers. At some point politics of envy and anger have to give way to real efforts to boost job creation. Let's face it, without a job consumer protection is a (sad) joke. Yet, this is one of the top priorities. I seriously believe that the heavy-handed approach and determination to punish the financial industry will only result in less credit moving to few consumers. That's not even a pyrrhic victory.

Retirement Pains and Realities

It was bound to happen in the post-crash (maybe that's too optimistic). There is a ton of bitterness and fear among those that were told to work hard, put their money away in the stock market, so their golden years would be golden. Instead, there are endless stories of folks having to work at golf courses rather than play away on them. It's a tragedy in many ways, but some of the solutions being tossed about could be even more tragic. Local municipalities are balking at making fresh contributions to pensions, while there is talk that it's inevitable the Pension Benefits Guarantee Corp. will have to step up to the plate. But, the thing is that people are panicking. An article in "Time" magazine suggests ditching 401Ks in favor of some kind of guaranteed system. An article in the "Washington Post" suggests that government pension funds are going broke so what good is a guarantee.

The market had been predictable and unstoppable for decades, so it was easy to assume history would be a reliable guide. As it turns out, the last ten years are the lost decade for the U.S. stock market. Sure, toss in dividends and spin-offs and you could argue that money has been made, but not the kind of money people are relying on for years of comfortable retirement. Of course, the stock market could be an effective wealth creation tool and it's a great place to make money, but the notion of just putting money into it without actively monitoring progress and making changes is part of the fallacy that has wrecked so many people. When I say monitor I'm not talking gains and losses but what their holdings are, what industries those holdings are in, and how well those holdings are performing on a fundamental basis (are they gaining market share, growing margins, etc.).

Government Pension Funds

Some of the sobering realizations made in the "Washington Post" article by David Cho:

  • Within 15 years public systems on average will have less than enough money needed to pay pension benefits
  • Government pension funds are $1.2 trillion short of funds expected at this time
  • Warren Buffett calls these pensions "time bombs"

With respect to the current dilemma of state pension funds, there has to be a realization that people have to take the hit. Moreover, now isn't the time to lose faith in the system but to understand it's going to take more creative ways to play the stock market and invest for the long haul.

I would take these funds and put them into smaller, nimbler baskets, I would allow some baskets to even go short the market and write options against established positions. I think that government pension funds should also consider investing in local businesses to create a win-win situation. Let's bring more free markets to government rather than more government to free markets. In the meantime, payouts are going to have to take hits. There is no way around it as all Americans have taken hits, so too should government employees. There is a good argument that firefighters and policeman desire special recognition for the risks they took during their careers, but that should be handled with higher pay because once exemptions are made politics kick in and it would only be a matter of time before good arguments for dog catchers getting bailed out is floated.

I don't see how any investment can be guaranteed in the first place. States must find better ways to manage the retirement savings of its workers, but there is no guarantee.

So, pension funds are in trouble, and 401Ks are in trouble, too.

401K Funk

The fact is that 401Ks haven't lived up to their potential for a variety of reasons. They were sold and still continued to be hyped as cure-alls. Magic boxes where workers dump in money and it's nurtured and grows into a big retirement safety net. The big mistakes:

  • Being told to always be long the stock market all the time even when it has had a terrific rally and may be due for a pullback has been a major disservice to investors.
  • Ironically, people load up at the top and avoid putting money into their 401Ks at the bottom

I think that people should be allowed to go short the market and individual stocks. Other options include:

  • I think people should do a thorough investigation of their holdings monthly, quarterly at the least. It's amazing to me how many people don't know what they're holding in their retirement funds.
  • People need more choices right now as they are just offered a handful on mutual funds that aren't very different.
  • Facts:
  • The average 401K balance is $45,519
  • 46.0% of 401K plans have less than $10,000

By the Way

The idea of replacing 401Ks with a guaranteed plan is farfetched in the sense that nothing can really be guaranteed...take for instance government pensions which are facing huge dilemmas down the road. State and local governments have lost $1.0 trillion in the market, and are $1.2 trillion behind projected holdings right now. These funds probably will raid taxpayers to make up the difference so in the end, we have an entire system that is based on hiking taxes. When it comes up short it's nothing more than a Ponzi scheme. The stock market picked a terrible time to have its lost decade just as baby boomers are beginning to retire.

The fact is that people are living longer and are going to have to make greater sacrifices. But, they also need to be empowered and have more investing options and strategies available to them.

But, we need 401Ks to augment savings as Americans have become horrendous savers. Even with the U.S. savings rate increasing this year there are signs it may be just a flash in the pan. In fact, there are signs that the spike in the U.S. savings rate may have ebbed as consumers were drawn out to spend on things like cash for clunkers. I think that Americans have to be cajoled and seduced into savings, especially with our own government conspiring to get us to spend even with blood-stained household balance sheets. The thing is that they don't have to do much arm-twisting. There is a place for government pensions and 401Ks, but they need to be more dynamic and amenable to real world investing conditions.

Written by Charles Payne, CEO and Principal Analyst of Wall Street Strategies ( providing independent stock market research to over 30,000 subscribers, in more than 60 countries. Mr. Payne is a regular contributor to the Fox Business and Fox News Networks. For more information about Mr. Payne, please refer to the company’s website