The Next Financial Catastrophe

Now  that the U.S. and the world have experienced a financial catastrophe comparable only to the Great Depression, the thing we might want to ask is this: are we safe now? The answer is no. Even while Ireland is facing financial devastation, because they followed a path that mirrors George Bush’s economic “thinking” for the past several years, the U.S. is seemingly on the road to recovery. That’s because the newly elected Democrats instituted a major stimulus program (admittedly a weak and barely sufficient stimulus – but far better than what the misers of the Party of Herbert Hoover would ever offer).

The problem is that we are a myopic country. Our Congress is incapable of looking down the road beyond the next election cycle. And that is exactly where the problem lies.

The crazy, mind-boggling, economic policies of Ronald Reagan and his Republican successors will soon bear their bitter fruit. I am talking about a little time bomb created by the Reagan administration called section 401k of the U.S. income tax code. It is what governs the 401k plans that most Americans have instead of the old employer-guaranteed pension plans. Reagan’s lunatic idea was that throughout your working life you would contribute tax-deferred money into your 401k account, which would sometimes be matched by employer contributions. You take charge of this money while you are working and cleverly invest it in the stock market. Then, when you retire, you live in grand style off your earnings from the stock market! For as long as you live!

Complete economic rubbish. Complete deception of the American people. However, the good news is that your former employer is completely off the hook, and you are on your own! Isn’t that just grand? It’s a Republican Tea Party dream come true.

If you care to look at the history of the U.S. stock market, you will see that, for the thirty years or so before Ronald Reagan’s administration created the 401k  idea, the Dow had very anemic growth. It was only  when America’s workers started pumping large chunks of their salaries, via the 401k plan, into the stock market that stocks really took off. This soon led to two stock market bubbles (one NASDAQ and one NYSE). Remember the “irrational exuberance” of ten years ago?

A couple of years ago, we had the  housing bubble that led to the world economic collapse. This was enabled by Congress changing the income tax laws so that you could buy and flip houses every two years and not pay income tax on the profit. This gave the false hope to many people that they could still build up a nest egg even though their 401k accounts that had been destroyed in the previous stock market bubbles.

So what has Republican Reaganomics achieved for  our economy (and, while we are on the subject, where is Ireland’s heading)? The answer: A gigantic smouldering ruin.  High unemployment, low wages, a devastated real estate market, and little to hope for. Could things get any worse? As Tea Party Palin would say, “You betcha!”

A large part of our population is about to enter crisis mode, and we are totally unprepared.  The World War II baby boomers are now reaching retirement age and most do not have employer guaranteed pensions. However, most do have those good ol’ 401k plans.  Of course these 401k accounts have been savaged by the Voodoo economics policies of Republican Presidents Ronald Reagan and George Bush. But wait – won’t  Social Security save them? Hardly. Well, yes, maybe from starvation, I suppose. Maybe. Unless, that is, the Republican Tea Party succeeds in cutting or privatizing Social Security, which they would love to do.

We are on the verge of having an entire generation enter a situation so desperate that they cannot meet their own living expenses because the 401k thing was just a gigantic Ponzi scheme and their not-fully-paid-for homes are only worth half of what they used to be worth. It will be a financial catastrophe.  Many have virtually nothing left in their 401k accounts. They will be lucky to survive a year if they have to depend only on their 401k plans – but many have life expectancies that would take them into their 80’s or beyond. What can they do?

Expect another wave of house selling as the boomers divest themselves of this last piece of wealth they partially own. It’s a young Tea Party Republican’s dream of course – think of how cheaply these houses can then be bought and then flipped! What a chance to make a killing! It’s the chance to make a small fortune! The question, of course, is who is going to buy them and at what price? And what will this mass selling will do to an already bleeding real estate market?

The baby boomers are a huge bulge in the population of this country, and as they have gone through life their generation has always had major effects on the U.S. economy simply because they represent such a large part of the population. When they were young, schools had to be built for them. When they earned money they spent it and the economy boomed. When they objected to war, they caused chaos in the streets.They changed the culture. They changed the environment. They changed the way we worked, shopped, ate, vacationed. They changed America because there were just so many of them. Now they will change America again.

Soon, a  significant number of the boomers will start leaving the work force. They have to. They are getting too old to work. They will soon stop putting money from their jobs into the economy. But, they will still need  money to meet their living expenses. Sadly, for many, their 401k money has gone up in Republican smoke.  They have little other savings. In the near future the U.S. will soon be facing another major financial crisis, because millions of these boomers have almost no retirement funds, and they won’t be able to survive on their paltry Social Security check. This is a recipe for financial disaster.

And nobody, as usual, in our government is thinking about it or planning for it.

But the Boomers are coming, and they’re coming soon.

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The 401k Catastrophe

It began during the reign of Ronald Reagan, although he certainly was not the architect of the idea.  Even so, he must have wholeheartedly approved. Why? Because it was good for business.  If there was ever a gigantic hoax put upon the unsuspecting American public, it is embodied in section 401k of the U.S. tax code.  It is this provision that provides for employers to set up tax deferred 401k retirement accounts for their employees. You know, so that when that day comes, in the dim and distant future, you will have a great big nest egg awaiting you, so you can have a long and comfortable retirement.  – Oh, and by the way, since all you workers now have these great 401k plans there isn’t a need any longer for your employer to provide a pension plan, is there?  So – goodbye pension plans. American workers, you are on your own.  How very Republican.

Oh, but wait.  There is one other little detail. You know all that money you can put in your 401k account? Well, you can’t put it in a bank and earn interest like other money you save. Of course you could of course put it in a money market account  with your broker.  There you could earn 0.003 percent interest and then watch the actual purchasing power of your savings drop by 50% or more in the next 30 years before you retire. (because of inflation. Or… you could invest it!  Yes, that’s the ticket!  You can put all of your money in the stock market – you could even buy stock in the company you work for!  And don’t worry. This isn’t gambling with your retirement money – it’s investing for the future!

Well, the future is here. As far too many boomers have found out and far to0 many children of the boomers have learned, there is no gold at the end of this rainbow, just a pile of horse manure – all of it a  gift from your government and big business and the IRS. Wasn’t it wonderful for them? Think of it. For so many years before the invention of the 401k scheme the Dow Jones average was essentially flat. The stock market was a no growth system.  Stocks had hardly moved since the Great Depression. Then, as if by magic, as soon as the 401k ripoff began the stock market started going up.  And the more our 401k dollars went into the market the more it went up!  Isn’t that incredible – just like the housing market! Of course the housing market went the way of all good Ponzi schemes…. and so did the stock market, because that was just an artificial bubble too – a scheme contrived by the arch Capitalists of America to use their employees wages to fuel the growth of their businesses, and all the while calling their scheme a retirement plan.

I’m afraid the chickens have come home to roost. Too many 401k plans are nothing but a smoldering ruin now. Too many retirees will be getting most of their retirement income from Social Security, not their 401k plan.  Thank God for Franklin Roosevelt, perhaps the last honest President this country has had.  But wait. It’s not over yet.  The 401k system still hangs over the heads of our youth. Cunning businessmen and government “servants” tell us to invest our 401k money wisely. Better still, young man, take the money and run.  Don’t listen to the advice of the big businessmen and certainly don’t listen to the government people who are owned by the businessmen.  They have worked out a system where your employer no longer has to give you a pension.  Even worse, a lot of people in power would like to kill Social Security as well.  Avoid the advice of businessmen and government hacks, they mean you no good.  We are truly floundering in a Republican world now – you are on your own and you will sink or swim by your own wits and not with any help from your employer or the government.

Meanwhile, a new crop of people are reaching retirement age every day. They are being pushed out from their jobs by mandatory retirement rules.  They can’t survive on what is left of their puny 401k and their Social Security benefits don’t come close to paying the bills. And WalMart doesn’t need anymore help. They’ll need to sell their homes now, but to whom? There is no market for houses anymore. It is like the retirees are stepping off the deck of the sinking Titanic only to find that there are no lifeboats in the water.  It is a slow moving catastrophe.  It is happening one day at a time, but it never makes the headlines.

How can a government tell its citizens to gamble in the stock market with their pension funds?  How can an employer look an employee in the face and shut down their pension plan while at the same time telling them to invest their savings in the company’s stock?  Today as people retire in their 60’s they can look forward to living a long life, perhaps into their 90’s or more.  But how will they pay for their housing and how will they buy food? The 401k catastrophe is only beginning. Wait a few years.  Wait until the retirees have spent what little is left of their 401k money.  Wait until they try to survive on their paltry Social Security payments. And just to rub salt into the wounds of these unsuspecting workers, wait until they try to take their money out of their 401k plan and they find they have to pay tax on each withdrawal – It was tax deferred, remember? Ah, but the IRS is sneakier than either you or I could ever imagine, for you not only have to pay tax on the money withdraw from your 401k, for if you also take additional money from your 401k to pay the 401k tax, you have to pay tax on that money too! So then, if you take out more money to pay that tax, well…you have to pay tax on that too! So you are paying tax on the tax on the tax. Isn’t that wonderful?  It’s a tax collectors dream.  And it all comes out of your 401k.  How perfect!

Happy retirement, America.

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Madoff Conviction Sends Shudders Through the Financial Industry

A hour ago Bernard Madoff pled guilty to what has been described as the largest Ponzi scheme in history.  Is seems that Mr. Madoff bilked quite a few people out of billions of dollars by telling them that he had a secret way of beating the market.  He always paid dividends that were much higher than the return other investors were making on their investments. He was a miracle worker, or so it seemed.  In actuality he was simply using new investor’s money to pay old investors: a classic Ponzi scheme.  It worked well for a long time – all he had to do was to keep finding new investment dollars. The collapse of global economy sort of put an end to new investments in Bernie’s scheme and that, ultimately, proved to be very inconvenient for him and somewhat more inconvenient for his investors who had gotten used to making remarkable earnings on their investments.  Bernie will be sentenced, probably to life in prison, in a few months or so.  His investors? Probably out of luck – their money is just gone.

As massive as the Madoff Ponzi scheme was, it pales in comparison to the Worldwide Real Estate Ponzi scheme that is responsible for the global loss of somewhere between $30 and $50 trillion of wealth (yes, trillion).  Just thinking about that number for a moment puts Obama’s $800 billion stimulus into perspective, doesn’t it?  One thing to note is that there is not enough money in the U.S. Treasury and probably not even enough money printing capability in the U.S. to provide refunds to everyone who lost part or all of their wealth.  It’s just gone.

The question now is: what should happen to the people who perpetrated this truly massive Ponzi scheme on the world? What should be done with all those whose complicity in this insane scheme directly led to the loss of millions of people’s 401k and 529 fund values?  What should be done to those who created Liar Loans?  What should be done to those who misrepresented the value of property in order to get a mortgage approved?  What should be done to those who rated toxic mortgages as AAA-rated?  What should be done to the bankers who sliced and diced the toxic mortgages and flipped them as fast as they could to the entire world?  What should be done to those who sold mortgage insurance on these toxic mortgages, called credit default swaps, knowing full well that their company couldn’t begin to cover the losses if these mortgages weren’t paid?  What should be done to the Wall Street bankers who took TARP bailout money, taxpayer funds meant to keep their banks from dissolving into a slimy, black pool of toxic sludge, and handed out multimillion dollar bonuses to the very people who created this gigantic Ponzi scheme?

Pretty good questions, huh?  Well, it turns out I’m not the only one who’s asking.  David Segal reports in today’s New York Times that federal investigators are starting to ask, more or less, the same questions.  It’s about time.  Isn’t it sort of surprising that Bernie Madoff rips off a fairly small number of very wealthy investors and before you can say “Free Market Capitalism” he’s hauled off to court and pleads guilty to an historic crime.  Meanwhile, as literally billions of people suffer from the greedy antics of our completely-out-of-control financial industry, we are just getting around to sort of starting to begin to think about maybe checking to see if anyone can be found who might possibly be responsible for the Worldwide Real Estate Ripoff.

So what do we do? What if it turns out that all the leaders of our financial industry are culpable?  What if every last one of our big time bankers is a crook?  Do we throw them all in jail? No, of course not. We need them – remember? Our banks are too big to fail.  Our bankers must also be too big to replace, right?  That’s why we can’t nationalize the banks: all the knowledge of the financial industry resides with these people. Who would run our financial industry if all the crooks were all in jail? The sad reality is this: we can’t throw them all in jail. The solution: find some scapegoats. Find a few of the top dogs, maybe 0.00 1% of the financial industry who probably can’t duck or hide from some massive financial fraud charges and haul them off to court and throw them in jail. Maybe they can get a cell next to Bernie.

Then we declare ourselves to be cleansed of the toxic infection and we take a few moments to mourn over the billions of people who lost their fortunes.  Everyone will feel a lot better and then we will turn our attention to rebuilding our economy.  Then we turn over the task of creating a new financial industry, with built in safeguards against any more Worldwide Real Estate Ponzi schemes, of course, to the same people who got us into this mess.

And then we start all over again.

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What We Need Now Is a Good Ponzi Scheme

It is fashionable in economic and government circles to condemn the tactics of tricksters like Charles Ponzi, a man who made a fortune by using new investors’ money to pay old investors their expected returns on their investments.  The most recent person to become famous in this way is Bernie Madoff, who is thought to have cost his investors somewhere around $50 billion. These newly destitute investors are rather unhappy these days. It seems they have quickly forgotten all those fabulous investment returns they made over the years, while the rest of us  struggled just to keep up with inflation. It sure liked Bernie was a genius in the old days, and a lot of people liked him too.  They just didn’t realize that the amazing earnings he was paying out depended upon more and more people investing more and more money with him, because, after all, he wasn’t really making any money in the market.

While we all can sit back and condemn poor Bernie, we might want to consider that Ponzi schemes seems to be more the rule than the exception these days.  For example, consider our 401k plans.  I already wrote about that in a previous blog a few days ago.  If you look at the history of the Dow Jones Average you will see that the Dow really took off after the whole 401k thing was created.  Without our 401k money piling into the economy it is likely that we never would have had the growth that we did have over the past thirty years.  Sure the 401k thing is sort a Ponzi deal – the more money we put in the more market went up, and so we put in even more money!  We all benefited right? Well, except for recent history anyway – if you want to count that.

But look at the real estate bubble.  Wasn’t that a grand Ponzi scheme too?  Everybody buying and selling houses to each other and every time houses were bought and fixed up and sold everyone making money.  It was great. You couldn’t lose – even the banks knew that.  And the government.  Thank God for the government and how they changed the tax laws so that you could flip a house every two years and not pay tax on the profit.  If that wouldn’t create a beautiful Ponzi scheme what would?  And didn’t we all benefit from that? Didn’t America, and a lot of the rest of the world too, just sprout up with gorgeous McMansions?  They’re everywhere now – not all of them inhabited, mind you – but beautiful nonetheless.  And all thanks to the brilliance of Charles Ponzi.

But wait.  There’s more.  Remember the Tech bubble?  Remember how the stock market just skyrocketed when Tech was born and there was a new IPO every day and everyone could make a fortune just by buying IPO stock one day and selling it the next? I know some people who made fortunes doing that.  Those were the days, I’ll tell you.  The Nasdaq going up and up and Greenspan saying we were guilty of irrational exuberance.  I wish I had sold my stock then.

Just think back: the 401k bubble, the tech bubble, the housing bubble…wait there’s another bubble I forgot to mention. The Social Security Ponzi scheme bubble.  That’s the one where you take money out of your paycheck for your entire life and the government uses that money to pay other people who are older than you their retirement income.  It works great as long as the population keeps on increasing, but when you have a population bubble, like the Baby Boomers, well, someone is probably going to wind up holding the short end of the stick.  But you have to admit it has worked really well for a long time and lots of people have had very nice retirements from this government sponsored Ponzi scheme.  We’ll just have to tell the boomers that you can’t win them all – I’m sure they’ll understand.

So, if you look back, it’s pretty clear that we’ve been running our economy on bubbles and Ponzi economics for a long time now – and we’ve had a good time doing it!  Do we really want to change horses in mid-stream and try to find some sort of drab, responsible sort of economic plan that is based upon creating real products and people actually working and making stuff?  What kind of growth rate could we possibly get from that? 2%? 3%? Doesn’t our government realize that, like all of Bernie Madoff’s clients, we have become used to 10% or more growth?  We can’t get that from just having an economy that makes stuff that people buy because they want the stuff!

No, we need an economy that works because people buy stuff because they think they can flip it to someone else and a make a ton of money in the process. We are a Ponzi people who really like Ponzi economics: make your money fast, get out, and stick it to the last guy in line.  Isn’t that how our businesses work?  Isn’t that how Wall Street works? Isn’t that the system our government created with 401k, and 529 plans, and Social Security too? Sure it is.  And that’s what we need now to get us out of this economic mess we’re in.  We just need a new Ponzi Plan – preferably one endorsed by the government, of course.

Hmmm…now what sort of plan could that be? Let’s see we’ve done Ponzi housing, Ponzi tech, Ponzi retirement stuff…what else is there?  How about Ponzi banks?  What if we give the banks a lot of money so we become part owners? OK… So how about then the banks loan the money to whoever wants it? That’d be good!  Then…then we use the money we borrow from the banks to buy more stock in the banks! I bet that would drive up the stock price! Then we just keep doing that over and over again! We can’t lose!

Oh, wait…I have another idea. How about we buy the U.S. automobile companies! And then we all get stock in them and then we buy our cars from them and then….

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401k Plans Are Just a Ponzi Scheme

The 401(k) section of the Internal Revenue Service code was approved by the U.S. Government in 1978 and became effective on January 1, 1980. This plan supposedly allows employees to invest in the stock market in order to create funding for a comfortable retirement.  Ever since the 401(k) provision was created Congress has passed more and more 401(k) related legislation to encourage more workers to invest more of their retirement money in the stock market.  Employers loved the idea because it removed their obligation to provide defined benefitension plans for their employees, i.e. plans that provided a specific, guaranteed income.  Instead, employees were sold the story that these 401 (k) “defined contribution” plans could provide them fabulous amounts of money because the stock market always goes up.

Take a look at the history of the Dow Jones average since 1900 until now.  First of all notice that the chart is logarithmic.  Stock analysts like to use log charts, they seem so much more well-behaved than linear charts.  However if you look at a few dates and take the numbers from the vertical scale you can see that, in the linear world, they are not so well-behaved – and, by the way, the world we live in, and the money we own, is linear, not logarithmic.  For example, lets take the extreme case.  Suppose you had invested all your money in the Dow components in the 1920’s. By 1929 the Dow had reached a peak value of about 380.  By 1932 it had dropped to about 43.  This is a drop of about 89% in value.  And remember, this is the Dow – a 30 stock index of the biggest companies in America.

On the other hand, suppose you had a 401k plan in 1929 but a lot of it was not invested in the Dow but in some of the smaller companies.  It is likely you would have lost even more because a lot of the small companies simply evaporated as the country entered the Great Depression.  Fortunately, 401k plans didn’t exist then. Unfortunately, a lot of people who thought they might be able to make it in retirement from company pensions or other funding were rudely awakened when their company pensions vaporized as well as their life savings because a lot of the banks failed.  Many retirement-aged people in the Great Depression were destitute and it was for this reason that FDR created the Social Security system. (Imagine where we would be today if George Bush had gotten his way and converted Social Security into a plan where each individual invested their Social Security contributions in the stock market – just like the their current 401k plans).

The Dow Jones chart shows that time and again the stock market drops as drastically as it rises. Over all it can be expected that the value of the Dow will drop dramatically between 20% and 50% every four or five years, with a few exceptions where it may not drop quite so much and others where it drops a lot more. Overall, it doesn’t seem to be the sort of thing you would want to bet your retirement on, does it? And that’s just the Dow, the biggest companies in America. That is not taking into account all the little companies that just vaporize when things get tough. Even more disconcerting to note is that of the original companies that made up the Dow, there is only one left! The others are gone or morphed into something else or downsized into insignificance.  The one original company that is left is GE.  GE’s stock traded at $6.66 today, only about a tenth of its value in 2000. So much for safety in the Dow.

Look again at the historical chart of the Dow Jones average.  Notice that from about 1960 until 1980 it just oscillated with no upward momentum. But in 1982 it took off! Of course it took off.  Everyone began plowing all their retirement money into the stock market – just what American business and our Republican Party dominated government wanted. The market skyrocketed from about 800 in 1982 to almost 14,000 in 2007, a gain of almost 1650%!!! Compare that with the period 1960 to 1980. The Dow went from about 700 to about 800 in twenty years, a gain of only 14%.  Could it be that our economy magically took off in 1982 and never looked back because our business community suddenly figured out some new business plan?  Hardly.  It was because of all the money that people innocently put into their 401k plans.  The American working man was the victim of a monumental Ponzi scheme cooked up by a business/government coalition that didn’t give a hoot about the welfare of the American citizen. The 401k scheme was just a clever idea to get the ordinary American citizen to plow his earnings right back into the business world so the wealthy could get even wealthier.  And it worked.

Now, as the world of banks, finance, and insurance has been shown to be a community of cheats and liars who gleefully defrauded each other as well as their investors and the American public, the typical American is looking at the smoldering ruin of his 401k plan and wondering how he can ever retire – or worse – if he is already retired, what will he do now?  Will he be able to afford a house or food?

There is only one good solution for retirement money: Social Security.  FDR had it right.  If people are going to contribute to a retirement account it should be a Social Security account, backed by the full faith and credit of the United States government.  401k plans should be eliminated.  Investing in the stock market is for people who can afford the risk.  The average American can’t. The American people have been robbed by the largest Ponzi scheme imaginable, and as the stock market continues to tank we are headed for a crisis of truly vast proportions.  Many, many millions of American’s have lost their only hope for a viable retirement because of the 401k Ponzi scheme.

I can only wonder, when will our government take serious note of this human disaster, and what in the world will happen to all these people now?

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