I was forwarded this email by a Republican friend. I don't know if this justifies you being a vice president but it was interesting.
Question: What is America 's first line of missile interceptor defense that protects the entire United States ?
Answer: 49th Missile Defense Battalion of Alaska National Guard. Question: What is the ONLY National Guard unit on permanent active duty?
Answer: 49th Missile Defense Battalion of Alaska National Guard
Question: Who is the Commander in Chief of the 49th Missile Defense Battalion of Alaska National Guard?
Answer: Governor Sarah Palin, Alaska
Question: What U.S. governor is routinely briefed on highly classified military issues, homeland security, and counter terrorism?
Answer: Governor Sarah Palin, Alaska
Question: What U.S. governor has a higher classified security rating than either candidate of the Democrat Party?
Answer: Governor Sarah Palin, Alaska According to the Washington Post, she first met with McCain in February, but nobody ever found out. This is a woman used to keeping secrets. She can be entrusted with our national security, because she already is.
Friday, October 31, 2008
Is Barack Obama realy a socialist?
Is Barack Obama really a socialist?
By Donald J. Boudreaux Donald J. Boudreaux – Thu Oct 30, 4:00 am ET
Fairfax, Va. – Since telling Joe the Plumber of his wish to "spread the wealth around," Barack Obama is being called a socialist. Is he one?
No. At least not in the classic sense of the term. "Socialism" originally meant government ownership of the major means of production and finance, such as land, coal mines, steel mills, automobile factories, and banks.
A principal promise of socialism was to replace the alleged uncertainty of markets with the comforting certainty of a central economic plan. No more guessing what consumers will buy next year and how suppliers and rival firms will behave: everyone will be led by government's visible hand to play his and her role in an all-encompassing central plan. The "wastes" of competition, cycles of booms and busts, and the "unfairness" of unequal incomes would be tossed into history's dustbin.
Of course, socialism utterly failed. But it wasn't just a failure of organization or efficiency. By making the state the arbiter of economic value and social justice, as well as the source of rights, it deprived individuals of their liberty – and tragically, often their lives.
The late Robert Heilbroner – a socialist for most of his life – admitted after the collapse of the Iron Curtain that socialism "was the tragic failure of the twentieth century. Born of a commitment to remedy the economic and moral defects of capitalism, it has far surpassed capitalism in both economic malfunction and moral cruelty."
This failure was unavoidable. It was predicted from the start by wise economists, such as F.A. Hayek, who understood that no government agency can gather and process all the knowledge necessary to plan the productive allocation of millions of different resources.
Likewise, socialism's requirement that each person behave in ways prescribed by government planners is a recipe for tyranny. A central plan, by its nature, denies to individuals the right to choose and to innovate. It replaces a multitude of individual plans – each of which can be relatively easily adjusted in light of competitive market feedback – with one gigantic, monopolistic, and politically favored plan.
A happy difference separating today from the 1930s is that, unlike back then, no serious thinkers or groups in America now push for this kind of full-throttle socialism.
But what about a milder form of socialism? If reckoned as an attitude rather than a set of guidelines for running an economy, socialism might well describe Senator Obama's economics. Anyone who speaks glibly of "spreading the wealth around" sees wealth not as resulting chiefly from individual effort, initiative, and risk-taking, but from great social forces beyond any private producer's control. If, say, the low cost of Dell computers comes mostly from government policies (such as government schooling for an educated workforce) and from culture (such as Americans' work ethic) then Michael Dell's wealth is due less to his own efforts and more to the features of the society that he luckily inhabits.
Wealth, in this view, is produced principally by society. So society's claim on it is at least as strong as that of any of the individuals in whose bank accounts it appears. More important, because wealth is produced mostly by society (rather than by individuals), taxing high-income earners more heavily will do little to reduce total wealth production.
This notion of wealth certainly warrants the name "socialism," for it gives the abstraction "society" pride of place over flesh-and-blood individuals. If taxes are reduced on Joe the Plumber's income, the rationale must be that Joe deserves a larger share of society's collectively baked pie and not that Joe earned his income or that lower taxes will inspire Joe to work harder.
This "socialism-lite," however, is as specious as is classic socialism. And its insidious nature makes it even more dangerous. Across Europe, this "mild" form of socialism acts as a parasitic ideology that has slowly drained entrepreneurial energy – and freedoms – from its free-market host.
Could it happen in America? Consider the words of longtime Socialist Party of America presidential candidate Norman Thomas: "The American people will never knowingly adopt socialism, but under the name of liberalism, they will adopt every fragment of the socialist program until one day America will be a socialist nation without ever knowing how it happened." In addition to Medicare, Social Security, and other entitlement programs, the gathering political momentum toward single-payer healthcare – which Obama has proclaimed is his ultimate goal – shows the prescience of Thomas's words.
The fact that each of us depends upon the efforts of millions of others does not mean that some "society" transcending individuals produces our prosperity. Rather, it means that the vast system of voluntary market exchange coordinates remarkably well the efforts of millions of individuals into a productive whole. For Obama to suggest that government interfere in this process more than it already does – to "spread" wealth from Joe to Bill, or vice versa – overlooks not only the voluntary and individual origins of wealth, but the dampening of the incentives for people to contribute energetically to wealth's continued production.
• Donald J. Boudreaux is professor of economics at George Mason University. He is the author of "Globalization."
By Donald J. Boudreaux Donald J. Boudreaux – Thu Oct 30, 4:00 am ET
Fairfax, Va. – Since telling Joe the Plumber of his wish to "spread the wealth around," Barack Obama is being called a socialist. Is he one?
No. At least not in the classic sense of the term. "Socialism" originally meant government ownership of the major means of production and finance, such as land, coal mines, steel mills, automobile factories, and banks.
A principal promise of socialism was to replace the alleged uncertainty of markets with the comforting certainty of a central economic plan. No more guessing what consumers will buy next year and how suppliers and rival firms will behave: everyone will be led by government's visible hand to play his and her role in an all-encompassing central plan. The "wastes" of competition, cycles of booms and busts, and the "unfairness" of unequal incomes would be tossed into history's dustbin.
Of course, socialism utterly failed. But it wasn't just a failure of organization or efficiency. By making the state the arbiter of economic value and social justice, as well as the source of rights, it deprived individuals of their liberty – and tragically, often their lives.
The late Robert Heilbroner – a socialist for most of his life – admitted after the collapse of the Iron Curtain that socialism "was the tragic failure of the twentieth century. Born of a commitment to remedy the economic and moral defects of capitalism, it has far surpassed capitalism in both economic malfunction and moral cruelty."
This failure was unavoidable. It was predicted from the start by wise economists, such as F.A. Hayek, who understood that no government agency can gather and process all the knowledge necessary to plan the productive allocation of millions of different resources.
Likewise, socialism's requirement that each person behave in ways prescribed by government planners is a recipe for tyranny. A central plan, by its nature, denies to individuals the right to choose and to innovate. It replaces a multitude of individual plans – each of which can be relatively easily adjusted in light of competitive market feedback – with one gigantic, monopolistic, and politically favored plan.
A happy difference separating today from the 1930s is that, unlike back then, no serious thinkers or groups in America now push for this kind of full-throttle socialism.
But what about a milder form of socialism? If reckoned as an attitude rather than a set of guidelines for running an economy, socialism might well describe Senator Obama's economics. Anyone who speaks glibly of "spreading the wealth around" sees wealth not as resulting chiefly from individual effort, initiative, and risk-taking, but from great social forces beyond any private producer's control. If, say, the low cost of Dell computers comes mostly from government policies (such as government schooling for an educated workforce) and from culture (such as Americans' work ethic) then Michael Dell's wealth is due less to his own efforts and more to the features of the society that he luckily inhabits.
Wealth, in this view, is produced principally by society. So society's claim on it is at least as strong as that of any of the individuals in whose bank accounts it appears. More important, because wealth is produced mostly by society (rather than by individuals), taxing high-income earners more heavily will do little to reduce total wealth production.
This notion of wealth certainly warrants the name "socialism," for it gives the abstraction "society" pride of place over flesh-and-blood individuals. If taxes are reduced on Joe the Plumber's income, the rationale must be that Joe deserves a larger share of society's collectively baked pie and not that Joe earned his income or that lower taxes will inspire Joe to work harder.
This "socialism-lite," however, is as specious as is classic socialism. And its insidious nature makes it even more dangerous. Across Europe, this "mild" form of socialism acts as a parasitic ideology that has slowly drained entrepreneurial energy – and freedoms – from its free-market host.
Could it happen in America? Consider the words of longtime Socialist Party of America presidential candidate Norman Thomas: "The American people will never knowingly adopt socialism, but under the name of liberalism, they will adopt every fragment of the socialist program until one day America will be a socialist nation without ever knowing how it happened." In addition to Medicare, Social Security, and other entitlement programs, the gathering political momentum toward single-payer healthcare – which Obama has proclaimed is his ultimate goal – shows the prescience of Thomas's words.
The fact that each of us depends upon the efforts of millions of others does not mean that some "society" transcending individuals produces our prosperity. Rather, it means that the vast system of voluntary market exchange coordinates remarkably well the efforts of millions of individuals into a productive whole. For Obama to suggest that government interfere in this process more than it already does – to "spread" wealth from Joe to Bill, or vice versa – overlooks not only the voluntary and individual origins of wealth, but the dampening of the incentives for people to contribute energetically to wealth's continued production.
• Donald J. Boudreaux is professor of economics at George Mason University. He is the author of "Globalization."
Thursday, October 30, 2008
Fair Value Here to Stay
NEW YORK (Fortune) -- Fair value accounting is still fair game for attack, but there may be more common ground than imagined between critics and proponents of the rules governing how financial firms value the securities they hold.
The Securities and Exchange Commission at a Wednesday roundtable heard comments on fair value, or mark-to-market bookkeeping, which requires firms to value securities in their portfolio at, well, market prices.
Such accounting arcana has turned into a political football in recent months as firms were forced to write down the value of debt for which few buyers existed - like mortgage-backed securities in a deflating real estate bubble. SEC chief Christopher Cox said Wednesday that the fair-value standards need "further work."
He wasn't alone. Though fans maintain the fair-value approach results in greater transparency for investors, critics such as former Federal Deposit Insurance Corp. chief William Isaac argue that it does no such thing.
Worse, they say, it's intensifying the financial-sector meltdown by forcing banks to write down the value of debt securities even if the loan payment streams behind them are flowing satisfactorily.
"[M]ark-to-market accounting has been extremely and needlessly destructive of bank capital in the past year, and is a major cause of the current credit crisis and economic downturn," Isaac said in prepared remarks.
"The rules have destroyed hundreds of billions of dollars of capital in our financial system, causing lending capacity to be diminished by ten times that amount." (Banks typically lend out around ten times their capital.)
Caught in the middle is the Financial Accounting Standards Board, the private-sector group that sets U.S. accounting rules along with the SEC.
Not so opposite
Despite the lively debate, one expert says there is more common ground than might be initially apparent - which, in his view, means the mark-to-market rules are likely here to stay.
"Those who looked like polar opposites were actually much closer than they appeared," says David Larsen, a managing director at investment advisor Duff & Phelps and a member of the FASB committee that advises the board on fair-value accounting issues. "The task now is to harmonize the conflicting views."
Isaac's broadsides aside, Larsen says he believes many comments made at Wednesday's meeting show that critics of the mark-to-market regime often misunderstand the current rules and how they should be applied. Proponents and critics of the rules, he says, often agree on some principles but don't know it because they're "speaking different languages."
That observation, he says, gives the FASB and the SEC latitude to possibly issue further guidance and make minor changes to the rules, without throwing them out - a move that he said would reduce whatever insight investors have into often opaque financial firms.
One aspect of the fair-value approach that may need adjusting, Larsen says, revolves around how to hold accountants, auditors and financial executives accountable for the judgments they make in assessing the value of an infrequently traded security.
He says that one common misperception centers on what happens when a recent trade has been at a fire-sale price. He takes the example of Merrill Lynch's (MER, Fortune 500) agreement in July to sell a $30.6 billion portfolio of troubled debt to Lone Star funds for 22 cents on the dollar.
Fair value rules don't force holders of similar securities to use 22 cents as their mark, Larsen says. But he says some comments made by opponents of the fair value rules suggest they believe otherwise - and he fears that accountants and auditors who recall Arthur Andersen's prosecution for its mishandling of Enron's books may see things the same way.
"We have people who are doing the right thing who are just afraid of making a mistake," said Larsen. He says one thing regulators might consider is some sort of safe harbor that would permit accountants to make difficult securities-valuation judgments without the risk of jail time.
Those aren't the only changes that may come to the fair-value regime. The FASB is working on adding disclosure requirements, Financial Week reported, that would help investors and analysts more fully understand the types of assumptions firms made in valuing infrequently-traded securities.
Wednesday's roundtable came about as a result of the passage earlier this month of the Emergency Economic Stabilization Act, which directed the SEC to study the economic impact of fair-value accounting. The agency is due to hold another roundtable next month and to report back to Congress by Jan. 2.
Larsen, for one, believes the fair value rules are here to stay, even if their form is apt to change at the margins. "My sense is that investors want and need transparency," he said. "That's out of Aladdin's lamp, and you can't push it back in."
By Colin Barr, senior writer
The Securities and Exchange Commission at a Wednesday roundtable heard comments on fair value, or mark-to-market bookkeeping, which requires firms to value securities in their portfolio at, well, market prices.
Such accounting arcana has turned into a political football in recent months as firms were forced to write down the value of debt for which few buyers existed - like mortgage-backed securities in a deflating real estate bubble. SEC chief Christopher Cox said Wednesday that the fair-value standards need "further work."
He wasn't alone. Though fans maintain the fair-value approach results in greater transparency for investors, critics such as former Federal Deposit Insurance Corp. chief William Isaac argue that it does no such thing.
Worse, they say, it's intensifying the financial-sector meltdown by forcing banks to write down the value of debt securities even if the loan payment streams behind them are flowing satisfactorily.
"[M]ark-to-market accounting has been extremely and needlessly destructive of bank capital in the past year, and is a major cause of the current credit crisis and economic downturn," Isaac said in prepared remarks.
"The rules have destroyed hundreds of billions of dollars of capital in our financial system, causing lending capacity to be diminished by ten times that amount." (Banks typically lend out around ten times their capital.)
Caught in the middle is the Financial Accounting Standards Board, the private-sector group that sets U.S. accounting rules along with the SEC.
Not so opposite
Despite the lively debate, one expert says there is more common ground than might be initially apparent - which, in his view, means the mark-to-market rules are likely here to stay.
"Those who looked like polar opposites were actually much closer than they appeared," says David Larsen, a managing director at investment advisor Duff & Phelps and a member of the FASB committee that advises the board on fair-value accounting issues. "The task now is to harmonize the conflicting views."
Isaac's broadsides aside, Larsen says he believes many comments made at Wednesday's meeting show that critics of the mark-to-market regime often misunderstand the current rules and how they should be applied. Proponents and critics of the rules, he says, often agree on some principles but don't know it because they're "speaking different languages."
That observation, he says, gives the FASB and the SEC latitude to possibly issue further guidance and make minor changes to the rules, without throwing them out - a move that he said would reduce whatever insight investors have into often opaque financial firms.
One aspect of the fair-value approach that may need adjusting, Larsen says, revolves around how to hold accountants, auditors and financial executives accountable for the judgments they make in assessing the value of an infrequently traded security.
He says that one common misperception centers on what happens when a recent trade has been at a fire-sale price. He takes the example of Merrill Lynch's (MER, Fortune 500) agreement in July to sell a $30.6 billion portfolio of troubled debt to Lone Star funds for 22 cents on the dollar.
Fair value rules don't force holders of similar securities to use 22 cents as their mark, Larsen says. But he says some comments made by opponents of the fair value rules suggest they believe otherwise - and he fears that accountants and auditors who recall Arthur Andersen's prosecution for its mishandling of Enron's books may see things the same way.
"We have people who are doing the right thing who are just afraid of making a mistake," said Larsen. He says one thing regulators might consider is some sort of safe harbor that would permit accountants to make difficult securities-valuation judgments without the risk of jail time.
Those aren't the only changes that may come to the fair-value regime. The FASB is working on adding disclosure requirements, Financial Week reported, that would help investors and analysts more fully understand the types of assumptions firms made in valuing infrequently-traded securities.
Wednesday's roundtable came about as a result of the passage earlier this month of the Emergency Economic Stabilization Act, which directed the SEC to study the economic impact of fair-value accounting. The agency is due to hold another roundtable next month and to report back to Congress by Jan. 2.
Larsen, for one, believes the fair value rules are here to stay, even if their form is apt to change at the margins. "My sense is that investors want and need transparency," he said. "That's out of Aladdin's lamp, and you can't push it back in."
By Colin Barr, senior writer
A Return to Thrift
Fortune Magazine) -- Sometimes it takes a near-death experience to change bad behavior. Think of your friend who quit Lucky Strikes after a coronary incident. Or look at how banks are reducing their dependency on debt after watching rivals go belly-up.
On Wall Street this process of reducing debt relative to equity is called deleveraging. Main Street should be deleveraging too.
Deleveraging is different for people than it is for companies, however. Big institutions are selling equity to pay down debt, but most individuals can do little if any of that. Their largest asset is probably their home, which they don't want to sell because they need a place to live, and in today's environment it may be worth less than the mortgage balance. So for most people the only way to pay down debt is to cut back on spending, or to use a quaintly antique term for it, be thrifty.
To realize how far we have gotten away from thrift, consider how those in the Greatest Generation financed the big purchases of their lives and how little cash the Facebook generation puts down for homes and cars or how comfortable they are with credit card debt. The present crisis could actually be the ideal moment to make thrift cool again, because debt has rarely been in worse repute.
Debt got us into this mess. Blaming the subprime lenders has become popular, and in some cases they were deceptive, but most borrowers knew perfectly well what they could afford. Millions joined in the debt mania, and now we're paying the price. Maybe American culture is ready to turn a corner.
It's an idea that's gaining momentum. The Thrift Project, a research effort by several think tanks, has produced a recent report ("For a New Thrift: Confronting the Debt Culture"), a book, and a traveling exhibit. Ronald T. Wilcox, a professor at the University of Virginia's Darden Business School, has written a book called Whatever Happened to Thrift?: Why Americans Don't Save and What to Do About It. The common message: America's debt addiction is seriously bad news for the country, and solving the problem requires action on many fronts.
The researchers of the Thrift Project believe we need to change our institutions. Most big banks are no longer very friendly toward small savers or even present in less than affluent neighborhoods. Meanwhile, state lotteries are depressingly effective at getting poor people to put their scarce dollars into essentially negative-interest "investments."
Wilcox believes we can use the findings of behavioral finance to entice people to save more - for example, by changing the default choice in 401(k) plans so that employees have to opt out rather than opt in. From that perspective, Barack Obama's proposal to let citizens break into their 401(k)s is a step in the wrong direction.
But it will take more than white papers and wonkery to change social norms. So what forces in today's society could be harnessed to make economizing admirable? A couple seem promising.
One is environmentalism: The mantra of "reduce, reuse, recycle" is a formula for saving money, while wasting resources not only is personally profligate but also harms everyone by hurting the planet. In Hollywood a Prius is far hipper than a Hummer.
Another force might be retirement anxiety: If you don't save enough to pay all your own bills, then you're forcing your kids and mine to pay them, and that's not right.
It's far from certain that focusing on any of this would work. The famous Harvard sociologist (and former Fortune staffer) Daniel Bell contended in The Cultural Contradictions of Capitalism that something like the current mess was predictable; capitalism depends on diligent hard work but also on the promotion of hedonism and self-gratification to keep people spending, which eventually must corrode the ethic of self-sacrifice. The story, he felt, cannot end happily.
I'm not ready to give up on thrift just yet, because I suspect Americans are finally ready to embrace thrift today for a better tomorrow. If we do, and even if that causes a temporary hit to economic growth, I'm certain that we will be happier, saner, calmer, and ultimately much better off
By Geoff Colvin, senior editor at large
On Wall Street this process of reducing debt relative to equity is called deleveraging. Main Street should be deleveraging too.
Deleveraging is different for people than it is for companies, however. Big institutions are selling equity to pay down debt, but most individuals can do little if any of that. Their largest asset is probably their home, which they don't want to sell because they need a place to live, and in today's environment it may be worth less than the mortgage balance. So for most people the only way to pay down debt is to cut back on spending, or to use a quaintly antique term for it, be thrifty.
To realize how far we have gotten away from thrift, consider how those in the Greatest Generation financed the big purchases of their lives and how little cash the Facebook generation puts down for homes and cars or how comfortable they are with credit card debt. The present crisis could actually be the ideal moment to make thrift cool again, because debt has rarely been in worse repute.
Debt got us into this mess. Blaming the subprime lenders has become popular, and in some cases they were deceptive, but most borrowers knew perfectly well what they could afford. Millions joined in the debt mania, and now we're paying the price. Maybe American culture is ready to turn a corner.
It's an idea that's gaining momentum. The Thrift Project, a research effort by several think tanks, has produced a recent report ("For a New Thrift: Confronting the Debt Culture"), a book, and a traveling exhibit. Ronald T. Wilcox, a professor at the University of Virginia's Darden Business School, has written a book called Whatever Happened to Thrift?: Why Americans Don't Save and What to Do About It. The common message: America's debt addiction is seriously bad news for the country, and solving the problem requires action on many fronts.
The researchers of the Thrift Project believe we need to change our institutions. Most big banks are no longer very friendly toward small savers or even present in less than affluent neighborhoods. Meanwhile, state lotteries are depressingly effective at getting poor people to put their scarce dollars into essentially negative-interest "investments."
Wilcox believes we can use the findings of behavioral finance to entice people to save more - for example, by changing the default choice in 401(k) plans so that employees have to opt out rather than opt in. From that perspective, Barack Obama's proposal to let citizens break into their 401(k)s is a step in the wrong direction.
But it will take more than white papers and wonkery to change social norms. So what forces in today's society could be harnessed to make economizing admirable? A couple seem promising.
One is environmentalism: The mantra of "reduce, reuse, recycle" is a formula for saving money, while wasting resources not only is personally profligate but also harms everyone by hurting the planet. In Hollywood a Prius is far hipper than a Hummer.
Another force might be retirement anxiety: If you don't save enough to pay all your own bills, then you're forcing your kids and mine to pay them, and that's not right.
It's far from certain that focusing on any of this would work. The famous Harvard sociologist (and former Fortune staffer) Daniel Bell contended in The Cultural Contradictions of Capitalism that something like the current mess was predictable; capitalism depends on diligent hard work but also on the promotion of hedonism and self-gratification to keep people spending, which eventually must corrode the ethic of self-sacrifice. The story, he felt, cannot end happily.
I'm not ready to give up on thrift just yet, because I suspect Americans are finally ready to embrace thrift today for a better tomorrow. If we do, and even if that causes a temporary hit to economic growth, I'm certain that we will be happier, saner, calmer, and ultimately much better off
By Geoff Colvin, senior editor at large
Monday, October 27, 2008
Don't Blame Accountants
Fortune Magazine) -- Mark to market is a business rarity - an accounting term that draws reactions from people who don't know spreadsheets from bedsheets. Mark to market, which we'll call MTM, evokes images of Enron's made-up profits and the other corporate scandals that marred the first years of this decade. Not pretty.
Now MTM - which means valuing marketable securities at market prices - is a hot item again, but for the opposite reason. This time financial companies and their allies are claiming it's too strict. They argue that marking the value of complex, illiquid securities to artificially low market prices has unnecessarily crippled the U.S. and world financial systems by creating billions of illusory losses on perfectly fine (albeit illiquid) securities, such as collateralized debt obligations linked to mortgages. Markets for these things, the argument goes, are depressed way below true economic value.
Accountants argue that MTM - known formally as Financial Accounting Standard 157 - is fine, although the Financial Accounting Standards Board has agreed to tweak it some. (Don't ask me for details - the written arguments on this are so sleep-inducing they could be marketed as an Ambien alternative.)
This week, the Securities and Exchange Commission is scheduled to hold a high-profile public meeting about MTM. The SEC, which has the power to overrule FASB, is holding the meeting because Section 133 of the $700 billion bailout bill requires that it study MTM and report to Congress by late December.
The guy who got 133 into the bill, Representative Spencer Bachus (R-Alabama), the ranking minority member of the House Banking Committee, told me he wasn't trying to politicize accounting. "It just says, 'Study it,'" he told me. "It doesn't say [to do] a study to repeal it. It doesn't say [to do] a study to suspend it."
But given that it's finger-pointing time both in Washington and on Wall Street, it's not going to be easy for the SEC to leave mark to market strictly alone. In this environment what regulator dares run the risk of being held responsible for not doing something that would supposedly mitigate the world's credit crunch? Would you want to find yourself accused of failing to act if the financial world totally melted down, as it has occasionally seemed about to do?
Normal accounting is being overridden to help banks in various ways. In early October, for instance, federal financial regulators jointly ruled that the $125 billion of preferred stock the Treasury is buying from nine big banks will be treated as tier-one capital (the best kind), even though it normally wouldn't qualify.
Second, in a little-noted move, regulators allowed banks with losses on some Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) securities to treat the resulting tax savings as tier one in their regulatory statements for the third quarter. That's strange, given that the third quarter ended Sept. 30, as usual, but legislation making this tax break usable didn't become law until Oct. 3. How often has my source for this nugget - accounting guru Robert Willens of Robert Willens LLC - seen such grandfathering in his 40-year career? "Never," he says.
Of course, this is more about optics than economics. As is mark to market, in my humble opinion. Credit markets have been frozen much of the past 15 months largely because banks haven't trusted the balance sheets of other banks and have thus been afraid to lend to them. I can't imagine that confidence problem being resolved by changing MTM.
There are problems with MTM: It's relatively new, and parts of it seem arbitrary. But its problems have been exaggerated. It's easier to blame accountants for your problems than to admit you made your institution vulnerable by overleveraging its balance sheet and buying securities you didn't understand. Ironically, many of today's whiners adopted MTM a year before they had to, partly because of an arcane provision that let them count as profit the decline in the market value of their publicly traded debt.
The bottom line: Despite MTM's flaws, blaming it for the world's financial problems isn't the answer. Neither is shooting the messenger - or, in this case, the accountant.
Now MTM - which means valuing marketable securities at market prices - is a hot item again, but for the opposite reason. This time financial companies and their allies are claiming it's too strict. They argue that marking the value of complex, illiquid securities to artificially low market prices has unnecessarily crippled the U.S. and world financial systems by creating billions of illusory losses on perfectly fine (albeit illiquid) securities, such as collateralized debt obligations linked to mortgages. Markets for these things, the argument goes, are depressed way below true economic value.
Accountants argue that MTM - known formally as Financial Accounting Standard 157 - is fine, although the Financial Accounting Standards Board has agreed to tweak it some. (Don't ask me for details - the written arguments on this are so sleep-inducing they could be marketed as an Ambien alternative.)
This week, the Securities and Exchange Commission is scheduled to hold a high-profile public meeting about MTM. The SEC, which has the power to overrule FASB, is holding the meeting because Section 133 of the $700 billion bailout bill requires that it study MTM and report to Congress by late December.
The guy who got 133 into the bill, Representative Spencer Bachus (R-Alabama), the ranking minority member of the House Banking Committee, told me he wasn't trying to politicize accounting. "It just says, 'Study it,'" he told me. "It doesn't say [to do] a study to repeal it. It doesn't say [to do] a study to suspend it."
But given that it's finger-pointing time both in Washington and on Wall Street, it's not going to be easy for the SEC to leave mark to market strictly alone. In this environment what regulator dares run the risk of being held responsible for not doing something that would supposedly mitigate the world's credit crunch? Would you want to find yourself accused of failing to act if the financial world totally melted down, as it has occasionally seemed about to do?
Normal accounting is being overridden to help banks in various ways. In early October, for instance, federal financial regulators jointly ruled that the $125 billion of preferred stock the Treasury is buying from nine big banks will be treated as tier-one capital (the best kind), even though it normally wouldn't qualify.
Second, in a little-noted move, regulators allowed banks with losses on some Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) securities to treat the resulting tax savings as tier one in their regulatory statements for the third quarter. That's strange, given that the third quarter ended Sept. 30, as usual, but legislation making this tax break usable didn't become law until Oct. 3. How often has my source for this nugget - accounting guru Robert Willens of Robert Willens LLC - seen such grandfathering in his 40-year career? "Never," he says.
Of course, this is more about optics than economics. As is mark to market, in my humble opinion. Credit markets have been frozen much of the past 15 months largely because banks haven't trusted the balance sheets of other banks and have thus been afraid to lend to them. I can't imagine that confidence problem being resolved by changing MTM.
There are problems with MTM: It's relatively new, and parts of it seem arbitrary. But its problems have been exaggerated. It's easier to blame accountants for your problems than to admit you made your institution vulnerable by overleveraging its balance sheet and buying securities you didn't understand. Ironically, many of today's whiners adopted MTM a year before they had to, partly because of an arcane provision that let them count as profit the decline in the market value of their publicly traded debt.
The bottom line: Despite MTM's flaws, blaming it for the world's financial problems isn't the answer. Neither is shooting the messenger - or, in this case, the accountant.
Middle Class in Big Trouble
Middle Class in big trouble?
Friday, October 24, 2008 6:25 PM CDT
The strength of our great nation is our middle class and they are in trouble. By middle class I mean that great mass of more than 150 million workers that are the backbone of all our country's industries and businesses. By middle class I mean male, female, every human hue possible, every religion conceived, and every ethnic or national background possible.This great economic force created by the middle class, the greatest the world has ever known, is in deep trouble. What kind of trouble? The rest of the world, which for years has envied us, is downright mad at us!
Why is the rest of the world mad at us? We all of a sudden don't have money to spend to buy their products. And what really angers them is it is our own fault.How is it the great middle class of these great United States of America are to blame? We allowed apathy to overcome us. At the same time we gave into greed and impatience. We took our eye off the target and somebody stole it from us.After surviving the Great Depression and WWII, the US middle class experienced about 50 years of unparalleled economic boon. We went from being huddled around a radio for entertainment to a TV in every room and movies galore. We went from an old “keep it running” family car to a vehicle for every member of the family. We went from two party lines to a multi-faceted instrument that not only brings calls to you wherever you may be, but will find you a restaurant, balance your checkbook, make photos of your grandchildren, and so forth and so on.Get the picture? We have gone from small bungalows to sprawling homes in the ‘burbs. We have also gone from begging banks for money to answering daily letters of how we have been pre-approved regardless of our credit history or income.
All of this expansion was made possible by cheap, overseas labor and easy credit at home. But during those 50 years we were king of the hill. Yes, they envied us and at times despised us, but they never asked us to quit buying. So we didn't.That is when we took our eye off the ball. Since the Revolutionary War the middle class has always kept businesses and politicians in check. If they were openly corrupt like Tammany Hall, it was with the silent blessing of the middle class. But somehow during all our giddy success after WWII we quit keeping them in check. Maybe it was due to the dynamic change from rural to urban, or the scattering of the families. I don't know for sure.
What I do know is we allowed evil, greedy people into our political process and business world. They came disguised as Political Action Committees with wheelbarrow loads of cash for any politician who would listen. And listened they did. In fact they listened so much to PAC's they forgot to hear us.They also came disguised as easy credit so we could find instant gratification for anything our hearts desired. Without blinking we said thanks and took every credit card they gave us, whether we needed it or not. Our motto became, “It is mine and I want it now!” No longer did the long-term dreams and goals of our parents apply. We didn't have to wit till mid-life to drive a BMW and cruise the Caribbean. Nope, we could have it all.For 50 years we ate, drank, spent, and made merry without regard to consequences. Now the consequences have hit us and our lack of buying power is shutting down industries all over the world. And they are mad as all get out at us, because we let it happen.
Dennis Bennett is a columnist for The Daily Citizen.
Friday, October 24, 2008 6:25 PM CDT
The strength of our great nation is our middle class and they are in trouble. By middle class I mean that great mass of more than 150 million workers that are the backbone of all our country's industries and businesses. By middle class I mean male, female, every human hue possible, every religion conceived, and every ethnic or national background possible.This great economic force created by the middle class, the greatest the world has ever known, is in deep trouble. What kind of trouble? The rest of the world, which for years has envied us, is downright mad at us!
Why is the rest of the world mad at us? We all of a sudden don't have money to spend to buy their products. And what really angers them is it is our own fault.How is it the great middle class of these great United States of America are to blame? We allowed apathy to overcome us. At the same time we gave into greed and impatience. We took our eye off the target and somebody stole it from us.After surviving the Great Depression and WWII, the US middle class experienced about 50 years of unparalleled economic boon. We went from being huddled around a radio for entertainment to a TV in every room and movies galore. We went from an old “keep it running” family car to a vehicle for every member of the family. We went from two party lines to a multi-faceted instrument that not only brings calls to you wherever you may be, but will find you a restaurant, balance your checkbook, make photos of your grandchildren, and so forth and so on.Get the picture? We have gone from small bungalows to sprawling homes in the ‘burbs. We have also gone from begging banks for money to answering daily letters of how we have been pre-approved regardless of our credit history or income.
All of this expansion was made possible by cheap, overseas labor and easy credit at home. But during those 50 years we were king of the hill. Yes, they envied us and at times despised us, but they never asked us to quit buying. So we didn't.That is when we took our eye off the ball. Since the Revolutionary War the middle class has always kept businesses and politicians in check. If they were openly corrupt like Tammany Hall, it was with the silent blessing of the middle class. But somehow during all our giddy success after WWII we quit keeping them in check. Maybe it was due to the dynamic change from rural to urban, or the scattering of the families. I don't know for sure.
What I do know is we allowed evil, greedy people into our political process and business world. They came disguised as Political Action Committees with wheelbarrow loads of cash for any politician who would listen. And listened they did. In fact they listened so much to PAC's they forgot to hear us.They also came disguised as easy credit so we could find instant gratification for anything our hearts desired. Without blinking we said thanks and took every credit card they gave us, whether we needed it or not. Our motto became, “It is mine and I want it now!” No longer did the long-term dreams and goals of our parents apply. We didn't have to wit till mid-life to drive a BMW and cruise the Caribbean. Nope, we could have it all.For 50 years we ate, drank, spent, and made merry without regard to consequences. Now the consequences have hit us and our lack of buying power is shutting down industries all over the world. And they are mad as all get out at us, because we let it happen.
Dennis Bennett is a columnist for The Daily Citizen.
Thursday, October 16, 2008
Americans are saving more
By Colin Barr, senior writer
NEW YORK (Fortune) -- The economic storm pelting the U.S. economy is going to do plenty more damage to already flattened job and housing markets.
But as dark as the next three or four quarters could be, the U.S. economy appears to be undergoing a more lasting, and ultimately uplifting, shift.
Americans who for decades have spent an increasing share of their incomes and taken on more and more debt are now, for the first time in years, saving instead.
The personal savings rate, which measures the amount of disposable personal income that isn't spent, ticked up to almost 3% in the second quarter of 2008, after almost four years below 1%.
While Americans still aren't going to win any awards for thrift - consumers save more than 10% of their paychecks in creditor nations such as Germany and Japan, for instance - the return to saving carries big implications for U.S. economic health.
More saving is good over the long haul, because domestic savings create a pool of money from which companies can borrow to invest in new plants and equipment, creating the jobs that push living standards higher over time.
A growing domestic savings pool could also reduce America's need to borrow money overseas - which would make the U.S. less beholden to foreign creditors who now supply us with hundreds of billions of dollars in financing every year.
The trouble with virtue
Unfortunately, thrift will cost in the short run. Saving more means spending less - which translates into more hard times in retail and other consumer-driven businesses like the auto industry. The latest evidence of the shift came in Wednesday's steeper-than-expected pullback in retail sales. They dropped 1.2% in September, in their first year-on-year decline in six years and only their third drop in the past 16 years. Economists had been looking for a 0.7% drop.
Given that two-thirds of economic activity is consumer spending, today's thrift will exacerbate a general downturn and will weaken the impact of the massive interventions the government has made in the financial markets.
"The breadth of the decline shows a broad-based pullback in consumer spending that will not quickly turn around," writes PNC economist Stuart Hoffman, "even with the arsenal of federal firepower now aimed at the Great Financial Crisis of 2008."
Federal actions such as a $250 billion plan to buy preferred shares in banks, along with a public guarantee of bank deposits and bank debt, are aimed at unlocking credit markets and boosting economic activity. Policymakers have promised to get banks lending again, to restore economic growth that has clearly been ebbing even as government data chalked up modest gains in gross domestic product for the first half of the year.
"This plan is a means to an end," Hoffman says of the Treasury's agreement to make capital injections in banks such as Citi (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500). "The key concept is that reasonably prudent lending should be supported."
But as the economy shows further signs of deceleration - factory production and industrial capacity utilization fell sharply in September, the Federal Reserve said Thursday - the question is who the banks will be lending to. Indeed, merely plying the banks with capital isn't certain to get them lending in a world in which businesses and consumers are trying to reduce their leverage after a long run of credit expansion.
William Cline, a senior fellow at the Peterson Institute for International Economics, notes that the decline of saving in the United States over the past two decades was accompanied by a sharp increase in the rate of bank lending, as consumers cashed in on the appreciating value of their houses.
Bank credit growth, after averaging around 6.5% in the 1990s, spiked to 12% in the four years ended in 2007, Cline says. Meanwhile the U.S. personal saving rate turned negative at the height of the housing bubble in 2005, down from around 7% in the early 1990s.
"We were already on course to have some return to saving," says Cline, who is the author of the 2005 book, "The United States as a Debtor Nation." With the credit crunch making consumer credit scarcer, he adds, and reduced house prices making Americans feel poorer, "We're going to see some more pressure on household spending."
For now, that will mean more pressure on companies that sell their goods to consumers. GM (GM, Fortune 500) and Ford (F, Fortune 500) have traded at multi-decade lows this month as U.S. auto sales slowed to a pace last seen in the early 1990s. Macy's (M, Fortune 500) dropped 12% Wednesday after the department store chain cut its profit forecast, prompting ratings agency Moody's to warn that further problems could prompt a costly credit downgrade.
The government interventions mean deleveraging can continue without the risk of an economic collapse, which is obviously "extremely positive" in the long run, says Ken Kamen, a financial adviser who is president of Mercadien Asset Management in Trenton, N.J. But that doesn't mean the short run is going to be particularly enjoyable, as Wednesday's 9% stock market decline suggests.
Kamen warns his clients that before they make any hasty decisions, they should decide how much stress they can tolerate in their portfolios.
"You don't want to be resetting your financial future while the compass needle is spinning," he says. "You may need to sell assets - but only to the point where you can sleep at night."
First Published: October 16, 2008: 11:44 AM ET
NEW YORK (Fortune) -- The economic storm pelting the U.S. economy is going to do plenty more damage to already flattened job and housing markets.
But as dark as the next three or four quarters could be, the U.S. economy appears to be undergoing a more lasting, and ultimately uplifting, shift.
Americans who for decades have spent an increasing share of their incomes and taken on more and more debt are now, for the first time in years, saving instead.
The personal savings rate, which measures the amount of disposable personal income that isn't spent, ticked up to almost 3% in the second quarter of 2008, after almost four years below 1%.
While Americans still aren't going to win any awards for thrift - consumers save more than 10% of their paychecks in creditor nations such as Germany and Japan, for instance - the return to saving carries big implications for U.S. economic health.
More saving is good over the long haul, because domestic savings create a pool of money from which companies can borrow to invest in new plants and equipment, creating the jobs that push living standards higher over time.
A growing domestic savings pool could also reduce America's need to borrow money overseas - which would make the U.S. less beholden to foreign creditors who now supply us with hundreds of billions of dollars in financing every year.
The trouble with virtue
Unfortunately, thrift will cost in the short run. Saving more means spending less - which translates into more hard times in retail and other consumer-driven businesses like the auto industry. The latest evidence of the shift came in Wednesday's steeper-than-expected pullback in retail sales. They dropped 1.2% in September, in their first year-on-year decline in six years and only their third drop in the past 16 years. Economists had been looking for a 0.7% drop.
Given that two-thirds of economic activity is consumer spending, today's thrift will exacerbate a general downturn and will weaken the impact of the massive interventions the government has made in the financial markets.
"The breadth of the decline shows a broad-based pullback in consumer spending that will not quickly turn around," writes PNC economist Stuart Hoffman, "even with the arsenal of federal firepower now aimed at the Great Financial Crisis of 2008."
Federal actions such as a $250 billion plan to buy preferred shares in banks, along with a public guarantee of bank deposits and bank debt, are aimed at unlocking credit markets and boosting economic activity. Policymakers have promised to get banks lending again, to restore economic growth that has clearly been ebbing even as government data chalked up modest gains in gross domestic product for the first half of the year.
"This plan is a means to an end," Hoffman says of the Treasury's agreement to make capital injections in banks such as Citi (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500). "The key concept is that reasonably prudent lending should be supported."
But as the economy shows further signs of deceleration - factory production and industrial capacity utilization fell sharply in September, the Federal Reserve said Thursday - the question is who the banks will be lending to. Indeed, merely plying the banks with capital isn't certain to get them lending in a world in which businesses and consumers are trying to reduce their leverage after a long run of credit expansion.
William Cline, a senior fellow at the Peterson Institute for International Economics, notes that the decline of saving in the United States over the past two decades was accompanied by a sharp increase in the rate of bank lending, as consumers cashed in on the appreciating value of their houses.
Bank credit growth, after averaging around 6.5% in the 1990s, spiked to 12% in the four years ended in 2007, Cline says. Meanwhile the U.S. personal saving rate turned negative at the height of the housing bubble in 2005, down from around 7% in the early 1990s.
"We were already on course to have some return to saving," says Cline, who is the author of the 2005 book, "The United States as a Debtor Nation." With the credit crunch making consumer credit scarcer, he adds, and reduced house prices making Americans feel poorer, "We're going to see some more pressure on household spending."
For now, that will mean more pressure on companies that sell their goods to consumers. GM (GM, Fortune 500) and Ford (F, Fortune 500) have traded at multi-decade lows this month as U.S. auto sales slowed to a pace last seen in the early 1990s. Macy's (M, Fortune 500) dropped 12% Wednesday after the department store chain cut its profit forecast, prompting ratings agency Moody's to warn that further problems could prompt a costly credit downgrade.
The government interventions mean deleveraging can continue without the risk of an economic collapse, which is obviously "extremely positive" in the long run, says Ken Kamen, a financial adviser who is president of Mercadien Asset Management in Trenton, N.J. But that doesn't mean the short run is going to be particularly enjoyable, as Wednesday's 9% stock market decline suggests.
Kamen warns his clients that before they make any hasty decisions, they should decide how much stress they can tolerate in their portfolios.
"You don't want to be resetting your financial future while the compass needle is spinning," he says. "You may need to sell assets - but only to the point where you can sleep at night."
First Published: October 16, 2008: 11:44 AM ET
Housing prices fall but not property taxes
By Les Christie, CNNMoney.com staff writer
NEW YORK (CNNMoney.com) -- Housing prices have plummeted, but property tax bills probably won't budge.
This January, local tax authorities will begin to send out property assessments for 2009, telling homeowners what their property is valued at, and how much their tax bill is.
But many assessments won't reflect any of the steep home price declines that have been making headlines for the last year or so.
And even if property assessments do drop, property tax bills won't necessarily be any lower.
"I think you're going to see a lot more taxpayer protest this year," said Bruce Hahn, president of the American Homeowners foundation, a non-partisan consumer advocacy group.
A huge runup slows
Property taxes climbed relentlessly earlier this decade as home prices rose, according to Pete Sepp, spokesman for the National Taxpayers Union. This year Americans will pay more than $400 billion in property taxes, up about 25% from levels in 2004 and double what they paid ten years ago.
At best, says Sepp, those steep increases may start to level off.
Nevertheless, homeowners are already pressing assessors for lower tax assessments.
"For my first 25 years [as an assessor], nobody ever asked me to lower the assessment based on a home selling for less down the street. There are many such inquiries this year," said Ken Wilkinson, the tax assessor for Lee County Fla., which includes Cape Coral and Ft. Myers.
He estimates that 80% of county residents have seen the value of their homes decline. The median price of existing homes fell more than 25% in the 12 months ending June 30, according to the Housing Opportunity Index compiled by Wells Fargo (WFC, Fortune 500) for the National Association of Home Builders.
Home prices in Moreno Valley, Calif. a city of 187,000, have fallen by more than a third over the past two years, according to the same index. And that has many more homeowners clamoring for reassessments, according to Barry Foster, the city's economic development director.
But even if local prices are way down, taxpayers may not win a lower assessment, because there can be a big lag time between when the home sales used to calculate them take place and when the assessment is actually issued.
To calculate 2009 assessments, for example, assessors will use home sale prices from 2008 or even earlier, according to Sepp. Usually this works to taxpayers's advantage, since price increases take a while before they are fully reflected in assessments.
That's why it's typical for most homes to be under-valued, according to Bruce Hahn of the American Homeowners foundation. But that's also why many homeowners aren't likely to see their assessments shrink immediately.
Lower values, same bill
There's another reason why homeowners are unlikely to see any decrease in property tax bills. In some states, such as California, Washington State, Massachusetts and Idaho, taxes are based on the last resale price of the house. Even a home worth $500,000 in California may be taxed based on the sale price when it was bought 10 years earlier for $200,000.
"Because the assessment is based on acquisition value, it's difficult to get that re-evaluated," said Sepp.
That's why the market value of most homes in these states exceeds the assessed tax values. The owners with best case for a reassessment are the ones who bought at the top of the market and have seen their values drop by a third or more, like many of Moreno Valley's residents.
Even if citizens do receive a lower assessment - and this year Wilkinson expects to lower assessments for most taxpayers in Lee county, Fla. by 20% or more - their property tax bill may not shrink at all.
Tax collectors often raise tax rates to offset lower assessments to meet their budgets, which will be very strained this year. Assessments go down but rates go up so that the tax collections stay roughly the same.
"State and local governments depend very heavily on real estate taxes and they are reeling from a loss of revenues from sales taxes and other sources," said Bruce Hahn.
Once homeowners get their bills, they'll have several weeks to contest their assessments, according to Hahn.
He suggested they go online to real estate evaluation sites such as Trulia or Zillow to determine how far property values have fallen in their communities. They can also cite comparable home sales for similar properties to make their cases.
"Some tax assessors have been very reasonable," said Hahn, "but others are under great pressure to keep revenues up."
NEW YORK (CNNMoney.com) -- Housing prices have plummeted, but property tax bills probably won't budge.
This January, local tax authorities will begin to send out property assessments for 2009, telling homeowners what their property is valued at, and how much their tax bill is.
But many assessments won't reflect any of the steep home price declines that have been making headlines for the last year or so.
And even if property assessments do drop, property tax bills won't necessarily be any lower.
"I think you're going to see a lot more taxpayer protest this year," said Bruce Hahn, president of the American Homeowners foundation, a non-partisan consumer advocacy group.
A huge runup slows
Property taxes climbed relentlessly earlier this decade as home prices rose, according to Pete Sepp, spokesman for the National Taxpayers Union. This year Americans will pay more than $400 billion in property taxes, up about 25% from levels in 2004 and double what they paid ten years ago.
At best, says Sepp, those steep increases may start to level off.
Nevertheless, homeowners are already pressing assessors for lower tax assessments.
"For my first 25 years [as an assessor], nobody ever asked me to lower the assessment based on a home selling for less down the street. There are many such inquiries this year," said Ken Wilkinson, the tax assessor for Lee County Fla., which includes Cape Coral and Ft. Myers.
He estimates that 80% of county residents have seen the value of their homes decline. The median price of existing homes fell more than 25% in the 12 months ending June 30, according to the Housing Opportunity Index compiled by Wells Fargo (WFC, Fortune 500) for the National Association of Home Builders.
Home prices in Moreno Valley, Calif. a city of 187,000, have fallen by more than a third over the past two years, according to the same index. And that has many more homeowners clamoring for reassessments, according to Barry Foster, the city's economic development director.
But even if local prices are way down, taxpayers may not win a lower assessment, because there can be a big lag time between when the home sales used to calculate them take place and when the assessment is actually issued.
To calculate 2009 assessments, for example, assessors will use home sale prices from 2008 or even earlier, according to Sepp. Usually this works to taxpayers's advantage, since price increases take a while before they are fully reflected in assessments.
That's why it's typical for most homes to be under-valued, according to Bruce Hahn of the American Homeowners foundation. But that's also why many homeowners aren't likely to see their assessments shrink immediately.
Lower values, same bill
There's another reason why homeowners are unlikely to see any decrease in property tax bills. In some states, such as California, Washington State, Massachusetts and Idaho, taxes are based on the last resale price of the house. Even a home worth $500,000 in California may be taxed based on the sale price when it was bought 10 years earlier for $200,000.
"Because the assessment is based on acquisition value, it's difficult to get that re-evaluated," said Sepp.
That's why the market value of most homes in these states exceeds the assessed tax values. The owners with best case for a reassessment are the ones who bought at the top of the market and have seen their values drop by a third or more, like many of Moreno Valley's residents.
Even if citizens do receive a lower assessment - and this year Wilkinson expects to lower assessments for most taxpayers in Lee county, Fla. by 20% or more - their property tax bill may not shrink at all.
Tax collectors often raise tax rates to offset lower assessments to meet their budgets, which will be very strained this year. Assessments go down but rates go up so that the tax collections stay roughly the same.
"State and local governments depend very heavily on real estate taxes and they are reeling from a loss of revenues from sales taxes and other sources," said Bruce Hahn.
Once homeowners get their bills, they'll have several weeks to contest their assessments, according to Hahn.
He suggested they go online to real estate evaluation sites such as Trulia or Zillow to determine how far property values have fallen in their communities. They can also cite comparable home sales for similar properties to make their cases.
"Some tax assessors have been very reasonable," said Hahn, "but others are under great pressure to keep revenues up."
Mortgage rates headed to 7%
By Les Christie, CNNMoney.com staff writer
NEW YORK (CNNMoney.com) -- Low mortgage rates, the one bright spot in a devastated housing market, are on the rise.
And while rates remain low by historical comparison, experts say they could continue to creep up.
The average interest rate on a 30-year, fixed rate mortgage jumped to 6.6% late Tuesday from 6.06% the Tuesday before, according to Keith Gumbinger of HSH Associates, a publisher of mortgage information.
A borrower with a $200,000 mortgage would pay about $1,207 a month at 6.06%, and $70 more at 6.6%.
Mike Larson, an analyst with Weiss Research who participates in Bankrate.com's weekly mortgage rate surveys, expects to see rates top 7% in the next six months, and then turn back down.
That's quite a bit higher than rates have been, but it's no disaster.
Gumbinger blames the rate increase on the massive federal bailout. To fund the rescue and the new government guarantees, Treasury must sell a raft of new Treasury bills to raise money.
"Who even has the cash to buy them all?" said Gumbinger. "The Treasury has to offer higher interest rates to sell."
Mortgage rates tend to move in conjunction with Treasurys.
But mortgage rates are higher than Treasury yields, because when mortgages are securitized and sold to investors, they're a riskier proposition than government bonds.
"There's any number of risks with mortgage securities," said Gumbinger, "including the risk that borrowers may not pay the mortgages at all."
So, with Treasury yields on the rise, mortgage rates should continue to be a more expensive for the next few months, he said.
Unintended consequences
There may be another factor at work sending rates skyward, according to FTN Financial Group analyst, Jim Vogel.
The cost of financing mortgages will grow for the biggest buyers of mortgage debt, Freddie Mac (FRE, Fortune 500) and Fannie Mae (FNM, Fortune 500), thanks to the plan for the Federal Deposit Insurance Corp. to back the newly issued, unsecured debt of some banks.
By guaranteeing bank debt, the government is making that debt more attractive for investors, and consequently creating more competition for Fannie and Freddie when they look to sell their own securities. To compete for buyers, the mortgage giants will have to raise their own yields - and to pay for that they'll have to charge borrowers higher interest.
"In theory, I think that could be correct," said Mark Zandi, chief economist for Moody's Economy.com, who is also an adviser to John McCain's presidential campaign. "But in practice, whether it means that rates will rise is an open question. There's a strong demand for really safe assets these days and Fannie and Freddie bonds are just a step removed from Treasurys."
If there's enough demand for ultra-safe investments like Fannie and Freddie bonds, Zandi says, they may not have to boost their yields all that much to attract investors.
Zandi pointed out that the difference between Treasury yields and 30-year mortgage rates is very high right now, more than 2% compared with 1.5% normally. That's because investors fled to risk-free Treasurys when the markets panicked.
But eventually, he says, the government rescue may send mortgage rates down and narrow that spread. "If that helps bring down the general angst, than mortgage rates should fall," he said.
Gumbinger expects rates to stay higher for several more months, as financial markets and lending take some time to return to normal. But he doesn't see the current spike as the beginning of the end of affordable mortgages.
"Rates should probably settle back down," he said. "We should see an easing of credit availability and that should put downward pressure on rates."
NEW YORK (CNNMoney.com) -- Low mortgage rates, the one bright spot in a devastated housing market, are on the rise.
And while rates remain low by historical comparison, experts say they could continue to creep up.
The average interest rate on a 30-year, fixed rate mortgage jumped to 6.6% late Tuesday from 6.06% the Tuesday before, according to Keith Gumbinger of HSH Associates, a publisher of mortgage information.
A borrower with a $200,000 mortgage would pay about $1,207 a month at 6.06%, and $70 more at 6.6%.
Mike Larson, an analyst with Weiss Research who participates in Bankrate.com's weekly mortgage rate surveys, expects to see rates top 7% in the next six months, and then turn back down.
That's quite a bit higher than rates have been, but it's no disaster.
Gumbinger blames the rate increase on the massive federal bailout. To fund the rescue and the new government guarantees, Treasury must sell a raft of new Treasury bills to raise money.
"Who even has the cash to buy them all?" said Gumbinger. "The Treasury has to offer higher interest rates to sell."
Mortgage rates tend to move in conjunction with Treasurys.
But mortgage rates are higher than Treasury yields, because when mortgages are securitized and sold to investors, they're a riskier proposition than government bonds.
"There's any number of risks with mortgage securities," said Gumbinger, "including the risk that borrowers may not pay the mortgages at all."
So, with Treasury yields on the rise, mortgage rates should continue to be a more expensive for the next few months, he said.
Unintended consequences
There may be another factor at work sending rates skyward, according to FTN Financial Group analyst, Jim Vogel.
The cost of financing mortgages will grow for the biggest buyers of mortgage debt, Freddie Mac (FRE, Fortune 500) and Fannie Mae (FNM, Fortune 500), thanks to the plan for the Federal Deposit Insurance Corp. to back the newly issued, unsecured debt of some banks.
By guaranteeing bank debt, the government is making that debt more attractive for investors, and consequently creating more competition for Fannie and Freddie when they look to sell their own securities. To compete for buyers, the mortgage giants will have to raise their own yields - and to pay for that they'll have to charge borrowers higher interest.
"In theory, I think that could be correct," said Mark Zandi, chief economist for Moody's Economy.com, who is also an adviser to John McCain's presidential campaign. "But in practice, whether it means that rates will rise is an open question. There's a strong demand for really safe assets these days and Fannie and Freddie bonds are just a step removed from Treasurys."
If there's enough demand for ultra-safe investments like Fannie and Freddie bonds, Zandi says, they may not have to boost their yields all that much to attract investors.
Zandi pointed out that the difference between Treasury yields and 30-year mortgage rates is very high right now, more than 2% compared with 1.5% normally. That's because investors fled to risk-free Treasurys when the markets panicked.
But eventually, he says, the government rescue may send mortgage rates down and narrow that spread. "If that helps bring down the general angst, than mortgage rates should fall," he said.
Gumbinger expects rates to stay higher for several more months, as financial markets and lending take some time to return to normal. But he doesn't see the current spike as the beginning of the end of affordable mortgages.
"Rates should probably settle back down," he said. "We should see an easing of credit availability and that should put downward pressure on rates."
Tuesday, October 14, 2008
How to Survive the next depression
How to survive the next depression
Whether the sky is falling or not, times definitely will be tougher, and you can't count on anyone to bail you out. It's time to be a grown-up.
By Liz Pulliam Weston
Let me make it clear at the start: I don't think we're headed for another Great Depression.
Many of you disagree. More than half the people polled in a recent CNN survey believe an economic depression is either very likely (21%) or somewhat likely (38%).
I do believe that a recession is probable, that it may be severe and that many people will lose their jobs in the coming months.
But I don't think we'll return to a time when:
The official unemployment rate was 25%, with many more people who either gave up looking for work or who involuntarily worked part time.
Bank failures wiped out the life savings of millions of customers.
One-third of the nation was, as President Franklin D. Roosevelt famously put it in his 1937 inaugural address, "ill-housed, ill-clad, ill-nourished."
This 12-year period of economic disruption and widespread poverty was unprecedented in our nation's history. From it sprang many of the safety nets -- including Federal Deposit Insurance Corp. coverage, Social Security, unemployment insurance and food stamps -- that, though overburdened now, will continue to keep our most vulnerable citizens from falling into the destitution that characterized the Great Depression.
Still, I think we're in for a rough ride. And the smart steps to take now are virtually the same whether you think what's coming is a run-of-the-mill downturn or a once-in-a-lifetime cataclysm.
Such as:
Implement your austerity budget Pretend you just lost your job. Whatever expenses you'd cut in that situation, cut them now and use the savings to build up your emergency fund and pay off your toxic debt, such as credit cards.
"If you'd shut off the cable (after losing your job), shut it off now," says Sheryl Garrett, founder of the Garrett Planning Network, which represents fee-only financial planners who charge by the hour. "Only spend money on essentials."
If you need some inspiration, check out "Could you stop spending for a month?" Many people find they can save hundreds of dollars a month just by changing their food purchases: eating at home instead of dining out, cooking more meatless meals, reusing leftovers and shopping with coupons.
Erase that toxic debt You know you should have done it long ago. Credit card debt is expensive and leaves you vulnerable to the ever-changing whims of credit card companies, which have been raising interest rates with abandon.
Now, though, shedding credit card balances may be critical. If you still have a job, Garrett says, use it to pay off this cancerous debt.
"Go ahead and get serious about it. Be a grown-up," Garrett says. "Realize you aren't going to get bailed out by a 0% credit card offer or another mortgage refinance."
If you're seriously behind -- if you can't pay the minimums or if you're getting collection calls -- make appointments with a legitimate credit counselor and a bankruptcy attorney. Between the two, you'll learn your options for dealing with truly difficult debt.
Stock market historyDon't panic. Historical data show that, short of another Great Depression, investors who hold on for 5 years don't lose much money, even in a bear market, says MSN Money's Jim Jubak.
Keep your emergency exits open Once you've paid off the cards, don't close them. Not only can closing accounts hurt your credit scores -- which have become all-important lately for getting loans -- but you may need access to that credit in an emergency.
The same holds true for other lines of credit, including home-equity lines. If you've got access to those, try to keep them open and unused so they're available in case of emergency.
Try to stay employed No kidding, right? But here's exactly what that looks like: Volunteer for extra work, nab high-profile assignments, keep higher-ups apprised of your victories and value to the company.
Don't complain, and steer clear of people who do. And if you're on irredeemably rocky ground, tune up that resume now and start networking.
Pile up cash In bad times, cash is king. Your emergency savings will pay the bills if you lose your job and will generally help you sleep better at night. Set up automatic transfers into a high-yield, FDIC-insured savings account and add any windfalls you get along the way.
If you've been prepaying any low-rate, tax-deductible debt -- such as a mortgage or a federal student loan -- consider suspending those extra payments and putting the money into your savings instead to boost your financial flexibility.
Prepare for inflation The Federal Reserve and other central banks will flood our financial system with cash as they try to encourage lenders to lend. Once the economy starts to turn around, all that cash sloshing around in the system could spark inflation that might be tough to bring under control.
To protect clients, financial-planning firm Evensky & Katz of Coral Gables, Fla., has been adding TIPS (treasury income protected securities) to the fixed-income side of its portfolios, says Taylor Gang, the firm's vice president.
"We feel that the long-term risk is likely to be inflation," Gang said, "and we construct portfolios with this in mind."
But the firm isn't telling clients to abandon stocks. Far from it.
"Through exposure to equities, clients own securities that are likely to appreciate in value," Gang said, "and outpace inflation over time."
To repeat:
Stay invested in stocks This advice is hard for many people to stomach. They feel that if only they'd gotten out of the market weeks or months ago, they'd feel so much better now.
That's probably why so many are raiding their retirement funds, cashing them out or refusing to contribute. A recent AARP survey found that 20% of workers 45 or older had stopped contributing to their retirement funds in the past year and that 13% are tapping their accounts to pay day-to-day expenses.
These are exactly the wrong moves. While the current market turmoil may mean a delayed retirement for many people (see "How to retire in bad times"), failing to fund your retirement accounts could mean no retirement at all.
And the problem with getting out of the market is that you won't know when to get back in. Markets usually turn around well before the actual economy starts improving, and they typically advance so rapidly that people who aren't already invested miss most of the gains.
Besides, it's not like most of us need the money right now. Many of us have decades to go before we'll tap our retirement funds. These losses we're seeing are purely theoretical unless we act to make them real, by selling in a panic.
And if inflation does kick in, it will be even more important to have the inflation-beating returns that only stocks can provide. Furthermore:
Don't ignore your asset allocation It may feel like diversification hasn't worked, since all classes of U.S. and foreign stocks have taken it in the teeth lately. But this synchronized performance is temporary, says financial planner Ross Levin of Accredited Investors in Edina, Minn. Eventually, a rebound will begin, and some of the most-beaten-down sectors will bounce back the strongest.
"Rebalancing is critical during these periods," Levin recently told his clients in a quarterly newsletter. "By systematically rebalancing, you are forcing yourself to buy low."
Stock market historyDon't panic. Historical data show that, short of another Great Depression, investors who hold on for 5 years don't lose much money, even in a bear market, says MSN Money's Jim Jubak.
Learn some old-school skills Plant a garden. Plan your meals. Repair rather than toss. Barter or trade rather than buy. Throw a potluck.
You'll save money, help the planet and combat that feeling that you're the helpless pawn of economic forces greater than you.
Construct your Plan B If the bottom does drop out of our economy, you probably won't wind up on the street. Maybe you'd move in with your in-laws or rent out rooms in your home (as many previously affluent families did during the Depression). Honing your backup plan can be surprisingly therapeutic, particularly for people who tend to get all catastrophic. (For details, read "Is your money making you crazy?")
Instead of fearing the worst, in other words, you plan for it -- then hope to be surprised.
Whether the sky is falling or not, times definitely will be tougher, and you can't count on anyone to bail you out. It's time to be a grown-up.
By Liz Pulliam Weston
Let me make it clear at the start: I don't think we're headed for another Great Depression.
Many of you disagree. More than half the people polled in a recent CNN survey believe an economic depression is either very likely (21%) or somewhat likely (38%).
I do believe that a recession is probable, that it may be severe and that many people will lose their jobs in the coming months.
But I don't think we'll return to a time when:
The official unemployment rate was 25%, with many more people who either gave up looking for work or who involuntarily worked part time.
Bank failures wiped out the life savings of millions of customers.
One-third of the nation was, as President Franklin D. Roosevelt famously put it in his 1937 inaugural address, "ill-housed, ill-clad, ill-nourished."
This 12-year period of economic disruption and widespread poverty was unprecedented in our nation's history. From it sprang many of the safety nets -- including Federal Deposit Insurance Corp. coverage, Social Security, unemployment insurance and food stamps -- that, though overburdened now, will continue to keep our most vulnerable citizens from falling into the destitution that characterized the Great Depression.
Still, I think we're in for a rough ride. And the smart steps to take now are virtually the same whether you think what's coming is a run-of-the-mill downturn or a once-in-a-lifetime cataclysm.
Such as:
Implement your austerity budget Pretend you just lost your job. Whatever expenses you'd cut in that situation, cut them now and use the savings to build up your emergency fund and pay off your toxic debt, such as credit cards.
"If you'd shut off the cable (after losing your job), shut it off now," says Sheryl Garrett, founder of the Garrett Planning Network, which represents fee-only financial planners who charge by the hour. "Only spend money on essentials."
If you need some inspiration, check out "Could you stop spending for a month?" Many people find they can save hundreds of dollars a month just by changing their food purchases: eating at home instead of dining out, cooking more meatless meals, reusing leftovers and shopping with coupons.
Erase that toxic debt You know you should have done it long ago. Credit card debt is expensive and leaves you vulnerable to the ever-changing whims of credit card companies, which have been raising interest rates with abandon.
Now, though, shedding credit card balances may be critical. If you still have a job, Garrett says, use it to pay off this cancerous debt.
"Go ahead and get serious about it. Be a grown-up," Garrett says. "Realize you aren't going to get bailed out by a 0% credit card offer or another mortgage refinance."
If you're seriously behind -- if you can't pay the minimums or if you're getting collection calls -- make appointments with a legitimate credit counselor and a bankruptcy attorney. Between the two, you'll learn your options for dealing with truly difficult debt.
Stock market historyDon't panic. Historical data show that, short of another Great Depression, investors who hold on for 5 years don't lose much money, even in a bear market, says MSN Money's Jim Jubak.
Keep your emergency exits open Once you've paid off the cards, don't close them. Not only can closing accounts hurt your credit scores -- which have become all-important lately for getting loans -- but you may need access to that credit in an emergency.
The same holds true for other lines of credit, including home-equity lines. If you've got access to those, try to keep them open and unused so they're available in case of emergency.
Try to stay employed No kidding, right? But here's exactly what that looks like: Volunteer for extra work, nab high-profile assignments, keep higher-ups apprised of your victories and value to the company.
Don't complain, and steer clear of people who do. And if you're on irredeemably rocky ground, tune up that resume now and start networking.
Pile up cash In bad times, cash is king. Your emergency savings will pay the bills if you lose your job and will generally help you sleep better at night. Set up automatic transfers into a high-yield, FDIC-insured savings account and add any windfalls you get along the way.
If you've been prepaying any low-rate, tax-deductible debt -- such as a mortgage or a federal student loan -- consider suspending those extra payments and putting the money into your savings instead to boost your financial flexibility.
Prepare for inflation The Federal Reserve and other central banks will flood our financial system with cash as they try to encourage lenders to lend. Once the economy starts to turn around, all that cash sloshing around in the system could spark inflation that might be tough to bring under control.
To protect clients, financial-planning firm Evensky & Katz of Coral Gables, Fla., has been adding TIPS (treasury income protected securities) to the fixed-income side of its portfolios, says Taylor Gang, the firm's vice president.
"We feel that the long-term risk is likely to be inflation," Gang said, "and we construct portfolios with this in mind."
But the firm isn't telling clients to abandon stocks. Far from it.
"Through exposure to equities, clients own securities that are likely to appreciate in value," Gang said, "and outpace inflation over time."
To repeat:
Stay invested in stocks This advice is hard for many people to stomach. They feel that if only they'd gotten out of the market weeks or months ago, they'd feel so much better now.
That's probably why so many are raiding their retirement funds, cashing them out or refusing to contribute. A recent AARP survey found that 20% of workers 45 or older had stopped contributing to their retirement funds in the past year and that 13% are tapping their accounts to pay day-to-day expenses.
These are exactly the wrong moves. While the current market turmoil may mean a delayed retirement for many people (see "How to retire in bad times"), failing to fund your retirement accounts could mean no retirement at all.
And the problem with getting out of the market is that you won't know when to get back in. Markets usually turn around well before the actual economy starts improving, and they typically advance so rapidly that people who aren't already invested miss most of the gains.
Besides, it's not like most of us need the money right now. Many of us have decades to go before we'll tap our retirement funds. These losses we're seeing are purely theoretical unless we act to make them real, by selling in a panic.
And if inflation does kick in, it will be even more important to have the inflation-beating returns that only stocks can provide. Furthermore:
Don't ignore your asset allocation It may feel like diversification hasn't worked, since all classes of U.S. and foreign stocks have taken it in the teeth lately. But this synchronized performance is temporary, says financial planner Ross Levin of Accredited Investors in Edina, Minn. Eventually, a rebound will begin, and some of the most-beaten-down sectors will bounce back the strongest.
"Rebalancing is critical during these periods," Levin recently told his clients in a quarterly newsletter. "By systematically rebalancing, you are forcing yourself to buy low."
Stock market historyDon't panic. Historical data show that, short of another Great Depression, investors who hold on for 5 years don't lose much money, even in a bear market, says MSN Money's Jim Jubak.
Learn some old-school skills Plant a garden. Plan your meals. Repair rather than toss. Barter or trade rather than buy. Throw a potluck.
You'll save money, help the planet and combat that feeling that you're the helpless pawn of economic forces greater than you.
Construct your Plan B If the bottom does drop out of our economy, you probably won't wind up on the street. Maybe you'd move in with your in-laws or rent out rooms in your home (as many previously affluent families did during the Depression). Honing your backup plan can be surprisingly therapeutic, particularly for people who tend to get all catastrophic. (For details, read "Is your money making you crazy?")
Instead of fearing the worst, in other words, you plan for it -- then hope to be surprised.
Friday, October 10, 2008
Crazy week in the market
What a crazy week in the market it has been. Here a just some random thoughts about it. At one point (the market is always changing) the S& P was down 40% for the year. That is a huge number! If we make the assumption that on the average the stock market gives returns of around 7%, this would mean that the average american would have to work 5-6 years just to get back to the principal they had on January 1st. This proabably means they will have to delay retirement that much longer than they would would have planned. There is a big difference in retireing at 65 compared to 70. This also means that new college graduates might not find as many job openings as once thought.
Thursday, October 9, 2008
Treasury eyeing bank deals
I do not understand the logic of this idea. The governement is going to take a ownership role in banks. When the governmnet audits banks (each bank is audited every year) and they get a bad report is the government going to step in and make sure they get a better grade because they are worried about stock. Are they going to make laws out to help the banks they own stocks in. Is the government going to push for or against jobs because of their influence, either one could be bad depending on what kind of position the bank is in. If the governement buys bank stock the stock price will proabably go up. What happens when they sell the stock, probably go down. Are they going to get insider information to help them time the market leaving the everyday consumer picking up the pieces. There just to me seems to be too much influence, too much conflict of interest and ways this can go wrong.
Retirement
By Stephen Gandel and Paul J. Lim
With stock markets plunging, nest eggs are cracking and retirement dreams are slipping away. But don't hit the panic button yet. With a solid strategy, there's still hope for your golden years.
Will I ever be able to retire?
If you have several years, if not decades, to go, don't worry. Yes, your 401(k) and IRAs have taken a significant hit. But history shows that you'll make up 80% of your bear market losses within the first year of the recovery, according to Standard & Poor's Equity Research.
If you're planning to retire in the next few years, the answer is still yes, with a bit of effort. Why? The decade before you quit your job and the first five years that you're out of the work force are vulnerable times. How much your investments earn - or lose - during this time will go a long way toward determining how much money you can afford to spend for the following 30 years or more.
Say you planned to quit this year and begin withdrawing 4% of your retirement funds annually. If you started with a $1 million retirement portfolio last year (split 70% stocks, 30% bonds), the market has already cut that down to $833,000. That means if you pulled 4% of your remaining money out, you'd be left with just under $800,000 after Year One, cutting your odds of having your money last 30 years from nearly 80% to less than 50%.
Sounds scary. But you can fix this problem. For starters, pledge to work one more year. A study from T. Rowe Price found that putting in another 365 days at the job would boost your annual retirement income by 7%. Work three years more and your retirement income could soar by 22%.
By staying at your desk longer, you can also delay taking Social Security benefits. For each year you put off starting your benefits between ages 62 and 70, you boost your Social Security payments by 8%.
What if you don't want to - or can't - work longer? You still have an option: spend less. The traditional advice is to withdraw 4% of your assets in the first year of retirement and boost subsequent withdrawals by the inflation rate. But in this type of market, consider withholding your inflation adjustments for the first three years after you retire. T. Rowe Price found that a retiree with a 55% stock/45% bond allocation in 2000 would have cut his odds of running out of money by half simply by following this approach.
What should I be doing with my portfolio?
Every long-term investor has to face nerve-rattling times like this - likely more than once - and your success will hinge on your ability to keep a cooler head than many others around you.
If you own a diversified portfolio, your asset-allocation strategy has probably protected you from the worst of the storm. While the S&P 500 has lost more than a quarter of its value over the past year, a portfolio consisting of 70% stocks and 30% bonds has fallen around 17%, thanks to the gains fixed-income funds enjoyed.
Still, markets like this are a good time to check if your asset-allocation strategy is still appropriate for your time horizon and if you need to rebalance. You'll likely find that you own too big a stake in bonds - or at least more than you bargained for.
Let's go back to that portfolio of 70% stocks and 30% bonds. If you hadn't traded in the past year, the market would have shifted your mix to 62% stocks and 38% fixed income. That might feel good now because bonds are less volatile, but it will mean that you will lose out on the higher returns on stocks when the market eventually recovers.
If you're selling bonds to add to stocks, what's safe to buy? It's fair to assume that the government's efforts to bail out Wall Street will add to our national debt, which will likely push up interest rates. Basic-materials stocks tend to do well when rates rise. So consider T. Rowe Price New Era (PRNEX), which owns energy and mining stocks. New Era is a member of the Money 70, our list of recommended funds and ETFs.
Also, beef up your blue chips. As Lehman and WaMu shareholders learned, not every large company can weather tough times. But as a whole, the category clearly can. The Vanguard 500 Index (VFINX) is the safest way to invest in the largest American companies.
Another sound option is the Fairholme fund (FAIRX). The managers of this Money 70 fund follow the Warren Buffett school of investing. They buy a stock only if it's trading well below its intrinsic value - perhaps a richly populated universe after this market meltdown.
If you see that the bond portion of your portfolio is underperforming, consider Treasury Inflation-Protected Securities (TIPS), one of the few types of bonds that can do well when rates rise.
I'm retired. What does this mean for me?
If you're living off a collection of dividend-paying stocks, it may feel as if you've been hit by the perfect storm. Not only have financial stocks, which generate around a quarter of all the dividends produced by the S&P 500, taken a huge beating - they've sunk nearly 45% since the start of this bear - but 30 blue-chip financial firms have cut their dividends.
Worse still, not all of the income you'll receive this year will be eligible for the beneficial 15% tax rate. For dividends to qualify for the rate, the company that issues them must pay taxes on them. And since many banks and brokers are reporting huge losses, they may not owe a penny to Uncle Sam this year.
As long as you diversify among different stocks as well as different sectors, dividend investing still has a lot of appeal. One strategy that's holding up, relatively speaking: Instead of focusing on companies with the highest yields - which could simply be a sign that a payer's share price has tanked or the dividend is at risk - concentrate on companies that are consistently growing their payouts over time. By doing so, the Vanguard Dividend Growth fund (VDIGX) has kept its exposure to the financial sector to only around 11%, and the fund is down just 10% so far this year, about half what the overall market has lost.
In the wake of the near failure of AIG, another worry for retirees is whether to buy an immediate annuity. In exchange for handing over a lump sum of money to an insurer, you get monthly or annual payments guaranteed for life with one of these policies. In this environment, it's hard enough to have faith that your financial institution will be around for the next three months, let alone three decades.
But bear in mind that no major insurer has failed in this meltdown. Even though AIG required $85 billion in loan guarantees to stay in business, it was the parent company that needed the help - not its insurance subsidiary.
In the event your insurer does fail, your state's life and health insurance guaranty association will attempt to find another carrier to take over the failed firm's contracts. If that can't be done, state guaranty funds will cover at least $100,000 in benefits (around 20 states cover more).
There is one reason to hold off awhile before you enter a new contract: Rating agencies like A.M. Best, Moody's, Fitch and Standard & Poor's are likely to re-assess the financial health of insurers in the wake of the financial crisis. Wait to see which insurers maintain the highest ratings.
How will I know when things are recovering?
An oft-quoted Warren Buffett bit of wisdom goes that the stock market is designed to transfer money from the active to the patient. Keep that in mind when you wonder when this crisis is over for good.
Let's remember what this crisis is all about. It's not just about problems with bad mortgages and toxic mortgage-backed bonds. "That's just the tip of the iceberg," says Charles de Vaulx, portfolio manager for International Value Advisers. The reason that we're still stuck in a bear market and that loans are hard to come by is the ongoing crisis in confidence in the financial system that greases the wheels of the economy. It may take months, if not longer, for the markets to get enough courage to overcome this.
Whether you're an investor or a would-be borrower looking for a sign of better days to come, pay attention to the so-called overnight London Interbank offered rate. Libor is a rate banks charge one another. The lower it is, the greater the likelihood that banks are willing to lend freely - and the sooner this credit crisis may be over.
Historically, Libor has run fairly close to the federal funds rate, which the Fed is currently targeting at 2%. But lately the overnight Libor has fluctuated between around 3% and 6%, an indication that banks still perceive a great deal of risk in the market.
In the short run, that's not great news for investors or consumers waiting for banks to start lending again. In the long run, however, the fact that banks are starting to consider risk isn't necessarily bad. After all, says Steven Romick, manager of the FPA Crescent Fund, "the reason we're in this mess is that financial institutions tried to make money without any regard to the concept of risk
With stock markets plunging, nest eggs are cracking and retirement dreams are slipping away. But don't hit the panic button yet. With a solid strategy, there's still hope for your golden years.
Will I ever be able to retire?
If you have several years, if not decades, to go, don't worry. Yes, your 401(k) and IRAs have taken a significant hit. But history shows that you'll make up 80% of your bear market losses within the first year of the recovery, according to Standard & Poor's Equity Research.
If you're planning to retire in the next few years, the answer is still yes, with a bit of effort. Why? The decade before you quit your job and the first five years that you're out of the work force are vulnerable times. How much your investments earn - or lose - during this time will go a long way toward determining how much money you can afford to spend for the following 30 years or more.
Say you planned to quit this year and begin withdrawing 4% of your retirement funds annually. If you started with a $1 million retirement portfolio last year (split 70% stocks, 30% bonds), the market has already cut that down to $833,000. That means if you pulled 4% of your remaining money out, you'd be left with just under $800,000 after Year One, cutting your odds of having your money last 30 years from nearly 80% to less than 50%.
Sounds scary. But you can fix this problem. For starters, pledge to work one more year. A study from T. Rowe Price found that putting in another 365 days at the job would boost your annual retirement income by 7%. Work three years more and your retirement income could soar by 22%.
By staying at your desk longer, you can also delay taking Social Security benefits. For each year you put off starting your benefits between ages 62 and 70, you boost your Social Security payments by 8%.
What if you don't want to - or can't - work longer? You still have an option: spend less. The traditional advice is to withdraw 4% of your assets in the first year of retirement and boost subsequent withdrawals by the inflation rate. But in this type of market, consider withholding your inflation adjustments for the first three years after you retire. T. Rowe Price found that a retiree with a 55% stock/45% bond allocation in 2000 would have cut his odds of running out of money by half simply by following this approach.
What should I be doing with my portfolio?
Every long-term investor has to face nerve-rattling times like this - likely more than once - and your success will hinge on your ability to keep a cooler head than many others around you.
If you own a diversified portfolio, your asset-allocation strategy has probably protected you from the worst of the storm. While the S&P 500 has lost more than a quarter of its value over the past year, a portfolio consisting of 70% stocks and 30% bonds has fallen around 17%, thanks to the gains fixed-income funds enjoyed.
Still, markets like this are a good time to check if your asset-allocation strategy is still appropriate for your time horizon and if you need to rebalance. You'll likely find that you own too big a stake in bonds - or at least more than you bargained for.
Let's go back to that portfolio of 70% stocks and 30% bonds. If you hadn't traded in the past year, the market would have shifted your mix to 62% stocks and 38% fixed income. That might feel good now because bonds are less volatile, but it will mean that you will lose out on the higher returns on stocks when the market eventually recovers.
If you're selling bonds to add to stocks, what's safe to buy? It's fair to assume that the government's efforts to bail out Wall Street will add to our national debt, which will likely push up interest rates. Basic-materials stocks tend to do well when rates rise. So consider T. Rowe Price New Era (PRNEX), which owns energy and mining stocks. New Era is a member of the Money 70, our list of recommended funds and ETFs.
Also, beef up your blue chips. As Lehman and WaMu shareholders learned, not every large company can weather tough times. But as a whole, the category clearly can. The Vanguard 500 Index (VFINX) is the safest way to invest in the largest American companies.
Another sound option is the Fairholme fund (FAIRX). The managers of this Money 70 fund follow the Warren Buffett school of investing. They buy a stock only if it's trading well below its intrinsic value - perhaps a richly populated universe after this market meltdown.
If you see that the bond portion of your portfolio is underperforming, consider Treasury Inflation-Protected Securities (TIPS), one of the few types of bonds that can do well when rates rise.
I'm retired. What does this mean for me?
If you're living off a collection of dividend-paying stocks, it may feel as if you've been hit by the perfect storm. Not only have financial stocks, which generate around a quarter of all the dividends produced by the S&P 500, taken a huge beating - they've sunk nearly 45% since the start of this bear - but 30 blue-chip financial firms have cut their dividends.
Worse still, not all of the income you'll receive this year will be eligible for the beneficial 15% tax rate. For dividends to qualify for the rate, the company that issues them must pay taxes on them. And since many banks and brokers are reporting huge losses, they may not owe a penny to Uncle Sam this year.
As long as you diversify among different stocks as well as different sectors, dividend investing still has a lot of appeal. One strategy that's holding up, relatively speaking: Instead of focusing on companies with the highest yields - which could simply be a sign that a payer's share price has tanked or the dividend is at risk - concentrate on companies that are consistently growing their payouts over time. By doing so, the Vanguard Dividend Growth fund (VDIGX) has kept its exposure to the financial sector to only around 11%, and the fund is down just 10% so far this year, about half what the overall market has lost.
In the wake of the near failure of AIG, another worry for retirees is whether to buy an immediate annuity. In exchange for handing over a lump sum of money to an insurer, you get monthly or annual payments guaranteed for life with one of these policies. In this environment, it's hard enough to have faith that your financial institution will be around for the next three months, let alone three decades.
But bear in mind that no major insurer has failed in this meltdown. Even though AIG required $85 billion in loan guarantees to stay in business, it was the parent company that needed the help - not its insurance subsidiary.
In the event your insurer does fail, your state's life and health insurance guaranty association will attempt to find another carrier to take over the failed firm's contracts. If that can't be done, state guaranty funds will cover at least $100,000 in benefits (around 20 states cover more).
There is one reason to hold off awhile before you enter a new contract: Rating agencies like A.M. Best, Moody's, Fitch and Standard & Poor's are likely to re-assess the financial health of insurers in the wake of the financial crisis. Wait to see which insurers maintain the highest ratings.
How will I know when things are recovering?
An oft-quoted Warren Buffett bit of wisdom goes that the stock market is designed to transfer money from the active to the patient. Keep that in mind when you wonder when this crisis is over for good.
Let's remember what this crisis is all about. It's not just about problems with bad mortgages and toxic mortgage-backed bonds. "That's just the tip of the iceberg," says Charles de Vaulx, portfolio manager for International Value Advisers. The reason that we're still stuck in a bear market and that loans are hard to come by is the ongoing crisis in confidence in the financial system that greases the wheels of the economy. It may take months, if not longer, for the markets to get enough courage to overcome this.
Whether you're an investor or a would-be borrower looking for a sign of better days to come, pay attention to the so-called overnight London Interbank offered rate. Libor is a rate banks charge one another. The lower it is, the greater the likelihood that banks are willing to lend freely - and the sooner this credit crisis may be over.
Historically, Libor has run fairly close to the federal funds rate, which the Fed is currently targeting at 2%. But lately the overnight Libor has fluctuated between around 3% and 6%, an indication that banks still perceive a great deal of risk in the market.
In the short run, that's not great news for investors or consumers waiting for banks to start lending again. In the long run, however, the fact that banks are starting to consider risk isn't necessarily bad. After all, says Steven Romick, manager of the FPA Crescent Fund, "the reason we're in this mess is that financial institutions tried to make money without any regard to the concept of risk
Job Market
By Stephen Gandel and Paul J. Lim
It's rough out there, but most of us can weather the storm as long as we keep getting a paycheck. With all this talk of the R-word though, economists predict that lots of workers are going to end up on the chopping block. Could your job be next?
How safe is my job?
If you are an investment banker, you already know the answer. If you work in most other fields, you're likely nervous but not panic-stricken. In the past year the U.S. economy has shed just over 550,000 jobs, according to the Bureau of Labor Statistics, but most of the layoffs have come in home building, the auto industry and financial services. Take those three industries out of the equation and our economy has created 90,000 jobs.
"Companies are continuing to add executive positions even as the market slows," says Mark Anderson, president of ExecuNet, a Norwalk, Conn. firm that tracks management hiring.
The recent financial turmoil could make the jobs outlook tougher, and not just for Wall Street types. If business lending stays choked off, hiring will suffer. In a deeper recession, some economists predict more than 1 million jobs will be lost in 2009.
Now is the time to make sure your emergency fund is in place. Three months of expenses is standard, but if you are in an at-risk industry, sock away enough for six months to a year.
At work, lower your chances of being the first out the door by making yourself valuable - and conspicuous. This may be the time to reconsider your flexible schedule. Demonstrate that you can find ways to bring in revenue and cut costs, don't be afraid to point out the good job you and your team are doing and, to be safe, step up your networking, both inside and outside your company.
It's rough out there, but most of us can weather the storm as long as we keep getting a paycheck. With all this talk of the R-word though, economists predict that lots of workers are going to end up on the chopping block. Could your job be next?
How safe is my job?
If you are an investment banker, you already know the answer. If you work in most other fields, you're likely nervous but not panic-stricken. In the past year the U.S. economy has shed just over 550,000 jobs, according to the Bureau of Labor Statistics, but most of the layoffs have come in home building, the auto industry and financial services. Take those three industries out of the equation and our economy has created 90,000 jobs.
"Companies are continuing to add executive positions even as the market slows," says Mark Anderson, president of ExecuNet, a Norwalk, Conn. firm that tracks management hiring.
The recent financial turmoil could make the jobs outlook tougher, and not just for Wall Street types. If business lending stays choked off, hiring will suffer. In a deeper recession, some economists predict more than 1 million jobs will be lost in 2009.
Now is the time to make sure your emergency fund is in place. Three months of expenses is standard, but if you are in an at-risk industry, sock away enough for six months to a year.
At work, lower your chances of being the first out the door by making yourself valuable - and conspicuous. This may be the time to reconsider your flexible schedule. Demonstrate that you can find ways to bring in revenue and cut costs, don't be afraid to point out the good job you and your team are doing and, to be safe, step up your networking, both inside and outside your company.
Credit Market
By Stephen Gandel and Paul J. Lim
In today's world, most of us need to borrow to buy a home or a car, go to school or start a business. But the credit crisis has banks too scared to lend. Is it really as bad as they say? Here's what it takes to get funding in today's tough market.
How tough is it really to get a loan today?
For months you've likely been hearing about (or even experiencing) tight credit: frozen home-equity lines of credit, lower credit-card limits, tougher loan standards. That could be just the beginning. One reason regulators have been so anxious to step in during this crisis is the fear that consumer and business borrowing will be shut off altogether.
For now, though, many people are still able to get loans. "If you have good credit, job stability and low debt, there is a good likelihood that you will get a mortgage," says Marc Savitt, president of the National Association of Mortgage Brokers.
In general you'll need a 660 credit score and a 10% down payment to qualify for a loan. Another important criterion is how much of your monthly income goes to repaying all your debts. Today lenders want you to cap that at 41% of your income.
Getting a small business loan is similarly tough. But if you can borrow and have the itch to strike out on your own, small business experts say economic downturns can be a good time to start a venture. In bad times, you may find better deals on, say, advertising and office space. And some of the land mines are more apparent.
"When existing companies are stumbling, it's more obvious what mistakes are to be avoided," says Bob Chalfin, a Metuchen, N.J. small business adviser and a lecturer at the Wharton business school. "When there is change, there is opportunity."
In today's world, most of us need to borrow to buy a home or a car, go to school or start a business. But the credit crisis has banks too scared to lend. Is it really as bad as they say? Here's what it takes to get funding in today's tough market.
How tough is it really to get a loan today?
For months you've likely been hearing about (or even experiencing) tight credit: frozen home-equity lines of credit, lower credit-card limits, tougher loan standards. That could be just the beginning. One reason regulators have been so anxious to step in during this crisis is the fear that consumer and business borrowing will be shut off altogether.
For now, though, many people are still able to get loans. "If you have good credit, job stability and low debt, there is a good likelihood that you will get a mortgage," says Marc Savitt, president of the National Association of Mortgage Brokers.
In general you'll need a 660 credit score and a 10% down payment to qualify for a loan. Another important criterion is how much of your monthly income goes to repaying all your debts. Today lenders want you to cap that at 41% of your income.
Getting a small business loan is similarly tough. But if you can borrow and have the itch to strike out on your own, small business experts say economic downturns can be a good time to start a venture. In bad times, you may find better deals on, say, advertising and office space. And some of the land mines are more apparent.
"When existing companies are stumbling, it's more obvious what mistakes are to be avoided," says Bob Chalfin, a Metuchen, N.J. small business adviser and a lecturer at the Wharton business school. "When there is change, there is opportunity."
Real Estate
By Stephen Gandel and Paul J. Lim
The global contagion has spread, but the source of the crisis is still bleeding. From struggling homeowners who can't make their payments to would-be buyers, almost everyone is wondering where home prices are heading next. Here's some insight.
Is there any hope for home prices?
The burst real estate bubble that kicked off this crisis is unlikely to reinflate quickly. "I don't see the slump in housing prices ending anytime soon," says Dean Baker, co-director of the Center for Economic Policy and Research. The government takeover of Fannie Mae and Freddie Mac lowered mortgage rates briefly (which helps buyers afford your home).
But the bankruptcy of Lehman Brothers, the failure of Washington Mutual and the sale of Wachovia, as well as the stock market sell-off, have made investors nervous about everything, mortgage bonds included. And that has pushed home-loan rates right back up.
The proposed government bailout could help home prices if the banks that get relief turn around and make new loans, but it's not clear that they will. More important, housing prices are not just a factor of mortgage rates. Foreclosures and slow sales have left 4-million-plus homes on the market, nearly half a million more than two years ago. That could get worse before it gets better if rising unemployment translates to fewer buyers to work off that fat inventory.
"In the long run none of what we're doing now is going to matter that much to real estate," says Wellesley economics professor Karl Case. "Home prices have to do with the scarcity of land and perception of that scarcity."
Until homes for sale are again scarce, it will continue to be better to be a buyer than a seller. Most economists expect another 10% drop in housing prices nationally over the next year. Some, like Nouriel Roubini of New York University, say a 15% to 20% drop is more likely.
The global contagion has spread, but the source of the crisis is still bleeding. From struggling homeowners who can't make their payments to would-be buyers, almost everyone is wondering where home prices are heading next. Here's some insight.
Is there any hope for home prices?
The burst real estate bubble that kicked off this crisis is unlikely to reinflate quickly. "I don't see the slump in housing prices ending anytime soon," says Dean Baker, co-director of the Center for Economic Policy and Research. The government takeover of Fannie Mae and Freddie Mac lowered mortgage rates briefly (which helps buyers afford your home).
But the bankruptcy of Lehman Brothers, the failure of Washington Mutual and the sale of Wachovia, as well as the stock market sell-off, have made investors nervous about everything, mortgage bonds included. And that has pushed home-loan rates right back up.
The proposed government bailout could help home prices if the banks that get relief turn around and make new loans, but it's not clear that they will. More important, housing prices are not just a factor of mortgage rates. Foreclosures and slow sales have left 4-million-plus homes on the market, nearly half a million more than two years ago. That could get worse before it gets better if rising unemployment translates to fewer buyers to work off that fat inventory.
"In the long run none of what we're doing now is going to matter that much to real estate," says Wellesley economics professor Karl Case. "Home prices have to do with the scarcity of land and perception of that scarcity."
Until homes for sale are again scarce, it will continue to be better to be a buyer than a seller. Most economists expect another 10% drop in housing prices nationally over the next year. Some, like Nouriel Roubini of New York University, say a 15% to 20% drop is more likely.
Insurance
By Stephen Gandel and Paul J. Lim
When AIG had to be rescued by the U.S. government, holders of annuities and home insurance policies everywhere got spooked. If AIG could be vulnerable, couldn't anybody? To find out what could happen to your policy in the event of catastrophic failure, read on.
What would happen if my insurer went under?
You may have wondered that very thing before the federal government stepped in with an $85 billion loan guarantee to save American International Group from bankruptcy. Since then no other large insurance company appears to be in similar peril. That's because few insure mortgage bonds, the business that contributed to AIG's problems.
In the event that your insurer goes belly up, you have protections. If you have an outstanding claim when your insurer fails, a state guaranty fund will cover it. The rules vary, but funds typically pay up to $300,000 in claims on most policies.
In nearly all states, disability payouts have no caps. With a variable annuity, you are completely protected because you're investing in mutual-fund-like separate accounts held in your name, and insurance companies can't touch those assets when they liquidate.
If you have yet to collect on your insurance policy, will you face any coverage gaps? With life insurance, you shouldn't lose coverage: In past failures, regulators have moved policies of failed insurers to healthy ones. For most other types of insurance, you'll have 30 days to find another insurer. And if you have paid in advance for, say, a year's worth of homeowners insurance, you can apply for a refund from your state insurance fund.
When AIG had to be rescued by the U.S. government, holders of annuities and home insurance policies everywhere got spooked. If AIG could be vulnerable, couldn't anybody? To find out what could happen to your policy in the event of catastrophic failure, read on.
What would happen if my insurer went under?
You may have wondered that very thing before the federal government stepped in with an $85 billion loan guarantee to save American International Group from bankruptcy. Since then no other large insurance company appears to be in similar peril. That's because few insure mortgage bonds, the business that contributed to AIG's problems.
In the event that your insurer goes belly up, you have protections. If you have an outstanding claim when your insurer fails, a state guaranty fund will cover it. The rules vary, but funds typically pay up to $300,000 in claims on most policies.
In nearly all states, disability payouts have no caps. With a variable annuity, you are completely protected because you're investing in mutual-fund-like separate accounts held in your name, and insurance companies can't touch those assets when they liquidate.
If you have yet to collect on your insurance policy, will you face any coverage gaps? With life insurance, you shouldn't lose coverage: In past failures, regulators have moved policies of failed insurers to healthy ones. For most other types of insurance, you'll have 30 days to find another insurer. And if you have paid in advance for, say, a year's worth of homeowners insurance, you can apply for a refund from your state insurance fund.
Savings
By Stephen Gandel and Paul J. Lim
With banks falling like dominos, there's a lot of worry about the solvency of financial institutions. Some people are pulling their cash out of the stock market and putting it into FDIC-insured accounts, while others are hiding theirs under their mattress. Before you make any drastic moves, read these answers to some common questions about your savings.
Are there any safe havens left?
It sure doesn't feel like it. Even conservative investments - like ultrashort- term bond funds and a single money market fund - have lost value recently. But rest assured, your cash accounts are still extremely safe. To shore up confidence in money-market mutual funds after a prominent portfolio "broke the buck," the Treasury Department launched an insurance plan to guarantee their value.
What's more, bank money-market accounts and CDs are as protected as ever. While it's certainly hard to tell which banks will eventually survive this financial meltdown, your accounts are FDIC-insured.
Finally, if you're looking for a safe option within your 401(k), consider a stable value fund. These portfolios often invest in a diversified mix of short- to intermediate- term bonds that are backed by different insurers. Plus, they've been yielding around 4% lately.
Is my bank or brokerage going to disappear?
Even with the government stepping in to buy up the crummy mortgage-backed securities that are endangering the health of so many banks and brokers, this relief won't be immediate. It may take weeks for the Treasury Department to put together a team to evaluate these bonds. In the meantime, more banks and brokers could go under or be forced to sell out to healthier firms.
Still, the tally of failed banks is unlikely to come close to the number we saw in the savings and loan crisis. Between 1986 and 1995, 1,043 thrifts went under (though many of them were tiny). So far this year, only 13 banks and savings and loans have failed, according to the Federal Deposit Insurance Corporation. That includes Washington Mutual, the nation's largest S&L, which was shut down before its deposits were sold to J.P. Morgan Chase (JPM, Fortune 500).
Regardless of what the final tally is, it's important to keep in mind that your bank deposits are for the most part safe. Deposits up to $250,000 per person per institution and $500,000 for joint accounts will be protected by the FDIC (The FDIC temporarily raised the limits from $100,000 and $200,000 respectively through December 30, 2009.). Some retirement accounts are covered up to $250,000.
Investment banks and brokerages have also come under pressure. Here too you are mostly protected. Unlike commercial banks, which use your deposits to lend to other customers, brokerages are supposed to segregate your assets from theirs. So if you own 1,000 shares of General Electric and your brokerage collapses, your 1,000 shares of GE should still be there and will most likely be transferred to another broker on your behalf.
If for any reason your failed broker can't locate your securities, up to $500,000 of your assets per account is covered by the Securities Investor Protection Corporation, a nonprofit funded by member firms. With a few exceptions, SIPC limits its safety net to SEC-registered investments. So while your stocks, bonds and mutual funds will be covered, foreign currency, precious metals and commodity futures contracts won't be.
With banks falling like dominos, there's a lot of worry about the solvency of financial institutions. Some people are pulling their cash out of the stock market and putting it into FDIC-insured accounts, while others are hiding theirs under their mattress. Before you make any drastic moves, read these answers to some common questions about your savings.
Are there any safe havens left?
It sure doesn't feel like it. Even conservative investments - like ultrashort- term bond funds and a single money market fund - have lost value recently. But rest assured, your cash accounts are still extremely safe. To shore up confidence in money-market mutual funds after a prominent portfolio "broke the buck," the Treasury Department launched an insurance plan to guarantee their value.
What's more, bank money-market accounts and CDs are as protected as ever. While it's certainly hard to tell which banks will eventually survive this financial meltdown, your accounts are FDIC-insured.
Finally, if you're looking for a safe option within your 401(k), consider a stable value fund. These portfolios often invest in a diversified mix of short- to intermediate- term bonds that are backed by different insurers. Plus, they've been yielding around 4% lately.
Is my bank or brokerage going to disappear?
Even with the government stepping in to buy up the crummy mortgage-backed securities that are endangering the health of so many banks and brokers, this relief won't be immediate. It may take weeks for the Treasury Department to put together a team to evaluate these bonds. In the meantime, more banks and brokers could go under or be forced to sell out to healthier firms.
Still, the tally of failed banks is unlikely to come close to the number we saw in the savings and loan crisis. Between 1986 and 1995, 1,043 thrifts went under (though many of them were tiny). So far this year, only 13 banks and savings and loans have failed, according to the Federal Deposit Insurance Corporation. That includes Washington Mutual, the nation's largest S&L, which was shut down before its deposits were sold to J.P. Morgan Chase (JPM, Fortune 500).
Regardless of what the final tally is, it's important to keep in mind that your bank deposits are for the most part safe. Deposits up to $250,000 per person per institution and $500,000 for joint accounts will be protected by the FDIC (The FDIC temporarily raised the limits from $100,000 and $200,000 respectively through December 30, 2009.). Some retirement accounts are covered up to $250,000.
Investment banks and brokerages have also come under pressure. Here too you are mostly protected. Unlike commercial banks, which use your deposits to lend to other customers, brokerages are supposed to segregate your assets from theirs. So if you own 1,000 shares of General Electric and your brokerage collapses, your 1,000 shares of GE should still be there and will most likely be transferred to another broker on your behalf.
If for any reason your failed broker can't locate your securities, up to $500,000 of your assets per account is covered by the Securities Investor Protection Corporation, a nonprofit funded by member firms. With a few exceptions, SIPC limits its safety net to SEC-registered investments. So while your stocks, bonds and mutual funds will be covered, foreign currency, precious metals and commodity futures contracts won't be.
The Stock Market
By Stephen Gandel and Paul J. Lim
Wondering when the roller-coaster ride will end? Should you bail out now? Here are some answers to your questions about your stock portfolio in the current economy and what your next move should be.
When will stocks bounce back?
Don't expect an immediate rebound. "Investors shouldn't get overly enthusiastic," says Jean-Marie Eveillard, portfolio manager for the First Eagle Funds. Why? Even if Washington gets its act together, the economy will remain a drag. "In a time of slow growth, profits will not be that great," Eveillard says.
Remember too that a massive government rescue plan could have unintended consequences. If the budget deficit were to balloon - as many economists assume it would - that could further weaken the dollar, which would lead to another bout of inflation fears.
Rising inflation and a falling dollar, in turn, would likely boost market interest rates, since it will take a big carrot to entice foreign investors to buy U.S. bonds. When rates are on the rise, investors typically aren't willing to pay up for stocks in the form of higher price/earnings ratios.
Economists are predicting that a recession could last through next spring or even the fall. Does this mean stocks will languish that entire time? No. Equities have a knack for rallying in anticipation of an eventual recovery. So a stock market rebound could take place sometime in the first half of 2009. Until then, don't hold your breath.
If the outlook is so bad, why not dump stocks?
Selling stocks after they've sunk to a three-year low in hopes of buying them back after they're trading at higher prices is a surefire recipe for losing your shirt.
While it's understandable to want to flee, Bohemia, N.Y. financial planner Ronald Rogé suggests taking a cue from Warren Buffett. "Here's the smartest guy on the block, and his firm, Berkshire Hathaway, is down like most other stocks this year." But instead of looking to sell, Buffett is buying. Recently he agreed to plow $5 billion into Goldman Sachs.
Still have the urge to purge your portfolio? Consider this: So far this year, fund investors have yanked more money out of their stock funds than they've put in, marking only the third time in recent memory this has happened. The other two times? In 2002, just before a five-year bull market, and 1988, the start of a 12-year bull.
"If you leave the market now entirely, you probably won't make it back in time to enjoy the recovery," says Torrance, Calif. financial planner Phillip Cook. According to Standard & Poor's, equities typically recoup a third of what they lost in a bear market in the first 40 days of a new bull.
Are stocks still best for the long run?
If you've been a stock investor over the past decade, you probably feel like the mythical Sisyphus: You've been trying to roll your portfolio up the hill, only to see the market keep batting it back down. Stocks are trading lower than they were at the start of 2000. Even boring bonds have beaten equities during this time.
But disappointing performance doesn't erase the case for stocks. Over the long term (meaning more than a decade), equities give you something fixed-income investments can't: a share of growth. The benefit of owning a stake in a company - as the Treasury Department, no doubt, understands with the majority position it is taking in exchange for helping AIG - is that you get to share in the earnings of the firm. And because stock prices, over time, reflect corporate profit growth, you're likely to far outpace the long-term rate of inflation.
If your faith in stocks is still wavering, consider the last time they performed so poorly: the 1930s. "What if you concluded then that stocks weren't the best place to be?" says Alan Skrainka, chief market strategist for Edward Jones. "You'd have missed out on decades of bull markets."
Wondering when the roller-coaster ride will end? Should you bail out now? Here are some answers to your questions about your stock portfolio in the current economy and what your next move should be.
When will stocks bounce back?
Don't expect an immediate rebound. "Investors shouldn't get overly enthusiastic," says Jean-Marie Eveillard, portfolio manager for the First Eagle Funds. Why? Even if Washington gets its act together, the economy will remain a drag. "In a time of slow growth, profits will not be that great," Eveillard says.
Remember too that a massive government rescue plan could have unintended consequences. If the budget deficit were to balloon - as many economists assume it would - that could further weaken the dollar, which would lead to another bout of inflation fears.
Rising inflation and a falling dollar, in turn, would likely boost market interest rates, since it will take a big carrot to entice foreign investors to buy U.S. bonds. When rates are on the rise, investors typically aren't willing to pay up for stocks in the form of higher price/earnings ratios.
Economists are predicting that a recession could last through next spring or even the fall. Does this mean stocks will languish that entire time? No. Equities have a knack for rallying in anticipation of an eventual recovery. So a stock market rebound could take place sometime in the first half of 2009. Until then, don't hold your breath.
If the outlook is so bad, why not dump stocks?
Selling stocks after they've sunk to a three-year low in hopes of buying them back after they're trading at higher prices is a surefire recipe for losing your shirt.
While it's understandable to want to flee, Bohemia, N.Y. financial planner Ronald Rogé suggests taking a cue from Warren Buffett. "Here's the smartest guy on the block, and his firm, Berkshire Hathaway, is down like most other stocks this year." But instead of looking to sell, Buffett is buying. Recently he agreed to plow $5 billion into Goldman Sachs.
Still have the urge to purge your portfolio? Consider this: So far this year, fund investors have yanked more money out of their stock funds than they've put in, marking only the third time in recent memory this has happened. The other two times? In 2002, just before a five-year bull market, and 1988, the start of a 12-year bull.
"If you leave the market now entirely, you probably won't make it back in time to enjoy the recovery," says Torrance, Calif. financial planner Phillip Cook. According to Standard & Poor's, equities typically recoup a third of what they lost in a bear market in the first 40 days of a new bull.
Are stocks still best for the long run?
If you've been a stock investor over the past decade, you probably feel like the mythical Sisyphus: You've been trying to roll your portfolio up the hill, only to see the market keep batting it back down. Stocks are trading lower than they were at the start of 2000. Even boring bonds have beaten equities during this time.
But disappointing performance doesn't erase the case for stocks. Over the long term (meaning more than a decade), equities give you something fixed-income investments can't: a share of growth. The benefit of owning a stake in a company - as the Treasury Department, no doubt, understands with the majority position it is taking in exchange for helping AIG - is that you get to share in the earnings of the firm. And because stock prices, over time, reflect corporate profit growth, you're likely to far outpace the long-term rate of inflation.
If your faith in stocks is still wavering, consider the last time they performed so poorly: the 1930s. "What if you concluded then that stocks weren't the best place to be?" says Alan Skrainka, chief market strategist for Edward Jones. "You'd have missed out on decades of bull markets."
The Economy
By Stephen Gandel and Paul J. Lim
If you're watching the news and scratching your head wondering what bomb hit the economy, you're certainly not alone. It's rough out there. People are losing their jobs, retirement dreams are going up in smoke and personal wealth is plummeting. Here's why it's happening and what it all means.
How did we get here?
By now you likely know that the crisis in the financial markets is the culmination of years of reckless mortgage lending and Wall Street dealmaking. It's the final gasp of the burst housing bubble. But how exactly did this happen?
To find the root cause of Wall Street's woes, you have to go back to the collapse of a different bubble - tech. In 2001, after the dotcom craze ended and the bear market began, the Federal Reserve started aggressively slashing short-term interest rates to stave off recession. By eventually reducing rates to a historically low 1%, the Fed reinflated the economy. But this cheap money sparked a new wave of risk taking.
Homeowners, armed with easy credit, snapped up properties as if they were playing Monopoly. As prices soared, buyers were able to afford ever-larger properties only by taking out risky mortgages that lenders were happily approving with little documentation or money down.
At the same time, Wall Street investment banks got a brilliant idea: bundle the riskiest of these mortgages, then slice and dice these portfolios into tradable bonds to be sold to other banks and investors. Amazingly, bond-rating agencies slapped their highest ratings on the "best" of this debt.
This house of cards came down when subprime borrowers began defaulting on their mortgages. That sent housing prices tumbling, unleashing a domino effect on mortgage-backed securities. Banks and brokerages that had borrowed money to boost the impact of those investments had to race to raise capital.
Some, like Merrill Lynch, were forced to sell. Others, like Lehman Brothers, weren't so lucky. "What we always tell investors is beware of too much leverage in a company," says Brian Rogers, chairman and portfolio manager for T. Rowe Price. "Leverage is the enemy of the investor."
Sure, everyone from former Fed chairman Alan Greenspan to your friends and neighbors played a role in stoking this casino culture. But troubled banks and brokerages can't pass the blame. "These firms closed their eyes and made very bad bets on risky securities that they didn't truly understand," says Jeremy Siegel, finance professor at the University of Pennsylvania's Wharton business school. "Investments that they did not have to make led to their demise."
How bad could the economy get?
Before the meltdown, economists fell into two camps: those who thought the economy had already slipped into recession and those who thought a recession could still be avoided.
While forecasters still differ on the timing and severity of a downturn, "the consensus view is that we're headed for recession and will be in one until next year," says Mark Zandi, chief economist for Moody's Economy.com.
Corporate profits are already on the verge of falling for a fifth straight quarter, according to Thomson Financial. The next shoe to drop will be consumer spending. "Two years ago, people were using their homes as ATMs, pumping out cash," says Robert Arnott, chairman of the investment consulting firm Research Affiliates in Pasadena. "As banks continue to tighten their lending, that spending is disappearing."
But softer profits and slower spending haven't translated into widespread layoffs yet. "This is the strongest recessionary job market in 40 years," says James Paulsen, chief investment strategist of Wells Capital Management. A jump in unemployment could still be coming, especially given bank and brokerage failures and mergers. But outside of finance and housing, much of the rest of the economy is strong, he says.
The weak dollar is boosting demand for our goods abroad, and lower gas prices are making Americans feel more flush. Add in the cash that the Fed has been hosing into the banking system and we are bound to see growth in 2009. "If all this stimulus has no effect on the economy, that would be a rarity indeed," says Paulsen.
Standard & Poor's chief economist David Wyss expects a mild recession that ends next spring. "Gradually we will regain confidence in the market. Lower oil prices and a falling trade deficit will help," he says. "This is a financial panic, not an economic one."
Of course, that could change if the financial panic doesn't abate soon. If banks remain too scared or broke to lend, would-be home buyers will be frozen out of the market. If that happens, home values could fall even more, crimping confidence and putting the brakes on the economy's greatest engine: the consumer.
Does all this mean I'll pay higher taxes?
Yes. "Taxes will rise regardless of who wins the Presidency," predicts Greg Valliere, chief political strategist for Stanford Group Co.
It's impossible to say what the final bill for rescuing Wall Street will be. Even before the bill to buy $700 billion of unwanted mortgage-backed debt, the government had already signed on for nearly $365 billion in loan guarantees and other costs.
The eventual price tag will depend in part on the housing market. If it recovers by 2010, the value of mortgage-backed securities could rise, minimizing the tab for taxpayers, says Brian Bethune, chief U.S. financial economist for Global Insight.
"On the other hand," Bethune adds, "if the economy continues to tank into a deeper recession, dragging the housing market along with it, then the costs to the taxpayers easily could escalate to several hundred billions of dollars."
Under Treasury Secretary Henry Paulson's original debt-buyback proposal, some economists predicted the federal deficit could soar to $900 billion in 2009. Even without a bailout, the federal budget was expected to hit $482 billion next year. If government aid pads that figure by $200 billion, the deficit will be back to where it stood in the 1980s - around 5% of GDP. At the very least, that will make it hard for a future President to keep tax-cut promises.
If you're watching the news and scratching your head wondering what bomb hit the economy, you're certainly not alone. It's rough out there. People are losing their jobs, retirement dreams are going up in smoke and personal wealth is plummeting. Here's why it's happening and what it all means.
How did we get here?
By now you likely know that the crisis in the financial markets is the culmination of years of reckless mortgage lending and Wall Street dealmaking. It's the final gasp of the burst housing bubble. But how exactly did this happen?
To find the root cause of Wall Street's woes, you have to go back to the collapse of a different bubble - tech. In 2001, after the dotcom craze ended and the bear market began, the Federal Reserve started aggressively slashing short-term interest rates to stave off recession. By eventually reducing rates to a historically low 1%, the Fed reinflated the economy. But this cheap money sparked a new wave of risk taking.
Homeowners, armed with easy credit, snapped up properties as if they were playing Monopoly. As prices soared, buyers were able to afford ever-larger properties only by taking out risky mortgages that lenders were happily approving with little documentation or money down.
At the same time, Wall Street investment banks got a brilliant idea: bundle the riskiest of these mortgages, then slice and dice these portfolios into tradable bonds to be sold to other banks and investors. Amazingly, bond-rating agencies slapped their highest ratings on the "best" of this debt.
This house of cards came down when subprime borrowers began defaulting on their mortgages. That sent housing prices tumbling, unleashing a domino effect on mortgage-backed securities. Banks and brokerages that had borrowed money to boost the impact of those investments had to race to raise capital.
Some, like Merrill Lynch, were forced to sell. Others, like Lehman Brothers, weren't so lucky. "What we always tell investors is beware of too much leverage in a company," says Brian Rogers, chairman and portfolio manager for T. Rowe Price. "Leverage is the enemy of the investor."
Sure, everyone from former Fed chairman Alan Greenspan to your friends and neighbors played a role in stoking this casino culture. But troubled banks and brokerages can't pass the blame. "These firms closed their eyes and made very bad bets on risky securities that they didn't truly understand," says Jeremy Siegel, finance professor at the University of Pennsylvania's Wharton business school. "Investments that they did not have to make led to their demise."
How bad could the economy get?
Before the meltdown, economists fell into two camps: those who thought the economy had already slipped into recession and those who thought a recession could still be avoided.
While forecasters still differ on the timing and severity of a downturn, "the consensus view is that we're headed for recession and will be in one until next year," says Mark Zandi, chief economist for Moody's Economy.com.
Corporate profits are already on the verge of falling for a fifth straight quarter, according to Thomson Financial. The next shoe to drop will be consumer spending. "Two years ago, people were using their homes as ATMs, pumping out cash," says Robert Arnott, chairman of the investment consulting firm Research Affiliates in Pasadena. "As banks continue to tighten their lending, that spending is disappearing."
But softer profits and slower spending haven't translated into widespread layoffs yet. "This is the strongest recessionary job market in 40 years," says James Paulsen, chief investment strategist of Wells Capital Management. A jump in unemployment could still be coming, especially given bank and brokerage failures and mergers. But outside of finance and housing, much of the rest of the economy is strong, he says.
The weak dollar is boosting demand for our goods abroad, and lower gas prices are making Americans feel more flush. Add in the cash that the Fed has been hosing into the banking system and we are bound to see growth in 2009. "If all this stimulus has no effect on the economy, that would be a rarity indeed," says Paulsen.
Standard & Poor's chief economist David Wyss expects a mild recession that ends next spring. "Gradually we will regain confidence in the market. Lower oil prices and a falling trade deficit will help," he says. "This is a financial panic, not an economic one."
Of course, that could change if the financial panic doesn't abate soon. If banks remain too scared or broke to lend, would-be home buyers will be frozen out of the market. If that happens, home values could fall even more, crimping confidence and putting the brakes on the economy's greatest engine: the consumer.
Does all this mean I'll pay higher taxes?
Yes. "Taxes will rise regardless of who wins the Presidency," predicts Greg Valliere, chief political strategist for Stanford Group Co.
It's impossible to say what the final bill for rescuing Wall Street will be. Even before the bill to buy $700 billion of unwanted mortgage-backed debt, the government had already signed on for nearly $365 billion in loan guarantees and other costs.
The eventual price tag will depend in part on the housing market. If it recovers by 2010, the value of mortgage-backed securities could rise, minimizing the tab for taxpayers, says Brian Bethune, chief U.S. financial economist for Global Insight.
"On the other hand," Bethune adds, "if the economy continues to tank into a deeper recession, dragging the housing market along with it, then the costs to the taxpayers easily could escalate to several hundred billions of dollars."
Under Treasury Secretary Henry Paulson's original debt-buyback proposal, some economists predicted the federal deficit could soar to $900 billion in 2009. Even without a bailout, the federal budget was expected to hit $482 billion next year. If government aid pads that figure by $200 billion, the deficit will be back to where it stood in the 1980s - around 5% of GDP. At the very least, that will make it hard for a future President to keep tax-cut promises.
Wednesday, October 8, 2008
The Decline of Men
(Fortune Magazine) -- The mood in the ballroom at Cipriani Wall Street was exultant as several hundred influential New Yorkers gathered last year at the Women Who Make a Difference gala to benefit the National Council for Research on Women. Dina Dublon, a PepsiCo board member and former CFO of J.P. Morgan Chase, introduced one of the evening's honorees, PepsiCo chairman Steve Reinemund, who was about to hand over his post to his chosen successor, Indra Nooyi.
In her remarks, Dublon noted that Reinemund was the first man ever to receive an award from the group, adding that he was "part of our No Man Left Behind program." The mostly female audience laughed appreciatively, but the truth behind the jest stirred conversation. The suddenly pensive diners traded stories about men they knew who had lost their jobs or their marriages or both, and were now basically idle, taking up golf or the piano, writing that novel, doing nothing. The women spoke about brothers, sons, nephews, and husbands. "It's weird how everyone has a story like this," remarked a woman officer from a Fortune 1,000 company. "There's definitely something going on."
What's going on is a conundrum with economic and cultural ramifications for both men and women. From the classroom to the boardroom, American men are losing ground. It affects affluent white men in the heartland and young immigrants in the Southwest, computer nerds and family guys. To some extent it's the inevitable result of greater competition from women - as barriers have fallen, women have achieved according to their potential.
But it raises a critical question: If the playing field is level, why are so many men tripping up and dropping out? Why have they failed to keep up not only with women but with the higher competitive standards of the global marketplace? That failure is not just eroding the ability of men to earn a living and become contributing members of society but also undermining the very definition of what it means to be a man. No wonder that cable reality shows like Ice Road Truckers and Deadliest Catch, which glorify men who do dangerous, physically demanding jobs, have struck a nostalgic chord in the zeitgeist.
America's gender divide starts in elementary school and progresses through college, where women now earn 60% of all degrees (51% of the total U.S. population is female). On American college campuses, women now outnumber men by more than two million.
"Women have been making educational progress, and men are stuck," Tom Mortenson, senior scholar for the Pell Institute for the Study of Opportunity in Higher Education, told the Associated Press. "They haven't just fallen behind women. They have fallen behind changes in the job market."
Those changes tend to favor women, whose innate networking and social skills often give them an edge in the service industry, now the fastest-growing sector of the U.S. economy. In corporate America the cycle has accelerated because women tend to know their customers: other women. The ability of women consumers to make or break a brand is being felt in industries from publishing to health care. Women, armed with advanced degrees and expanding spending power, are increasingly seen as the decision-makers in housing, autos, and technology.
And that power is showing up in paychecks. While women on average still earn less than men, the gap in some areas has reversed itself. A study by the Citizens Union Foundation calculated that females between the ages of 21 and 30 earned 117% of male wages in the same age group; U.S. Census figures confirm that women in their 20s already make more than their male counterparts in major cities like New York, Los Angeles, Chicago, Boston, Minneapolis, and Dallas.
As many women's earnings have soared, incomes for men, including those with college degrees, have stalled or declined. Ronald Mincy, a professor of social policy at Columbia University, has spent a decade tracking what he considers a very ominous number. "We've seen no growth in the average hourly earnings of men in 25 years - and that is the biggest, most glaring statistic because as the earnings of men go, so go the fortunes of men," he observes.
One consequence could be a painful impact on family life. A pillar of male identity is the ability to work - to earn money and social status to help support a wife and family. "If you're a man," says Mincy, "you can't play house if you're not making enough money at your job."
Most disturbing of all, perhaps, is the drift of able-bodied unemployed men of all ages who are dropping out of the workforce altogether. Among American men in their prime working years - between the ages of 30 and 55 - 13% are not working, up from 5% during the 1960s, according to the New York Times. Most of those men, who number about four million, are former blue-collar workers who have been displaced. But a growing number are college-educated professionals in their 30s and 40s who have been out of a job for years.
While it's been widely noted that women have innate skills that help them thrive in an organization - communication, multitasking, collaboration - what's less well-known is how this extends to global competition. Geert Hofstede, a Dutch psychologist who worked at IBM and now consults at major corporations, has profiled national cultures according to key values, including masculinity. On that index the U.S. scores relatively high at 62, compared with countries like Sweden (5) and Norway (8), but lower than Japan, which has the highest masculinity index in the world at 95. For Christopher Liechty, a design and marketing executive based in Salt Lake City, "Masculine is primarily competitive and prestige-oriented; feminine is primarily nurturing, caring, but that means egalitarianism. Women are more consensus-building."
Liechty notes that when national gender values are overlaid onto corporations, many of those with the most "feminine" traits, including Scandinavian companies like Nokia (NOK), IKEA, Lego, and Volvo, have an inclusive brand identity that often gives them an edge in today's global - and increasingly feminine - markets. The world, it turns out, may be curved after all.
Help for struggling U.S. males will have to take many forms, starting with school. But one way for men to help themselves is to take a few pages from the female playbook: less hierarchy, more networking; less aggression, more consensus.
Not all men are swimming against the tide. "Women are playing a bigger role, but I think it's a good thing," says an affable, 34-year-old software designer in the Washington, D.C., area, who says he has no problems working for a woman (but didn't want his name used). "Change is difficult, though, and some guys will have an identity crisis." To put it in bluntly male terms, those who fail to adapt may find their next position is at the end of an unemployment line.
Adapted from The Decline of Men by Guy Garcia, to be published in October by Harper. Copyright © 2008 by Guy Garcia.
In her remarks, Dublon noted that Reinemund was the first man ever to receive an award from the group, adding that he was "part of our No Man Left Behind program." The mostly female audience laughed appreciatively, but the truth behind the jest stirred conversation. The suddenly pensive diners traded stories about men they knew who had lost their jobs or their marriages or both, and were now basically idle, taking up golf or the piano, writing that novel, doing nothing. The women spoke about brothers, sons, nephews, and husbands. "It's weird how everyone has a story like this," remarked a woman officer from a Fortune 1,000 company. "There's definitely something going on."
What's going on is a conundrum with economic and cultural ramifications for both men and women. From the classroom to the boardroom, American men are losing ground. It affects affluent white men in the heartland and young immigrants in the Southwest, computer nerds and family guys. To some extent it's the inevitable result of greater competition from women - as barriers have fallen, women have achieved according to their potential.
But it raises a critical question: If the playing field is level, why are so many men tripping up and dropping out? Why have they failed to keep up not only with women but with the higher competitive standards of the global marketplace? That failure is not just eroding the ability of men to earn a living and become contributing members of society but also undermining the very definition of what it means to be a man. No wonder that cable reality shows like Ice Road Truckers and Deadliest Catch, which glorify men who do dangerous, physically demanding jobs, have struck a nostalgic chord in the zeitgeist.
America's gender divide starts in elementary school and progresses through college, where women now earn 60% of all degrees (51% of the total U.S. population is female). On American college campuses, women now outnumber men by more than two million.
"Women have been making educational progress, and men are stuck," Tom Mortenson, senior scholar for the Pell Institute for the Study of Opportunity in Higher Education, told the Associated Press. "They haven't just fallen behind women. They have fallen behind changes in the job market."
Those changes tend to favor women, whose innate networking and social skills often give them an edge in the service industry, now the fastest-growing sector of the U.S. economy. In corporate America the cycle has accelerated because women tend to know their customers: other women. The ability of women consumers to make or break a brand is being felt in industries from publishing to health care. Women, armed with advanced degrees and expanding spending power, are increasingly seen as the decision-makers in housing, autos, and technology.
And that power is showing up in paychecks. While women on average still earn less than men, the gap in some areas has reversed itself. A study by the Citizens Union Foundation calculated that females between the ages of 21 and 30 earned 117% of male wages in the same age group; U.S. Census figures confirm that women in their 20s already make more than their male counterparts in major cities like New York, Los Angeles, Chicago, Boston, Minneapolis, and Dallas.
As many women's earnings have soared, incomes for men, including those with college degrees, have stalled or declined. Ronald Mincy, a professor of social policy at Columbia University, has spent a decade tracking what he considers a very ominous number. "We've seen no growth in the average hourly earnings of men in 25 years - and that is the biggest, most glaring statistic because as the earnings of men go, so go the fortunes of men," he observes.
One consequence could be a painful impact on family life. A pillar of male identity is the ability to work - to earn money and social status to help support a wife and family. "If you're a man," says Mincy, "you can't play house if you're not making enough money at your job."
Most disturbing of all, perhaps, is the drift of able-bodied unemployed men of all ages who are dropping out of the workforce altogether. Among American men in their prime working years - between the ages of 30 and 55 - 13% are not working, up from 5% during the 1960s, according to the New York Times. Most of those men, who number about four million, are former blue-collar workers who have been displaced. But a growing number are college-educated professionals in their 30s and 40s who have been out of a job for years.
While it's been widely noted that women have innate skills that help them thrive in an organization - communication, multitasking, collaboration - what's less well-known is how this extends to global competition. Geert Hofstede, a Dutch psychologist who worked at IBM and now consults at major corporations, has profiled national cultures according to key values, including masculinity. On that index the U.S. scores relatively high at 62, compared with countries like Sweden (5) and Norway (8), but lower than Japan, which has the highest masculinity index in the world at 95. For Christopher Liechty, a design and marketing executive based in Salt Lake City, "Masculine is primarily competitive and prestige-oriented; feminine is primarily nurturing, caring, but that means egalitarianism. Women are more consensus-building."
Liechty notes that when national gender values are overlaid onto corporations, many of those with the most "feminine" traits, including Scandinavian companies like Nokia (NOK), IKEA, Lego, and Volvo, have an inclusive brand identity that often gives them an edge in today's global - and increasingly feminine - markets. The world, it turns out, may be curved after all.
Help for struggling U.S. males will have to take many forms, starting with school. But one way for men to help themselves is to take a few pages from the female playbook: less hierarchy, more networking; less aggression, more consensus.
Not all men are swimming against the tide. "Women are playing a bigger role, but I think it's a good thing," says an affable, 34-year-old software designer in the Washington, D.C., area, who says he has no problems working for a woman (but didn't want his name used). "Change is difficult, though, and some guys will have an identity crisis." To put it in bluntly male terms, those who fail to adapt may find their next position is at the end of an unemployment line.
Adapted from The Decline of Men by Guy Garcia, to be published in October by Harper. Copyright © 2008 by Guy Garcia.
Tuesday, October 7, 2008
We'll Pay for it later
Editor's note: Canadian writer Margaret Atwood is the author of more than 35 books of poetry, fiction and nonfiction. Her novels include "The Handmaid's Tale" and "The Blind Assassin," which won the Booker Prize in 2000. Her new book, published this week by House of Anansi Press, is "Payback: Debt and the Shadow Side of Wealth." Atwood says the book "is not a practical guide about how to get out of debt. Instead it examines the underpinnings of the whole structure -- why we human beings have such a thing as a debt-credit system in the first place."
Margaret Atwood says we've come to feel that debt is essential to our lives.
(CNN) -- Unless we value fairness, reciprocity, and honest dealing, and the concept of balances -- for debt and credit depend on them -- and unless we are able to trust our systems, we would not be able to have debt and credit -- no one would lend, because there would be no expectation of ever getting paid back.
What caused the massive financial mess we are in comes back ultimately to these concepts. The rules were too loose, fairness and honest dealing were violated, the balance was upset. We must now restore trust so people will take their pennies out of the sock under the mattress where they are now inclined to store them.
In my part of the world we have a ritual interchange that goes like this:
First person: "Lovely weather we're having."
Second person: "We'll pay for it later."
My part of the world being Canada, where there is a great deal of weather, we always do pay for it later. One person has commented, "That's not Canadian, it's just Presbyterian." Nevertheless, it's a widespread saying among us.
What this ritual interchange reveals is a larger habit of thinking about the more enjoyable things in life: They're only on loan or acquired on credit, and sooner or later the date when they must be paid for will roll around. It's pay-up time. Or payback time, supposing that you haven't paid up.
In any case, the time when whatever is on one side of the balance is weighed against whatever is on the other side -- whether it's your heart, your soul or your debts -- and the final reckoning is made.
The financial world has recently been shaken as a result of the collapse of a debt pyramid involving something called "subprime mortgages" -- a pyramid scheme that most people don't grasp very well, but that boils down to the fact that some large financial institutions peddled mortgages to people who could not possibly pay the monthly rates and then put this snake-oil debt into cardboard boxes with impressive labels on them and sold them to institutions and hedge funds that thought they were worth something.
A friend of mine from the United States writes: "I used to have three banks and a mortgage company. Bank number one bought the other two and is now trying hard to buy the mortgage company, which is bankrupt, only it was revealed this morning that the last bank standing is also in serious trouble.
"Now they are trying to renegotiate with the mortgage company. Question One: If your company is going broke, why would you want to buy a company whose insolvency is front-page news? Question Two: If all the lenders go broke, will the borrowers get off the hook?
"You can't imagine the chagrin of the credit-loving American. I gather that whole neighborhoods in the Midwest look like neighborhoods in my hometown, empty houses with knee-high grass and vines growing over them and no one willing to admit they actually own the place. Down we go, about to reap what we sow."
Which has a nice biblical ring to it, but still we scratch our heads. How and why did this happen? The answer I hear quite often -- "greed" -- may be accurate enough, but it doesn't go very far toward unveiling the deeper mysteries of the process.
What is this "debt" by which we're so bedeviled? Like air, it's all around us, but we never think about it unless something goes wrong with the supply. Certainly it's a thing we've come to feel is indispensable to our collective buoyancy.
In good times we float around on it as if on a helium-filled balloon; we rise higher and higher, and the balloon gets bigger and bigger, until -- poof! -- some killjoy sticks a pin into it and we sink. But what is the nature of that pin?
Another friend of mine used to maintain that airplanes stayed up in the air only because people believed -- against reason -- that they could fly: Without that collective delusion sustaining them, they would instantly plummet to earth. Is "debt" similar? In other words, perhaps debt exists because we imagine it.
Another part of the human imaginative debt/credit structure has to do with payback time -- the time when you have to pay the debt back, or else suffer the consequences.
All major religions have extended this structure to the afterlife, where, if you haven't righted the moral balances on earth, you must do so after death.
There are no clocks in heaven. Nor are there any in hell. In both, everything is always now. Or so goes the rumor.
In heaven, there are no debts -- all have been paid, one way or another -- but in hell there's nothing but debts, and a great deal of payment is exacted, though you can't ever get all paid up. You have to pay, and pay, and keep on paying. Hell is like an infernal maxed-out credit card that multiplies the charges endlessly.
Margaret Atwood says we've come to feel that debt is essential to our lives.
(CNN) -- Unless we value fairness, reciprocity, and honest dealing, and the concept of balances -- for debt and credit depend on them -- and unless we are able to trust our systems, we would not be able to have debt and credit -- no one would lend, because there would be no expectation of ever getting paid back.
What caused the massive financial mess we are in comes back ultimately to these concepts. The rules were too loose, fairness and honest dealing were violated, the balance was upset. We must now restore trust so people will take their pennies out of the sock under the mattress where they are now inclined to store them.
In my part of the world we have a ritual interchange that goes like this:
First person: "Lovely weather we're having."
Second person: "We'll pay for it later."
My part of the world being Canada, where there is a great deal of weather, we always do pay for it later. One person has commented, "That's not Canadian, it's just Presbyterian." Nevertheless, it's a widespread saying among us.
What this ritual interchange reveals is a larger habit of thinking about the more enjoyable things in life: They're only on loan or acquired on credit, and sooner or later the date when they must be paid for will roll around. It's pay-up time. Or payback time, supposing that you haven't paid up.
In any case, the time when whatever is on one side of the balance is weighed against whatever is on the other side -- whether it's your heart, your soul or your debts -- and the final reckoning is made.
The financial world has recently been shaken as a result of the collapse of a debt pyramid involving something called "subprime mortgages" -- a pyramid scheme that most people don't grasp very well, but that boils down to the fact that some large financial institutions peddled mortgages to people who could not possibly pay the monthly rates and then put this snake-oil debt into cardboard boxes with impressive labels on them and sold them to institutions and hedge funds that thought they were worth something.
A friend of mine from the United States writes: "I used to have three banks and a mortgage company. Bank number one bought the other two and is now trying hard to buy the mortgage company, which is bankrupt, only it was revealed this morning that the last bank standing is also in serious trouble.
"Now they are trying to renegotiate with the mortgage company. Question One: If your company is going broke, why would you want to buy a company whose insolvency is front-page news? Question Two: If all the lenders go broke, will the borrowers get off the hook?
"You can't imagine the chagrin of the credit-loving American. I gather that whole neighborhoods in the Midwest look like neighborhoods in my hometown, empty houses with knee-high grass and vines growing over them and no one willing to admit they actually own the place. Down we go, about to reap what we sow."
Which has a nice biblical ring to it, but still we scratch our heads. How and why did this happen? The answer I hear quite often -- "greed" -- may be accurate enough, but it doesn't go very far toward unveiling the deeper mysteries of the process.
What is this "debt" by which we're so bedeviled? Like air, it's all around us, but we never think about it unless something goes wrong with the supply. Certainly it's a thing we've come to feel is indispensable to our collective buoyancy.
In good times we float around on it as if on a helium-filled balloon; we rise higher and higher, and the balloon gets bigger and bigger, until -- poof! -- some killjoy sticks a pin into it and we sink. But what is the nature of that pin?
Another friend of mine used to maintain that airplanes stayed up in the air only because people believed -- against reason -- that they could fly: Without that collective delusion sustaining them, they would instantly plummet to earth. Is "debt" similar? In other words, perhaps debt exists because we imagine it.
Another part of the human imaginative debt/credit structure has to do with payback time -- the time when you have to pay the debt back, or else suffer the consequences.
All major religions have extended this structure to the afterlife, where, if you haven't righted the moral balances on earth, you must do so after death.
There are no clocks in heaven. Nor are there any in hell. In both, everything is always now. Or so goes the rumor.
In heaven, there are no debts -- all have been paid, one way or another -- but in hell there's nothing but debts, and a great deal of payment is exacted, though you can't ever get all paid up. You have to pay, and pay, and keep on paying. Hell is like an infernal maxed-out credit card that multiplies the charges endlessly.
10 Things cubs fans doesn't want to hear right now
Top 10 things Cubs Fan doesn't want to hear right now
10. Realistically, the Dodgers are a better team than their record
9. The White Sox are still alive. so you can just root for them, right?
8. Rich Harden is sure to be healthy again next year
7. Game Three was a much closer loss, so clearly, they just needed the series to be a best of seven
6. If they won, they'd lose their whole brand identity
5. There must be some other franchise that has lost nine straight postseason games
4. Those LCS and WS tickets would have cost a lot of money, and with heating oil so expensive these days, you're better off with the cash
3. Thanks to their big contracts, you'll be able to root for Fukudome and Soriano for years to come
2. Maybe the next time they are in the playoffs, they'll avoid the goat and priest nonsense, and just finally show Satan some love
1. It's Gonna Happen
Friday, October 3, 2008
Credit still tought
NEW YORK (CNNMoney.com) -- Though a financial rescue plan was passed Friday, credit still remained tighter than ever.
The House voted in favor of the Treasury's $700 billion plan to buy up troubled assets from financial institutions. Those assets, mostly mortgage-related, have caused the credit markets to seize up.
The bill now goes to President Bush to sign into law.
But even with a rescue plan on the horizon that is designed to restore liquidity to the credit markets, banks still opted to hoard cash rather than lend to one another Friday.
Even if the bailout ultimately works to unlock credit markets, it would potentially take time. Institutions that sell their bad assets to the government could have to sell those securities at a huge discount, resulting in large writedowns. As a result, experts say it may be months after the legislation is enacted until banks start to see some relief.
"It will take some time for the markets to recover - this bill will not be an overnight cure," said Peter Cardillo, chief market economist with Avalon Partners.
Meanwhile, banks remained hesitant to take on more risky loans while dragging their anchors of their own troubled assets.
Credit measures at all-time highs
The 3-month Libor rate, or the London interbank offered rate, rose to 4.33%, up from 4.21% on Thursday, its highest level since January. The measure is a daily average of what banks charge other banks to lend money in London.
The difference between that measure and the Overnight Index Swaps rate rose to an all-time record 2.73 percentage points, up from 2.55 points Thursday, according to data reported by Bloomberg.com. The Libor-OIS "spread" measures how much cash is available for lending between banks, and is used by banks to determine lending rates. The bigger the spread, the less cash is available for lending.
Friday marked the sixth-straight record for the indicator, showing that banks are hoarding cash rather than lending to one another.
Historically, the typical Libor-OIS spread is about 0.11 percentage points, but it has averaged 1.66 points since the crisis began on Wall Street in mid-September, according to Merrill Lynch economist Drew Matus.
Another credit market indicator, the "TED spread," rose to yet another record high of 3.88 percentage points. The higher the spread, the more likely banks are risk averse. The TED spread was only 1.04 points on Sept. 5.
The TED spread measures the difference between 3-month Libor and the yield on the 3-month Treasury , considered by many investors to be the safest investment. The spread is a key indicator of banks' willingness to lend to one another.
With a wrench in the financial system's gears, many customers who need a loan to finance a home, car or tuition aren't able to get the credit they need. Others who can get a loan have to pay high interest rates. Frozen credit also affects companies' ability to make payroll, which can result in layoffs.
Treasurys
With credit tighter than ever, investors fear that the economy will continue to slump into a recession. Signs of a prolonged slowdown are evident. For instance, the U.S. Department of Labor is reported that the economy shed 159,000 jobs in September - the highest drop in employment since 2002.
"There's a growing unease about the recession," said Scott Anderson, senior economist with Wells Fargo. "It's pretty clear from the economic data from the past few days that the economic downturn has gotten worse in U.S. and globally."
As a result, banks and investors began to speculate that the Federal Reserve will cut its key funds rate by as much as a half of a percentage point to stimulate the economy.
The U.S. central bank uses its rate-cutting tool to encourage lending in an attempt to boost the economy. However, rate cuts tend to be inflationary, and bond investors worry that their assets will devalue over time as the dollar sinks.
"There is growing speculation that the Fed might cut rates," said Cardillo. "There's no inflation problem right now, but there may be down the road as the printing presses will be running at full speed."
The 2-year note, which fluctuates the most on rate changes, fell 2/32 to 100-12/32 and its yield rose to 1.66% from 1.63%. Bond prices and yields move in opposite directions.
Bond prices were down for the majority of the day Friday, as rumors of a rate cut took hold and stocks rose in anticipation of the House vote. But after the afternoon vote, the stock market refocused on the struggling economy and most Treasurys began to rise.
The benchmark 10-year note rose 2/32 to 103-1/32 and its yield held steady at 3.63%.
The "2-10 yield spread," or the difference between the 10-year and 2-year yields, fell to 1.97 percentage points from 2.02 points right before the bill was signed. That suggests a very slight easing of credit, as short term money is being made available at lower rates. But experts warned that it is way too early to declare victory for the credit markets.
"Spreads are coming down a little bit, but we have to wait and see how the plan works," Cardillo said. "It still won't be implemented for weeks."
The 30-year bond rose 21/32 to 106-18/32 and its yield fell to 4.12% from 4.15%.
The yield on the 3-month bill, which is considered by many to be the safest investment, fell to a measly 0.49% from 0.69% late Thursday.
"People just want good collateral because of the fear factor," Cardillo said. "They have no confidence in the credit markets."
The House voted in favor of the Treasury's $700 billion plan to buy up troubled assets from financial institutions. Those assets, mostly mortgage-related, have caused the credit markets to seize up.
The bill now goes to President Bush to sign into law.
But even with a rescue plan on the horizon that is designed to restore liquidity to the credit markets, banks still opted to hoard cash rather than lend to one another Friday.
Even if the bailout ultimately works to unlock credit markets, it would potentially take time. Institutions that sell their bad assets to the government could have to sell those securities at a huge discount, resulting in large writedowns. As a result, experts say it may be months after the legislation is enacted until banks start to see some relief.
"It will take some time for the markets to recover - this bill will not be an overnight cure," said Peter Cardillo, chief market economist with Avalon Partners.
Meanwhile, banks remained hesitant to take on more risky loans while dragging their anchors of their own troubled assets.
Credit measures at all-time highs
The 3-month Libor rate, or the London interbank offered rate, rose to 4.33%, up from 4.21% on Thursday, its highest level since January. The measure is a daily average of what banks charge other banks to lend money in London.
The difference between that measure and the Overnight Index Swaps rate rose to an all-time record 2.73 percentage points, up from 2.55 points Thursday, according to data reported by Bloomberg.com. The Libor-OIS "spread" measures how much cash is available for lending between banks, and is used by banks to determine lending rates. The bigger the spread, the less cash is available for lending.
Friday marked the sixth-straight record for the indicator, showing that banks are hoarding cash rather than lending to one another.
Historically, the typical Libor-OIS spread is about 0.11 percentage points, but it has averaged 1.66 points since the crisis began on Wall Street in mid-September, according to Merrill Lynch economist Drew Matus.
Another credit market indicator, the "TED spread," rose to yet another record high of 3.88 percentage points. The higher the spread, the more likely banks are risk averse. The TED spread was only 1.04 points on Sept. 5.
The TED spread measures the difference between 3-month Libor and the yield on the 3-month Treasury , considered by many investors to be the safest investment. The spread is a key indicator of banks' willingness to lend to one another.
With a wrench in the financial system's gears, many customers who need a loan to finance a home, car or tuition aren't able to get the credit they need. Others who can get a loan have to pay high interest rates. Frozen credit also affects companies' ability to make payroll, which can result in layoffs.
Treasurys
With credit tighter than ever, investors fear that the economy will continue to slump into a recession. Signs of a prolonged slowdown are evident. For instance, the U.S. Department of Labor is reported that the economy shed 159,000 jobs in September - the highest drop in employment since 2002.
"There's a growing unease about the recession," said Scott Anderson, senior economist with Wells Fargo. "It's pretty clear from the economic data from the past few days that the economic downturn has gotten worse in U.S. and globally."
As a result, banks and investors began to speculate that the Federal Reserve will cut its key funds rate by as much as a half of a percentage point to stimulate the economy.
The U.S. central bank uses its rate-cutting tool to encourage lending in an attempt to boost the economy. However, rate cuts tend to be inflationary, and bond investors worry that their assets will devalue over time as the dollar sinks.
"There is growing speculation that the Fed might cut rates," said Cardillo. "There's no inflation problem right now, but there may be down the road as the printing presses will be running at full speed."
The 2-year note, which fluctuates the most on rate changes, fell 2/32 to 100-12/32 and its yield rose to 1.66% from 1.63%. Bond prices and yields move in opposite directions.
Bond prices were down for the majority of the day Friday, as rumors of a rate cut took hold and stocks rose in anticipation of the House vote. But after the afternoon vote, the stock market refocused on the struggling economy and most Treasurys began to rise.
The benchmark 10-year note rose 2/32 to 103-1/32 and its yield held steady at 3.63%.
The "2-10 yield spread," or the difference between the 10-year and 2-year yields, fell to 1.97 percentage points from 2.02 points right before the bill was signed. That suggests a very slight easing of credit, as short term money is being made available at lower rates. But experts warned that it is way too early to declare victory for the credit markets.
"Spreads are coming down a little bit, but we have to wait and see how the plan works," Cardillo said. "It still won't be implemented for weeks."
The 30-year bond rose 21/32 to 106-18/32 and its yield fell to 4.12% from 4.15%.
The yield on the 3-month bill, which is considered by many to be the safest investment, fell to a measly 0.49% from 0.69% late Thursday.
"People just want good collateral because of the fear factor," Cardillo said. "They have no confidence in the credit markets."
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