Daily Digest

Daily Digest - May 6

Wednesday, May 6, 2009, 11:26 AM
  • 401(k)s Hit by Withdrawal Freezes (H/T Suzie G and CM)
  • Ben Bernanke to Ron Paul: “I will resist any attempt to dictate monetary policy.” (Video)
  • Reality Brought to You via Truth Tellers…
  • WSJ: About 10 of 19 Banks will need Capital
  • Richardson and Roubini Call for Bank Resolution, Diss Stress Tests
  • Goldman connection at NY Fed “doesn’t pass the smell test” (Video)
  • The Truth
  • From Michael Covel's Site: Bright Future, Superfund Gold (PDF)
  • Chart: U.S. domestic light truck sales
  • Auto Sales (Chart, April)
  • You Know the Answer
  • Flu Pandemics, Financial Pandemics, and the Macroeconomy
  • Perception: Bernanke: Economy should grow again later in 2009
  • Reality: Michiganians mine bodies for cash to make ends meet
  • A(H1N1) Map 

Economy

401(k)s Hit by Withdrawal Freezes (H/T Suzie G and CM)

Some investors in 401(k) retirement funds who are moving to grab their money are finding they can't.

Even with recent gains in stocks such as Monday's, the months of market turmoil have delivered a blow to some 401(k) participants: freezing their investments in certain plans. In some cases, individual investors can't withdraw money from certain retirement-plan options. In other cases, employers are having trouble getting rid of risky investments in 401(k) plans.

When Ed Dursky was laid off from his job at a manufacturing company in March, he couldn't withdraw $40,000 from his 401(k) retirement account invested in the Principal U.S. Property Separate Account.

That fund, which invests directly in office buildings and other properties, had stopped allowing most investors to make withdrawals last fall as many of its holdings became hard to sell.

Now Mr. Dursky, of Ottumwa, Iowa, is looking for work and losing patience. All he wants, he said, is his money.

"I hate to be whiny, but it is my money," Mr. Dursky said.

The withdrawal restrictions are limiting investment options for plan participants and employers at a key time in the markets. The timing is inconvenient for the number of workers like Mr. Dursky who are laid off and find their savings inaccessible.

Though 401(k) plans revolutionized the retirement-savings landscape by putting investment decisions in the hands of individuals, the restrictions show that plan participants aren't always in the driver's seat.

Individual investors mightn't even be aware of some behind-the-scenes maneuvers causing liquidity problems in their retirement plans. Many funds offered in 401(k) plans lend their portfolio holdings to other investors, receiving in exchange collateral that they invest in normally safe, liquid holdings.

(More)

Ben Bernanke to Ron Paul: “I will resist any attempt to dictate monetary policy.” (Video)

Reality Brought to You via Truth Tellers… 

Let’s start with David Tice, former manager of the Prudent Bear Fund. Sorry to the sunshine crowd, but David has been correct and is correct in what he says here, especially his comments about debt and the government’s debt bubble Ponzi dynamics.

WSJ: About 10 of 19 Banks will need Capital

From the WSJ: More Banks Will Need Capital

The U.S. is expected to direct about 10 of the 19 banks undergoing government stress tests to boost their capital ...

One big risk worrying industry officials is that the market will view banks on the list as insolvent when the official results are announced Thursday, even though Fed officials have repeatedly said that's not the case.
...
An initial stress test identified Wells Fargo as among the banks needing a bigger buffer ... It is unclear whether Wells would be forced to raise fresh capital or if regulators would accept the bank's argument that it can earn its way through the losses in future years. Wells expects more clarity Tuesday.
Wells Fargo will probably suffer enormous losses from Wachovia's Option ARM portfolio (originally from Golden West) and from their own HELOC portfolio. The estimated losses will apparently be broken out into the 12 categories listed in the Fed's White Paper, and that should show substantial losses for Wells Fargo in these categories.

Citi, BofA, Wells ... the constant leaks are pretty amazing ...

Richardson and Roubini Call for Bank Resolution, Diss Stress Tests

History repeats itself, the first time as tragedy, the second time as farce. But when it's your farce, sometimes it's hard to appreciate the humor.

We've railed about the stress tests since they were announced, but the chicanery, starting with the March 10 Citi and Bank of America pronouncements that they had had a decent couple of months, have lead to a big rally in bank shares. Of course, before we get too excited, it's important to remember that Citi is still trading at a bit over $3 and Bank of America at just over $10.

Nevertheless, the insistence of the cheerleading is looking strained, particularly when pretty much every professional investor we know is skeptical of the rally, even those who had the foresight to buy into it early. And even an equity broker (generally of the bullish persuasion) commented on earnings season: "One third had earnings that beat expectations, one third were short, and one third were delusional."

I've also noticed more than a few headlines, particularly on Bloomberg, that take any snippet of the positive and play it up. For instance, one a few days ago called a morning when stocks opened down and then moved into weakly positive territory as 'stocks gain" which was technically accurate, but when the averages again fell into losses, it was "stocks fluctuate." Please. Similarly, tonight Bloomberg tells us, "Chrysler Bankruptcy May Not Dent Economy as Cutbacks Were Set". The point of the story is that (assuming the bankruptcy goes according to plan, an open question) the plant cutbacks and furloughs had already been planned as part of the restructuring. But that means that much damage was inevitable, regardless. Saying "Bankruptcy May Not Dent" is not the same as "Bankruptcy May Do No Incremental Damage," which is what the story really says. I plan to keep closer tabs on this and readers are encouraged to e-mail sightings of misleading headlines.

Back to the matter at hand. Matthew Richardson and Nouriel Roubini, in "We Can't Subsidize the Banks Forever," provides a welcome bit of reality to the unwarranted optimism about banks. Having companies look viable as the result of massive, and seeming open ended subsidies does not say much about how they'd be faring ex life support. And even worse are the distortions. We've seen that large scale banking with score based credit paradigms has fared badly. Yet these companies are being subsidized to the detriment of smaller regional and local players who are closer to their communities and can incorporate local knowledge into their credit decisions. But no, just as old style computer jockeys had trouble accepting that big iron might be inferior to PC and distributed processing, so to the powers that be seem unduly fond of very large banks when the superiority of that model is in question.

(More)

Goldman connection at NY Fed “doesn’t pass the smell test” (Video)

The Truth

This caught my eye today:
“It takes two to speak truth, one to speak and another to hear.”
-Henry David Thoreau, American Essayist, Poet and Philosopher, 1817-1862

From Michael Covel's Site: Bright Future, Superfund Gold (PDF)

Chart: U.S. domestic light truck sales

Auto Sales (Chart, April)

You Know the Answer

This is something of a rhetorical question, of course, but does the following excerpt from a 1989 research paper by Miguel A. Kiguel, "Budget Deficits, Stability, and the Monetary Dynamics of Hyperinflation" --

Large budget deficits financed by money creation are widely believed to be the primary force sustaining prolonged high inflation processes. The relationship appears to be closer for hyperinflationary episodes, which are usually associated with the presence of massive budget deficits. Hyperinflation, understood in this paper as a process of accelerating inflation, in fact occurs because governments have unsustainably large budget deficits.(1)

A correction of the fiscal imbalance has been crucial for stopping hyperinflation. This factor is well documented in the works of Yeager (1981), Sargent (1982), and Webb (1986) on the hyperinflation episodes in the central European countries during the 1920s and by Sachs (1987) on the more recent Bolivian episode. Substantial reductions in the budget deficit, monetary reform, and a fixed exchange rate were crucial for the successful stabilization policies in those countries. Indeed, fiscal restraint, which in most cases meant outright elimination of the budget deficit, was probably the most important of these policy measures.

-- sound like something we should be thinking about when we read the following New York Times article, "Worries Rise on the Size of U.S. Debt"?

The nation’s debt clock is ticking faster than ever — and Wall Street is getting worried.

Flu Pandemics, Financial Pandemics, and the Macroeconomy

Flu Pandemics, Financial Pandemics, and the Macroeconomy

Two from the WSJ. First, Barro and Ursua discuss the macroeconomic threat posed by flu pandemics:

Pandemics and Depressions, by Robert J. Barro and Jose F. Ursua, Commentary, WSJ: Here we are, struggling to find a way out of the worst financial crisis since the 1930s, when along comes the possibility of a global influenza epidemic. Though the first concern about the new strain of A/H1N1 virus involves health, we also have to worry that a full-blown flu pandemic would intensify the world's economic problems.

Our ongoing study of economic disasters for 36 countries since 1870 suggests that this concern is well founded. In this sample, we have isolated 158 depressions -- defined as declines in a country's real per capita gross domestic product (GDP) by at least 10%. The most prominent features of these depressions are wars and financial crises. But the fourth-worst global macroeconomic event since 1870 seems to be the Great Influenza Epidemic of 1918-20. This "health shock" accounts for 13 of the depression events. In contrast, World War II is associated with 25, World War I with 23, and the Great Depression of the early 1930s with 21. ...

Next, Richardson and Roubini on the state of the banking system:

We Can't Subsidize the Banks Forever, by Mathew Richardson and Nouriel Roubini, Commentary, WSJ: The results of the government's stress tests on banks, to be released in a few days, will not mark the beginning of the end of the financial crisis. If we are to believe the leaks, the results will show that there might be a few problems at some of the regional banks and Citigroup and Bank of America may need some more capital if things get worse. But the overall message is that the sector is in pretty good shape.

This would be good news if it were credible. But the International Monetary Fund has just released a study of estimated losses on U.S. loans and securities. It was very bleak -- $2.7 trillion, double the estimated losses of six months ago. Our estimates at RGE Monitor are even higher, at $3.6 trillion, implying that the financial system is currently near insolvency in the aggregate. With the U.S. banks and broker-dealers accounting for more than half these losses there is a huge disconnect between these estimated losses and the regulators' conclusions. ...

Perception: Bernanke: Economy should grow again later in 2009

Federal Reserve Chairman Ben Bernanke told Congress Tuesday that the economy should pull out of a recession and start growing again later this year.

Reality: Michiganians mine bodies for cash to make ends meet

As Michigan's economy continues to suffer, people are offering themselves up as medical guinea pigs for a quick buck to make ends meet. Some are selling plasma, others their hair for hundreds on the Internet, while others take the more extreme road by wanting to sell their eggs or participate in medical studies in exchange for payment and free medical exams.

 A(H1N1) Map

26 Comments

Davos's picture
Davos
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Re: Daily Digest - May 6

Nirvana.

Maybe, just maybe if I stop reading 3 hours a day about the soft depression/economy I could be this happy and truly belive that "the economy should pull out of a recession and start growing again later this year."

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Re: Daily Digest - May 6

Thank you for all you guys do on this site! 

This will end in tears.

SteveS's picture
SteveS
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Lie to me

I saw this in one of the comments in the Tice piece:

http://www.theonion.com/content/news/nation_ready_to_be_lied_to_about

And please remember - the Onion is a (intentional)  joke news source.

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cannotaffordit
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Re: Daily Digest - May 6

 I saw on TV last night that Ron Paul has introduced legislation (HR1207, I think) to audit the monetary policies of the FED, and now has 126 Co-sponsors.  Should we be excited about this?  Or, will the FED find a way to get around it, and continue to hide what they do that really matters, and just keep making unbelievable "profits" for its owners?

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Re: Daily Digest - May 6

 Interesting article this morning in LA Times Business section, which should have been on page one, of course:

...a two line and rather lame, anonymous rebuttal in the article, " Financial services industry officials called the analysis simplistic and stale."

www.latimes.com/business/la-fi-subprime6-2009may06,0,6489207.story

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Ray Hewitt
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Re: Daily Digest - May 6

There is no chance HR1207 will get through Congress. There are too  many skeletons.

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Jim Rogers Defends Capitalism

"Where would you rather live? North Korea or South Korea?"

Great interview with Jim Rogers by a German(I think) news outlet. Part 2 is especially good when Jim strongly defends capitalism.

Part 1, Part 2

SPM's picture
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Re: Daily Digest - May 6

Lol Davos. Bernake never has to worry about money, he can be eternally blissful.

On the 401, I'm glad I pulled my money months ago.

I noticed gold and silver is on its way up again. Hmm

 

Kind Regards,

Sean

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vvolf
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Re: Daily Digest - May 6

Proof that the governments read and respond to news stories about what the people want.

 

 

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Re: Daily Digest - May 6
vvolf wrote:

Proof that the governments read and respond to news stories about what the people want.

That's a very interesting article indeed...

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Re: Daily Digest - May 6

RE: 401K's. I used to manage those in the past and when you choose the "evergreen" fund which Mr. Dursky did, it clearly explains that your withdrawal is limited to 20% per year over 5 years. That provision was in place 10 years ago so it has nothing to do with today's liquidity crisis. It is simply a choice for a higher payout, you have to give the money managers time to buy and sell office buildings or such things.

There may have been more to read that explains this to paid subscribers, but I have yet to make that leap.

Great site Chris!

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Damnthematrix
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Re: Daily Digest - May 6
20% of homeowners 'underwater':
 
Study finds more than 20% of U.S. homeowners - about 20 million residences - owe more than their homes are worth.
http://money.cnn.com/2009/05/05/real_estate/underwater_homeowners/?postversion=2009050609
SPM's picture
SPM
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Re: Daily Digest - May 6

BrianB - if you click on the title, it will take you to the full article.

One of my 401s was in Principal Financial Group. I didn't read the full article before. I'm now even more happy I cashed it out.

Can you please read the full article and explain whether it was an "evergreen" fund? I don't know much about that kind of stuff. As far as 401s, they didnt really break down what funds, it was only risk classes.

Sean

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Jasenica
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Re: Daily Digest - May 6

I am a regular reader of this forum who finally decided to register. I don't have any background in finance or economics so I am in no position to debate the various opinions being offered about the current situation. Until early 2008 I never paid much attention to stock markets, shares etc. After my superannuation started to rapidly erode I decided to do some reaserch. I understand that stocks go up and down so a loss every once-in-a-while didn't concern me. Hence there was little concern at the start of 2008. As the year progressed the situation continued to deteriorate and I concluded during July that something wasn't right. Since then I have been reading articles on a daily basis from various sources and stumbled across this web-site. The pattern of the global erosion from September 2008 has been shocking to watch even though I don't understand the mechanisms involved, nor do I have any previous experiences to compare this event with. What has left me completely bewildered are the events since the start of March 2009. Does anybody know what is going on and if so, can they please explain it to? 

Davos's picture
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Re: Daily Digest - May 6

Hello Jasenica:

I'd advocate, if you haven't already? that you watch Chris's Crash course, I'd concentrate on the chapters that go in depth on fuzzy math, debt and how money is created, but I'd catch the entire course I think it puts the whole picture together.

After that I'd watch IOUSA

IMHO, (and I'm certain others here could offer other and even better opinions, there are some amazingly smart folks on this site), in a nutshell it boils down to this. The USA is in debt and obligated for about$ 80,000,000,000,000.00. Using real math it's earnings (GDP) are likely around 6,000,000,000,000.00 to 8,000,000,000,000.00.

The gig is almost up. We are Enron. We are broke. We are maxed out. Countries who we once borrowed from likely won't loan to us.

They will print dollars to pay debt, our dollar will be like Zimbabwe's soon - worthless, when that happens I seriously doubt other countries will want it for the reserve currency.

How long before TSHTF? I haven't a clue.

The article Jim Quinn emailed me this morning is a good overview.

Remember please, I'm no economist and I'm no financial planner (not that they saw this coming) this is just my opinion.

And finally, Chris's video also bring the two other aspects into this. Energy and Environment. Doesn't matter if you do or don't believe in AGW, what he brings to light is we are stripping the planet of its resources.

I'm kind of awestruck, and not in a positive way, when I look at the new administration. We have a president now who seems pretty smart, he even talks in full sentences and his chief of staff is notorious for never letting a crisis go to waste. Yet, our president is relying on, IM not so HO some really bad economic advice givers (although he did have dinner with Roubini and Krugman). But, the "stimulus" isn't stimulus. Stimulus would have been solar, and other alternate forms of energy. Something to manufacture and sell to other countries to create a trade surplus and get rid of the trade deficit and our deficit. Stimulus would have been cutting the size of government - drastically.

But it is what it is. 

 

Mike Pilat's picture
Mike Pilat
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Re: Daily Digest - May 6

spot on, Davos. I honestly would not gripe too much about deficit spending if it was truly only infrastructure and alternative energy. Spending money (even if it is borrowed money) on those would truly be an investment for the future and as I see it, that would be the best way to "not let a crisis go to waste." Likewise, that sort of spending would probably be less inflationary than bankster bailouts, since infrastructure and energy should tend to increase real economic output. I'm with Chris in that I still think that there is an orderly and fair way out of this, but we are rapidly destroying one of our most precious resources - time, while at the same time sending the completely wrong message to an equally important resource - our people. I don't think we can count on solutions to come from the government at all. There are too many entangled interests with private interests.

Like Chris, I'm continually surprised at the apparent resilliance of this corrupt system that we have. The sooner the public gains awareness and starts taking actions, the less S is going to HTF. But if everyone passes off the responsibility for cleaning this up to their neighbors, eventually there will be an unpleasant dislocation of sorts in the social order of this country when reality sinks in. The inflation the government is pursuing is buying time for many of us to plan and take action. I'm just grateful that I jumped on this train of awareness before it left the station.

Thanks for all of your Daily Digests

Jasenica's picture
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Re: Daily Digest - May 6

Hello Davos,

If the proverbial muck does hit the fan, is it possible that this crisis could lead to the end of the western world as we know it? The mighty Egyptian, Greek and Roman empires failed so that means our civilisation has no guarantee of eternal existence. Or I am being too melodramatic? Some people are suggesting that a worst-case-scenario could lead to such a dramatic event.

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Re: Daily Digest - May 6

Hi Jasenica,

I'll pipe in here.  IMO, that is not only possible, but there is a good argument to be made that it is emminent.  All the pros that actually have gotten right throughout the decades (Jim Rogers, Celente, Roubini, and the German-accent sounding guy whose name I can't remember) are prediciting something along those lines.  Sad but true. 

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Re: Jim Rogers Defends Capitalism - Smoke and Mirrors...

Hi Turbo,

I just watched the Jim Rogers video's and appreciate you putting them up. Thankyou...

Just to add my own thoughts. Do you think that there can only be one country on the planet that can live to the excess of the USA and the USA is no-longer that country?

I mean, 4% of the population (America) using 25% of the planets resources, verses 18% of the population (China) using 15% (rough guess) of resources, climbing exponentially. On this merry ship Planet Earth, the parody of growth capitalism is that it isn't sustainable, yet, if I was Jim Rogers, nestled away in Singapore, by the time the US is sunk under the waves, I would have been in one of the best places in the World to emigrate to in maintaining the illusion of 'American style' wealth, and will most probably be pushing up the daisies before it fully topples over...

His philosophy works for those that play the roulette table and have had a history of winning the house.

I think he makes no gains on my moral barometer, and if I were to have the chance at looking back upon his career from the point of view of someone born a hundred years in the future and seeing him as part of the historical and global financial collapse of the early 21st century, I don't believe for one minute that I would place him on the kind of guru pedestal that he has been placed upon today. In fact, I believe that many would assume he was almost a member of the very people that caused or at least advanced the problems we face now, and today.

He is well traveled, has been well positioned and has positioned himself well. However, the discussion with the 'socialist' interviewer brought up a question that he didn't answer with any honesty, and that was that this adventure in capitalism has now created the very socialized financial system that had been fore-warned 30 years ago.

Chris Martenson joked in the (humor) thread with a truism :-

"Under Capitalism, man exploits man. Under Socialism, it's exactly the opposite."

I believe neither are the answer. One will be chosen. One is the lesser of two evils...neither, the defining answer...

I'm sure Rogers sleeps most soundly in his bed, dreaming dreams both magnanimous and unaccountable...

Noah Webster's 1828 Dictionary of the American Language defines Magnanimity as such:

MAGNANIM'ITY, n. [L. magnanimitas; magnus, great, and animus, mind.] Greatness of mind; that elevation or dignity of soul, which encounters danger and trouble with tranquillity and firmness, which raises the possessor above revenge, and makes him delight in acts of benevolence, which makes him disdain injustice and meanness, and prompts him to sacrifice personal ease, interest and safety for the accomplishment of useful and noble objects.

Best,

Paul

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Re: Daily Digest - May 6

Hello Jasenica:

I'll defer on answering that question to those on this site who are much more versed in history than I (I barely made it out of school). While I read a lot, I don't read a lot of history. Some, but not a lot and living a short ways from Monticello doesn't make me an expert.

I'm hopeful it is more a repeat of the last depression's recovery and that we learn, as Mike points out that we need to invest in green energy, and we need some regulation and less corruption. And as Paul points out, we need to live sustainably.

But, Patrick's view has merrit, getting the family updated passports is and has been on the long to do list.

Basically, my take: This is like a giant enema and there is a lot of crud that needs to be cleaned out, from Congress to consumerism to banking.

Mike mentions Chris's optimism and getting it worked out. I respect Chris's opinions more than my own, I pray he is correct. Personally I don't share this optomistic view and am more pessimistic. I'd feel differently if they'd have identified the problem (insolvency and debt and debt addictions) and if they'd use real facts and figures not this bogus Enron'd math/books. To me, this has Katrina written all over it. The strom is a storm, the US is underwater, and after it passes a few (Geithner, Summers, Romer and Bernanke) will be revealed and let go or resign and life will go on - for most, some will, like the last depression not fair (?SP) so well.

But, don't get me wrong. Greenspan wrote

 

“A democratic society requires a stable and effectively functioning economy.I trust that we and our successors at the Federal Reserve will be important contributors to that end.”

 

And I have no clue to which end he is referring. One day I will write him and ask him: The end of our republic/democracy or the end of the economy? Like the name "Federal" "Reserve" is an oxymoron so do I find his statement to be an oxymoron. (Well after reading what he wrote in a Rand article I find him to be an oxymoron, but that is another storey).

Essentially, his statement is the same question that you ask. And I dunknow!

Take care

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Re: Daily Digest - May 6

I think one of the strongest lessons we can take away from history is that humans often don't learn from it. The bubble mentality of "it's different this time" is not just present on short term items like the dot-com bubble and the housing bubble but also in longer term rolling trends like large wars, fascism, and empire. It takes a lot of courage, discipline, and insight to understand where we are in historical terms and then take action, even when nobody else is. So I view a lot of this in the context of broader, long term social trends as well. I won't predict exactly what the future holds, but it would be against most odds to think that the corruption will suddenly cease and people will start to behave in a responsible and moral manner. The enema that Davos speaks of always comes, but historically it's not pleasant.

My ears would prick up and I would think that we have actually learned from the past if we really saw public awareness grow over the true nature of our banking system, if we really did invest in alternative energy and infrastructure with the dedication that we fought World War II, and if we as a society unwound the entitlement/consumerist mentality that we have become addicted to. Real change won't happen unless it is truly demanded very strongly, and right now, I see few signs of strength from the general American public. I hate to break it, but changing our future is not so simple as checking a box at the voting booth. Really, can any of our problems be solved with that little effort?

I certainly do hope things are different this time.

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Re: Daily Digest - May 6

Mike Pilat wrote:

 

I think one of the strongest lessons we can take away from history is that humans often don't learn from it. 

Mike, you make me feel better for cutting all those history classes.

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Re: Daily Digest - May 6
Jasenica wrote:

If the proverbial muck does hit the fan, is it possible that this crisis could lead to the end of the western world as we know it? The mighty Egyptian, Greek and Roman empires failed so that means our civilisation has no guarantee of eternal existence. Or I am being too melodramatic? Some people are suggesting that a worst-case-scenario could lead to such a dramatic event.

Hello Jasenica

In my opinion, this will not be such a dramatic event.  It will play-out over time with changes happening that will drive our lives in a direction that the oligarchy wants it too.  Heck the mainstream media has even discussed this happening, with not even a head turn from the general public. Change is and has been happening, our country and the world is on this path.

I would advise you to look at a thread I believed it is named, "idea-whose-time-has-come".  It has a movie on it about 1 hour and 15 minutes long and explains what has happened to the western world.  It is interesting and we are seeing alot of what the speaker talks about happening today in the way laws have been added and executive orders are issued.

 

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Re: Daily Digest - May 6
Mike Pilat wrote:

I think one of the strongest lessons we can take away from history is that humans often don't learn from it.

 

We don't all fail to learn from it

I think it's more that a select few

hope to repeat it

and bank on the rest of us forgetting

but you're right Mike

Talk and checkmarks are cheap

and that's 

the biggest thing they bank on

in more ways than one

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Re: Daily Digest - May 6

Hi Sean,

Thanks for the title click trick!

Regarding your question: if you were in the "Principal U.S. Property Separate Account" (which would have been only one of many choices of funds for you to choose from in your 401k) that one is deffinately an evergreen fund with withdrawal restrictions that you would have been made aware of. They are called evergreen because even employers cannot get rid of them once they introduce them to employees. I learned that the hard way when I tried to change our company's 401k program from Travelers to Fidelity many years ago.

After reading the rest of the article I need to retract my comment that the restrictions may not be related to the current environment. They are obviously related and very scary. Even the value funds (bonds) are having trouble and restricting withdrawals! That is unbelievable....what a mess!

I think you are very fortunate you got out when you did. I hope you are that lucky with all your decisions:)

Brian

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Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - May 6

 Hello BrianBMurr:

Thanks for the clarification. I always learn more from the comments then from reading the articles and it never ceases to amaze me the experts in all walks of life we have here.

I don't know if everyone has seen this, I have posted it several times, I believe it was originally a hat tip from CM but it is worthy of a repost and my appologies for not adding it to this Daily Digest.

All I can think of is Social Security "Trust" "Fund" and what would happen to hard cash folks saved.

Also I shortened the headline, I'm not posting it for a political statement but a "This is an idea that was floated by lawmakers statement". I think everyone here knows my politcal views: I didn't vote for McCain or President Obama, but I certainly did vote. I'm disgusted with both parties --- for the record. I like Ron Paul and I like Alan Grayson and a handfull of others. I wish President Obama the best but listening to Summers, Romer, Geithner et al I think he is going to wind up looking as smart as the last guy who couldn't complete a sentance.

Take care

Target Private Retirement Accounts

November 04, 2008

RALEIGH — Democrats in the U.S. House have been conducting hearings on proposals to confiscate workers’ personal retirement accounts — including 401(k)s and IRAs — and convert them to accounts managed by the Social Security Administration.

Triggered by the financial crisis the past two months, the hearings reportedly were meant to stem losses incurred by many workers and retirees whose 401(k) and IRA balances have been shrinking rapidly.

The testimony of Teresa Ghilarducci, professor of economic policy analysis at the New School for Social Research in New York, in hearings Oct. 7 drew the most attention and criticism. Testifying for the House Committee on Education and Labor, Ghilarducci proposed that the government eliminate tax breaks for 401(k) and similar retirement accounts, such as IRAs, and confiscate workers’ retirement plan accounts and convert them to universal Guaranteed Retirement Accounts (GRAs) managed by the Social Security Administration.

Rep. George Miller, D-Calif., chairman of the House Committee on Education and Labor, in prepared remarks for the hearing on “The Impact of the Financial Crisis on Workers’ Retirement Security,” blamed Wall Street for the financial crisis and said his committee will “strengthen and protect Americans’ 401(k)s, pensions, and other retirement plans” and the “Democratic Congress will continue to conduct this much-needed oversight on behalf of the American people.”

Currently, 401(k) plans allow Americans to invest pretax money and their employers match up to a defined percentage, which not only increases workers’ retirement savings but also reduces their annual income tax. The balances are fully inheritable, subject to income tax, meaning workers pass on their wealth to their heirs, unlike Social Security. Even when they leave an employer and go to one that doesn’t offer a 401(k) or pension, workers can transfer their balances to a qualified IRA.

Mandating Equality

Ghilarducci’s plan first appeared in a paper for the Economic Policy Institute: Agenda for Shared Prosperity on Nov. 20, 2007, in which she said GRAs will rescue the flawed American retirement income system (www.sharedprosperity.org/bp204/bp204.pdf).

The current retirement system, Ghilarducci said, “exacerbates income and wealth inequalities” because tax breaks for voluntary retirement accounts are “skewed to the wealthy because it is easier for them to save, and because they receive bigger tax breaks when they do.”

Lauding GRAs as a way to effectively increase retirement savings, Ghilarducci wrote that savings incentives are unequal for rich and poor families because tax deferrals “provide a much larger ‘carrot’ to wealthy families than to middle-class families — and none whatsoever for families too poor to owe taxes.”

GRAs would guarantee a fixed 3 percent annual rate of return, although later in her article Ghilarducci explained that participants would not “earn a 3% real return in perpetuity.” In place of tax breaks workers now receive for contributions and thus a lower tax rate, workers would receive $600 annually from the government, inflation-adjusted. For low-income workers whose annual contributions are less than $600, the government would deposit whatever amount it would take to equal the minimum $600 for all participants.

In a radio interview with Kirby Wilbur in Seattle on Oct. 27, 2008, Ghilarducci explained that her proposal doesn’t eliminate the tax breaks, rather, “I’m just rearranging the tax breaks that are available now for 401(k)s and spreading — spreading the wealth.”

All workers would have 5 percent of their annual pay deducted from their paychecks and deposited to the GRA. They would still be paying Social Security and Medicare taxes, as would the employers. The GRA contribution would be shared equally by the worker and the employee. Employers no longer would be able to write off their contributions. Any capital gains would be taxable year-on-year.

Analysts point to another disturbing part of the plan. With a GRA, workers could bequeath only half of their account balances to their heirs, unlike full balances from existing 401(k) and IRA accounts. For workers who die after retiring, they could bequeath just their own contributions plus the interest but minus any benefits received and minus the employer contributions.

Another justification for Ghilarducci’s plan is to eliminate investment risk. In her testimony, Ghilarducci said, “humans often lack the foresight, discipline, and investing skills required to sustain a savings plan.” She cited the 2004 HSBC global survey on the Future of Retirement, in which she claimed that “a third of Americans wanted the government to force them to save more for retirement.”

What the survey actually reported was that 33 percent of Americans wanted the government to “enforce additional private savings,” a vastly different meaning than mandatory government-run savings. Of the four potential sources of retirement support, which were government, employer, family, and self, the majority of Americans said “self” was the most important contributor, followed by “government.” When broken out by family income, low-income U.S. households said the “government” was the most important retirement support, whereas high-income families ranked “government” last and “self” first (www.hsbc.com/retirement).

On Oct. 22, The Wall Street Journal reported that the Argentinean government had seized all private pension and retirement accounts to fund government programs and to address a ballooning deficit. Fearing an economic collapse, foreign investors quickly pulled out, forcing the Argentinean stock market to shut down several times. More than 10 years ago, nationalization of private savings sent Argentina’s economy into a long-term downward spiral.

Income and Wealth Redistribution

The majority of witness testimony during recent hearings before the House Committee on Education and Labor showed that congressional Democrats intend to address income and wealth inequality through redistribution.

On July 31, 2008, Robert Greenstein, executive director of the Center on Budget and Policy Priorities, testified before the subcommittee on workforce protections that “from the standpoint of equal treatment of people with different incomes, there is a fundamental flaw” in tax code incentives because they are “provided in the form of deductions, exemptions, and exclusions rather than in the form of refundable tax credits.”

Even people who don’t pay taxes should get money from the government, paid for by higher-income Americans, he said. “There is no obvious reason why lower-income taxpayers or people who do not file income taxes should get smaller incentives (or no tax incentives at all),” Greenstein said.

“Moving to refundable tax credits for promoting socially worthwhile activities would be an important step toward enhancing progressivity in the tax code in a way that would improve economic efficiency and performance at the same time,” Greenstein said, and “reducing barriers to labor organizing, preserving the real value of the minimum wage, and the other workforce security concerns . . . would contribute to an economy with less glaring and sharply widening inequality.”

When asked whether committee members seriously were considering Ghilarducci’s proposal for GSAs, Aaron Albright, press secretary for the Committee on Education and Labor, said Miller and other members were listening to all ideas.

Miller’s biggest priority has been on legislation aimed at greater transparency in 401(k)s and other retirement plan administration, specifically regarding fees, Albright said, and he sent a link to a Fox News interview of Miller on Oct. 24, 2008, to show that the congressman had not made a decision.

After repeated questions asked by Neil Cavuto of Fox News, Miller said he would not be in favor of “killing the 401(k)” or of “killing the tax advantages for 401(k)s.”

Arguing against liberal prescriptions, William Beach, director of the Center for Data Analysis at the Heritage Foundation, testified on Oct. 24 that the “roots of the current crisis are firmly planted in public policy mistakes” by the Federal Reserve and Congress. He cautioned Congress against raising taxes, increasing burdensome regulations, or withdrawing from international product or capital markets. “Congress can ill afford to repeat the awesome errors of its predecessor in the early days of the Great Depression,” Beach said.

Instead, Beach said, Congress could best address the financial crisis by making the tax reductions of 2001 and 2003 permanent, stopping dependence on demand-side stimulus, lowering the corporate profits tax, and reducing or eliminating taxes on capital gains and dividends.

Testifying before the same committee in early October, Jerry Bramlett, president and CEO of BenefitStreet, Inc., an independent 401(k) plan administrator, said one of the best ways to ensure retirement security would be to have the U.S. Department of Labor develop educational materials for workers so they could make better investment decisions, not exchange equity investments in retirement accounts for Treasury bills, as proposed in the GSAs.

Should Sen. Barack Obama win the presidency, congressional Democrats might have stronger support for their “spreading the wealth” agenda. On Oct. 27, the American Thinker posted a video of an interview with Obama on public radio station WBEZ-FM from 2001.

In the interview, Obama said, “The Supreme Court never ventured into the issues of redistribution of wealth, and of more basic issues such as political and economic justice in society.” The Constitution says only what “the states can’t do to you. Says what the Federal government can’t do to you,” and Obama added that the Warren Court wasn’t that radical.

Although in 2001 Obama said he was not “optimistic about bringing major redistributive change through the courts,” as president, he would likely have the opportunity to appoint one or more Supreme Court justices.

“The real tragedy of the civil rights movement was, um, because the civil rights movement became so court focused that I think there was a tendency to lose track of the political and community organizing and activities on the ground that are able to put together the actual coalition of powers through which you bring about redistributive change,” Obama said.

Karen McMahan is a contributing editor of Carolina Journal.

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