Posts from — September 2008

I was not at home this weekend, but the first thing I did when I got home was watch two programs that I record weekly on my DVR: This Week with George Stephanopoulos and Meet the Press with Tom Brokaw (Brokaw has taken over temporarily after the sudden death of long-time host Tim Russert).  They are phenomenal shows, and when the government needs to talk to the people, it often does it through these two broadcasts.  Some people say that the hosts are too partisan – Stephanopoulos was a high-ranking adviser to Bill Clinton and Brokaw has shown some liberal leanings during his career – but I think they both do a good job of being neutral and usually ask the questions that I want to have answered.  Though Meet the Press is really the more prestigious show, I tend to like This Week better, because of the roundtable analysis portion.  I’m a big fan of George Will, who’s a regular at the roundtable, and Stephanopoulos does a great job of mediating the discussion between Will and a rotating cast of other analysts.  Meet the Press tends to get higher profile guests, but often they forgo their roundtable analysis segment.

This morning, Treasury Secretary Henry Paulson appeared on both shows to talk about the current financial crisis.  If you get a chance, watch the interview of Paulson on This Week, and the ensuing roundtable discussion – it’s the best reality TV there is.  You can also watch Paulson’s Meet the Press interview.

Over the last couple of weeks, I have been captivated by the happenings on Wall Street. It truly does seem like a critical time for our great nation, and one can only hope that the people handling this crisis will make the right decisions. I do feel that we’re in good hands, because Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are well-respected across the board and are by all accounts two of the smartest people in the financial world. I think we all just have to trust them. It’s going to be hard for me or anyone to second-guess those guys in 5-10 years, because most economists say there is nothing close to a historical precedent for the current crisis. In any case, I wish I had a more formal education in finance and economics, so I could better understand what’s going on. But I don’t, so I’ve just been reading as much as I possibly can. Here are the best articles I have run across, in no particular order:

• Freddie Mac and Fannie Mae: An Exit Strategy for the Taxpayer – from the Libertarian think tank the Cato Institute; includes a timeline of the history of Fannie Mae and Freddie Mac.
• AIG’s Troubles and Why They Matter – New York Times Illustration.
• New Agency Proposed to Oversee Freddie Mac and Fannie Mae – from Stephen Labaton at the New York Times. Notice that this article was written five years ago – of course the proposal never came to fruition.
• Who Is To Blame For The Subprime Crisis? – from Investopedia.
• The Social Imperative of Sound Money – opinion piece from the Ludwing von Mises Institute, a Libertarian academic organization; it is a bit critical of Henry Paulson.
• Seven Deadly Sins of Deregulation — and Three Necessary Reforms – opinion piece by Robert Kuttner, a liberal economist. Though I don’t agree with his stance on this issue, it’s important to include an opposing viewpoint.

In the wake of the collapse of Lehman Brothers and Merrill Lynch, both presidential candidates are calling for tighter regulation of the U.S. financial markets. That might make for good soundbites, but it’s more important to look back at the root cause of today’s troubles.

Under Presidents Bill Clinton and George W. Bush, the government heavily promoted home ownership to all citizens, even those with lower incomes and weak credit. Fannie Mae and Freddie Mac bought these loans from the primary lenders (banks) because they offered the highest rate of return, and coincidentally, the most risk. Fannie and Freddie casually assumed those risks, because the two companies were effectively guaranteed by the federal government, i.e., the taxpayer.

Whose idea was it to create Fannie Mae? It was part of Franklin Roosevelt’s New Deal administration. Who’s idea was it to make Fannie Mae a private corporation with implicit government backing? It was Lyndon Johnson’s (Freddie Mac was created in 1970 during Richard Nixon’s administration to provide some competition to Fannie Mae). Whose jobs were to make sure that Fannie and Freddie were able to handle these high-risk mortgages? The regulators. Why didn’t the regulators do their jobs? It might be that the incentive for someone to do his/her job as a regulator is much less than the incentive for someone else to try to make millions of dollars. The end result is that the seeds sown by the government years ago probably set the stage for the takedown of two huge financial companies, and possibly more to come.

I think what we can learn from all this is that when the government intervenes in the free market, any short-term benefit will likely be counteracted by an unforeseen catastrophe in the long-term. What’s happening now is probably a much needed correction in the financial markets that will be necessary for long-term economic health. Hopefully, the government doesn’t throw too many wrenches in the works during the meantime.

Social Security seems like a good idea. You put some money into the system now and you get to take that money out when you retire, right? It’s called a tax, but it’s not really since you get that money back, right? It’s nice to have that big security blanket when you retire, isn’t it?

To me, it sounds too good to be true, so I decided to put some hypothetical numbers down in a spreadsheet. Take a look at it, and put in your own numbers. To calculate your Social Security benefits, you can either go to the estimator on the Social Security Website, or use this quicker one.

Right now, 12.4% of every working person’s paycheck goes to Social Security. That includes 6.2% taken directly out of your paycheck, and another 6.2% that is matched by your employer. So for my spreadsheet, I wanted to figure out how much money I could make if I could invest that 12.4% of my paycheck privately, rather than having the federal government take it. I assumed that I made $50,000 starting out of school at age 24, and would retire at age 65. I assumed my income would grow slightly faster than inflation (4% vs. 3.1%), and that I could invest that Social Security money at a 6% rate of return, which I think is fairly conservative. Change up the numbers if you like.

The results are astonishing. Without Social Security, at the age of 65 I would have about $2 million in my investment account, whereas with Social Security, I would start getting back $59,677 per year from the government. The government money does goes up with inflation every year. But even if I took that $59,677 (inflation-adjusted) out of my investment account every year, I would never run out of money. The investment account would actually grow each year by more than the Social Security benefit. By the age of 80 I would have almost $2.8 million in the account!

Social Security helped lift millions of the elderly out of poverty in the 1930s and the decades beyond. But the original tax rate was only 2% (1% each on the employer and employee). Since then it has ballooned to a whopping 12.4%. Instead of handing that money over to the federal government so they can waste it, I’d rather hold on to it – to do with as I please.