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David Walker: Obama’s Tax Pledge ‘Ridiculous Promise’

“Let me tell it to you straight. The. Math. Politicians. Sell. Does. Not. Work. And if we don’t start dealing with the truth soon, this country could face dire consequences.”

-David M. Walker, Comptroller General of the United States, October 2007

Before I closed shop late last night, I stumbled on the following from Bloomberg’s Brian Faler and Nicholas Johnston:

President Barack Obama said he is “confident” that he won’t have to raise taxes on most Americans to close the budget deficit as long as the economy picks up steam.

“One of the biggest variables in this whole thing is economic growth,” the president said in an interview with Bloomberg News at the White House. “If we are growing at a robust rate, then we can pay for the government that we need without having to raise taxes.”

Obama has repeatedly said he would keep his campaign pledge to cut taxes for 95 percent of working Americans while rolling back tax breaks for households making more than $250,000 a year.

“I’m confident that we don’t have to raise taxes on ordinary working families,” he said.

Now, many will argue the U.S. President still needs to build up his “street credibility” on economic matters. It remains to be seen if President Obama, despite his vast experience in other areas, can grasp the multitude and degree of the financial difficulties at hand.

That being said, consider what someone who’s already achieved “street cred” has to say about the Obama campaign pledge to cut taxes for the “ordinary working families.”

The person I’m referring to here is David M. Walker, former Comptroller General of the United States (nation’s chief accountant), former head of the U.S. Government Accountability Office (GAO), and current President and CEO of The Peter G. Peterson Foundation.

I’ve been following Mr. Walker’s career for quite some time now. Back on June 20, 2007, I wrote:

The tremendous financial burden brought on by entitlements also frightens David Walker, who is basically the nation’s accountant-in-chief. Walker is touring the United States through the 2008 elections, and according to Bloomberg, is “talking to anybody who will listen about the fiscal black hole Washington has dug itself, the ‘demographic tsunami’ that will come when the baby boom generation begins retiring and the recklessness of borrowing money from foreign lenders to pay for the operation of the U.S. government.” His speaking tour includes economists and budget analysts from across the political spectrum. The message they are conveying is that if the U.S government continues to conduct business as usual in the coming years, the national debt ($8.8 trillion as of today) could reach $46 trillion or more, adjusted for inflation.

I added on February 26, 2008:

On February 15, David M. Walker, Comptroller General of the United States, announced his resignation as head of the U.S. Government Accountability Office (GAO). Since November 9, 1998, Walker has served as the nation’s chief accountability officer, leading the GAO in its mission to help improve the performance and accountability of the federal government for the benefit of the American people. Back on February 15, Richard Cowan wrote in Reuters that:

Walker repeatedly urged Congress to waste no time in reforming massive government programs, such as health care for the elderly, which will grow significantly as the U.S. population ages.

“The picture I will lay out for you… is not a pretty one and it’s getting worse with the passage of time,” the blunt-talking Walker told Congress more than once.

Despite those warnings, Congress and the White House have yet to begin cooperating on how to tackle the huge growth in health care and retirement benefit costs…

Yesterday, Bill Donoghue from MarketWatch had this to say about Walker’s departure:

Facing indifference on the Hill and unrealistic spending promises, Walker is resigning with five years still remaining in his term to head the newly formed Peter G. Peterson Foundation. Peterson, senior chairman of The Blackstone Group and Commerce secretary in the Nixon administration, has pledged an astounding startup budget for the foundation of $1 billion.

That money will attack what the foundation considers “the most substantial economic, fiscal and other sustainability challenges of our current age” — including federal entitlement programs, health care, unprecedented trade and budget deficits, low savings rates, mounting foreign debt, soaring energy consumption, an uncompetitive educational system, and the proliferation of nuclear warfare materials. Maybe Congress will listen this time.

The departing Comptroller General told Reuters:

As Comptroller General of the United States and head of the GAO, there are real limitations on what I can do and say in connection with key public policy issues, especially issues that directly relate to GAO’s client — the Congress.

My new position will provide me with the ability and resources to more aggressively address a range of current and emerging challenges facing our country.

MarketWatch’s Donoghue lamented:

This sounds to me like the ultimate sell signal on America…

When the nation’s best-informed watchdog resigns and few are acting on his recommendations on his “Fiscal Wake-Up Tour,” it’s time to reconsider over-optimistic domestic stock investments and look elsewhere, or bet against the U.S. market.

So, what is this dedicated public servant saying these days?

This past Monday, Mr. Walker appeared on CNBC’s “Squawk Box” and said the following about the Obama campaign pledge to cut taxes for 95 percent of working Americans:

His pledge to not raise taxes on people making less than $250,000 was totally unrealistic, especially given $1.8 trillion-plus deficits, and growing structural deficits going forward…

It was a ridiculous promise. I don’t know why he made it. Politicians are good at making these type of promises during campaigns. Anybody that passed basic math would have known that you cannot end up dealing with our structural problems in our deficits without having more revenues.

David M. Walker Interview
CNBC Video Link

Sources:

“Obama Says ‘Robust’ Growth Will Prevent Tax Increases (Update1)”
Brian Faler, Nicholas Johnston
Bloomberg, June 16, 2009

David Walker Interview
CNBC, June 15, 2009

Congress Scrutinized For Potential Conflicts-Of-Interest

Washington lawmakers are receiving more attention these days for possible conflicts-of-interest relating to the taxpayer bailouts and the proposed health care system overhaul. From the Washington Post’s Paul Kane and Carol D. Leonnig last week:

Top House lawmakers had considerable holdings in major financial institutions that took billions of dollars in taxpayer bailouts at the end of last year, according to annual financial disclosure reports released yesterday.

From stock holdings to retirement funds to mortgages, more than 20 House leaders and members of the House Financial Services Committee had large personal stakes in the Wall Street powerhouses whose collapse last year led to an unprecedented government intervention in the marketplace. In some instances those lawmakers, like millions of other investors, sold their holdings at steep losses while others retained the stocks at greatly diminished value.

House Speaker Nancy Pelosi (D-Calif.) and her husband lost hundreds of thousands of dollars investing in American International Group, which has received $170 billion in government loans and cash injections, making it by far the largest recipient of federal bailout dollars. Republican Whip Eric Cantor (R-Va.) and his wife held stock, retirement plans and other investments worth at least $183,000 and as much as $495,000 in firms benefiting from federal government rescue efforts, including Goldman Sachs and Morgan Stanley.

At least 18 members of the House Financial Services Committee — which oversees the banking and housing industries at the core of the economic meltdown — held stock last year in firms that received federal bailout assistance, according to a review of the forms that were available yesterday.

As President Obama pushes his universal health care program, more potential conflicts-of-interest involving lawmakers have surfaced. From the Associated Press’ Larry Margasak and Sharon Theimer last Friday:

Influential senators working to overhaul the nation’s health care system have investments and family ties with some of the biggest names in the industry. The wife of Sen. Chris Dodd, the lawmaker in charge of writing the Senate’s bill, sits on the boards of four health care companies.

Members of both parties have industry connections, including Democrats Jay Rockefeller and Tom Harkin, in addition to Dodd, and Republicans Tom Coburn, Judd Gregg, John Kyl and Orrin Hatch, financial reports showed Friday.

Jackie Clegg Dodd, wife of the Connecticut Democrat, is on the boards of Javelin Pharmaceuticals Inc., Cardiome Pharma Corp., Brookdale Senior Living and Pear Tree Pharmaceuticals…

Other publicly available documents show Mrs. Dodd last year was one of the most highly compensated non-employee members of the Javelin Pharmaceuticals Inc. board, on which she has served since 2004. She earned $32,000 in fees and $109,587 in stock option awards last year, according to the company’s SEC filings.

Mrs. Dodd earned $79,063 in fees from Cardiome in its last fiscal year, while Brookdale Senior Living gave her $122,231 in stock awards in 2008, their SEC filings show. She earned no income from her post as a director for Pear Tree Pharmaceuticals but holds up to $15,000 in stock in Pear Tree, which describes itself as a development-stage pharmaceutical company focused on the needs of aging women.

Sources:

“Lawmakers Invested in Bailed-Out Firms”
Paul Kane, Carol D. Leonnig
Washington Post, June 11, 2009

“Key health care senators have industry ties”
Larry Margasak, Sharon Theimer
Associated Press, June 12, 2009

Agency That Insures Pensions To Require Bailout?

Think you’ve seen the last of the taxpayer bailouts? Maybe not. The Associated Press’ Deb Riechmann wrote earlier today:

In an ominous setback, the government agency that insures the pensions of 44 million Americans has amassed a record $33.5 billion deficit — triple what it was just six months ago.

The bleak financial snapshot, in a report obtained by The Associated Press, raises new fears that a federal bailout eventually will be needed for the Pension Benefit Guaranty Corp. The beleaguered agency is being saddled with the underfunded pension plans of companies going bankrupt in the worst economic slump since the Great Depression.

A rare midyear financial update requested by Congress shows the $11.1 billion deficit the agency posted at the end of its fiscal year on Sept. 30 has swelled by $22.5 billion to its highest level in the agency’s 35-year history…

The agency does not insure 401(k) plans, but its fate is important not only to the workers covered by more than 29,000 employer-sponsored benefit pension plans but to all taxpayers who could be asked to foot the bill on a bailout if the agency ever becomes insolvent.

It’s possible the Pension Benefit Guaranty Corp. could be saddled with even more liabilities down the road. Riechmann added:

The agency is closely monitoring the auto, retail, financial services and health care industries, all in financial distress. The PBGC estimates that pension underfunding in the auto sector alone is $77 billion.

Source:

“Deficit surges at agency that insures pensions”
Deb Riechmann
Associated Press, May 20, 2009

Some Investors Prevented From Withdrawing 401(k) Funds

Do you have a 401(k) retirement account? You might be interested in the following piece from the Wall Street Journal the other day. From Eleanor Laise back on May 5:

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.

Unlike the money managers…

Source:

“401(k)s Hit by Withdrawal Freezes”
Eleanor Laise
Wall Street Journal, May 5, 2009

College Seniors Face Tough Job Market

It doesn’t take a genius to figure out that college seniors are going to have a tough time landing a job upon graduation. Boom2Bust.com readers were made aware of this last year, when I wrote back on October 23:

Looks like this year’s crop of college seniors will be facing one of the toughest job markets in years. Cari Tuna of the Wall Street Journal wrote yesterday:

College seniors may have more trouble landing a job next spring than recent graduates, as employers trim their hiring outlooks in response to the slowing economy and financial-sector turmoil.

So just how tough is the job market for graduating seniors? Reuters’ Andrew Stern wrote today:

A college diploma has long been the ticket to a good job, but the deepest economic slump in decades has dampened the dreams of many U.S. college seniors.

They face a hard reality upon graduation this spring: stiff competition from the growing ranks of the unemployed, from those forced out of retirement or delaying it because of the collapsing stock market, and from graduates of past years who are still searching for jobs in their chosen field…

Confronted by a prolonged recession and a rising 8.5 percent unemployment rate, the highest U.S. rate in a quarter-century, some college seniors have grown “so anxious and worried they are paralyzed” and are not looking for a job, said University of Wisconsin, Madison, career services director Leslie Kohlberg.

The U.S. Census Bureau says that 1.6 million college degrees will be awarded in 2009, a figure which has climbed steadily. According to David McDonough, a Clark University career counselor, there are those who question whether this is just too many. From the piece:

Rumblings that U.S. colleges and universities pump out too many graduates who are ill-equipped for the available jobs echoes sentiments expressed in Britain and China, he said.

Obama frequently urges access to college be expanded.

Regardless, I’d like to wish all the graduating seniors the best of luck when it comes to landing a job in the coming months. Especially those for whom the journey through college was long and difficult…

“Now I lay me down to sleep…”

Source:

“Graduating U.S. college seniors entering grim market”
Andrew Stern
Reuters, April 27, 2009

Friday Freebie: The “A-Letter”

I love free stuff. And I bet a lot of you do as well. Which is why I’m starting a new series called “Friday Freebie,” where every so often I’ll introduce you to some free, yet possibly useful, finds of mine related to topics covered in this blog, starting with this post.

One of my favorite free newsletters that I like to read on a regular basis is the “A-Letter” that’s published by The Sovereign Society. The “A-Letter” is their “free offshore financial e-newsletter containing late breaking news, commentary and ground breaking advice about everything effecting the ‘offshore world’ delivered straight to your email inbox, six times per week.” Anyway, I thought the April 1 edition of the “A-Letter” was a real keeper— and thought-provoking. Here’s an excerpt from that issue:

2009 seems to be working out to be the “year of the fool” judging from headlines like…

 The Social Security Surplus is already gone…fini…no more. “Expected” to last through 2017, thanks to rosy estimates from the bean-counters in Washington, the surplus was annihilated in last year’s stock market crash…meaning the U.S. government will likely need to raise hundreds of billions more in Treasury sales in the coming years…aside from the trillions already scheduled, of course.

 Apparently dissatisfied with only causing the biggest bankruptcy in recorded history, a former Lehman Exec decided to gamble with 44 million American pensions. Former Lehman Managing Director Charles Millard – acting as head of the Pension Benefit Guarantee Corp. (PBGC, the federal government’s safety net for pensions) – boldly moved a substantial portion of the PBGC’s funds out of “boring” bonds and into promising stocks…all in hopes of avoiding a future government bailout. Unfortunately, he started this plan mid last-year, and his picks were already down by 23% at the end of September ‘08. Oh yeah, and he was almost a trillion in deficit when he started.

 Obama says Detroit Bankruptcy Restructuring is “inevitable,” after the latest round of media back-and-forth that pushed Waggoner out the door with a US$20 Million+ retirement package. I can’t tell you how glad I am that we gave these yahoos US$17 Billion last year just to stall the bankruptcy process for a few months. What a great investment that was.

 And on a similar note (wink wink) “The administration of President Obama is suffering very, very strong pressure from sectors affected by the U.S. economic recession,” (ed.: *cough* UAW *cough*) “and that is preventing it from acting correctly,” said Mexican President Felipe Calderon in a recent interview. A look at the list of Obama’s biggest campaign contributors suggests that Felipe was right on. Change? Well, I suppose changing from a neo-conservative puppet of an oil-man to a “bought and & paid for” cog in the Chicago machine does count as “change.”

 And just when you thought hypocrisy couldn’t possibly raise itself to new heights in Washington, President Obama nominated yet another tax dodger to his cabinet in Kathleen Sebelius, his nominee to Health and & Human Services. She owes US$7,000 in total due to some “unintentional mistakes.” Funny thing is, when I make an “unintentional mistake” on my returns, I tend to get whacked with fees, calls and threats from the IRS. Good thing she’s a member of the “Washington Club.”

 Housing Prices are Falling Faster than any other time on record, at least according to Case Shiller’s highly reliable statistics. The 20-city average decline hit 19% in January, muffling any speculation of a bottom forming in the housing market.

 Banks are Refusing to Take Ownership of Properties at the End of the Foreclosure Process in cities all across America, because the cost of the process is higher than the rapidly-declining value of the underlying real estate. But homeowners aren’t off the hook…they’re still obligated to take care of their mortgage and handle any maintenance and repairs that occur in the months after they vacate due to foreclosure.

 Commercial Real Estate Lenders are hesitating to push borrowers into bankruptcy for reasons ranging from misguided optimism to the harsh reality of having to write those debts off. As evidenced by companies like General Growth Properties and Centro, CRE borrowers are staving off bankruptcy for much longer than they would in any other situation. Apparently wishful thinking still qualifies as a business plan in some circles.

 And now the OECD is pleading the EU to begin Quantitative Easing, aka “printing money and throwing it at the problem.” Germany’s so far been vehemently against the idea, for reasons including the problems Eric highlighted with QE in the EU.

So…Which One was the Joke?

Could you figure it out? Which one of the above was a joke?

Well…you’re right. None of them were; they’re all real. I suppose that’s the joke…albeit a very morbid and existentialist joke. But hey, I work with what I’ve got.

And what’s worse; following this crisis as it unfolds on a daily basis, watching every blip of news and trying to decipher what it means for you and I – I’m starting to feel like the joke’s on us.

Us the taxpayers…us the voters. Even us the dollar holders, because the “inflation tax” that will surely follow Washington’s blundering bailouts will bushwhack the value of everyone’s dollars…no matter whether you’re American, Mexican, pink, purple, green or some lily-livered presidentially-appointed tax-cheat.

Hey, who said there was no such thing as a free lunch?

Source:

“In 2009, Every Day is April Fool’s Day!”
“A-Letter” Newsletter
Matt Collins
Sovereign Society, April 1, 2009

How Main Street Is Coping With The Economy

This afternoon I happened to catch an interesting video on the MarketWatch website in which reporter Stacey Delo and her colleagues talk to people on Main Street all over America, and how they’ve been dealing with falling asset prices and an economy in recession.

The segment is 4 minutes and 4 seconds long.

“Postcards from the Stock Crash”
MarketWatch Video Link

Source:

“Postcards from the Stock Crash”
Stacey Delo
MarketWatch, March 24, 2009

The Boomer Bust

Bad news for the Baby Boomer generation. CNN Money’s Les Christie reviewed a new report from the Center for Economic and Policy Research on the financial well-being of Americans born between 1946 and 1964, and wrote this afternoon:

What a turnaround for the American Dream!

According to a report released Wednesday, the real estate market bust and stock market declines have carved a huge chunk out of the assets of baby boomers, the largest age cohort in U.S. history.

So much home equity has been lost that should boomers need to sell their homes, 30% of those aged 45 to 54 would owe money at closing, according to “The Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble,” a report released by the Center for Economic and Policy Research, a Washington, D.C.-based, non-partisan think tank. About 18% of boomers aged 55 to 64 are underwater and would have to bring money to the table.

The CEPR also found that people who were renting homes in 2004 will have more wealth in 2009 than those who were owners. That’s true for all five wealth groups the study analyzed, from the poorest to the wealthiest.

“The collapse of the housing bubble, which led to the current recession, has already destroyed almost $6 trillion dollars in housing wealth for homeowners,” said report co-author Dean Baker. “This reality is compounded by the recent collapse of the stock market. Many baby boomers will only have Social Security and Medicare to rely on in their retirement.”

“Crap!”

The CNN staff writer noted the following about the change in net worth for this demographic. Christie wrote:

Boomers between 45 and 54 have lost 45% of their median net worth, leaving them with just $80,000 in net worth, including home equity, according to the report.

Older boomers have fared marginally better. Those between 55 and 64 have lost 38% of their net worth, leaving them with $140,000. But this group is rapidly nearing retirement age and they have few working years left to make up the losses.

You can read the CEPR report here.

Source:

“Boomers: 30% underwater”
Les Christie
CNN Money, February 25, 2009

U.S. Post Office Might Cut Back Delivery Days

For many, the impact of the economic recession might soon hit home in an unexpected way. From the Associated Press’ Randolph Schmid this afternoon:

Massive deficits could force the post office to cut out one day of mail delivery, the postmaster general told Congress on Wednesday, in asking lawmakers to lift the requirement that the agency deliver mail six days a week. If the change happens, that doesn’t necessarily mean an end to Saturday mail delivery. Previous post office studies have looked at the possibility of skipping some other day when mail flow is light, such as Tuesday.

Faced with dwindling mail volume and rising costs, the post office was $2.8 billion in the red last year. “If current trends continue, we could experience a net loss of $6 billion or more this fiscal year,” [Postmaster General John E.] Potter said in testimony for a Senate Homeland Security and Governmental Affairs subcommittee…

The post office’s problem is twofold, Potter explained.

“A revolution in the way people communicate has structurally changed the way America uses the mail,” with a shift from first-class letters to the Internet for personal communications, billings, payments, statements and business correspondence.

To some extent that was made up for my growth in standard mail — largely advertising — but the economic meltdown has resulted in a drop there also.

Potter also asked that Congress ease the requirement that it make advance payments into a fund to cover future health benefits for retirees. Last year the post office was required to put $5.6 billion into the fund.

“We are in uncharted waters,” Potter said. “But we do know that mail volume and revenue — and with them the health of the mail system — are dependent on the length and depth of the current economic recession.”

“Let me tell you the REAL story”

Source:

“Postmaster General: Mail days may need to be cut”
Randolph E. Schmid
Associated Press, January 28, 2009

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401(k) Plans To Lose Preferential Tax Treatment?

Remember all that talk some time ago about the U.S. government ending tax advantages for 401(k) retirement savings accounts? Well, the topic’s back in the headlines these days. In October, U.S. News & World Report’s James Pethokoukis wrote:

I hate to use the “S” word, but the American government would never do something as, well, socialist as seize private pension funds, right? This is exactly what cash-strapped Argentina just did in the name of protecting workers’ retirement accounts (Efharisto, Fausta’s Blog). Now, even Uncle Sam isn’t that stupid, but some Democrats might try something almost as loopy: kill 401(k) plans.

House Democrats recently invited Teresa Ghilarducci, a professor at the New School of Social Research, to testify before a subcommittee on her idea to eliminate the preferential tax treatment of the popular retirement plans. In place of 401(k) plans, she would have workers transfer their dough into government-created “guaranteed retirement accounts” for every worker. The government would deposit $600 (inflation indexed) every year into the GRAs. Each worker would also have to save 5 percent of pay into the accounts, to which the government would pay a measly 3 percent return. Rep. Jim McDermott, a Democrat from Washington and chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, said that since “the savings rate isn’t going up for the investment of $80 billion [in 401(k) tax breaks], we have to start to think about whether or not we want to continue to invest that $80 billion for a policy that’s not generating what we now say it should.”

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On December 19, Bloomberg’s Jeff Plungis reported the following:

Holders of 401(k) retirement savings accounts oppose changes to the tax deferments 401(k)s receive, according to a survey conducted for the Investment Company Institute released today.

And 87 percent reject the idea that government should make the investment decisions rather than individuals, the Washington-based group said. The survey of 3,000 people was done by Princeton, Jersey-based market research firm GfK Custom Research North America with a 1.8 percent margin of error.

“Some policy makers would have us abandon the system,” said Paul Schott Stevens, president and chief executive officer of the ICI, an association of companies that promotes investment issues. “But millions of Americans who are saving for retirement through that system want nothing of that sort.”

The survey said 72 percent “strongly” or “somewhat” disagreed with the idea of ending tax advantages for the savings accounts.

The Congressional Budget Office estimated that workers lost $2 trillion in retirement savings over a span of 15 months from declining stock markets at an October hearing of the House Education and Labor Committee. Chairman George Miller, a California Democrat, questioned whether the U.S. has gotten its money’s worth out of the estimated $80 billion in tax subsidies the retirement accounts receive each year.

One witness, professor Teresa Ghilarducci of the New School for Social Research in New York, suggested investors would be better off with government-run retirement savings accounts that would guarantee a 3 percent return above inflation.

3% return above inflation? Not exactly the path to wealth. However, my biggest hang-up regarding this proposed “guaranteed retirement account” is, who’s to prevent Uncle Sam from fudging the inflation numbers? Some suspect this has already been taking place for some time now.

However, getting back to the issue of eliminating the preferential tax treatment of 401(k) plans, I wouldn’t be too surprised if this became a reality. For if the nation’s precarious financial situation gets as bad as I think it will, Uncle Sam is going to need all the money he can get his hands on…

Sources:

“Would Obama, Dems Kill 401(k) Plans?”
James Pethokoukis
U.S. News & World Report, October 23, 2008

“Americans Want to Keep 401(k) Tax Break, Survey Says (Update1)”
Jeff Plungis
Bloomberg, December 19, 2008

Stock Market Losses Threaten Baby Boomer Retirements

It’s never a “good” time for the bear to growl down on Wall Street. But this one couldn’t have come at a more inopportune time, as far as Baby Boomers are concerned. From Reuters staff earlier today:

Wall Street is currently in its worst bear market since the Great Depression, and its stunning destruction of wealth and retirement savings has sent a wave of distress through investors, especially older ones…

The Organization for Economic Cooperation and Development estimates U.S. household wealth has taken a $7 trillion hit from the tumbling housing and stock markets.

Last week’s stock market losses took the S&P 500 down to 11-year lows and amounted to a 52 percent decline from record highs hit a year ago.

Source: American Chronicle

What makes this stock downturn so potentially devastating is that a sizeable portion of retirement assets belongs to older Americans. From the Reuters piece:

Households aged 50 and older held $5.1 trillion in retirement accounts as of Sept. 30, 2008, according to the Urban Institute. That means 71.5 percent of all retirement account assets are in the hands of those vulnerable to financial losses as they approach the end of their salary-earning years.

Of households ages 50 and older, 49 percent own retirement accounts, and nearly 80 percent of those accounts include stock holdings, according to the Urban Institute.

The typical retirement account for 50-and-older savers has half its assets in stocks, compounding the damage just as many enter the final stretch before retirement. This could also have a chilling effect on the economy if they are forced to adopt a more austere lifestyle to shore up savings.

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Source:

“Falling Stocks Crush Boomers’ Retirement Funds”
Reuters, November 28, 2008

Great Depression 2 Right Around The Corner?

Scary stuff from MarketWatch columnist Paul Farrell the other day. On Monday, Farrell wrote:

Now it’s time for my 2008 update, a look into the future where things will get far worse during the next presidential term. And given human behavior, especially in the deep recesses of Wall Street’s “greed is good” DNA, it seems inevitable that no matter how well-intentioned the new president may be Wall Street and Washington’s 41,000 special-interest lobbyists will drive America into the Great Depression 2.

Farrell then goes and rattles off 30 ‘leading edge’ indicators of the next Great Depression. From the piece:

Every day there is more breaking news, proof Wall Street’s greed is already back to “business as usual” and in denial, grabbing more and more from the new “Bailouts-R-Us” bonanza of free taxpayer cash and credits, like two-year-olds in a toy store at Christmas — anything to boost earnings, profits and stock prices, and keep those bonuses and salaries flowing, anything to blow a new bubble.

Scan these 30 “leading indicators.” Each problem has one or more possible solutions, but lacks unified political support. Time’s running out. We’re already at the edge. Add up the trillions in debt: Any collective solution will only compound our problems, because the cumulative debt will overwhelm us, make matters worse:

1. America’s credit rating may soon be downgraded below AAA
2. Fed refusal to disclose $2 trillion loans, now the new “shadow banking system”
3. Congress has no oversight of $700 billion, and Paulson’s Wall Street Trojan Horse
4. King Henry Paulson flip-flops on plan to buy toxic bank assets, confusing markets
5. Goldman, Morgan lost tens of billions, but planning over $13 billion in bonuses this year
6. AIG bails big banks out of $150 billion in credit swaps, protects shareholders before taxpayers
7. American Express joins Goldman, Morgan as bank holding firms, looking for Fed money
8. Treasury sneaks corporate tax credits into bailout giveaway, shifts costs to states
9. State revenues down, taxes and debt up; hiring, spending, borrowing add even more debt
10. State, municipal, corporate pensions lost hundreds of billions on derivative swaps
11. Hedge funds: 610 in 1990, almost 10,000 now. Returns down 15%, liquidations up
12. Consumer debt way up, now at $2.5 trillion; next area for credit meltdowns
13. Fed also plans to provide billions to $3.6 trillion money-market fund industry
14. Freddie Mac and Fannie Mae are bleeding cash, want to tap taxpayer dollars
15. Washington manipulating data: War not $600 billion but estimates actually $3 trillion
16. Hidden costs of $700 billion bailout are likely $5 trillion; plus $1 trillion Street write-offs
17. Commodities down, resource exporters and currencies dropping, triggering a global meltdown
18. Big three automakers near bankruptcy; unions, workers, retirees will suffer
19. Corporate bond market, both junk and top-rated, slumps more than 25%
20. Retailers bankrupt: Circuit City, Sharper Image, Mervyns; mall sales in free fall
21. Unemployment heading toward 8% plus; more 1930’s photos of soup lines
22. Government policy is dictated by 42,000 myopic, highly paid, greedy lobbyists
23. China’s sees GDP growth drop, crates $586 billion stimulus; deflation is now global, hitting even Dubai
24. Despite global recession, U.S. trade deficit continues, now at $650 billion
25. The 800-pound gorillas: Social Security, Medicare with $60 trillion in unfunded liabilities
26. Now 46 million uninsured as medical, drug costs explode
27. New-New Deal: U.S. planning billions for infrastructure, adding to unsustainable debt
28. Outgoing leaders handicapping new administration with huge liabilities
29. The “antitaxes” message is a new bubble, a new version of the American dream offering a free lunch, no sacrifices, exposing us to more false promises

And “leading indicator” number 30? Farrell wrote:

At a recent Reuters Global Finance Summit former Goldman Sachs chairman John Whitehead was interviewed. He was also Ronald Reagan’s Deputy Secretary of State and a former chairman of the N.Y. Fed. He says America’s problems will take years and will burn trillions.

He sees “nothing but large increases in the deficit … I think it would be worse than the depression. … Before I go to sleep at night, I wonder if tomorrow is the day Moody’s and S&P will announce a downgrade of U.S. government bonds.” It’ll get worse because “the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs, all very costly and all done by the government.”

Reuters concludes: “Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes. ‘I just want to get people thinking about this, and to realize this is a road to disaster,’ said Whitehead. ‘I’ve always been a positive person and optimistic, but I don’t see a solution here.’”

Farrell’s conclusion?:

We see the Great Depression 2. Why? Wall Street’s self-interested greed. They are their own worst enemy … and America’s too.

Geez. Looks like I picked the wrong week to quit smoking…

Scenes from Airplane! (1980)
YouTube Video Link

Source:

“30 reasons for Great Depression 2 by 2011”
Paul B. Farrell
MarketWatch, November 17, 2008

Social Security Recipients Being Short-Changed?

The Wall Street Journal’s Sarah N. Lynch reported this morning:

More than 55 million Americans will see a 5.8% boost in their monthly and supplemental Social Security benefits next year, the Social Security Administration announced Thursday.

That figure represents the largest increase in Social Security benefits since 1982.

The 5.8% cost-of-living adjustment will take effect for 50 million Social Security beneficiaries in January of next year. Another roughly 7 million people who receive supplementary Social Security income will start to see payment increases on Dec. 31.

Social Security benefits increase each year based on the rise in the Consumer Price Index. The increase comes at a time when many Americans are struggling economically in the wake of the financial crisis.

If you’re a recipient of Social Security benefits, this would appear to be good news. And in a way, it is. However, there’s a possibility you may be getting short-changed. How so? The key is the Consumer Price Index. According to the Bureau of Labor Statistics, U.S. Department of Labor:

The Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services purchased by households. The Bureau of Labor Statistics publishes CPIs for two population groups: (1) the CPI for Urban Wage Earners and Clerical Workers (CPI-W), which covers households of wage earners and clerical workers that comprise approximately 32 percent of the total population and (2) the CPI for All Urban Consumers (CPI-U) and the Chained CPI for All Urban Consumers (C-CPI- U), which cover approximately 87 percent of the total population and include in addition to wage earners and clerical worker households, groups such as professional, managerial, and technical workers, the self-employed, short-term workers, the unemployed, and retirees and others not in the labor force.

In addition, the CPI is the most widely watched and used measure of (or proxy for) the inflation rate in the United States.

The Wall Street Journal’s Jeff Bater and Brian Blackstone wrote this afternoon:

The consumer price index was unchanged in September compared to August, the Labor Department said Thursday. Excluding food and energy, the CPI advanced just 0.1% last month…

Still, consumer prices rose 4.9% on a year-over-year basis, though that’s well off the 17-year high of 5.6% reached in July.

Okay, so prices are up 4.9% from a year ago. With a 5.8% cost-of-living adjustment, Social Security recipients are still keeping ahead of inflation, right? Maybe not. In fact, they may even be far behind, even with the COLA from Uncle Sam.

Oakland economist John Williams has spent 25 years as a consulting economist and is the creator of Shadowstats.com, a Web site that tracks government statistics using alternative calculation methods. And according to his website:

Inflation, as reported by the Consumer Price Index (CPI) is understated by roughly 7% per year. This is due to recent redefinitions of the series as well as to flawed methodologies, particularly adjustments to price measures for quality changes.

Redefinitions? Flawed methodologies? MSN Money columnist Bill Fleckenstein wrote back in 2006:

Williams differentiates between two data-manipulation practices. One is “systemic manipulations, where methodologies are changed.” That’s done in order to align the government’s view of the world with the world, i.e., make things look better than they are. The second practice is out-and-out fudging of the data to produce whatever result is desired. Williams describes instances where various administrations have literally reverse-engineered the data to achieve that result (though politics is not the main purpose of the article).

For those not familiar with “substitution,” he explains the practice’s evolution in the CPI calculations. The concept of substitution was a concoction of Alan Greenspan and Michael Boskin, who basically argued that if one item were too expensive, consumers would substitute that with a cheaper one. Williams’ response: “The problem is that if you allow substitutions, you aren’t measuring a constant standard of living. You’re measuring the cost of survival. You can keep substituting down and have people buy dog food instead of hamburger. It happens. But that’s not the original concept behind the CPI.”

Williams says that the government’s motive in all of this, if there is a motive (of the government collectively; don’t picture a group of men cooking up something in a back room), is its desire to put a favorable spin on all the data.

Another motive? Transfer payments like Social Security are indexed to the CPI, and they would be far higher if the CPI were accurate. In fact, says Williams, if the “same CPI were used today as was used when Jimmy Carter was president, Social Security checks would be 70% higher.” That’s seven-zero.

In contrast to government data showing prices are up only 4.9% year-over-year, Williams says the real figure is closer to 13% through September 2008, when calculations are made using the methodologies in place in 1980.

So, is Williams on the level or what? Maybe so. The San Francisco Chronicle’s Sam Zuckerman wrote on May 25:

“If anything, the CPI understates inflation for the average household,” said Irwin Kellner, chief economist for the online investment news service MarketWatch. “Car prices might be down 5 or 10 percent in the CPI, but in reality, when you go to the dealer, you’re paying more.”

And while there’s not much patience for Williams’ claim of outright falsification, the idea that politics influences government statistics is not entirely far-fetched.

In the 1990s, for example, Republicans wanted to make changes in calculating inflation along the lines recommended by a special commission, including more use of quality adjustments. By lowering the official inflation rate, such changes promised to reduce the annual cost-of-living adjustments for Social Security and other federal programs.

[Katherine] Abraham, the Clinton bureau [of Labor Statistics] commissioner, remembers sitting in Republican House Speaker Newt Gingrich’s office:

“He said to me, ‘If you could see your way clear to doing these things, we might have more money for BLS programs.’ “

If summary, if you receive Social Security benefits (or are close to doing so), I’m sure you’re pretty excited about the news today. However, if Mr. Williams is correct in his calculations, you could be a heck of a lot more happier.

Sources:

“Social Security Benefits to Rise 5.8%”
Sarah N. Lynch
Wall Street Journal, October 16, 2008

“Inflation Pressures Eased in September”
Jeff Bater, Brian Blackstone
Wall Street Journal, October 16, 2008

“The numbers behind the lies”
Bill Fleckenstein
MSN Money, March 6, 2006

“Economist challenges government data”
Sam Zuckerman
San Francisco Chronicle, May 25, 2008

Tough Times For Those Nearing Retirement

More bad news on the retirement front. From William M. Bulkeley of the Wall Street Journal yesterday:

One in five middle-aged workers stopped contributing to their retirement plans in the last year, and one in three has considered delaying retirement, according to a new survey by AARP, an advocacy group for older Americans…

The survey, which covered 1,628 employed people over 45 years old, found that 20% had stopped participating in their retirement accounts in the past year, and 34% contemplated putting off retirement. Twenty-seven percent said they were having trouble making rent or mortgage payments.

Bulkeley pointed out the significance of these findings. He wrote:

About 60% of U.S. workers in the private sector have 401(k) accounts, holding about $3 trillion in assets. Earlier surveys have shown workers don’t put enough into 401(k)s to support their retirements, even as such plans have become the main source of retirement support, surpassing traditional fixed-benefit pensions. Labor Department statistics also show more Americans over 55 years old are staying in the work force, a sign that many can’t afford to stop working.

There is a silver lining to all this. Regarding all those middle-aged workers who stopped contributing to their 401k’s— at least their hard-earned money didn’t get swallowed up in the recent carnage on Wall Street.

Source:

“One in Five Baby Boomers Cuts Retirement Saving”
William M. Bulkeley
Wall Street Journal, October 7, 2008