As I suspected those (who are not earning minimum wage you can be sure) that have lost money on the Madoff case would expect others to bail them out: well paid lawyers (I am sure) are making their case for just such a bailout of their wealthy clients.
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The SIPC has little more than $1.6bn of funds and has promised $500,000 to each Madoff victim who had an account with his firm in the past 12 months.
The debate needs to be about what is the proper role for government. Not about this instance. What type of losses do we want secured? How large of payments do we want to insure? That amount has been $500,000 if we are changing the rules after the fact for a few is that really the best course of action)? How should these payments be funded? Do we really want to raise taxes on our grand children (many of which who will earn less than the equivalent of $50,000 today)? I don’t think so. This SIPC fund should be paid for by fees on investments just like the FDIC is paid for based on fees on covered deposits (as the SIPC is now – but no taxpayer funding should occur).
If we decide we want to pay back people several million each then the fees just need to be raised to fund such a system. Just as with the FDIC if we want the government to backstop the fund by guaranteeing they will loan the fund money if it runs short of cash is fine with me. Then the SIPC fund just pays back the taxpayers with interest.
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Compounding is the Most Powerful Force in the Universe
A talking head with some valuable info. I remember my father (a statistics professor) getting me to understand this as a small child (about 6 years old). The concept of growth and mathematical compounding is an important idea to understand as you think and learn about the world. It also is helpful so you understand that statistics don’t lie but ignorant people can draw false conclusions from data.
It is unclear if Einstein really said this but he is often quoted as saying “compounding is the most powerful force in the universe.” Whether he did or not, understanding this simple concept is a critical component of numeracy (literacy with numbers). My guess is that people just find the concept of compounding amazing and then attribute quotes about it to Einstein.
I strongly encourage you to watch at least the first 2 segments (a total of 15 minutes). And then take some time and think about compounding in ways to help you internalize the concepts. You can also read his book: The Essential Exponential For the Future of Our Planet by Albert Bartlett.
Understanding the benefits of compound interest can help you become a much more successful investor. And understanding the principles of compounding can help you see the excess of bubbles cannot continue. You still have to overcome psychology that can be a powerful force leading you to believe never ending growth is possible. But at least you will have the mathematical understanding to help.
Related: Curious Cat Investing and Economics Search – Playing Dice and Children’s Numeracy – Saving for Retirement (compound interest) – Bigger Impact: 15 to 18 mpg or 50 to 100 mpg?
I don’t believe you should carry credit card debt at all. See my tips on using credit cards effectively. And you should have an emergency fund to pay at least 6 months of expenses to tap before using credit card debt. But if you do have debt and you are in such a bad personal financial situation where you will not be able to pay back what you have borrowed this might be useful information: Credit Card Companies Willing to Deal Over Debt
So lenders and their collectors are rushing to round up what money they can before things get worse, even if that means forgiving part of some borrowers’ debts. Increasingly, they are stretching out payments and accepting dimes, if not pennies, on the dollar as payment in full.
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Lenders are not being charitable. They are simply trying to protect themselves. Banks and card companies are bracing for a wave of defaults on credit card debt in early 2009, and they are vying with each other to get paid first.
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Card companies will offer loan modifications only to people who meet certain criteria. Most customers must be delinquent for 90 days or longer. Other considerations include the borrower’s income, existing bank relationships and a credit record that suggests missing a payment is an exception rather than the rule.
While a deal may help avoid credit card cancellation or bankruptcy, it will also lead to a sharp drop in the borrower’s credit score for as long as seven years, making it far more difficult and expensive to obtain new loans. The average consumer’s score will fall 70 to 130 points, on a scale where the strongest borrowers register 700 or more.
This is only an option to minimize a big mistake that results in you finding your self in a very bad situation. The credit card companies are not charities or known for giving away money. They are only going to do this when they figure they won’t get the full amount they are owed and figure getting some is the best they can hope for.
Related: Americans are Drowning in Debt – Families Shouldn’t Finance Everyday Purchases on Credit – Don’t Let the Credit Card Companies Play You for a Fool – Hidden Credit Card Fees
Retirement Myths and Realities provides some ideas from former Boeing President, Henry Hebeler:
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My father used to tell me to save 10 percent of my wages all the time for retirement. And so I did. I never looked at any retirement plan; we didn’t have retirement planning tools in those days.
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I think the number is closer to 15 (percent) to 20 percent — that’s from the time when you’re a relatively young person, say, 30 years old or something like that.
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A retiree’s inflation rate is about 0.2 percent higher than the normal Consumer Price Index. When you retire, you have medical expenses that continually increase. You have more need for this service and the unit cost is increasing much faster than inflation.
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Now, if you’re going to retire at 80 years old, you could actually have a bigger number than 4 percent. If you’re going to retire around 65 or so, 4 percent is not a bad number. Some people are now saying 3.5 percent instead of 4 percent. If you’re going to retire at 55, you’d better spend a lot less than 4 percent because you’ve got another 10 years of life that you’re going to have to support.
He makes some interesting points. I agree it is very important for people to become financially literate and take the time to understand their retirement plans. Just hoping it will work out or trusting that just doing what someone told you are very bad ideas. You need to educate yourself and learn about financing your retirement.
I am not really convinced by his idea that you need to start saving 15-20% for retirement at age 30. But that is a decision each person has to make for themselves. Of course there are many factors including how much risk you are willing to accept, when you plan on retiring, what standard of living you want in retirement…
Related: How Much Retirement Income? – posts on retirement – Saving for Retirement – Our Only Hope: Retiring Later
The lowest 30 Year fixed mortgage rates in 37 years is great news for those looking to buy a house or to re-finance. However, that truth (the lowest rate) masks another truth, that it is available to a somewhat limited pool of borrowers. The rates for jumbo 30 year fixed mortgages and for regular 30 year fixed mortgages, for those with lower credit ratings, are not at the lowest rates they have ever reached. And getting mortgage rates that don’t require a 10-20% down payment and fully documented financial position are not as low as they have ever been. 15 year fixed rates are also low, but are not at all time lows. FHA loans still allow very low down payments, but others have moved away from this practice (which is a wise move).
Current rates, national average, from Bankrate: 30 year fixed 5.26%, 30 year fixed jumbo 6.96% (a full 170 basis points higher rate), 15 year fixed 5.07%. Jumbo rates have been less than 40 basis points higher than conventional rates most of time (based on my memory – I am looking for a source to confirm). The site does not present the credit score but my guess is these rates are based on a credit score of 700, or higher. Last week the jumbo rates increased by 11 basis points and regular 30 year rates fell by 3 basis points.
Related: Jumbo v. Regular Fixed Mortgage Rates: by Credit Score – historical mortgage rate chart – Nearly 10% of Mortgages Delinquent or in Foreclosure – misinterpreting data
Changes in the Market For Jumbo Mortgages
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On Nov 12, 2008 I shopped for an $800,000 30-year fixed-rate mortgage on Mortgage Marvel, an on-line site that I reviewed earlier in 2008 (see A Look at Mortgage Marvel). The mortgage companies on the site quoted rates of 8.125% to 8.375%. The credit unions and banks, in contrast, quoted rates ranging from 5.875% to 7.875%. I have never before seen rate differences on the same transaction this large. They no doubt reflect wide differences in lender access to funding, which is symptomatic of a market in turmoil.
More Insurers Raise Fees on Variable Annuities
As SmartMoney has reported, this is one way that annuities are failing to live up to their big promises. The guarantees attached to the products – minimum returns of 6% per year or better, market upside, no chance of loss and a lifetime income stream – were designed to attract people in retirement or close to it.
And it worked, attracting $650 billion in assets in the last five years. But the guarantees are only as good as the insurance company’s ability to hedge them, and even when the markets were rising, some insurance company executives admitted their strategies hadn’t been tested by real-life crisis conditions. Now some estimates suggest that hedging costs have doubled in the last year, and insurers are passing those costs along to their customers.
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For example, an investor might purchase a $100,000 annuity that pays a guaranteed 6% annual return for 10 years, or market returns — whichever is better. The fees for a product like that might look something like this:
- 1.3% annually on the current balance to cover the underlying investment
- 1% annually on the current balance for the insurance wrapper (called the mortality and expense charge)
- 1% of the original purchase price to cover the guarantee
The fees now rising are all in that last category — charges that cover guarantees. At the Hartford, the fees of three different kinds of guarantees are rising, from the current charge of 0.35% to 0.75%.
In general I am not inclined to insurance investment products. They are frequently overloaded with fees. Annuities can provide some balance in retirement, so annuitizing a portion of assets at retirement may be reasonable. But I would not use insurance investment products for a significant portion of my retirement assets.
Related: Personal Finance: Long-term Care Insurance – Many Retirees Face Prospect of Outliving Savings – Investor Protection Needed – Retirement Tips from TIAA CREF
I have posted photos from the first day of my Utah trip: Antelope Island, Great Salt Lake and Salt Lake City.
Related: Medieval Peasants had More Vacation Time – Dream More, Work Less – Parfrey’s Glen, Wisconsin Photos
Here is an interesting article at Bloomberg looks at the Chicago school of economics: Friedman Would Be Roiled as Chicago Disciples Rue Repudiation by John Lippert
By the end of November, the government had committed $8.5 trillion, or more than half the value of everything produced in the country in 2007, to save the financial system.
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Robert Lucas, a Chicago economist who won a Nobel in 1995 for a theory that argued against governments trying to fine-tune consumer demand, says deregulation may have gone too far. Depression-era laws that separated commercial and investment banks helped depositors decide if they wanted secure accounts or riskier investments. Today, without these distinctions, people can’t be sure if their investments, or those of their customers, are safe.
“I’m changing my views on bank regulation every week,” Lucas, 71, says. “It was an area I saw as under control. Now I don’t believe that.” Lucas says he voted for Obama, the only Democrat besides Bill Clinton he’d supported in 44 years. He concluded the candidate was comfortable talking with professional economists.
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“The big event of the last 20 years is the success of free markets in India and China,” says McCloskey via telephone from South Africa, where she’s a visiting professor at the University of the Free State in Bloemfontein. “This is more important than any financial crisis and makes it really hard to argue for a return to central planning.”
I believe capitalism is the best system for economic development. Unfortunately, as I have written before, too many decision makers don’t have the slightest clue about economics. They accept simplistic views just like scientifically illiterate people accept simplistic claims that have no merit.
The basics are pretty easy. You want to use the market to guide the economy. You need to regulate in those areas the market alone is know to be weak (negative externalities – including pollution, risks to the public…) anti-market behavior (large players controlling markets for their own benefit, large players paying off politicians for benefits…) and systemic risks (“too big to fail“…). And practical consideration is more important that ideological purity.
One of the most important consistent failures is the continued favoring of large entities that pay politicians large amounts of money. The continued creation of huge organizations that are anti-competitive by their nature and create systemic economic risk have not economic justification. The role of the government should be to enforce competitive markets not allow huge competitors to buyout other huge competitors so that they can further distort the market.
Related: Ignorance of Capitalism – Misuse of Statistics, Mania in Financial Markets – Greenspan Says He Was Wrong On Regulation – Lobbyists Keep Tax Off Billion Dollar Private Equities Deals and On For Our Grandchildren – Treasury Now (1987) Favors Creation of Huge Banks
We now have the lowest 30 year fixed mortgage rates since data has been collected (37 years) in the USA. Is this due to the Fed cutting the discount rate? I do not think so. As I have said previously 30 year fixed rates are not correlated with federal reserve rates. But this time the government is actively seeking to reduce mortgage rates.
Mortgage Rate Hits 37-Year Low
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The 15-year fixed-rate mortgage averaged 4.92%, down from last week when it averaged 5.20%. A year ago the 15-year loan averaged 5.79%. The 15-year mortgage hasn’t been lower since April 1, 2004, when it averaged 4.84%.
Homeowners refinance, put savings under mattress
These rates sure are fantastic if you are in the market. I was not in the market, but I am considering re-financing now. You need to be careful and not just withdraw money because you can. If you can refinance and reduce your payments it may well be a wise move though. One problem can be extending the date you will finally be free of mortgage debt. If you re-finance a current 30 year loan, that you got 5 years ago, you will now be paying 5 more years. One option is to see if you can get a 25 or 20 year loan. Or if you can make a 15 year loan work, do that (15 and 30 year fixed rate mortgages are common).
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The economy (in the USA and worldwide) continues to struggle and the prospects for 2009 do not look good. My guess is that the economy in 2009 will be poor. If we are lucky, we will be improving in the fall of 2009, but that may not happen. But what does that mean for how to invest now?
I would guess that the stock market (in the USA) will be lower 12 months from now. But I am far from certain, of that guess. I have been buying some stocks over the last few months. I just increased my contributions to my 401(k) by about 50% (funded by a portion of my raise). I changed the distribution of my future contributions in my 401(k) (I left the existing investments as they were).
My contributions are now going to 100% stock investments (if I were close to retirement I would not do this). I had been investing 25% in real estate. I also moved into a bit more international stocks from just USA stocks. I would be perfectly fine continuing to the 25% in real estate, my reason for switching was more that I wanted to buy more stocks (not that I want to avoid the real estate). The real estate funds have declined less than 3% this year. I wouldn’t be surprised for it to fall more next year but my real reason for shifting contributions to stocks is I really like the long term prospects at the current level of the stock market (both globally and in the USA). The short term I am much less optimistic about – obviously.
I will also fully fund my Roth IRA for 2009, in January. I plan to buy a bit more Amazon (AMZN) and Templeton Emerging Market Fund (EMF). And will likely buy a bit of Danaher (DHR) or PetroChina (PTR) with the remaining cash.
Related: 401(k)s are a Great Way to Save for Retirement – Lazy Portfolio Results – Starting Retirement Account Allocations for Someone Under 40