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Today's Commentary: 03.16.05
Mr. Greenspan Speaks Again

With each Congressional committee he addresses - on Tuesday it was the Senate Select Committee on Aging - Alan Greenspan sits, and with great eloquence, tries to keep the elected lawmakers from undoing a life's work. Perhaps not a whole life's work, but enough of one that even Mr. Greenspan realizes that while first impressions are great, it's the last one that people remember. And I believe he wants to be remembered fondly.

On the cusp of his retirement, the Fed Chairman has been telling Congress that he thinks private accounts would be exactly what Social Security needs to remain solvent. He believes that the wave of baby boomers soon to arrive on the shores of this august program will devastate the surplus that is currently there, sap the taxes of those who will remain working to support it and eventually disappear altogether. This he also believes will have an ill-effect on the economy.

What Mr. Greenspan fails to grasp is the plan itself, the one that has yet to be offered for examination by the White House, the plan that the President and his cronies are stumping across the country - coming to a closed venue near you - is even in theory, seriously flawed.

Mr. Greenspan is not wrong in his assessment of needed change. Something needs to be done. As well placed as the President's attempt at reforming the program may be, it has been the previous decisions this administration has made on the spending side of the equation that not only reversed the course this country was on but made this type of reform virtually impossible.

Before Social Security can be fully debated, Congress must tweak a budget that intends to rectify those spending errors turned deficits with cuts in programs that will land squarely on the backs of middle and low income citizens.

Even where the budget intends to help, it fails. There is evidence that the tax cuts eventually granted in the proposed budget will do little to help this group. Addressing savings by adding options to current savings incentives in the hope that this group can indeed grow their own retirement statistically will also have little effect. The average amount of savings currently amassed by these wage earners closest to retirement age is only $42,000. Increasing incentives to save now seems a far removed gesture to the reality of a world that has less job security, higher costs for health care, longer periods of unemployment with less benefits, and fewer and fewer companies offering the protection and promise of a pension.

Expecting this already beleaguered group to wrap themselves around the notion that they would ultimately benefit from a program that creates private accounts that would be accompanied by less benefits no matter whether you chose to save privately of not, and a longer wait until those reduced benefits can be had requires the use of smoke and mirrors.

Let's take a look backwards through the program thirty years from now, after you retire in a world of private accounts. Congress listened to Mr. Greenspan and pushed the retirement age to seventy, and gave President Bush his privatized world. The carrot that was dangled to the general public, worn down by a constant stream of doomsday accounts, was easy enough to understand. President Bush told America that if you used private accounts, a person would have not only a better funded retirement but also something to leave one's heirs. The lure of such a promise weighs heavy on a person's soul especially at a certain age.

Now that you have retired, you must buy an annuity. An annuity is a financial contract that provides the owner a steady stream of income for the rest of their life. It is an insurance product that uses actuarial tables to determine your life expectancy and the cost of the annuity is then based on their predictions. Once that shock settles in, a second one awaits.

You would be required to take enough funds from your private account to purchase an annuity large enough to keep you above the poverty line. That could, for some middle and lower income wage earners - and possibly some whose investments fell short of historic averages - leave little inheritable money in the private account.

Much more problematic is what would happen should you die after the annuity has been purchased. Once again, all that is inheritable is what is left in the private account and outside the annuity. The abandoned annuity has been earmarked to pay for the cost of the program's reform.

The Bush administration was allowed to pin the cost of the reform on the very ones who participated in private accounts. Dying before you reach retirement would exact a cost on any accumulated funds in your private account as well. The cost to those accounts would be levied by the government to pay for the reform. Dying shortly after retirement would also leave your heirs little or far less than you had been told. Only outliving the actuarial tables, a feat the would surely deplete the remainder of the money in your private account, means outliving much of your obligation to the cost of reform.

Mr. Greenspan sees this picture with clarity and yet he continues to suggest that these kinds of accounts would be beneficial in keeping the economy from stagnating. He unfortunately believes that this can be done without a dramatic increase in taxes, done gradually to allow the markets to assess the risks, and completed through bipartisan effort. he would like to see significant progress made by 2008.

The Democrats have admirably held their ground in the early rounds of this debate. It is not their place to offer alternatives to a program that they agree needs work, but to point out the faults of offered plans and then contribute solutions of their own. This is a GOP reform that, as it is being proposed would undeniably penalize the poorer beneficiary. The costs of any reform will involve some benefit cuts and a retirement age farther into the future but those changes need to be evenly distributed preserving the core concepts of the program.

Social Security was designed to keep the middle and lower wage earners from a retirement in poverty. Any reform would need to address the risk that privatizing could do to this group. Although inflation protection and indexed investments provide a theoretical safety net, there needs to be a minimum pension provided to keep this group from experiencing any substantial losses.

The Chairman is correct in warning Congress to careful to phase in any reforms. The only problem with Mr. Greenspan's approach is his track record. Warnings about tax cuts fell on deaf ears as Congress without the accompanying spending restraints quickly turned surpluses into deficits. Each time he speaks with his wisdom riddled caveats, there is the always the possibility that Congress is missing something in the translation.

Today's Commentary: 03.13.05
Listen Closely -

Using a High Tech Aural Translator

Ford Prefect wasted no time inserting the small yellow fish into Authur Dent's aural tract allowing him the use of, as The Hitchhiker's Guide to the Galaxy describes as the oddest thing in the universe. Although it is a convenient literary tool for the late Douglas Adams, the Babel fish, which is not actually a fish but an evolutionary oddity in the form of a leech, decodes what you hear "by effectively removing all barriers to communication between different races and cultures". The guide does go on to say - the guide actually speaks - that this new found understanding using the Babel fish has led to more and bloodier wars than anything else in creation.

We weren't seeking confrontation just understanding and what the Babel fish supplied after listening intently to last week's events, left me somewhat alarmed.

The Republican majority in the Senate announced last week that they had finished a long sought change in how the average American could declare bankruptcy. These astute lawmakers saw fit to push through a well financed agenda designed to aid those poor beleaguered financial institutions that issue America credit. They did this by spinning their actions as something that would benefit the populace as a whole.

These pillars of finance along with the majority of the lawmakers - all from the same side of the aisle - claim that because they will no longer need to charge higher interest rates on the consumers who handle their credit without any difficulty, they will be able to pass this savings on to the average consumer.

Which, if you listen to them without the high tech means I employed means that we all win. Because the Senate, and as soon as the House receives the written bill next week and our more-than-willing President signs it, has made declaring bankruptcy more difficult under this new bill, millions of deadbeats who have lost the battle with medical bills and ever-easier flood of credit that arrives in the mail will now have to pony up. No more free rides on the credit card industry.

This will eliminate the "fresh start" that many folks seek when the burden of debt becomes overwhelming. Despite efforts by concerned Democrats who sought to protect the elderly from losing their homes, those suffering medical catastrophes beyond the limits of their insurance, if they ever had any, and a good deal of the financial difficulties that our armed services and veterans face, the bill passed.

While the President declares this a victory, he shares the winner's circle with the lobbyists who have fought hard since President Clinton - who used a pocket veto in the last hour of his term to defeat a previous effort - and of course, the financial institutions who committed millions to the campaigns of the GOP to allow the American public the benefits of lower a cost of goods in the marketplace.

No sooner had that veil of deceit been revealed then the Federal Reserve Chairman, whose release of the Beige Book caused much worry among Wall Streeters who have their own version of the Babel fish. Theirs suggests trouble when the slightest hint of inflation. The Book also needed some translation in terms of wages - which they saw as being okay, when in fact they were stagnate - and job creation - which will be vetted in the coming months as being lackluster at best.

Alan Greenspan and his almost equally famous side kick, Fed governor Ben Bernanke have identified the problem. Out and about making comments about the deficits and in general the nation's indebtedness, a rather precarious finger was pointed at global savers. These unlikely nations, some of whom have been involved in financial crises of their own, have unwittingly amassed too much in savings and because of these huge stockpiles of cash, are crippling the world.

The United States has embraced consumerism to such a degree - while in turn spurning saving - that the trade deficit ballooned even further in the previous month. While the $58.3 billion deficit is not as bad as November's record, and equally troubling because of the lower overall cost of oil during the latest measurement, our appetite for foreign goods is swelling the coffers of nations who save all those US dollars.

The verbal attacks against these developing nations, who somehow do not share this country's unbridled optimism for globalization and growth instead embracing the need for a rainy day fund, are meant to denounce the parsimony of these cash rich devils who are seemingly hellbent on creating economic stagnation. Mr. Greenspan and Mr. Bernanke are doing their best to keep the dollar on the ledge it is now occupying.

The Babel fish suggests that all of this verbal dancing merely means that should the American consumer become one of those evil savers, the economy would face serious trouble.

Should the dollar fall, it will force interest rates higher here at home grinding whatever growth is beginning to an agonizing halt. The two economists understand this although they seldom say so, that because we are not prepared - from a savings standpoint - for any sort of economic downturn. Hoping the world cooperates may be our last best hope.

Words, apparently from high ranking officials whose business is selling us goods and financing the debt we incur because of those purchases was all that was needed to cause the dollar to fall.

If some South Korean banker mentions some shift in exposure to Treasuries, the dollar slides. When the Japanese Premier Junichiro Koizumi's makes comments about moving away from investing in dollars and American debt, in other words, diversifying, the dollar takes a step closer to the edge. Should that happen, and we were quickly assured by the Finance Ministry of that country that it would not, the effect would be devastating for the American public, a group that is mostly ignorant of the brewing international crisis in their currency.

Here is what they don't know. Should the major Asian holders of Treasuries decide that their exposure -currently at 56% among China, Japan, South Korea and Taiwan - decide to diversify, far too many things would need to align themselves to avoid the inevitable disaster. Alan Greenspan makes light of the matter suggesting that a shift in foreign investment is inevitable. What he doesn't say - and the Babel fish does - is that private investment would need to pick up the slack. The only way to do that is to prove that interest rates are low, growth is steady, and that America has a handle on the debt we currently have.

The reaction to these words challenge the Bush administration and their strong dollar policy. Granted, much of the reason the dollar has shown such ongoing weakness has been largely due to the strength of other currencies. Had China pegged their Yuan to the Euro, a currency that is up 52% or the South African Rand, which has doubled, this whole mess of a weak dollar could have been avoided. Instead, the Yuan is pegged to the dollar which means that it needs to be sold for greenbacks which build up in reserves which are in turn invested in Treasuries. These are the same Treasuries that are showing signs of having lost some of their attractiveness.

The Babel fish translates these Asian finance ministers, the ones who quickly followed the quotes made by their bosses, as a smiling indication that they intend to diversify. To them and their banks, cutting losses is much more prudent than financing an American president.

Our hunger for anything cheap, preferably imported, and highly leveraged continued and the report that followed came as no real surprise. The translation however did.

Who would have thought that the widening trade deficit could be celebrated as proof that the economy is growing. Our mounting trade deficits, something that is not expected to fall anytime soon and our growing budget deficits, a twin of significant importance are no longer being ignored by the world's investors. If only those Europeans would start spending, the world would be a better place.

Each new round of borrowing for tax cuts, revamping Social Security, or spending cuts that are not likely to happen because of their political unpopularity, brings new doubts that our policies are no longer worth backing financially.

Republicans have begun to debate the wisdom of continued tax cuts in light of too few attempts at spending cuts. The federal deficit, based on the President's $2.57 trillion budget currently being discussed in Congress shaves entitlement programs while doing little to address the deepening hole the country has dug. This, the Babel fish tells me is a smoke screen.

As of last week, a moment in time that was marked as the five year anniversary of the greatest slide in American wealth, the average investor has learned that the forces of the marketplace are not to be ignored. From the lofty highs that tech stocks - and to a lesser degree Alan Greenspan - took us, to a place of unbelievable wealth for so little effort, to the devastating crash that followed taking not only tech names but stalwarts of the economy as well, we have learned little about investing.

The term bubble has never been a good one. Bubbles when they burst, leave very little evidence of their existence. I see plenty of wreckage still around and the possibility of more.

We have simply shifted our hopes and dreams into the equity in our homes. Although the case for whether there is a bubble in the housing, thought of as a mostly regional phenomena, the fact that many Americans still believe that the owning a home, or more specifically financing the long term purchase of property, is worth achieving is testimony ot the continued influence of the Fed chairman.

Much like the distance between value and business that became the hallmark of those irrational late '90s, the chasm between the worth of homes and their true value has widened giving Americans a false sense of security. We have apparently learned little from those heady days five years ago and still don't quite embrace diversity and a long term approach to investing. But the average investor/ homeowner will be hailed as the victorious one, the spendthrift, the engine of economic growth, and ultimately, the one who is left with the bill.

Should the dollar fall, the foreign appetite for our debt dry up, our economic policy of deep deficits to grow the economy fail, and if interest rates rise, the average American will lose. By how much is still debatable. With the safety nets of entitlement and government protection being discussed as unnecessary burdens - translated as costs for living in such a great nation - for future generations, the present is shaping up as the harbinger of a new era, one that promises the status quo, the one ushered in five years ago, a time of surpluses and exuberance, is no longer acceptable.

The Blue Money Report
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