March 17, 2008

So, are we still going to have our 401ks by April Fools Day?

Just asking ...

My published articles are archived at iSteve.com -- Steve Sailer

23 comments:

Anonymous said...

Much of this problem is being forced on us by a new accounting rule. In jargon it is FSAB rule 157, which requires “mark to market” for financial assets, such as the mortgage backed securities that contain the poison of sub-prime loans. This is especially difficult now because the rules are forcing markdowns at the upcoming March 31 ending quarter. Note also that much of the “paper” that is being marked down was rated AAA by the major rating agencies.

As some have suggested, the best short term solution to this problem is to suspend the implementation of FSAB (Financial Standards Accounting Board) rule 157. But that would appear to be too simple.

Of course, the FED caused much of this problem by keeping interest rates too low after the tech bubble burst and the 9-11 attack. Plus of course the government insistence that loans be extended to those with poor credit.

Derek Curry said...

Around April 8th is when the $200 billion worth of 28-day emergency credit lines offered by the Federal Reserve expire, so your 401(k) should make it just past April Fool's Day.

http://afp.google.com/article/ALeqM5gL31uM4rRe1VdanhYBxsjQ7AQZtg

D. Charles said...

Mine's dropped 15.7% YTD. At this rate, probably not. Sweet!

kurt said...

The FED created the tech bubble in the first place by keeping interest rates too low starting around 1997. Bailing out that hedge fund in 1998 with public money also did not help.

The book "Greenspan's Bubbles" is available in every airport bookstore I happen to wander into. This book makes it clear that Greenspan primed the pump too much starting in the early 90's with artificially cheap money. All of the bubbles and associated collapses are all his fault. I think Greenspan is right up there with Arthur Burns as one of worst central bankers we ever had. Where is Paul Volcher when we need him?

The federal government is complicit in this as they insisted that the banks loan money to people with poor credit.

This was a discussion on another site comparing the U.S. federal government insistence that credit be extended to those with bad credit with the various microlending programs going on in various 3rd world countries.

Apparently the microlending programs actually work because very few of the third world poor who borrow from them default in their loans, unlike the poor people in the U.S.

This begs the question: What exactly is the difference between poor people in the U.S. and poor people in the third world?

Any suggestions?

Anonymous said...

"This begs the question: What exactly is the difference between poor people in the U.S. and poor people in the third world?"

According to a post by Megan McCardle/Jane Gault a while back, the microlending in the third world generally works because credit to a community is at risk if one individual in that community defaults. So, basically, if a poor third-worlder defaults on her loan, there's a chance that the rest of the village will beat the crap out of her. American poor people have no similar incentive to repay their loans.

- Fred

Anonymous said...

So, basically, if a poor third-worlder defaults on her loan, there's a chance that the rest of the village will beat the crap out of her.

Well, maybe I'm missing something, but isn't America's problem that the *rich* aren't repaying their debts. For example, over the last few years, the senior Wall Streeters cashed out over $100B in bonuses based on "modeled profits" and now that the models proved wrong, the American taxpayer is making good the resulting losses.

Personally, I think "beating the crap" out of those Wall Street execs would work pretty well here also...

Steve Sailer said...

Ostracism from the marriage market of a defaulter's children is a useful sanction, both in microloans in Indian villages and on the Wall Street of J.P. Morgan. But, we're beyond all such crudities these days, so bankruptcy hold fewer terrors.

Steve Sailer said...

Are there going to be runs on 401Ks as people with draw money and put big piles of cash in their safe deposit boxes?

Anonymous said...

Early withdrawals from a SEP IRA carry a 10% penalty unless used for medical reasons. 401K early withdrawals might have a similar penalty. If my income is zero, then there is a tax arbitrage in doing an early withdrawal from a SEP IRA. Suppose I earn 150,000 in 2007 and zero in 2008. My income tax is 35% at the margin for 2007 and my 2007 IRA contribution is pre-tax. If I withdraw in 2008, I pay the 10% penalty and pay 0% income tax at the marginal rate (because income tax is zero percent when earnings are below the threshold).

So if someone loses their job, then early withdrawal from a retirement plan is not a bad strategy. Likewise, if they have capital losses and their net income falls to zero.

Joseph said...

This is a test, this is only a test. I apologize, but I've lost 3 comments in a row here that were kicked out by web errors of some sort.

Eric said...

Hah! You wish it was so easy!

The way the dollar is being inflated the money you put in your safe deposit box will be bleeding value at an alarming rate.

There's a reason commodity prices are skyrocketing. That's where you should have put your money. Last week.

John said...

anon,

FASB rule 157 was supposed to be enacted back in November of 2007. They've already put it off for too long.

The credit markets will implode. There is no stopping this. Suspending rule 157 just prolongs the collapse. There is no trust because no one knows what time bombs are sitting on the books of the companies that are trying to borrow more money.

Individuals trading stocks are required to mark everything to market each and every day. If I hold a stock and there is 'no bid' then the value of that stock is zero. Why shouldn't banks be held to the same standards?

James said...

My 403b and CDs are hurting but I have 2 ounces of gold; so, you win some, you lose some.

Anonymous said...

John’s comment on why we should enforce the new FASB rule 157 shows that enforcing the rule could render the institutions holding the mortgage backed paper instruments bankrupt; but not because the mortgages are all in default or the property is worthless, but because the extent of the default and sub-prime problems are unknown at this time.

Why not delay implementation of rule 157 until the mortgage and real estate crisis has played out some, in 9 months or a year? That way we won’t create a great an economic crisis over some technicality. Then, going forward we can look at these securities or securitazations more closely as well as require better accounting standards.

But to destroy the US Dollar and damage both the US and “world economy” over insisting that we MUST enforce this new rule NOW no matter the circumstances is pure insanity.

benn franklynn said...

"This begs the question: What exactly is the difference between poor people in the U.S. and poor people in the third world?"

Worst case economic scenario here in the States: you sit around in your jammy jams smoking MJ and watching cartoons in Section 8 housing (which still has running water, heating, safety from the elements, and cable TV).

Worst case economic scenario in the developing world: you sit around in your cardboard box scratching your parasitic skin infection drinking fecal contaminated water after working 12 hours a day in a toxic sweat shop (if you are very lucky) while your sister turns tricks to purchase as many maggot infested calories as you can afford. And when you are lucky, you die.

Bill said...

I told my folks to buy Chinese Yuan 6 months ago. They didn't listen, as usual...

MensaRefugee said...

Ostracism from the marriage market of a defaulter's children is a useful sanction, both in microloans in Indian villages and on the Wall Street of J.P. Morgan.
by Steve
$$$$$$$$$$$$$$$$$$$$$$

Deep thought - but do wall streeters have children any more?

William said...

So, are we still going to have our 401ks by April Fools Day?

Don't know. I was skeptical enough about the economy to pull my money out shortly after Thanksgiving of last year. Most of my former funds are down 10-15% since.

Years of reading common sense wisdom from places like, oh, VDare, iSteve and, to some degree, National Review, have taught me to think logically and honestly about the real troubles our economy faces. You don't build a stable, healthy economy by using the economic equivalent of steroids. You don't build a strong, 21st Century economy by importing millions of illiterate peasants for the benefit of industries that do almost nothing to raise America's competitiveness or reduce its trade deficit. You don't keep taxes low that way, either. My state, which supposedly has a "revenue surplus," actually raised taxes this year.

Roger Thatchery said...

We're facing nothing less than the end of Bretton Woods II i.e. the end of the fiat currency era. It's going to be a major conflagration. As a long time gold investor, I pity anyone in a 401k at this late date. But it's not too late. Gold is going much higher. Which is another way of saying the dollar is going much lower.

Here is a list of advisors who will save your ass if you will only let them:

Doug Casey
Martin Hutchinson
James Turk
Jim Sinclair
Peter Schiff
Jim Puplava
Mike Shedlock
Nouriel Roubini
Marc Faber
Jim Rogers

The Greater Depression looms.

RobertHume said...

Bill,

How does one go about investing in the yuan? That's a sincere question.

What about possible political breakup or civil war in China? Will loss of US market damage China? Will they be able to focus on an internal market?

John said...

anon,

The problem with not enforcing FASB rule 157 is that it just allows the banks to continue to hide the crap on their books and try to re-inflate this bubble.

We've got the ratings agencies in bed with the banks and a AAA credit rating is now worthless and those paying attention know it. That's why the credit markets are frozen solid.

We've had banks making liar loans to people who can't afford them. We've got people who've 'bought' homes using ARMs when in reality they are really renting these homes. The banks made assumptions that housing prices would always appreciate and they would basically force these people to get new mortgages with the accompanying fees every 3-5 years.

Whether or not we enforce FASB 157 will not change the fact that trust in the credit markets is gone and the people with the money are saying 'no mas!' Last time that happened was the 1930's. The hope would be that in FASB 157 is enforced we can get trust back into the credit markets and get them unstuck. At the rate we're going right now it'll be years before this happens.

Bill said...

roberthume said...
Bill,

How does one go about investing in the yuan? That's a sincere question.


All you have to do is open an account with the Bank of China. When I did it, I think (if I remember correctly) keeping a balance of yuan in addition to dollars was required, and they (used to, maybe not now) allow you to convert the money without a fee so long as it's from dollars to yuan. You can try the Agricultural Bank of China too. There was one of those across the street from where I lived.

What about possible political breakup or civil war in China? Will loss of US market damage China? Will they be able to focus on an internal market?

Loss of US market strength will hit China quite hard. China's going to lose a whole lot, but they've seen the writing on the wall for a few years now, so hopefully they've taken some steps to protect themselves. I know they've been doing business all over the world recently. From Chile to Sudan to Myanmar. It's kind of sad, but the kind of commodities they've been getting from those countries will probably be the only thing we have to offer them when (now that?) our credit's spent.

Civil War in China? Maybe someday, but you can usually see that coming for years in advance. Widespread uprisings and total loss of government control in large areas always precede revolution in China. That hasn't started yet.

Bill said...

roberthume said...
Bill,

How does one go about investing in the yuan? That's a sincere question.


Here Robert, I looked it up for you:

Bank of China

Bank of China Shanghai branch

If you want to go there to do it, I'd suggest Shanghai. It's more fun, or so I've heard.