Blog/ ArticlesBeware Phony Credentials When Selecting a Financial Advisor
Last Updated (Friday, 12 September 2008 10:45)
Written by Hank Brock, CPA, MBA, CLU, ChFC
“Investors should beware of salespersons claiming credentials, such as ‘Certified Senior Advisor’ (CSA) that sound impressive, but require little training or skills,” so says the Utah Division of Securities (Division Newsletter, Oct., 2007.)
Credentials, expertise, education, experience and ethics matter, which is why those that work for years to achieve legitimate credentials scoff at those that attempt a short-cut to credibility.
The most popular legitimate credential in the financial planning industry is the Certified Financial Planner®, or CFP®. A much older, lesser recognized, but accredited college offers the Chartered Financial Consultant, or ChFC. Both require years of experience and adherence to a strict code of ethics. The ChFC actually requires the same six courses required for the CFP, plus two more. Those who’ve taken both the CPA and ChFC exams often comment that the tax exam for the ChFC is actually more rigorous than the CPA exam’s tax questions.
The Certified Retirement Financial Advisor, or CRFA, focuses on financial issues for seniors, and holders of both the CFP and ChFC may take the pre-approved CRFA courses to meet their continuing education requirements.
The complaint against other credentials, such as the CSA, is that they often may be “bought” with a fee, a quick 3-day class, and only a few hours focused on financial issues of seniors.
The Division warned against other ways a financial advisor may attempt a short-cut to trust, “Other times [trust] is implied because the promoter and investor both belong to the same church…” Many are especially vulnerable when they are impressed by someone’s church connections. Reputable planners don’t “wear their religion on their sleeve.”
Nine Issues to Consider
First, is the consultant experienced? Ask about how many years he has been in business, what has been the nature of his practice and the types of problems he has solved, his existing clients, and the breadth and depth of experience. You may not think your issues are complex, but you are likely not aware of some of the strategies that could benefit you most, nor are they be understood by a novice. For example, it may take years of apprenticing to be ready to address the myriad issues facing seniors, so don’t be someone’s guinea pig. This is especially true in the area of tax and estate planning, where many novices present public seminars with only a basic understanding of complex issues.Second, as mentioned earlier, what is your advisor’s educational background? Look for bonafide credentials such as ChFC, CFP, CPA, CLU, JD, or other legitimate credentials. These signify background in investments, taxation, estate planning, finance, business, insurance, law, economics, etc. and require comprehensive examinations from accredited educational institutions, years of experience, and advanced continuing education requirements. Beware of those that solely have one of the many “quickie” designations proliferating these days.
Third, does the advisor have a commitment to high ethical standards? Look for membership in at least one industry association (such as NAIFA, Society of FSP, FPA, IBCFP, etc.) that enforces a code of ethics. Of particular concern in ethics are those that not-so-subtly use their church affiliation in advertising.
Beware of those that resort to “announcing” their high ethical standards by implying some religious or church connection. A person will usually find that the advisor is relying on an “implied endorsement” or “short-cut” to gain trust and cover-up other deficiencies in his educational background. Members of the LDS faith have been cautioned by their leaders about this “short-cut” to trust, but all could benefit from this counsel. One’s church affiliation should not have anything to do with one’s competencies or ethics, so beware of someone that uses their church affiliation to promote their business. Unfortunately, many seniors look to church affiliation as a sign of trustworthiness, and fall prey to inferior services, and too often scams.
Fourth, is there a commitment to continuing education? Complex laws are ever-changing and the economy never holds still. How many hours are spent each year keeping skills sharp? Are the continuing education hours at a beginning, intermediate, or advanced level?
Fifth, what services do you need? Comprehensive retirement, tax strategies and estate planning? Solely tax advice? An investment advisor? Real estate advice? Or, is he just an insurance salesman? Identify an advisor that emphasizes the services you need.
Sixth, is your advisor a solo-practitioner? Or is your advisor part of a team that he can turn to for strategizing on complex issues? Or to bring an additional perspective? Is his firm large enough to provide the extensive resources as a large firm of pros?
Seventh, what’s the average client like? If your net worth is $500,000, and your advisor primarily deals with people with a net worth of $3-10 million, will you get the attention you need? Are there other advisors in the office that would give you better attention while still benefiting from the firm’s resources? Does the advisor primarily work with senior citizens, professionals, business-owners, or whom? Will your unique needs be addressed?
Eighth, how is the advisor compensated? Is he/she paid by fees only, commissions, or both? More about planner compensation in an upcoming article.
Finally, is your advisor a professional? Be wary of persons who are merely part-timers working out of the trunk of their car, lack membership in professional societies, omit commitment to continuing professional education, and criticize others who do commit to high standards. Often they will downplay the need for education, or boast they “know more about estate planning than most attorney’s out there.” Smooth salespeople are often very charming, and may even present a charismatic public seminar—but they may also be dangerous because they don’t know what they don’t know.
When you find an advisor you feel comfortable with and there is a philosophical “fit,” consult thoroughly, be loyal, and have fun. A successful advisor has excelled in his profession for the same reason anyone has excelled in theirs: because he loves what he does, and because of the people with whom he is privileged to work and help. He enjoys his rewarding relationships, and sincerely wants his clients to achieve the success they want. For more information on selecting a financial planner, check out our post "11 Keys to Selecting a Financial Planner."
Hank Brock is President of Brock and Associates, a local fee-based financial consulting firm that celebrates its 30th Anniversary in 2009.
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The 25 Biggest Mistakes Seniors Make
Tuesday, 09 September 2008 09:12
Print this page out and put a check-mark next to any mistake you may be making or have not fully explored.
1. You have not taken all steps legally allowed you to protect your assets, especially your home, from frivolous lawsuits or creditors. (A Living Trust provides no protection.)
2. You have not taken all steps legally allowed you to transfer your assets from a taxable environment, to an environment that can generate a tax-free retirement income to you and pass income and estate tax-free to your heirs.
3. You are not aware that IRAs and annuities are the two assets that are subject to double taxation upon death, and have not taken all steps possible to avoid this.
4. You have not done adequate IRA Distribution Planning, with the objective to minimize or avoid taxes on the dollars distributed from your IRAs. You have not explored ways that may result in distributing part or all of your IRA tax-free.
5. You have merely postponed or deferred taxes on highly appreciated assets, such as real estate or stocks, through 1031 exchanges, thereby leaving assets subject to high income or estate taxes to yourself or heirs, versus using legally allowable means to by-pass capital gains taxes upon the sale of an appreciated asset (Capital-Gains By-Pass Trust). "A bird in the hand is worth two in the bush."
6. You consume non-IRA dollars first while leaving IRA dollars to grow, taking only the "required minimum distribution," when working the numbers often yields that you should be consuming IRA dollars first.
7. You have not taken steps to assure that unintended persons do not unwittingly become the beneficiaries of your estate, in spite of the traditional use of wills, living trusts, and the customary beneficiary designations on IRAs, annuities, and life insurance policies.
8. You are paying taxes on income you are not using (on interest that is being reinvested annually), rather than using all steps legally allowed you to avoid those taxes and only pay taxes on dollars you are using.
9. You have not taken the steps legally allowed you to avoid taxes on your Social Security Income.
10. You do not understand that income tax rates are as high as 65% on much of your retirement income, not 25%-35% as you supposed, or how to legally avoid this.
11. You have not taken steps legally allowed you to avoid state income taxes on investment income, state sales taxes on major purchases, or state property taxes on major personal property items (i.e., autos).
12. You have not taken steps to earn interest that participates in growth-type investments, i.e., the stock market indices, while insuring your accounts against any downside market risk or losses. Every year all gains are locked-in.
13. You have too many of your dollars tied-up in so-called "safe" assets (such as CDs) such that, after subtracting taxes and after-inflation, you are actually losing dollars. You feel paralyzed without choices, and are not aware of the safe alternatives.
14. You do not understand why inflation is the #1 enemy of longevity, nor the devastating long-term effect of inflation on investments, especially bonds, whether or not you hold the bonds to maturity.
15. You do not understand how to manage away each of the various types of risks out of your investment portfolio: default or fundamental risk, market risk, inflation risk, interest-rate risk; and how you are most vulnerable given the most probable future world economic conditions.
16. You do not realize that your life expectancy is longer than you think, and you have not made provisions to guarantee that you cannot outlive your income.
17. You do not understand the most common mistakes made by owners of annuities and life insurance, and what your insurance agent did not do when establishing those policies, or why you could end-up paying more than 50% of those annuities and/or death benefit proceeds in taxes.
18. You do not understand why transferring your home from Joint-Tenancy into your revocable living trust could have devastating implications, or how to rectify.
19. You do not take advantage of many tax breaks available for retirees simply because you are not aware of them, and you have not re-structured your assets and income to take maximum advantage of potential tax breaks.
20. Because of a lack of planning, your heirs receive a fraction of what they could receive without any additional significant effort, or complexity.
21. Because of a lack of planning, assets are passed to your heirs via the typical living trust in a manner that aggravates or creates ill feelings between heirs and weakens their character, rather than passing assets in a way to strengthen family togetherness and strengthen character.
22. You do not take advantage of special provisions of the tax code that could allow you to: increase your retirement income, plus pass twice as much to your heirs as currently, plus pass an equal amount to a church or charities of your choice, and get the IRS to essentially pay for the strategy. (Give your estate away twice and have IRS pay for it.)
23. Your estate plan consists of the usual components: Wills, Living Trust, Power-of-Attorney, Health Care Directives-Living Wills-but 9 times out of 10 you have unknowingly left one of your largest (if not your largest) asset to pass outside your estate plan and be excluded from your wishes for how your estate is to be distributed.
24. You have selected the wrong trustees for your revocable living trust and other trust(s).
25. You have left yourself or heirs vulnerable to higher fees that could otherwise have been avoided, in the areas of: asset or portfolio management fees, trust administration fees, legal fees, accounting and tax preparation fees, charges and loads on acquiring annuities or life insurance policies, and probate fees-fees and expenses that could have been avoided or minimized.
If you are making any of these mistakes, we urge you to schedule a time to come in and meet with one of our qualified financial advisors here at Brock and Associates.
Brock and Associates is a Utah based financial consulting firm specializing in retirement, estate, and tax planning. Copyright Brock Financial Network, LLC, 2006 – All Rights Reserved.
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The Walt Disney Legacy: A Lesson in Legacy Planning
Last Updated (Wednesday, 03 September 2008 08:26)
There are few better stories to emphasize the importance of legacy planning than the story of Walt Disney shortly before his death in 1966. Mike Vance, former dean of Disney University, tells this story of Walt Disney’s legacy as portrayed by Walt's final hours in 1966 in his book, Think Out of the Box:
“At Disney studios in Burbank, California, Mike could gaze out of his office window across Buena Vista Street to St. Joseph’s Hospital, where Walt Disney died. Mike was talking on the telephone when he saw the flag being lowered over the hospital around 8:20 a.m. His death was preceded by an amazing incident that reportedly took place the night before in Walt’s hospital room.
“A journalist, knowing Walt was seriously ill, persisted in getting an interview with Walt and was frustrated on numerous occasions by the hospital staff. When he finally managed to get into the room, Walt couldn’t sit up in bed or talk above a whisper. Walt instructed the reporter to lie down on the bed, next to him, so he could whisper in the reporter’s ear. For the next 30 minutes, Walt and the journalist lay side by side as Walt referred to an imaginary map of Walt Disney World on the ceiling above the bed.
“Walt pointed out where he planned to place various attractions and buildings. He talked about transportation, hotels, restaurants, and many other parts of his vision for a property that wouldn’t open to the public for another six years.
“We told this reporter’s moving experience, relayed through a nurse, to our organizational development groups, . . . the story of how a man who lay dying in the hospital whispered in the reporter’s ear for 30 minutes, describing his vision for the future and the role he would play in it for generations to come.
“This is the way to live—believing so much in your vision that even when you’re dying, you whisper it into another person’s ear.”
Soon after the completion of The Magic Kingdom at Walt Disney World, someone said, “Isn’t it too bad Walt Disney didn’t live to see this?” Vance replied, “He did see it. That’s why it’s here.”
Even after Walt Disney passed from this life, his vision of the future held strong. He had established firmly in the minds of all those he came in contact with the vision he held of the future. Even today, some forty-two years after he died of cancer, Walt Disney continues to influence millions upon millions of people each year.
And while many of us may not have the lofty aspirations of Walt Disney, we have still accumulated over the course of our lifetimes a collection of wisdom, knowledge, and virtue that we would like others to benefit from.
Walt Disney's last hours weren't spent determining how his estate would be allocated amongst his heirs. They were spent laying out his plans for the future. As he laid there whispering into the reporter's ear, he described in detail how his legacy would live on long after he had passed.
With legacy planning, you are not only able to minimize taxes and maximize the amount of money that you pass on to heirs, but you are also able to influence the spiritual, intellectual, and ethical development of family members.
A good legacy plan comes from knowing, living, and then planning from your values. You are building bridges that will take you and those you love to greater levels of abundance, purpose and significance.
It is important to understand that legacy planning needn't be egotistical; it can be much more than just a selfish desire to control from beyond the grave. Legacy planning can be an altruistic venture for the creator, an ability to provide for, guide, and influence for good the family members they are leaving behind.
Future generations can both benefit and experience from what you have learned. Your passion in creating a truly significant legacy can inspire, motivate, and uplift for generations. You can rest with the knowledge that you have passed on the skills, attitudes, and values necessary to manage those thing that you leave behind. As you plan your legacy, you are providing the means for your family to live happy and productive lives.
When the day comes that you pass from this life, will you be passing on a legacy similar to Walt Disney? Or will you leave your family wishing they had more to remember you by? Consider carefully how you intend to pass along the things that are most important to you.
If you are interesting in developing your own personal legacy plan, schedule time to meet with specially-trained financial advisor at Brock and Associates, LLC. Don't risk allowing your legacy to be lost when you pass.
Brock and Associates is a fee-based financial consulting firm specializing in retirement, estate, and legacy planning. Brock and Associates will be celebrating its 30th anniversary in 2009.
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One More Time...Let's Understand This Economy Now
Written by Hank Brock, CPA, MBA, CLU, ChFC
“Corporate and Personal borrowing is at an all-time high. This is the major chink in the armor of the economy. Rising interest rates may force defaults, causing a domino effect on defaults – on corporate debt and home mortgages….The severity of massive debt keeps the economy in a more precarious condition that it otherwise would be; more critically, it keeps families with debt more precarious, while families with minimal debt will be cushioned against economic volatility...” Do you remember reading this in your plan? It’s been there for four years.
We may not be able to change the economic problems of our nation, but we can do things to insulate ourselves against them. I will say it again: the last time we saw these economic indicators was 1977-1979. Do you remember 1979-1981? Let me remind you: falling dollar (this is the one to watch), 13% inflation rate, 13% unemployment rate, 21% Prime, 18% money market funds, 17% mortgages, $850 gold, $50 silver (remember the Hunt brothers trying to corner the silver market?), skyrocketing deficits, skyrocketing oil and food prices, money supply growing far faster than the economy, plummeting stock market, plummeting real estate, zero building, “stagflation,” and on and on.
We ask ourselves why? The discussion of indicators is too exhaustive to make meaningful mention here, except to say that the world has changed since then. Some of the similar signs are the falling dollar, which has fallen almost 50% against the Euro during the past few years. That suggests a terrible 10-15% inflation rate; after all, inflation is ultimately defined as “the value of the dollar.”
Some might ask, “Why has America been able to spend and spend and run such large deficits without inflation? Without a day of reckoning?” I’ll just mention two reasons we’ve been spared: (1) Free trade has allowed us to buy goods and services while keeping our costs down and enjoy a higher standard of living (incidentally, free-trade is also the #1 foreign policy to prevent war—people don’t go to war with people with whom they trade), and (2) Foreigners have been willing to finance our government deficit, allowing us to spend and spend without a day of reckoning. More on this in a moment.
Who can veto Congress? Who can veto the President? The Fed? No. Who can veto the Fed? Hint: Many are not even U.S. citizens. Those that are buying U.S. Government Bonds—China, Saudi Arabia, and Japan, in that order, because they are the one’s financing our budget deficit. They are why we have not had a day of reckoning. People can hate them all they want, but they pay for our Medicare, entitlement programs, and wars.
Now, what’s the problem with all this? The problem is that, with the falling dollar, U.S. interest rate must, I repeat must, rise! Those nations will not continue to finance our deficits if they can’t get their money returned to them, adjusted for the currency exchange rate! They’d rather go finance the deficits of Western Europe! Are our friends in Western Europe financing our deficits? No! They’ve got their own deficits. And will the U.S. Government pay the higher rates, even if it breaks the economy as it did in 1981? Or worse? Of course, because who would finance America’s deficit if it defaulted on its debt?
The Fed can lower short-term rates, but it has no control over long-term rates. That’s determined by the free market. Inflation is, and interest rates will, rise dramatically! What does this do to a debt-ridden nation? See 1979-1981. BUT, perhaps worse this time. Far worse.
A very wise and astute businessman made some quiet but urgent observations about our economy. Members of the predominate faith here in Utah refer to him as “the Prophet.” Whether you are of the faith or not, he was a mature adult at the time of the Great Depression, and he has managed the business of a large multinational organization. He passed away a couple months ago. He commented, “the economy is a fragile thing…there is a portent of stormy weather ahead.” (Gordon B. Hinckley, CR, 10/1998) Later he again stressed the importance of getting out of debt and the shocks our economy could see (CR, 10/2001). And again recently (CR, 4/2007). Why don’t we listen to those that have been down the path before?
Why far worse? In 1991 then Governor Bangerter appointed me along with two others to serve as three members of the Utah Thrift Panel to arbitrate claims brought by depositors against five failed thrift institutions. Do you remember the S&L debacle of the late 1980s? And how it broke the FSLIC, needing a congressional bail-out? And caused a real estate collapse of 50% in CA, AZ, and elsewhere? Now the banks are into mortgages, and the FDIC is no stronger, and the problem is many, many times larger. Unlike then, today the consuming public have been cannibalizing their net worth under the stupidity of home equity loans, living high, going to Tahiti, on equity that sometimes took generations to grow. The growth of the 1990’s was phony growth, spurred by spending that we did not have, and which is exhausted now.
Why far worse? Maybe this is the clincher: Derivatives. Ever heard of them? Originally Fed Chairman Greenspan was against regulating them because they were a means to “reduce risk.” Derivatives are basically “bets” that some risk will or will not happen. Derivatives do not “reduce risk,” they “transfer risk,” in a zero-sum manner. What’s the problem? Greedy bankers figured they could get rich off trading derivatives. And they could do this without regulation, without reporting it to their shareholders on their financial statements, and by being highly leveraged, based on the bank’s credit rating. Maybe they only had to put-up $1 for every $20 dollar bet, thus leveraging themselves 20 to 1, and as much as 100 to 1.
Get this. Every major financial collapse in the past 20 years has been the result of derivatives, starting with Black Monday in 1987. Then the S&Ls. Remember the 223-year-old British Barings Bank brought down by a reckless hotshot 27-year-old trader? Remember Orange County going bankrupt due to $1.5B loss in derivatives? Remember the collapse of the Asian markets in 1997? Remember Enron getting caught in the squeeze, too leveraged to hide any longer? The collapse of Argentina? Remember the LTCM hedge fund collapse when the Fed organized a $3.5B bailout? And now the collapse of Bear-Stearns. Why? Derivatives on their mortgage portfolio multiplying the impact of the basic problem (sub-prime loans) many-fold. It isn’t the sub-prime loans—it’s the derivatives.
How does all this happen? And how does it affect you? This happens when the bet is made, and a financially strong institution only has to put up, say, 2¢ on the dollar as collateral. But, if their financial rating gets downgraded, as happened to Ford & GM a while back, those holding the contract have to increase their collateral to double or triple. What assets do they sell to cover their bet? Their bad assets? The derivatives? No. They have to sell their good assets, their stocks. This puts selling pressure on the market, things worsen, and downward spiral begins. So, this isn’t just about derivatives. It is about the banking industry, the stock market, and real estate. (Bonds would likely increase in value, which is the major asset backing the insurance industry.)
Two weeks ago, for the first time in history, the Fed pumped money into the ailing securities markets to save the investment bankers and brokerage houses from collapse, to the tune of $200 billion. Now the Fed says they want to regulate not only banking, but also the securities industry, and virtually replace the SEC. Will it happen? Of course it will. “Them that’s got the money make the rules.” The Fed’s got to “protect their investment.” And the Fed can buy/dictate anything because it’s got the printing press (at the cost of our inflation).
How big is this phantom economy where no real goods or services are produced? The U.S. economy is almost $14 Trillion in total output. The world economy is about $50 Trillion in total output. Current derivative “bets” out there total $516 Trillion dollars—that’s 10 times the size of the entire global economy! And 37 times the size of the entire U.S. economy! And one-third of it is held by three banks: JP Morgan Chase, Bank of America, and Citigroup ($158T as of 3Q07, John Pugsley, Sovereign Individual, 3/08). “J.P. Morgan Chase’s dabbling in derivatives makes it too big for even the Federal Reserve to bail out.” (John Crudele, New York Post.)
“Derivatives the new ‘ticking bomb’ … Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen.” (Market Watch, 3/10/08) As Warren Buffett said at his last Berkshire Hathaway annual meeting: “A world where huge amounts of leverage have been brought into the system is a dangerous world.”
Banks and securities/brokerage firms are into derivatives, hence the $100 billion and $200 billion bail-outs, respectively, two weeks ago. This isn’t pocket change. We will all pay for it in a higher inflation-tax. Same with the mortgage industry. The only financial industry that has stayed away from derivatives is the insurance industry, which primarily holds 90%+ in bonds to back its obligations.
I am not a doomsayer. I simply say that we live in a precarious economy with unknown risks. I suggest we go conservative by staying/getting out of debt, and putting our dollars into safe vehicles that will weather most any financial storm. I suggest that if we prepare right, we have nothing to fear. I believe the prices of wheat and other commodities will continue to rise, so get your year-supply of food. And there is a whole list of other actions someone can take to protect their families against days of increasing commotion and volatility ahead. I am not saying anyone needs to panic and run out and live off nature, or sell everything and buy gold. I am suggesting that we be forewarned, forearmed, prepared, and informed about what’s going on in the world about us.
If you are already a client, we invite you to call for a periodic review. If you are not already a client, we invite you to talk with us. You can start by attending one of our public workshops. If not us, then talk with somebody that understands more than just a few annuity products, but also a little bit about tax strategies, and the world economy. My sincerest best wishes to you.
Hank Brock is president of Brock and Associates, LLC, a financial planning firm specializing in retirement, estate, and tax planning. Hank Brock can be reached at 435-673-9599.
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What You Should Know About Today's Economy
Written by Hank Brock
The following excerpt is taken from a conversation between Hank Brock, President of Brock and Associates, LLC and his daughter Andrea in February of 2008. It is in question/ answer format, and will be followed in the next posting by an in-depth commentary on current economic conditions, and how to prepare for the future.
Q. Dad, if it is good for one family to save money against misfortune, why is it not then good for a nation to save money?
A. Depends: In your question does "nation" mean government? If so, then no, a government should be neutral, and not taxing us to a surplus and then saving our money for us. But neutral also doesn't mean spending us into debt, especially if it becomes too much of GDP (% of total economy). If "nation" means the people, then yes, you are right--the people should save. Some would argue this slows the consuming economy, but only short-term. It provides capital for investment, some of which is going to be deployed in R&D, increased efficiency & productivity, lower inflation, and expansion long-term. But, which politico, or stock analyst, is interested in the long-term?
Q. It seems a little bit like Pharaoh and Joseph in Egypt. Why is the government letting the grain out of the store house when the famine has yet to hit? (These rebates are intended for people to consume, NOT save, pay bills, etc…).
A. Yes, exactly. Get your seven-year supply of wheat. (The spending will mean very little).
Q. I just read an AP article that said this will add 117 billion dollars to our national deficit. So much for good economic sense.
A. And $117 billion is a tiny impact on a $14 trillion economy (approximate). Worse, it is inflationary. Incidentally, a $10 increase in the cost of oil has the same drag on the economy as a $200 billion tax increase. Both are bad on jobs, inflation, lowering tax revenues in the long-term, and increasing the long-term deficit.
Incidentally, cost of oil, adjusted for inflation, today’s prices = 1988, the last time we had shortages. Oil & utilities have been the two dog sectors of stock market from 1989-2004. The companies are just catching-up. The increased cost is due to (1) China/India’s 25% annual increase in demand to produce cheap goods for us, and (2) refinery capacity at 100% - no refineries built since 1970's, one generation ago. Refinery cost = so great not even Exxon builds one alone, but only joint ventures with other oil companies. Remember: profits = money to build refineries. Building a refinery cannot be taken as an expense against income. It must be capitalized and then depreciated/expensed over decades.
Q. What is the deal with the government buying people out of their bad decisions when it comes to mortgages?
A. You may not remember the 1989-1991 mortgage crisis when congress had to borrow to bail out the FSLIC (Federal Savings and Loan Insurance Corp). S&L's failing, Frank Keating, etc. This time, it is the FDIC, the banks, that are in trouble, many, many multiples the size.
Q. Everyone knew the day would come when these mortgages would be due. Everyone knew there would be problems. I think the banks were counting on this and factored it into their loan approval process. But now, great, like a parent, the government is bailing people out of their bad decisions.
A. Yes. "Compassion" delivered en masse is just more government welfare.
Q. I guess I'm just a little bitter because we didn't take advantage of the bad loans that were available four or five years ago . . . we recognized them for what they were, and didn't get ourselves into the situation. If we did, we'd have 3x's the house and the government would essentially take away the consequences of a bad mortgage decision and let us stay in our home that we never could legitimately afford. So what about the rest of the country?
A. We will pay for it in higher taxes or higher inflation (which is another tax engineered by the government so it can pay off its debts with pennies on the dollar.)
Q. Does this smell a little of socialism?
A. Not just a little.
Q. So, without the clarity of actual conversation to sort out my thoughts - aren't these two acts basically yet another step of big government to push us into socialism (from which we will never be able to revert due to the complacency of technology--but that's another conversation all together).
A. It was all put into place under Franklin Roosevelt’s "New Deal," expanded under Lyndon Johnson’s "War on Poverty," and maintained by both parties ever since. Goes back to Thomas Jefferson’s comment about the demise of the Republic as soon as the people discover they can vote themselves largesse from the government treasury. Really started with the 16th Amendment to the Constitution when the people & States voted on the government's ability to tax income, and the 17th Amendment when Senators began getting elected by the people instead of the state legislatures--until then they represented the states, were accountable to state legislators, we had federalism, and we would not have the concentration of power and government programs/solutions in Washington. The Founding Fathers don't get enough credit for their genius/ inspiration.
Q. If you can explain the economic sense (or in my opinion nonsense) that drove these bills to pass, let me know.
A. Sorry, I can't explain it. But, even though the fed is "lowering" interest rates, actual long-term rates are (or must very shortly) skyrocketing, hence the falling stock market. We are living in 1977, maybe 1978. To understand that, you need to look at 1979-1981 just before Ronald Reagan took office: inflation rate (13%), unemployment rate (13%), interest rates (21% prime), mortgages (17%), gold ($800), silver ($50), money market funds (18%), new construction or home selling (0%), etc. The Jimmy Carter years--one generation ago--the last time the Democrats had control of all 3: House, Senate, and Presidency. Democrats had House & Presidency for the first 2 years of Bill Clinton’s Presidency in '92--'94. November '08 has: Senate, current Democratic majority 51 to 49. Seats up for re-election in Senate: 9 Democrats and 23 Republicans-- guess who'll lose seats? House: currently 31 more Democrats--seats up for re-election in house: all but 28 Republicans are retiring. Problem = House, Senate, President in same party. People don't like gridlock? Wall street/economy likes gridlock. Polls may say McCain over Hillary or Obama 47% to 45%. Percentages don't elect. Twice as many Democrats are showing up at their primaries as Republicans.
Q. I’ll ask you: Who are those that can veto the laws passed by congress? Veto the President's policies? Veto the Fed's policies and actions? And make them null & of no effect? Are many of those with veto power even U.S. Citizens?
A. The freely-traded bond market-- those that finance the deficit, and allow us to spend and spend without a day of reckoning. And those voters have been the Chinese, the Saudis, and the Japanese, in that order. With the plummeting dollar (down 50% in past 2-3 years), they want much higher interest if they are going to continue to use their surpluses to finance our deficits instead of Euro deficits, because they want their dollars returned to them adjusted for the currency exchange rate. Ultimately, inflation = value of the dollar, hence current gold & silver prices. No matter what, government will not default on its T-bonds, even if it means 13% or 15% unemployment and deep, deep recession, because then it couldn't borrow any more. So it must (no choice about it) raise interest rates, which will slow economic activity even more. When Bush Sr. was voted out of office in 1991, the recession had unemployment at 7%, which is 2% above "full employment" (5% of pop are changing jobs at any given time anyway. 13% is 8% above full employment, or 4x as much as the 2% that lost Bush Sr. the election of ‘91.)
In about 1995 Sweden’s parliament (socialist) passed a bill and within days free-market interest rates on their government bonds jumped to 200%. No government can survive on 200% interest rates. Parliament reversed itself within few days. No-one has to buy our U.S. Government bonds. They'll only buy at what price they decide. So, the Fed is band-aid short-term stuff. Watch the bond market especially & stock market to predict what's going on.
"The economy is resilient." --Bush, January 31, 2008. "The economy is a fragile thing." --Hinckley, October 3, 1998. (In credit to Bush, his responsibility is to say that, because he cannot contribute to a market- public panic.)
Well, just a few thoughts on your questions…
--Dad (Hank Brock)
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