dailywombat

A Way to May the US Tax Code Fairer

2012-01-28T14:00:00.000-08:00

(Reuters) - If the president and Congress are serious about income equality and cutting huge breaks for the wealthy, they should raise the capital gains rate.

While the president didn't mention it by name in his State of the Union speech on January 24, it's one of the many gorillas in the tax reform room.

There's no question that the 15 percent rate on capital gains and dividends largely favors super-wealthy taxpayers over wage earners. Just look at Mitt Romney's tax return. As former Labor Secretary and economist Robert Reich once noted: "It's a loophole large enough for the super-rich to drive their Ferraris through. About 80 percent of the income of America's richest 400 comes in the form of capital gains." (link.reuters.com/gen36s)

According to economist Jared Bernstein, who analyzed Congressional Research Service figures, capital gains and dividends were "the largest single contributor to the growth of inequality from 1996-2006." (link.reuters.com/hen36s)

Why should those who primarily make money from private equity, financial, business and real estate appreciation and dividends pay more than 50 percent less than wage workers who are subject to the top rate in federal, state, Medicare and Social Security taxes?

If you're from the supply-side camp, it's because the lower rate may encourage wealthy taxpayers to invest in capital, business and job formation while raising more tax revenues. More fundamentally, at least according to the conservative group Americans for Tax Reform, "when you tax something more, you get less of it."

When taxpayers know that the capital gains rate is going up, the "fire sale" effect comes into play: They sell assets to get taxed at the lower rate before the higher levy kicks in, hence the higher cash flow to the Treasury before the lower tax expires.

But there's no consistent evidence that shows that a lower capital gains rate does much for the economy long term. The rate of new business formations actually climbed from 1983-1987, when the maximum capital gains rate was 20 percent, according to the Kauffman Foundation, a think tank that specializes in entrepreneurism. (link.reuters.com/jen36s)

When the gains rate hit a maximum 29 percent from the middle of 1993 into 1997, there was another spurt of new business growth. Since 2006, though, small-business creation has generally fallen - even with the lower capital gains rate. The recession and housing meltdown are the likely malefactors.

Of course, recessions or periods of double-digit interest rates - which hurt small businesses the hardest - are the worst times for small-firm growth anyway, so the capital gains rate would not necessarily have been a primary hindrance during times like 1979 through 1983.

When do capital gains proceeds fill up the national Treasury the most? The data is inconclusive. In 1988, realized gains as a percentage of gross domestic product were more than 7 percent - the highest amount in almost a quarter century, and that was when gains rate was 20 percent.

Tax rates are often like porridge. Sometimes they may be too high; at other times just right. It could be that 20 percent is a sweet spot for gains. In contrast, the lowest capital gains/GDP percentage was 1.57 percent in 1977, when the maximum rate was nearly 40 percent.

What can barely be debated is that the capital gains rate is one of the multi-millionaire's best fiscal friends. Those who made $10 million or more, according to IRS statistics from 2009, reaped a total of nearly $70 billion in long-term capital gains. That's 10 times the amount of gains taken by those making from $75,000 to $100,000.

While cutting the capital gains rate generates more revenue overall due to the fire-sale effect, it's not in the best interest of the country to keep it at 15 percent. Raising it would also reduce the burgeoning federal deficit. If it's not an efficient way of creating jobs or businesses, why keep it so low?

"Arguments that the capital gains rate affects economic growth are even more tenuous," says the non-partisan Tax Policy Center. The group saw no correlation between rates and GDP growth "during the last 50 years."

Of course, the gains rate is but one item among thousands of special breaks in the tax code. You have to put everything on the table, from mortgage deductions to offshore corporate income if you want to ferret out wasteful tax handouts, which is highly unlikely in this election year.

Yet if one believed that Congress was earnestly tackling deficit reform in the interest of fairness and fiscal sanity - or did nothing this year - I would tell my tax preparer to take every possible break in 2012. That's because the special rate on capital gains will expire after December 31 - a deadline that will seem pretty urgent right around election time in November.

(The writer is a Reuters columnist. The opinions expressed are his own.)

Even the Bond King Can Be Wrong

2012-01-06T11:49:00.000-08:00

By John F. Wasik

No matter what theme you adopt in a market forecast, predictability has always been a bugaboo. Just ask Bill Gross, the legendary manager of the PIMCO Total Return bond fund.

Gross's $244 billion baby saw at least $5 billion in assets flee in 2011, more than $1.4 billion in the fourth quarter alone. Relative to the size of his fund, this is a notable vote of no confidence ().

Investors voted with their money because of Gross's bet against U.S. Treasuries last year. Like many of us, he digested the headlines and became dyspeptic over the Congress defaulting on its debt, sluggish economy, the S&P credit downgrade and euro zone debt woes. Yet what actually happened didn't follow Gross's "new normal" script. Instead we got the "old abnormal" of unpredictability.

While none of those perils can be dismissed - nobody is out of the woods - something odd happened. U.S. debt remained a safe haven and even more money flowed into Treasuries, which became the best-performing bond class and returned 17 percent last year.

In the second half of last year, U.S. Treasury prices climbed, while hot money fled European paper. It wasn't too long ago that the euro was seen as a respectable currency while the buck was being battered. Gold, that ultimate nervous Nellie insurance policy, also went south for a while.

"The 'new normal' thesis at PIMCO was predicated on a low interest rate environment dragging safe bonds down as investors sought higher-yielding opportunities elsewhere," said Jeff Tjornehoj, director of research at Lipper, a Thomson Reuters company. "That was reasonable in 2009, but started to fade in 2010 and was completely undone in 2011 as credit conditions in European banks deteriorated and investors rushed to safety."

So it's time to question whether Bill Gross is on target with his new "paranormal" theory and more importantly, if active managers can consistently predict market movements and protect your wealth.

Is Gross still on track? Here's what he said in his most recent "Investment Outlook" ():

"For 2012, in the face of a delivering zero-bound interest rate world, investors must lower return expectations. 2-5 percent for stocks, bonds and commodities are expected long term returns for global financial markets that have been pushed to the zero bound, a world where substantial real price appreciation is getting close to mathematically improbable."

Of course, Gross has forgotten more about bond trading than I'll ever know, so his long-term record is worth respecting. His cautions are still valid. But actively managing money becomes nettlesome because the future is as slippery as a politician's promise. What's predicted doesn't always transpire; if you make big bets, you can suffer big losses.

The larger question for investors is should you even bother with an active manager making periodic wagers based on theories that may not hold water?

Would you be better off in passive bond-index funds like the Vanguard Total Bond Market ETF or the iShares Barclays Aggregate Bond fund, which I hold as a U.S. broad-market bond proxy in my 401(k) portfolio?

Passive investing usually makes more sense since you avoid the high costs and frequent missteps of active managers. As of the last Lipper research report, Gross's PIMCO Total Return fund finished in the bottom 12 percent of its category, posting a 4.15 percent return. That's compared to a 6 percent average performance for its peers.

That's why a passive strategy still makes sense. The Vanguard fund, for example, samples a fairly static basket of U.S. government-based mortgage bonds, Treasuries, corporates, utilities and a touch of non-U.S. paper. It charges 0.11 percent annually for management. The PIMCO fund has an expense ratio of 1.15 percent annually with a costly 430 percent turnover rate, indicating high trading costs that are passed along to investors.

As for predicting the market going forward? Be cautious and hedge any large position in bonds (European or American), stocks and metals. The only guarantee is that big financial events often follow an abnormal course.

How to Help the Jobless

2011-11-29T20:30:00.001-08:00

(Reuters) - Two of my friends lost their jobs in the last month. One had worked for a large computer services company for 31 years. Another was an information technology manager whose position was eliminated in a restructuring. Both men are in their fifties.

Having been laid off more than once, I have a certain protocol I share with friends. I hope it's of value to them; I know it's paid off for me. Here's the plan that has worked for me in the past:

-- The best strategy is to be ready for a potential layoff with several months of cash, no credit card debt and an up-to-date resume. But don't lose heart if you're one of the more than 15 million unemployed and 1 million "discouraged" workers who can't find openings suitable to their skills and have stopped looking. There are strategies to lessen the pain and to improve your chances of finding a new job.

-- Ideally, don't leave your employer without knowing what benefits are available. Many large companies offer a suite of outplacement services to laid-off workers. Always take advantage of them.

One of my newly laid off friends got help in writing a resume, branding statement and doing interviews. He also got to keep his company-issued laptop. You're also entitled to at least 26 weeks of unemployment compensation, and in some cases as much as 99 weeks (assuming Congress extends long-term benefits by year-end).

-- You'll also need to make decisions about health care and your 401(k) plan. You have a choice of whether to keep your 401(k) with an employer or roll it over into another plan. Take your time in deciding what to do. I generally recommend that people look at the offerings of the largest fund companies (Fidelity, Vanguard, T. Rowe Price) and see if they can get better service, lower expense ratios and more diversification.

If health insurance is not covered in a severance plan, you may be eligible for it through a COBRA extension (link.reuters.com/zyq35s). This is a federal law that says an employer with more than 20 workers must extend their health plan to you if they lay you off. There's a nasty catch, though: You may have to pay for the premiums, although they can't be more than 104 percent of what employees are paying.

Of course, with no income coming in for a while, a large insurance premium could be unaffordable. If so, look at trade or alumni associations that may offer less-expensive group coverage. You'd have to be a member to qualify. A third alternative is to shop for short-term policies online (www.ehealthinsurance.com/).

Price high-deductible health policies first. Although out-of-pocket expenses range from roughly $1,200 for individuals to $11,900 for families (link.reuters.com/car35s), they are designed to cover most catastrophic health events such as heart attack, stroke or cancer. The premiums are much lower than full coverage policies and don't offer "soup to nuts" coverage.

-- Cash reserves are also essential. My friends were diligent savers, but they needed to do cash-flow statements to see how long their cash would hold out. That's a simple matter of adding up all basic expenses such as mortgage/rent, food, property taxes, health insurance and utilities to come up with a monthly "nut" number. These are the core bills when all discretionary items such as restaurant meals, movies/entertainment and cable TV are stripped out.

-- Need quick cash? Don't forget, that in a pinch, you can cash in or borrow against a life insurance policy -- if it carries a cash value -- or go down to one car.

And if you absolutely need the money, you can tap into your retirement plan, although I don't recommend it, because if you do it prior to age 59 ½, you'll pay income tax plus a 10 percent

federal penalty on withdrawals. That money's awfully hard to replace.

-- The nonmonetary part of joblessness is no less important. How well networked are you? Have you updated profiles on social media services such as Linkedin? Have you told friends and associates that you're looking for work? Have you checked college alumni association for job services? Use all social media options.

Often the hardest emotional toll is the long wait before another job is secured. Prior to the 2007 recession, the average wait to reemployment was five weeks, according to the U.S. Bureau of Labor Statistics. Today the wait is double that, and potentially longer if your chosen profession or industry is contracting.

New perspectives and brainstorming are essential. Forget about what you did; what can you do? Write down your life skills. What are you best at? What have you accomplished on the job and outside of work? What are your social skills? Do you need additional training? Don't forget skills you may have mastered outside the office volunteering.

The best jobs are often not advertised. Look at business headlines to see if companies are expanding. What kind of people are they seeking? Drill down into the story to see which executive is quoted and pitch them directly.

My recently unemployed friends are optimistic. They have decades of experience, are highly motivated and are well organized. One friend has already been on two interviews, and the other one has spent hours with an outplacement firm refining his resume.

Ultimately, getting a decent job is a numbers game. Job candidates need to make contact with the people who are doing the hiring -- and do it on a daily basis. Resumes are useful, but they may not sell their talents well enough.

---

The author is a Reuters columnist. The opinions expressed are his own.

How to Help the Jobless

2011-11-29T20:30:00.000-08:00

Having been laid off more than once, I have a certain protocol I share with friends. I hope it's of value to them; I know it's paid off for me. Here's the plan that has worked for me in the past:

-- Ideally, don't leave your employer without knowing what benefits are available. Many large companies offer a suite of outplacement services to laid-off workers. Always take advantage of them.

-- Need quick cash? Don't forget, that in a pinch, you can cash in or borrow against a life insurance policy -- if it carries a cash value -- or go down to one car.

And if you absolutely need the money, you can tap into your retirement plan, although I don't recommend it, because if you do it prior to age 59 ½, you'll pay income tax plus a 10 percent

federal penalty on withdrawals. That money's awfully hard to replace.

---

The author is a Reuters columnist. The opinions expressed are his own.

How to Nail Zombie Funds

2011-11-02T06:42:00.001-07:00

By John Wasik

(REUTERS) - Do you have zombie index funds within your portfolio?

Instead of eating up your brains, they devour your nest egg with high expenses and walking dead performance. They may be lurking within your 401(k)-type plan or individual retirement account.

I like index funds because they generally can track nearly any kind of asset class. As such, they are the white bread of investing and should cost about the same from fund to fund. The cheaper the better. Why pay Nieman-Marcus prices for the same thing you can get at Costco or Sam's Club for less?

You can vanquish these funds without overtly violent acts, but first you have to identify them. Unfortunately, mandated fee disclosure is still pending, so you have to take the initiative.

So how do you identify a zombie fund? First you need a reliable benchmark for comparison purposes. The easiest way is to look at the index that the fund is supposed to be tracking.

A good proxy for the U.S. bond market, for example, is the Barclays Capital Aggregate Bond Index. It's a basket of listed bonds. If a fund tracks the index return within 0.20 percentage points or less, then that's pretty good and not expensive.

A low-cost bond index fund would look like the Fidelity Spartan Intermediate Term Bond Index investor class fund, with a 0.20 percent expense ratio. You'd need at least $10,000 to get into this fund, though.

You want to pay a manager more to get less return on bonds? The ING US Bond Index portfolio charges a hefty 0.95 percent annually, meaning it will lag the index by nearly a full percentage point every year.

What about garden-variety stock index funds? Suppose you were stuck in a fund like the Principal Large Cap S&P 500 Index fund (C Shares). The managers charge you 1.3 percent annually to hold a basket of the largest U.S. stocks. You could reap huge savings by replacing it with the Fidelity Spartan S&P 500 Index Advantage fund, with an expense ratio of 0.07 percent.

Here's where "less is more" refers to more than architecture. The Principal fund lagged the S&P index by roughly a percentage point over the past year through October 28.

The Fidelity index fund, in contrast, slightly beat the index over the same period. By lowering your expense ratio, you got back that percentage point you would've lost in the more expensive fund.

Over time, the numbers add up. Let's say you had $100,000 in the Principal fund earning 5 percent over 30 years. At the end of that period, you'd have lost more than $140,000 to fees and foregone earnings. The Fidelity fund would have only cost you about $9,000. So one decision can save you roughly $131,000. Run your own numbers on the free SEC Mutual Fund Expense Analyzer (see here). It will take about two minutes.

If you have a zombie fund in your portfolio, run away from it and consider offerings in the DFA, Fidelity, iShares, Schwab, TIAA-CREF or Vanguard groups.

Have a nest-egg eater in your 401(k)? Suggest alternatives to your employer or plan administrator. By law, they must provide the most prudent, low-cost choices. You can sue them if they've loaded your plan with zombies. Several employee groups have done so in recent years -- and won (see www.uselaws.com/news/3/108).

Managing the Message

2011-10-10T12:10:00.000-07:00

What the Occupy Wall Street crowd should be saying when they talk about their plight

By John F. Wasik (Reuters)

Are the thousands who have taken to the streets in the “Occupy Wall Street” (OWS) protests a bunch of anarchistic slackers or do they have a point?

If they’re protesting their personal financial situations or prospects for the American Dream, they have plenty to howl about, but the “99 percent” crowds could use some message management.

When I recently visited the Chicago OWS spin-off in front of the Federal Reserve Bank, they were decrying everything from predator drones to corporations in general. There were fewer than 100 people there, although their theme was similar to the New York demonstrations.

Instead of yelling at people ensconced behind financial district edifices, though, protesters could be making some more constructive demands. I’d like to humbly offer a few suggestions:

Demand that big banks give ordinary citizens the same rates they receive from the Federal Reserve on loans. Borrowers can’t re-negotiate their college loans the way a big corporation or bank can, because they have access to interest rates that are nearly zero. Moreover, students can’t consolidate high-rate private loans with lower-rate federal borrowing, so the plums of high finance are out of their reach. Those who graduated from college may be staring down decades of paying off debt — an average of nearly $23,000 per student; those with professional degrees are wincing at six-figure burdens.
Demand that Congress permit regular folks to discharge student debt in bankruptcy. It’s somewhat of a consolation that graduates can get lower payments based on sparse income or employment if they have federal loans, but they still have to repay those loans. If they file for bankruptcy, they can’t discharge those debts, which are like albatrosses. Not so with the megabanks, who not only received a multi-trillion-dollar bailout, but got the U.S. Treasury and Federal Reserve to buy their bad debt and toxic securities. There’s a solid reason why the delinquency rate for student loans is almost as high as credit cards.
Demand that Congress pass a stimulus plan to create infrastructure, education, research and clean energy jobs instead of investing in two wars that three-quarters of the American electorate thinks are senseless. If the job market were robust, none of these protesters would have to worry. Like previous generations, they could work, pay off their debts and buy things like appliances, furniture and homes. They could afford to have children and provide them decent educations. That was the American Dream. The younger generation is not getting the job opportunities their parents or grandparents had. They are faced with average 15 percent unemployment. It’s much higher for minorities. Even if they can get a job, wages are depressed due to the recession and many are underemployed, working several jobs or are part-timers.
Instead of targeting financial districts, focus on specific congressmen and senators blocking financial/bankruptcy reform and job creation.

Unless more people get in the face of politicians, one thing is certain: it will be continue to be a raw deal for the middle class. Now is the time for the protesters to take their demonstrations out of financial districts and into the offices of their elected representatives. All of this reminds me of when Ralph Waldo Emerson visited Henry David Thoreau in jail, who was imprisoned for not paying a poll tax. Emerson asked his friend why he was there. “Why are you not here?” Thoreau replied. Maybe we’re not quite on the streets today in spirit, but most of us were there some time ago in personal financial solidarity — whether we choose to admit it or not.

Cutting Your Property Taxes

2011-10-03T15:36:00.000-07:00

By John F. Wasik (Reuters)

The author is a columnist for Reuters.com and author of The Audacity of Help: Obama's Economic Plan and the Remaking of America. The opinions expressed are his own.

By John Wasik

(Reuters) - For years, the mantra of American homeownership was to count on home appreciation. Every year like clockwork the value went up and houses were a growing source of wealth.

Now, more than three years after the housing market imploded, the tune is different. It may make sense for you to prove that your home's value has dropped so you can file for reduced property taxes.

This is the time of the year when local assessors send out notices of your home's assessed value. Note, however, that this is not your real market value. It's a base value that's used to calculate your property taxes. If you want to reduce your real estate taxes, start with paring your assessed value.

You have a reasonably good chance of winning a challenge to your assessed valuation. It's estimated that some 60 percent of residential properties are over-assessed, although only a handful of home owners appeal, according to the National Taxpayers Union.

As someone who's volunteered with a local nonprofit in Northeastern Illinois on property tax issues, I know it's worth fighting assessments every year. Sometimes I win, sometimes I lose. If you feel that your assessment is too high, there are many ways to challenge it, but it takes some homework and diligence.

You can always start by checking the property record of your home, which is on file with the assessor. Does it have the correct number of bathrooms and bedrooms? Is the total living space correct? Does it list a finished basement in error? You can fix any incorrect data by either allowing the assessor to inspect your home or by submitting an approved builder's drawing or survey.

Although you can dispute the assessed market value of your home with your assessor, it's not an easy task since you may need at least three comparable homes in your neighborhood with lower values.

If you can't reach an agreement with your assessor, then you'll have to file appeals with your county and state property-tax appeal boards. Your documentation should be filed on time and you may be scheduled for a short hearing.

You can, of course, hire a consultant or lawyer to do the appeal for you, but they will charge a flat fee or take a percentage of your tax savings.

When going through this process, you may feel like it's an uphill battle. It's much easier for assessors to neglect reducing assessed values -- even though home prices have plummeted 30 percent or more in many metropolitan areas since the housing meltdown began. They're in the business of pooling money for the taxing bodies, not providing current market values.

Yet to get an idea on how much housing values have dropped, you need to consult some recent numbers from Realtor.com , the main web site from the National Association of Realtors, the trade association.

Here's a sampling of some markets that showed the largest year-over-year declines in median list prices, that is, what buyers were asking for homes:

*Chicago: -14.9 percent

*Las Vegas : -11.19 percent

*Atlanta: -11.17 percent

*Los Angeles/Long Beach: -10.99 percent

*Detroit: -10.39 percent

*Tampa/Clearwater: -10.26 percent

Of course, these markets have declined much more than these percentages show since the real-estate market peaked in 2006-2007. So you may be able to reap some genuine savings in your property-tax bill.

For the purposes of your assessment, you can generally only focus on the last year. Your mission is to show how similar properties in your immediate area have declined along with your home.

Assessors aren't interested in national, statewide or even county housing prices, though. Stick to your neighborhood and get a professional appraisal for assessed valuation. And if there's something that has reduced the value of your property - a recent storm, neighborhood deterioration, etc. - you should present your case with pictures.

Even if you get a reduction in your assessed value, you may not see a huge decline in your property taxes, if at all. In most places, taxing bodies can still raise their tax rates or multipliers. When multiplied by your assessed value (minus any exemptions or credits), the rates will determine your tax bill. Unless subject to a tax cap, even in a sour property market taxes can still rise.

Since they are suffering from reduced tax revenue due to the housing recession, most public services are going to do whatever they can to ensure that they receive as much money from taxpayers as possible.

The good news is that, unless you employ outside help, it will cost you nothing to fight.

There's a strange benefit in arguing that your home is worth less than the year before. While it may be a blow to your ego, it's a fight worth waging that can make a difference in your tax bills in the future.

Some Sanity in Scary Times

2011-09-27T07:24:00.000-07:00

Balancing your portfolio in a bonkers market

By John F. Wasik

inShare

Balance is a rare bird these days. Jobs, housing, stocks, European debt: All seem to be in a spasmodic tailspin.

There is some consolation that a balanced portfolio can help smooth out the jagged curves of a bipolar market economy. But balance is rarely what we think it is, and it needs constant monitoring.

When most investment advisers tout a balanced portfolio, it typically means one thing: About 60 percent would be invested in a U.S. all-stock fund and the remainder in bonds.

A good proxy for the stock component would be the index exchange-traded fund SPDR S&P 500 fund. U.S. bonds could be ably represented by the SPDR Barclays Aggregate Bond ETF. Both funds are low cost, diversified ways of owning the lion’s share of each market. Here’s how the returns break out, according to Craig Israelsen, professor of finance at Brigham Young University, who analyzed the underlying indexes:

A balanced portfolio is roughly half as risky as an all-stock mix. If you looked at August’s returns, you would have only lost 2.75 percent in the 60/40 portfolio, compared to a 5.5 percent loss in the all-stock portfolio or a 1.37 percent gain in the much safer all-bond portfolio. No surprises there because bonds are safe havens when investors flee stocks as they did during last month’s volatility — and may continue to do so in a broad-based pullback.

Let’s look back even deeper into the past decade, which included two recessions, 9/11, the 2008 meltdown and the dot-com blow-out of 2001. Bonds are again the best performers as a buffer against stocks — returning 5.5 percent vs. 2.59 percent for 100 percent stocks. Between those two extremes was the balanced portfolio, with a 4.1 percent return through August 31.

In an even more volatile period — going back only five years to include the 2008 meltdown, recession and recovery — bonds again came out on top with a 6.26 percent return, compared to 0.74 percent return for all stocks and 3.3 percent for the balanced mix.

It’s hard to argue against being all in stocks or bonds at the right moments. In good times, stocks are the place to be as you’re rewarded with dividends and capital appreciation based on corporate earnings expectations. When the skies darken, though, bonds are decent hideouts due to their steady payments and appreciation when interest rates decline. Yet how do you time the market? That’s what makes the balanced approach a solid middle ground that lowers both stock and bond-market risk simultaneously.

Long-term, the middle route makes a huge difference. From 1926 through 2010, according to a recent T. Rowe Price study, a balanced portfolio delivered returns above 10 percent almost as frequently as an all-stock portfolio — with 40 percent less volatility.

That means in a dreadful year for stocks, the balanced portfolio would only lose 28 percent, compared to 43 percent for the 100 percent stocks mix.

The balanced approach is a compelling argument for mutual funds that automatically do the 60/40 allocation and for target-date or lifestyle choices within 401(k)-type plans that do the same thing only with specific years targeted for retirement withdrawals. Every major mutual-fund firm offers them as does Folio Investing.

You could also build a balanced portfolio on your own by buying the two SPDR funds I mentioned above. Buy them through a deep-discount broker or find their equivalents commission-free through Fidelity Investments, Charles Schwab or the Vanguard Group.

Want to take the balanced approach one-step further? Consider an ultra-balanced approach with at least 12 separate funds representing seven asset classes, such as the ones found in the 7-12 portfolio. Over the past five years, the passive version of 7-12 has returned 4.8 percent, compared with 3.87 percent for the Vanguard Balanced Index and 0.71 for the Vanguard 500 Index fund, according to Israelsen, who designed the portfolio.

Israelsen has expanded the definition of balanced portfolios by including inflation-protected bonds, cash, natural resources/commodities, global real estate, emerging markets and all sizes of companies. This model reduces risk through diversification and includes tangible assets such as commodities and real estate.

What’s important in a balanced approach for moderate to conservative investors is that more global asset classes get you away from the all-U.S. stocks and bonds orthodoxy. This diversity not only gives you room to breath, you’ll never fly too close to the sun.

Market Madness Avoidable

2011-09-23T12:50:00.000-07:00

How to focus in a manic market

By John F. Wasik (Reuters)

While the market was doing another backward swan dive, one email came to me that reflected the mass anxiety: “Some are saying it may be time to panic, and I am resisting. What do you think? And what does panic mean: Jump? Sell off?”

After I offered some brief words of staid resolve, it occurred to me that the luncheon speaker at the Morningstar ETF conference I was attending at the time had the right idea, even though he didn’t utter a word about finance or markets.

Words of fortitude came from Jeffrey Zaslow, who co-authored books with Chesley Sullenberger, the pilot who safely landed a disabled jet in the Hudson River (saving all 155 aboard); and Randy Pausch, the Carnegie-Mellon Professor who offered a moving “last lecture” on life and love before he died of cancer.

Both men faced life-threatening panics and had to make tough decisions. Sullenberger had minutes to decide the best course of action when bird strikes took out his jet’s engines after he left LaGuardia airport. Pausch had a few months to deliver his key life lessons to his students, colleagues and family.

What did they both have in common? Focus and an ability to discern what was important. To distill the essentials of life and articulate them. A lifetime of training, experience and thoughtful examination had prepared them for the moment of truth. As Zaslow noted, they — along with most of us — would be remembered for what they did in critical moments. Yet another such global moment is upon us.

I’m not going to pretend that the markets will suddenly see tomorrow that all will be okay with European banking, or that the U.S. government or American megabanks will fix their tattered balance sheets anytime soon. Or that we’re not all headed for a global recession or more bank failures.

All of that is possible and that’s why the markets are so utterly spooked. Volatility will not ease soon and if you can’t afford the risk, you shouldn’t be invested in stocks.

What I do know is that this is a perfect time to concentrate on what’s essential to you and your family. It’s nearing year-end, so now’s the perfect time to start asking — and answering — these questions:

Are you protected?
This question goes beyond having the basic forms of insurance to cover your vehicles, home/apartment/valuables, life and health. Disability insurance is essential because you’re far more likely to suffer loss of income for health reasons. Portfolio protection is key to make sure all of the risks (inflation, market, credit) are fully hedged.

Is your “gross family spending” positive?
I heard this phrase from Robert Arnott of Research Affiliates and thought it was perfectly descriptive of household financial health. It’s simple: Do your assets (home, business equity, pension, savings, cash) exceed your liabilities (mortgage, credit cards, taxes owed, loans)? If not, what can you do to clean up your balance sheet?

Do you have a plan?
I’m not just talking about a comprehensive financial plan that sets down your goals, objectives and risk factors in an investment policy statement. What about your estate planning? Do you have a living will or trust? Do you want to continue your education? How can you reduce your taxes? How do you plan to invest in your human capital — what you’re good at and passionate about?

What’s your legacy?
This is the hardest question of all. Building an estate is just fine, but if you leave behind love for the people you care about, there’s nothing wrong with that. This is the most lasting legacy.

You may come to the conclusion that you need some help in answering all of these questions. It wouldn’t hurt to approach all of your trusted advisors or summon your family to discuss some of these items. Also check in with your lawyer, accountant or financial planner.

Please note: By “trusted,” I don’t mean brokers or agents. Professionals who are not on commission can give you more objective advice.

Don’t make a move until you know your long-term plan. Now is a bad time to make a decision if you’re just doing it out of panic. You’re not alone in this and there’s no need to completely jump into gold or cash without having a rational defense.

The bottom line is sustainability. If your debts are out of control, why are you worried about the markets? And if you’re not protected against loss of income, the European banking situation is incredibly irrelevant.

After you’ve consulted with your family and professional counselors, then decide if your plan makes sense. You may feel that you’re still wobbly — and need to make some course corrections. But at least you won’t be flying blind.

Why Social Security Will Survive

2011-09-16T12:23:00.000-07:00

Perry’s monstrous lies about Social Security

By John F. Wasik (Reuters)

Gov. Rick Perry, the GOP presidential candidate who calls Social Security a “monstrous lie” and a “Ponzi scheme” has implied that future retirees can’t rely upon receiving benefits from the system.

Not only is Perry shooting wildly from the hip on these statements — a strategy cynically designed to attract angry, younger independent voters — he’s spewing some layered falsehoods that need to be addressed.

Social Security can not only be preserved for future generations, its coming fiscal shortfalls can be fixed relatively simply. What Perry also neglects to mention is that it’s one of the most successful anti-poverty programs in U.S. history.

The before-and-after Social Security picture is dramatic. Before Social Security, almost half of elderly Americans had income below the poverty line, reports the Center on Budget and Policy Priorities. Roughly 12 percent of elderly citizens are considered poor today. The program lifted more than 11 million out of poverty — more than 60 percent of those were women.

Here’s some even more relevant Texas-sized context: Today, more people are slipping back into poverty because of permanent job losses, recessions, a housing meltdown, stock-market downturns, reduced employment benefits, higher medical costs and stagnant wage growth. The U.S. poverty rate last year increased for the third straight year — the highest it’s been since 1993. Some 46 million have annual incomes below the poverty line of $22,113.

As the U.S. is saddled with the highest poverty rate among industrialized countries, why are the anti-poverty features of Social Security being attacked?

Behind Perry’s venom about the system is a larger truth that he’s yet to illuminate: Making cash-strapped states responsible for replacing Social Security or privatizing it is unrealistic. There is nothing in the private sector — nor is anything likely to emerge — that could replace Social Security at the same low cost to taxpayers.

Simply trashing Social Security by calling it a Ponzi scheme ignores the fact that when you pay your FICA payroll tax, you’re getting an inflation-adjusted annuity, disability insurance, a small death benefit for your survivors plus Medicare benefits.

Try to find a package like this in the private sector. It doesn’t exist. You’d have to buy an inflation-protected annuity, disability and life policy separately — and they are no bargains.

Keep in mind, when private insurers offer these products they have to pay commissions and marketing costs, so they load policies with lots of hidden expenses. They can’t offer the same economies of scale that Social Security can, which isn’t burdened with the excessive marketing and administrative expenses.

On an inflation-adjusted annuity alone, you pay dearly to keep up with the cost of living. Compared to an immediate annuity (without inflation protection), your payment would be from 24 percent to 30 percent lower. For that reason, private inflation-protected annuities are relatively scarce and unpopular.

Private disability policies, which I recommend, are expensive outside of group plans (buy one through your employer if you can). For a 40-year-old wanting a $4,500 monthly benefit, the annual premium would be about $2,300.

Life insurance premiums vary greatly, depending upon your health, age and amount of coverage. The older and sicker you are, the higher the cost. If you have chronic conditions, risky occupation or a flawed medical history, good luck getting coverage. Social Security and Medicare don’t turn anyone away.

What about examining Perry’s inference that current workers are contributing money for today’s retirees?
That’s true, but it’s not a Ponzi scheme. It’s well known that there will be fewer workers in the future to fund the system, which will create a regular structural deficit by 2016. But that’s only the case if nothing happens and Congress completely ignores technical fixes or simply cuts benefits.

There’s more about the “if nothing is done” scenario: The Social Security Trust Fund — Congress borrows the cash and replaces it with Treasury securities from a pool of payroll taxes — will be exhausted in 2039, according to the Congressional Budget Office. Yet that doesn’t mean that Social Security will be bust; it will then begin to pay reduced benefits, again, if Congress doesn’t take action.

In what Washington Post economics blogger Ezra Klein calls “the boring truth” about Social Security, Congress can raise the amount of salary subject to Social Security tax to fill the funding hole.

Right now, the earnings cap is $106,800 and the tax is only 4.2 percent for employees, which may drop even more (temporarily) if Congress approves President Obama’s extended payroll tax break.

If you want to get personal on how Social Security will impact your life, run a benefits estimate of how much you’re entitled to at retirement age. For me, it’s about $2,000 a month. It’s not a lot of money and I know I couldn’t live on that where I live now.

Now think of what would happen to your future lifestyle if that modest supplement was scaled back — or you had to retire later. Would you have enough in your 401(k) and other savings to ensure a dignified retirement?

Behind Social Security is an appallingly simple truth: We can put more money into it by asking higher-salaried employees to pay more, and by including immigrants and public-sector employees. I know that doesn’t have much political sizzle to it, but this kind of math doesn’t lie.

9/11's Unfinished Business

2011-09-09T13:51:00.000-07:00

Days of simmering carbon rage in the post 9/11 world

By John F. Wasik (Reuters)

inShare

By John Wasik
The opinions expressed are his own.

Three friends were recently arrested for sitting in front of the White House to protest a potentially damaging Keystone XL tar sands pipeline. They were joined by actress Darryl Hannah, environmentalist Bill McKibben and more than 1,200 others.

Although they were handcuffed, stuffed into a paddy wagon like livestock and quickly released after paying a $100 fine, they believed their civil disobedience was instrumental in bringing attention to a damaging fossil fuel production process. They are all in their seventh decades and highly educated, but felt they needed to make a stand.

A decade removed from the horror of 9/11 and what’s changed in our attitude towards ecology, energy and economics?

We are still frighteningly dependent upon imported oil and there’s no comprehensive U.S. energy policy other than to consume with abandon every last molecule of carbon by blowing up mountains, fracking bedrock, fouling waterways, polluting oceans and warming the atmosphere.

If you think I’m conflating the horrendous loss of life on and since 9/11 with something unrelated, I’m not. Terrorism is a beast that seems to know no master and we’re still fighting that battle. We are all still grieving for the thousands lost and a violated sense of security that will never be reclaimed.

Yet we can only live in the present and head into the future. The U.S. mostly exports jobs now and debt now instead of fostering new energy technologies to rid us of dependence upon foreign petroleum. We’ve become really good at consuming more than our share and kowtowing to entrenched interests that profit from feeding this addicted dragon, which has the face of most all of us.

If you were looking for a hint of an energy policy in President Obama’s jobs speech Thursday night, you would have needed a microscope. The proposed $447 billion plan is big on more tax cuts and didn’t directly promote earlier Obama proposals for green energy development.

Meanwhile, the carbon age grinds on with more drilling and billing from countries who are not really our friends. Each drop of the 4 million imported barrels of oil the U.S. imports every day uncomfortably links us to many countries that have appalling human rights records that are often openly hostile to American interests.

If anything, U.S. energy security has worsened since 9/11. With the exception of Canada, the leading U.S. oil supplier, five out of the top six exporting countries are run by repressive, hostile or unstable governments (Iraq is number six on the list). We’re financing brutal thuggery on a global scale.

The deadly irony is our nearly complete dependence upon fossil fuels — and our many battles to protect this dependency — has cost lives. Some one in eight soldiers were killed in Iraq from 2003-2007 just protecting fuel convoys.

All told, the U.S. war on terror in two countries and elsewhere is estimated to have cost us $5 trillion.

The lives and the dollars lost to fossil fuel dependence are needlessly wasted. The Navy alone estimates that for every $10 hike in the price of crude, it spends $300 million more annually in fuel costs. And that’s just the Navy.

Shouldn’t that money be going to create jobs, fund schools, clean energy research and fixing infrastructure?

Reducing U.S. dependence upon crude (and coal for that matter) can bolster the flagging U.S. economy and trim the budget deficit. The clean technology sector surged 8 percent last year and is now outpacing job creation in the oil industry.

Policymakers in Washington have known all of this for years, yet keep ignoring the inebriated folly of energy co-dependence.

This institutional blindness leads to astounding decisions such as the U.S. State Department green lighting the environmental soundness of the tar sands pipeline.

Since when did the State Department gain meaningful authority over environmental concerns? What’s next? Will the Energy Department gain purview over Yellowstone?

I’d like to believe that my friends briefly sacrificed their freedom and, in the words of Henry David Thoreau, refused to “resign their conscience” to show what an onerous burden dirty energy places upon the entire earth and society. They don’t want to leave behind one of the most destructive legacies of the industrial era that has become a paramount human rights issue as well.

We must challenge our government when it ignores the collective conscience. And if two wars, street protests, massive activism and voluntary incarceration aren’t enough? Then we will have learned nothing from one of the lessons of 9/11.

Photo: American actress Daryl Hannah is arrested as she joins a protest against the Keystone XL oil pipeline, outside the White House in Washington, August 30, 2011. Dozens were arrested on Tuesday in the protest against the pipeline that, if completed, will stretch from Canada to the gulf coast of the United States. REUTERS/Jason Reed

How Wall Street is Blocking Financial Reform

2011-09-07T12:22:00.000-07:00

Published on iWatch News (http://www.iwatchnews.org)

Consumer Finance [1]

Investor protections imperiled by Wall Street, GOP assault on financial reform [2]

It's no secret that a powerful, well-funded coalition of mega-banks, derivatives users and insurance brokers wants to see major pieces of the Wall Street financial reform law dismembered and defunded. They are partnering with mostly GOP House members to do so.

What's lost in this complex cyclone of industry lobbying, free-market ideology and campaign contributions: some of the most pro-investor protections of the law are at risk of disappearing, including safeguards that would help every American who deals with a broker, bank or insurance adviser.

Among the pro-investor measures facing an uncertain future:

Requiring stock brokers and insurance agents who offer financial advice to act as “fiduciaries” and put client interests ahead of their own profits;
Creating an Office of the Investor Advocate and a new Investor Advisory Committee within the Securities and Exchange Commission. Both have been put on hold [3] for lack of funding;
Supplying all the funding mandated by the Dodd-Frank financial reform law for the new Consumer Financial Protection Bureau;
Increasing the annual funding sought by the SEC and the Commodity Futures Trading Commission to carry out their Dodd-Frank mandates.

The all-out assault on the reforms began almost as soon as the law was signed in July 2010.

Following the money

Financial industry dollars have been pouring into congressional coffers for years and have mushroomed in the wake of the Dodd-Frank law.

While both Democrats and Republicans receive money from Wall Street, banks and insurers, several House GOP members have aggressively led efforts to dismember key provisions of the Wall Street reform law.

The House Financial Services Committee, now chaired by Republican Spencer Bachus of Alabama, has been at the forefront of trying to delay or dismantle Dodd-Frank investor rules. This was the committee that did the heavy lifting for financial reform under former chairman Barney Frank, the Massachusetts Democrat and eponymous co-author of the law passed in 2010.

Bachus has not only opposed the formation of the CFPB, he has introduced several bills to delay its start-up and replace its sole director with a five-member board answerable to a financial crisis committee of top regulators.

Bachus' frontal assault on the consumer bureau and other Dodd-Frank regulations reflects the disdain of GOP House leadership in general. Only three Republicans voted for the Dodd-Frank bill when it passed the House in a 237-192 vote on June 30, 2010.

First quarter 2011 campaign finance filings reviewed by the Sunlight Foundation showed "that seven of the 10 freshmen Republicans appointed to the House Financial Services Committee have received 40 percent or more of their political action committee (PAC) contributions from the finance, insurance, and real estate sector."

Bachus, who depends on the financial services industry for more than 80 percent of his campaign funds, framed his attack on the CFPB and other Dodd-Frank reforms in the context of government accountability and over-regulation.

“Everyone on this Committee supports robust consumer protection. But there must be real oversight and accountability of every massive government bureaucracy, and that includes the CFPB,” Bachus said [4] on the passage of a trio of bills passed by the Financial Services Committee on May 13.

A coalition of consumer groups including the Consumer Federation of America and the U.S. Public Interest Research Group assailed Bachus' approach, saying that his bills "aren't about reasonable oversight of the CFPB, they are an attack on consumer protection," according to Ed Mierzwinski of US PIRG.

When financial reform was still being debated in 2009, opponents of the bill—mostly Republican—reaped an average 20 percent more in campaign contributions from the financial industry than proponents, according to the Center for Responsive Politics.

House Democrats also received plenty of money from financial interests for their re-election campaigns.

Frank, an architect of the bill, received nearly $1.3 million, the second-highest amount of any House member, from the industry. Jim Himes of Connecticut received $1.2 million. He was followed by Ron Klein of Florida and Carolyn Maloney of New York, who received about $1 million each. Topping the list with $1.7 million was Democrat Paul Kanjorski of Pennsylvania, a former House Financial Services subcommittee chairman who lost his seat in the last election.

When Republicans took over House leadership last November, they began blasting away at the Dodd-Frank law with the support of the financial services industry. Since they knew they couldn't repeal the bill outright, they cherry-picked provisions that were most costly to the industry such as fiduciary duty, derivatives reform and the CFPB.

Bachus told [5] an Alabama newspaper weeks after the November 2010 election that his role was to "serve the banks," later clarifying his comment to say that regulators should set parameters for banks but not micromanage them.

"If they (Republicans) can get control of both houses," Frank told iWatch News , "they can gut this thing (Dodd-Frank). In general, [GOP attacks on Dodd-Frank] are a way to attract campaign contributions and intimidate regulators."

Bachus and his House Financial Services Committee have already passed more than a dozen bills this year aimed at killing or weakening various aspects of the reform law, but the bills have not advanced in the Democratic-controlled Senate.

The top donors [6] to Bachus: Independent Community Bankers PAC, JP Morgan Chase & Co., American Financial Services Association and Capital One Financial Corp. Assn. PAC. Of the 20 top contributors to Bachus, only two—ExxonMobil and Honeywell—had no direct connection to financial services.

All told, Bachus' campaign took in [7] at least $1.23 million from the finance, insurance and real estate sector, more than half of the $1.97 million he raised in the 2010 election cycle, according to Sunlight Foundation.

Financial lobbies have been particularly generous to those on the House Financial Services’ capital markets subcommittee, which has jurisdiction over the SEC, exchanges, capital markets and government-sponsored housing enterprises like Fannie Mae and Freddie Mac.

The subcommittee’s chairman, Republican Scott Garrett of New Jersey, opposes expanding the fiduciary standard. Garrett and 13 of GOP colleagues sent a letter on March 17 to the SEC, saying the agency "has not identified and defined clear problems that

would justify a [fiduciary duty] rulemaking and does not have a solid basis upon which to move forward." Lawmakers said they shared the concerns of the SEC’s two Republican commissioners, who said [8] the agency’s fiduciary study “fails to adequately justify its recommendation that the Commission embark on fundamentally changing the regulatory regime for broker-dealers and investment advisers."

Garrett also demanded a "thorough cost-benefit analysis" of any fiduciary rule that the SEC might propose. Soon after receiving the letter, the SEC chairman announced the rule was put on hold for further study.

Like Bachus, Garrett's campaign was flush with financial services money. Throughout Garrett’s political career, his single-largest contributor by industry came from the finance, insurance, real estate and securities sector, which accounted [9] for $1.8 million of the career total $5.2 million raised.

To be sure, the party in power generally receives more money from special interests, especially when new regulations surface.

According to Opensecrets.org, "The average member of the Financial Services Committee received about 75 percent more money in the last election cycle from industries under their jurisdiction than the average member of Congress." That included more than $3 million from the American Bankers Association, $1.7 million from JP Morgan Chase, $1.6 million from Bank of America and $1.3 million from Wells Fargo.

By imposing restrictions and curtailing funds for the key agencies responsible for protecting investors, House Republicans have put regulators on notice that they will be gunning for them. And if Republicans take control of the Senate in 2012, Dodd-Frank may be mortally wounded.

Investors who lost money from commission-oriented broker advice will continue to get hurt or be sold risky investments they don’t need without tougher watchdogs, according to consumer advocates.

"There absolutely needs to be fiduciary duty," says Robert Talbot, a University of San Francisco law professor who has represented hundreds of broker-fleeced investors. "People are completely trusting."

Attack on SEC funding, fiduciary rule

SEC Chairman Mary Schapiro, a champion of the Dodd-Frank reforms, has faced an onslaught from House and Senate Republicans. GOP members of the House Financial Services Committee want to cut the SEC’s funding and staffing, which would make it difficult for the agency to put in force the major safeguards mandated by the Dodd-Frank law, such as the Office of the Investor Advocate and better policing of investment advisers.

Republicans also want to neuter the power of the new consumer protection agency, complaining [4] that the CFPB should not be led by a single director as the agency is now structured.

Not only is the alliance of GOP lawmakers and the financial services industry seeking to cut funding for the SEC, it wants to shelve a stricter fiduciary rule for brokers. Under pressure from a group of House Republicans and GOP members of the Senate Banking Committee, Schapiro has delayed the rulemaking for the fiduciary rulemaking. The SEC has already received more than 400 emails [10] from industry groups as well as small investors in response to its January study.

One of the biggest supporters of expanding the fiduciary rule, the AARP, plans to do its own research to gauge the financial impact of the proposed rule, said Mary Wallace, senior legislative representative of the group that represents Americans over 50. Amid attempts to weaken or dismantle the Dodd-Frank law, Wallace says it's essential that the fiduciary rule survive so that investors will "be guaranteed that the products they are being sold are the best for the client's needs."

Schapiro recently told iWatch News that the agency has placed a higher priority on other rules for the time being. The reform law requires the SEC to write some 100 new rules, create five new offices and produce more than 20 reports. The SEC plans [11] further economic analysis of the fiduciary issue, and hopes to propose a fiduciary rule in the second half of this year, Schapiro said in May.

Even with its new powers under the Dodd-Frank law, the agency acknowledges that it will be difficult to police such a large and powerful industry.

The investor protection agency was crippled during the Bush administration as the SEC budget was reduced or frozen from 2005 to 2007 – just as Wall Street was selling securitized products that later proved to be toxic for investors and the financial system. Only recently has the agency returned to staffing levels of fiscal year 2005, Schapiro says.

In the interim, the SEC saw trading volume double, a 50 percent jump in the number of investment advisers, and investor assets grow to $38 trillion.

Six years ago, about 19 SEC examiners were available for every $1 trillion invested; now the ratio is 12 examiners per trillion, Schapiro said. Investor protection advocates are troubled by the fact that assets under management have ballooned while the number of watchdogs has dropped.

The agency requested $1.4 billion for fiscal 2012, an amount it says would be covered by the fines and other revenue the SEC generates. That's an increase of $222 million over the previous year, and would pay for 780 new jobs to carry out Dodd-Frank. House and Senate Republicans would like to cut the agency's funding.

"Insufficient funding for the SEC means fewer cops on the beat," Schapiro said in an April 8 speech, "even though fraudsters show no sign of backing off."

Industry defends status quo

Main Street investors have to look deep into the back story of the fiduciary rule to understand why it's attracted the enmity of financial advisers, brokers and insurance agents. The fiduciary rule would upend current business models used by brokers and insurance agents. It would cost brokerages, insurers and banks millions of dollars to retrain their brokers as fiduciaries, add in-house compliance practices and register with states or the SEC as investment advisers.

How much would it cost the industry?

Spokesmen with Securities Industry and Financial Markets Association (SIFMA), the National Association of Insurance and Financial Advisors (NAIFA) and the Independent Insurance Agents and Brokers of America did not respond to iWatch News’

repeated requests to comment on the issue.

Registered investment advisers, certified financial planners and many financial advisers already work in a fiduciary capacity with clients. And so do many lawyers and accountants who provide financial advice.

A coalition of fiduciary advisers has long supported and lobbied for the SEC rule. Their business model is simple: the client comes first. Brokers typically adhere to a much-weaker standard that simply says they must choose financial products that are "suitable" for clients – a definition allowing them to sell products with lucrative fees and commissions.

Another big difference: If an investor is wronged by an investment adviser, the investor can sue in court. But non-fiduciary brokers and insurance adviser/agents usually require customers to take any disputes to an arbitration forum run by the securities industry self-regulator, FINRA.

To challenge a broker’s behavior, a small investor must pay fees and appear before a three-member arbitration panel run by the industry with at least one of the arbitrators representing the brokerage industry. And as an investor, the odds are not in your favor, says Louis Straney, a securities arbitration consultant based in Santa Fe, N.M.

At present, the number of fiduciary advisers is small, so any imposition of a fiduciary rule on broker-dealers and other commissioned financial sales representatives would have broad impact and help the majority of American investors, according to investor advocates.

There are less than 12,000 registered investment advisers policed by the states and SEC, and even fewer certified financial planners. But the securities industry is represented by more than 600,000 brokers and 400,000 insurance agents, many of whom are cross-licensed to sell securities and commissioned variable annuities, which regulators frequently cite as sources of marketing abuses—particularly to older investors.

SIFMA, the main industry group representing securities brokers, stated earlier this year it supports "a uniform fiduciary standard of care for broker-dealers, investment advisers…yet remains concerned about the possible effects on broker-dealers' ability to serve customers as this approach is developed.”

While appearing to support the concept of fiduciary duty, SIFMA has also claimed that its customers would pay more if they were subject to fees instead of commission. A SIFMA-paid study said an investor with $200,000 in assets would pay $460 more annually in additional expenses with fee-based advisers versus commission-based brokers.

NAIFA, a group representing 200,000 insurance agent/advisers, also says that small investors would be hurt. A NAIFA survey of more than 3,000 members found that imposing a fiduciary duty would force many to "discontinue providing some services to middle-market clients," the group said.

“Clients aren’t concerned about whatever standard of care might be imposed by regulators or legislators,” NAIFA President Terry Headley said in a recent statement [12]. “An imposed universal fiduciary standard that increases costs and eliminates the ability of investors to choose how, and from whom, they receive financial products, advice and services would not be in the best interests of consumers.”

Barbara Roper, who has championed fiduciary duty for years on behalf of the Consumer Federation of America, has asked House Republicans to drop their opposition.

"The SEC has proposed a way to move forward on fiduciary duty that maximizes investor protections while minimizing industry disruption," Roper said in a May 9 letter to lawmakers. "It would be tragic if opposition from a few industry members intent on maintaining the status quo were able to derail that progress."

However, FINRA arbitration statistics [13] indicate growing discontent with non-fiduciary brokers and advisers. The number of investors’ claims citing "misrepresentation, omission of facts, unsuitability, negligence, failure to supervise and misrepresentation" doubled in 2009 over the previous year, according to FINRA data. The single-largest problem category was "breach of fiduciary duty."

The human toll

With the 2010 passage of financial reform, there was some hope that investors would gain more robust protection from inappropriate investments. Some $114 billion has been directly lost by investors since 2008 in high-risky, broker-sold products such as auction-rate securities, principal-protected notes and sham securities, according to a study published [14] by the nonprofit Nation Institute.

Linda Soltis, 63, could have used one of the reform law's intended investor shields when she was approached by a broker working inside a Washington Mutual Bank. After inheriting some money from her brother in 2007, the retired San Francisco teacher was hoping to buy a condo in one of the most expensive real estate markets in the country.

Despite making clear that her goal was to keep her money insulated from market volatility, the bank broker invested the money in risky and inappropriate mutual funds that earned him a healthy commission. When the Wall Street meltdown occurred in late 2008, Soltis was told by her broker that she had lost more than $46,000—a large part of her life savings.

After contacting several lawyers, her case against the broker was taken up by the Investor Justice Clinic at the University of San Francisco law school, which was able to recover more than $43,000 in an arbitration award against the bank, JP Morgan Chase & Co., which bought Washington Mutual in 2008 after it failed.

"Something about being in a bank made me trust him," Soltis says of the broker. "I thought he represented me and cared about my account. Then it came out in arbitration that his job was sales. I wasn't able to buy the condo when the money was lost."

Soltis is one of many investors who have been confused by brokers who work in banks, major wealth management firms or insurance agencies.

She could have been protected if the bank broker was required to act as a “fiduciary ,” a legal definition that means placing the client’s financial interests first. Investment advisers are already held to this legal standard when recommending where clients should put their money. But many less-sophisticated investors are unaware of the difference between brokers and investment advisers.

The Dodd-Frank law created a Consumer Financial Protection Bureau (CFPB) and an SEC Office of the Investor Advocate, both designed to protect bank customers and

small investors with a new arsenal of police. It also ordered the SEC to study a fiduciary duty for brokers.

The SEC produced [15] a report in January that said that the fiduciary standard should apply to anyone giving financial advice. The agency planned to begin writing a rule to that effect until it ran into pressure from Republican lawmakers and financial services industry lobbyists.

John F. Wasik is author [16] of ``The Cul-de-Sac Syndrome'' and 12 other books, and is a Reuters columnist.

SEC has yet to move on rules that would hold brokers, insurance agents to stricter “fiduciary” duty to clients

How to Create Jobs with Justice

2011-09-05T08:20:00.000-07:00

By John F. Wasik (Reuters)

Where is the real U.S. jobs plan?

Jobs, justice and peace. Have three themes ever been so intimately intertwined since Dr. Martin Luther King, Jr., championed this tri-partite campaign in his 1967 March on Washington?

Unemployment is ravaging the country, especially among urban minorities. Yet Congress has yet to put forward a comprehensive jobs plan to create employment. We’re still fighting two wars and garrisoning troops in Europe and Japan as the jobless rate soars at home. Debt reduction is still a priority over job creation.

The current economic downturn has put the brakes on economic progress for most of the American working class. They shared in widespread growth during the 1990s, but have been falling behind during the latest recession.

The pain has been uneven and most punishing in the inner city and among the young. For white men and women, the jobless rate for those 20 years and older was around 8 percent as of July. For white teenagers (age 16 to 19), the rate was 23 percent.

Unemployment for African-American adults is twice as high as white adults at 16 percent. For African-American teenagers, the rate soars to nearly 40 percent.

Much of the reason that decent-paying jobs have evaporated is that inner cities and suburbs have been de-populated and businesses have left — many of them to wealthy suburbs or overseas. Unionized industrial jobs have also fled.

There’s been great progress made since the end of World War II to create a broad base of high-paying jobs, although the bulk of those positions were in unionized manufacturing companies, nearly all of which have cut back, shut down or outsourced. High-wage jobs left urban manufacturing districts to be replaced by low-wage service jobs or occupational deserts.

There is a pernicious poverty in places where there’s no job growth and few opportunities. Go to any old industrial city like Chicago, Cleveland or Detroit to see what an occupational desert looks like.

Where once there were large plants employing thousands of workers, there are now empty lots. South Chicago and Chicago Heights, where I first started my journalism career, used to be thriving places, employing tens of thousands.

Men I knew like Frank Lumpkin came up from the Jim Crow south to northern cities like Chicago to land decent-paying jobs and to raise families. The mill in which he toiled shut down 30 years ago. Nothing has replaced it. Ironically, one abandoned Chicago steel mill site became a temporary venue for a recent Dave Matthews concert.

Being stuck in low-paying jobs is a social curse. It’s a sign that upward mobility hasn’t been extended to everyone. What’s to blame? Is it the failure of our educational system? Congress? State governments? Overpaying CEOs and Wall Street traders?

Instead of blasting the usual suspects, let’s take a hard look at our educational system. Somehow public schools aren’t guiding graduates to the right kinds of skills needed for lucrative, in-demand jobs such as biomedical engineers, network analysts, financial examiners, biophysicists and biochemists.

The top-paying jobs require extensive training and higher education. Almost half of the very high-paying occupations forecast to grow the most by the U.S. Department of Labor require college.

One-third of those fast-growing job categories require little training and are categorized as low or very-low paying: Home health aides, skin-care specialists, physical therapist aides, veterinary technicians, dental/medical assistants and fitness trainers. But these new service jobs often fall short because they won’t guarantee new workers living wages.

Not all of the current jobless situation can be attributed to a mismatch between needed skills and openings, though.

The “underemployment rate” — those who had to take part-time work because they couldn’t find full-time positions — more than doubled from 2007 through March, 2011, among those with bachelor’s degrees, reported the Economic Policy Institute, a think tank affiliated with organized labor.

“The fact that the economy’s best-educated workers have seen a more than doubling in their underemployment rate is just one of many pieces of evidence suggesting that the anemic recovery reflects a general lack of job growth rather than a deficit of skills or education among its workers,” the Institute stated.

Cutting more government programs will only create more unemployment. Any job stimulus plan has to marry training and education not only with present needs, but the job market of the future. How to best accomplish this?

We have diseases to cure, rebuilding to do and energy needs to meet. An infrastructure bank is a start.

A sustained national program to create clean energy technologies, a new generation of long-term storage batteries, biomedical research and modernizing the electrical grid is another approach. Despite these immediate needs, Washington is helping the wrong people.

As Princeton professor Cornel West wrote in a recent New York Times piece, referring to Washington’s side-stepping of Dr. King’s prophetic legacy:

“Instead of articulating a radical democratic vision and fighting for homeowners, workers and poor people in the form of mortgage relief, jobs and investment in education, infrastructure and housing, the administration gave us bailouts for banks, record profits for Wall Street and giant budget cuts on the backs of the vulnerable.”

If job opportunities don’t materialize on a mass scale, it won’t matter how much government spending is cut. Government assistance will then have to expand to accommodate a burgeoning, restive underclass.

Leadership from everyone in the political spectrum is lacking and most acutely from the Congress and White House. Washington needs to reconnect to the need to champion universal civil and economic justice.

Or, as Dr. King so eloquently put it, “Let us be dissatisfied until the tragic walls that separate the outer city of wealth and comfort from the inner city of poverty and despair shall be crushed by the battering rams of the forces of justice.”

Why You Can't Beat the Stock Market Through Active Trading

2011-08-30T06:14:00.001-07:00

By John F. Wasik (Reuters)

The days of you trying to make a buck actively trading in the stock market are over.

Individuals don’t stand a chance anymore because they are largely competing against rational machines often guided by herd-like irrational forces. The robots can rule in the blink of an eye.

I’m not spouting lines from an Isaac Asimov novel, but citing reality. The machines and people who program and profit from them have won — for now.

I knew it was over for human traders when I heard that high-frequency trading firms were hooking up their data lines directly to exchange computers to gain an extra hundredth of a second in execution time.

High-speed programs are designed to move millions of shares in a fraction of a second to take advantage of small movements in securities prices. These algorithms are ideal Wall Street workers. They don’t need health insurance and you don’t have to pay them bonuses to help finance their Lamborghinis or homes in the Hamptons.

There’s no way to beat the machines, unless of course, you have a faster machine, better programs or the ability to predict the future. Your odds are better in Vegas, which never had great odds for a palooka pulling a one-armed bandit.

Who are you trading against when you take on the machines? Any entity from a boutique investment firm with a handful of “quants” — math majors who flocked to Wall Street for the big bucks — to a mega-bank or hedge fund. Some 60 percent of the volume of the New York Stock Exchange is attributed to high-speed trading, maybe more.

Although many market observers blamed machine traders for a flash crash last year, regulators have done little to slow down these speed demons.

Machine traders don’t even need a human analyst to pull the trigger on trades based on the day’s news or price changes. Who watches CNBC any more in these firms? They don’t have to: Machine-readable feeds from all of the news services and exchanges go right into their computers and trading decisions happen without much direct human intervention.

The trading floor is becoming as relevant as the telegraph system.

That’s why will see even more flash crashes and huge price swings called “mini-flash crashes.”

The only perennial truth about the stock market is that it will remain volatile and virtually unpredictable because it’s based on the mass actions of millions of people. It’s like trying to predict the direction of a giant school of dumb fish.

Every day, even more money is chasing potential price swings at the speed of light all over the world. The more traders adopt these systems, the greater the chaos.

There are, of course, various ways of protecting your money from the market madness. Crafting a low-risk, long-term portfolio allocation of stocks, bonds and alternatives for your age, lifestyle and risk profile is one way.

For long-term stock investors, you’ll be better off in exchange-traded funds like the Vanguard High-Dividend Yield fund or the SPDR S&P Dividend fund. Both offer a portfolio of high-dividend paying stocks.

You can also create a high-dividend portfolio of your own, but you’d need to diversify across at least a dozen industries to buffer sector risk.

Dividends generally aren’t impacted by high-speed trading. If a company has sufficient earnings, they cut you a check every quarter. Once you create your portfolio (with individual stocks), you’d enroll in dividend-reinvestment programs to buy new shares on a regular basis on a dollar-cost averaging basis. That would ensure you wouldn’t be buying in at the market peak. The majority of these programs allow you to buy new shares commission-free.

Don’t even try to time the purchase of your stocks, because Washington will do nothing to protect you against huge market swings.

Wall Street is spreading plenty of money around in lobbying efforts to make sure that their trading desks don’t get regulated in any meaningful way. Sated with financial services industry contributions, House Republicans have already spent most of the year trying to kill Dodd-Frank financial reforms, so high-speed trading isn’t even near the top of their agenda.

So my advice couldn’t be more succinct. The best way to beat the machines is pretty simple: Don’t even play them. Game over.

Tea Party Unpatriotism

2011-08-12T14:51:00.000-07:00

The Tea Party’s “blue deal” for America

By John F. Wasik
Reuters

Imagine being elected to government even though you’re openly hostile to it.

Such is the perverse arrangement the Tea Party has with the electorate, which is foisting a “Blue Deal” on Americans. As opposed to a “New” deal or even “Square” deal, the Blue Deal and its prolonged pain will hurt most middle-class Americans through higher costs in retirement, health care and public health.

Tea Party affiliates’ nonchalant posturing on the potential debt default influenced the Standard and Poor’s decision to downgrade U.S. debt and the ensuing turmoil.

Now that the Congressional super-committee has been named to begin

cutting more government spending — and hopefully raising revenues — it’s time to craft a balanced agenda that will preserve social programs while cutting government waste.

The Tea Party’s brash intrusion into U.S. politics was a needed wake-up call, although the movement will be more destructive than productive if it doesn’t create a tide that lifts all boats. Here are the major stumbling blocks that need to be addressed head-on by the committee:

Being the World’s Cop. If Congress is truly interested in the kind of debt reduction the ratings agencies and markets will take seriously, it has to end its role as gendarme to the world’s hotspots. Rep. Barney Frank (D-Mass.) said as much on Tuesday in a National Public Radio interview in which he was cut off before he had a chance to fully explain why. Frank said overspending on needless military expenses is one reason U.S. debt was downgraded by Standard & Poor’s. Nobel Prize winning economist Joseph Stiglitz estimated in 2008 that the Iraq and Afghan wars will cost the U.S. at least $3 trillion — double the cost of the Korean War and outpacing the 12-year Viet Nam war. Pull out of these countries and reduce spending on forces in Europe and Asia and Congress will not have to touch social programs.
Deregulation Will Cost Money and Lives. The epic dismantling of government regulation by conservative GOP members is going to result in more deaths and higher costs for everyone. Ralph Nader, who knows more than anyone how consumer regulation works, noted that at least 150 million workers will be adversely impacted by cuts in workplace safety and health regulation. There’s more: ”There are 307 million eaters in America,” Nader states. “More than 7,000 of them die from contaminated food and more than 300,000 are hospitalized each year. The Tea Partiers pushed cuts through the House to the already underfunded FDA food safety programs.” Add to that the assault on investor protection, unions, bank regulation and environmental protection, and it’s difficult not to conclude that the Tea Party’s unrelenting hostility toward government watchdogs will largely hurt the populace.
Tax Expenditures Cost the Treasury Billions. Tax breaks such as mortgage interest and health insurance deductions take away up to $1 trillion from the Treasury every year and do nothing to promote affordable housing or health care. Conservative economist Martin Feldstein at the Bureau of Economic Research proposes capping all personal write-offs at 2 percent of annual gross adjusted income. He estimates that would raise annual tax revenue by $278 billion annually. Isn’t this a tax increase? While those making $500,000 a year would likely pay $40,000 more in taxes, taxpayers in the $25,000 to $50,000 range would pay only $1,000. The theme here is restoring progressivity to the tax code instead of raising rates. The wealthiest taxpayers don’t get to lard up on breaks that most of the middle class won’t benefit from. In any discussion about taxes, the Tea Party needs to recognize that fairness in the tax code can partially eliminate the cuts in education and health care. Needless corporate breaks that don’t create any jobs and rob the Treasury should also be on the chopping block.
Rebuild the American Dream. A new social contract is needed. A mindless slashing of every government program isn’t the answer. Social Security and Medicare are enormously successful social programs that have kept millions out of poverty. When you cut benefits, the math is simple: It will increase costs for the retired. If anything, these programs should be expanded to cover more people. Government should be in the business of saving money on hospital stays, medicine and retirement fund management. Social programs should be part of a separate discussion that doesn’t demonize them and implements meaningful cost controls reached by a consensus of Americans. Another dialogue should begin on how to create jobs and involve the private sector, which is sitting on more than $3.6 trillion in cash. Activities that are harmful to society — such as pollution, junk food, smoking, gambling, alcohol and trading speculation — should be heavily taxed. Use the revenue to create 21st Century jobs that pay a living wage and fund public education and clean energy.

Compromise and social progress need to have a seat at the table. The alternative: Chaos, economic despair, social unrest and a lower standard of living. We need only look to the streets of England or the Arab world to see how gross social inequity eventually translates into anarchy.

iBank: The Time is Right

2011-08-06T21:12:00.000-07:00

By John Wasik

We have iPhones, iPods and iPads. Why not an “iBank?”

This wouldn’t be an electronic gizmo that’s obsolete in a year, though. It would be a public-private partnership to bolster America’s infrastructure. It will create jobs, cut the deficit and repair what needs to be fixed all over the country.

An infrastructure bank, or iBank, solves a lot of problems without busting the budget. Instead of providing direct government grants or earmarks for specific projects, loans are made by a government-banking entity.

The U.S. is inexcusably late to the game on this time-tested idea. The European Investment Bank has financed some $350 billion in projects from 2005 through 2009. China spent 9 percent of its gross domestic product — also roughly $350 billion — to build subways, highways and high-speed rail in 2009 alone. Brazil invested $240 billion over the past three years.

The idea is not without high-level support. President Obama recently called for the creation of an iBank. In backing a U.S. iBank, Senator John Kerry of Massachusetts testified last year that “a national infrastructure bank will make Americans builders again.”

If the iBank became reality — and really it’s a necessity to compete in a globalized economy — there’s no shortage of projects. According to the American Society of Civil Engineers, more than $2 trillion is needed to fix U.S. bridges, dams, waterways and wastewater plants.

The sheer scale of a big fix is staggering: Some 69,000 bridges need to be repaired. The outdated electrical grid needs to be modernized everywhere. You can build solar plants and windmills all you want, but if you have no power lines to transport the electrons from the deserts and plains, you’re whistling in the wind.

Several spin-offs of an iBank have been floating around for years, and the idea already has support across the political spectrum. A “Clean Energy Bank” would fund solar energy equipment. Sen. Bernie Sanders of Vermont, supports legislation that would install 10 million roof solar panels. Sen. Mark Kirk of Illinois proposed a “Lincoln Legacy” infrastructure bill.

How is the iBank different from just handing out the money to each Congressional district and letting the local representative decide where the money should go?

In Kerry’s vision, federal dollars would be matched with private dollars from pension funds and endowments. Kerry told the Time’s Joe Klein recently that “a $10 billion federal contribution will leverage about $640 billion in private investments.” Kerry claims he has support from business, labor and Republican Senators.

Instead of doling out pork-barrel funding for bridges to nowhere, an independent board would decide which projects are needed most. It’s the inverse of a military base closing commission. Instead of shutting down facilities, this entity would greenlight and finance the most-worthy projects.

One thing an iBank wouldn’t be is another big-check stimulus plan, which Congress passed in 2009. That nearly $800 billion package was a huge fiscal band-aid to help states, school districts and wage earners through the recession. Yes, there were some public works projects that created short-term jobs, but the bulk of the money went to tax relief and the states.

The U.S. needs a new approach to economic triage. The June jobs report was nothing short of dismal as employment growth hit a wall with only 18,000 new jobs coming on the market.

Crumbling infrastructure will cost the U.S. economy nearly 1 million jobs and shave $3.1 trillion from gross domestic product by 2020, the Society of Civil Engineers estimates.

What about the budget? Isn’t there a disconnect between the current passion for cutting the federal deficit and spending money to fix America?

There’s little question that putting people to work will help the economy. Working people pay income, sales and property taxes, which flow back into communities. The steadily employed buy homes, vehicles and appliances. Increased tax revenue in turn reduces the deficit.

The iBank may be able to accomplish what a decade of personal income and estate-tax cuts didn’t: Provide the necessary public-private capital to revive the economy. Not even Harry Potter can make magic work on the U.S. economy without some significant infrastructure investment.

Payback Time for Banks

2011-07-29T15:28:00.000-07:00

By John F. Wasik (Reuters)

It’s time for banks to pay back their debt to the rest of us

The deficit dance has been a convenient distraction for big U.S. banks. They’ve not only escaped new taxes for now, but they also are relishing their taxpayer bailout by earning robust profits.

Except for Bank of America, the major U.S. banks are doing just fine, thank you. Yet for all of the abundant generosity and forgiveness of the American people, have banks lent out enough money to Americans to make a difference to the economy at large?

No. Banks are lending less to consumers than they did in 2007, the year before the full-blown financial meltdown, according to recent Federal Reserve Consumer Credit tallies.

Outstanding consumer credit was $2.5 trillion in 2007 compared to $2.4 trillion through May of this year. Revolving credit was down fivemo percent in the first quarter of this year. Total consumer lending was down about $100 billion in 2010 and 2009 alone from 2007 levels.

The net effect was less money flowing to consumers, who are the engine of the U.S. economy. Even if you wanted to build that addition to your home or buy a foreclosed home, good luck getting a large loan from a bank — unless you have perfect credit ratings.

Banks’ bowstring-tight standards for mortgages and home-equity loans triggered the lending squeeze. The Fed’s July 13 Monetary Policy report told the story:

“Mortgage originations trailed off with the end of the refinancing wave that occurred last fall, when interest rates declined … Bank lending through home equity lines also remained extraordinarily weak, reflecting in part tight lending standards amid declines in home prices that cut further into home equity. Both credit card and other consumer loans from banks contracted, on balance, over the first half of the year.”

For taxpayers, the bailout begun in 2008 worked as a mega-banking stimulus unrivaled in history. The largest banks were saved and became bigger. Their trading profits and brokerage operations were protected. Then they were able to pour their taxpayer-enabled profits into lobbying against the needed financial reforms of the Dodd-Frank law. Undaunted, banks are still free to lend out money to credit card holders for 14 percent or more.

In the economy at large, though, layoffs continue, the housing market is still in intensive care and the Federal Reserve’s stimulus plan is a bust.

Despite their soaring profits, megabanks still owe U.S. taxpayers money from the bailout. A new study of released by the Center for Media and Democracy shows that $1.5 trillion of the $4.8 trillion in federal bailout loans are still outstanding.

An even bigger boondoggle is the government’s effective nationalization of the U.S. home mortgage market. Through the purchase of mortgage backed securities and debt from government-seized Fannie Mae and Freddie Mac, the Fed has supported the moribund housing market.

The Obama Administration has yet to put forward a plan to resolve its ownership and continued funding of Fannie and Freddie, two fiscal black holes. Meanwhile, homeowners are still getting foreclosed upon with no end in sight.

“The Federal Reserve and the Treasury have spent $1.6 trillion in a bank-shot to save the housing market by using the same financial companies that got us into this mess,” said Conor Kenny, lead author of the Center study. “That’s more than 800 times what they’ve spent directly to keep homeowners in their houses, and the banks have only made money off the whole thing.”

For American taxpayers, the social return on the bailout has been dismal. Bank foreclosures have resumed their rise. So-called “robo-signing” abuses in home purchases where mortgages are fudged to the benefit of banks also continu e. And jobless claims are rising.

It’s time for banks to pay back their debt in a profound way. Yet first, an attitude adjustment is in order: Financial speculation in bank profits should be taxed to pay for education and health care. This trading tax will also reduce the federal deficit over time.

A “Robin Hood” tax like this would even the social capitalism balance sheet. Such a plan is afoot in the U.K. and it should be on the table in any larger discussion

Debt Ceiling Sellout

2011-07-22T15:46:00.000-07:00

3 more gloomy bargains: How much the debt deal will cost you

By John F. Wasik (Reuters)

No matter what plan Washington concocts to reduce the deficit, it’s going to cost you something. “Shared sacrifice” is in vogue, but your pain will be bigger if you’re unfortunate enough to earn wages or need social benefits.

Most conservative deficit-reduction plans shred the social safety net and cherished personal write-offs in unprecedented ways. The core elements of each proposal will pare middle-class tax breaks, Medicare and Social Security.

As Yogi Berra once said, “it’s déjà vu all over again.” The $3.7 trillion Senate “Gang of Six” plan and related iterations bear a striking resemblance to a “Moment of Truth” deficit commission report issued, and mostly ignored, late last year and pieces of a Heritage Foundation plan ironically entitled “Saving the American Dream.”

No plan will preserve or protect the American Dream as we’ve come to know it. And the powers that be don’t seem to be rattled by the potential chaos if an agreement on raising the federal debt ceiling by Aug. 2 doesn’t happen. Markets may collapse, benefits will be delayed and salaries won’t get paid if the U.S. can’t issue more debt, but the Beltway bickering goes on.

Instead, we have this power play in the form of Byzantine musical chairs. One sure loser is already ordained, though: Middle America. Let’s look at where the deficit commission, Senate and Heritage plans intersect:

“Broaden the tax base”
This is one of the most Orwellian prevarications since the coining of the “death tax.” (Have you ever met a dead person who paid a tax?) When conservative policymakers say this, they don’t mean raising taxes, they mean lowering tax rates and eliminating “tax expenditures,” like deductions for individuals.

The Senate “Gang” plan proposes three tax brackets ranging from eight to 29 percent. Currently the highest personal tax rate is 35 percent. The Senate plan would also cut the hated $1.7 trillion alternative minimum tax. At first blush, both moves will reduce revenue flowing into the Treasury and balloon the deficit. How would the Senate make up the shortfall, considering that it also cuts corporate tax rates from 35 percent to as low as 23 percent? They say: “Reform, not eliminate, tax expenditures for health, charitable giving and homeownership.” Bottom line: Your after-tax cost for healthcare and mortgages may be higher. Although limiting the mortgage interest deduction to one home and capping it isn’t a bad idea, this is not a “broadening” of the tax base. Middle class workers will pay more — unless the cost of healthcare and homeownership mysteriously drop.

“Enacting a $500 billion down payment … ”
One of the key elements of this Senate concept carves up Social Security. Instead of the current formula for cost-of-living adjustments, the Senate (and deficit commission) would substitute a “chained” Consumer Price Index. Through economic legerdemain, this new index would shave an estimated 0.25 percent annually from the current cost-of-living payments. That means a lower Social Security payment!

What about bringing more government workers into the system, immigration reform or simply raising the cap on earnings subject to Social Security and Medicare taxes? None of this is mentioned. After all, to “broaden” the tax base — at least in this perverse definition — “reformers” will reduce benefits. Note: There was no COLA paid in January due to low inflation, even though for millions of retired folks the cost of medicine, food and energy rose. The takeaway here is that “entitlement reform” means cutting benefits and raising your out-of-pocket costs for Medicare and Social Security.

“Repeal the CLASS Act”
The Senate document doesn’t even bother to explain what this is, but I will. The CLASS Act was one of the better ideas to emerge from Washington in recent years. It would have given workers the option to buy lower-cost long-term care insurance through their workplace. If you’ve seen a nursing home bill lately, you know that decent care costs more than $70,000 a year. It’s estimated that 70 percent of Americans over 65 will need long-term care at some point. Right now, either families or the Medicaid program absorbs these exorbitant costs — and Medicaid funding has one of the biggest bulls eyes on it. So middle-class and lower-class families will pay more.

There is some good news in all of this. If you’re a hedge fund, private equity manager, bank, corporate treasurer or securities investor, you’ll be just fine. No one has suggested raising taxes on capital gains, trading profits, derivatives, dividends or “carried interest.” Apparently not everyone will be asked to sacrifice when the tax base is broadened.

Can Your Protect Your Savings in the Event of a US Debt Default?

2011-07-15T08:44:00.001-07:00

Debt ceiling & dumber: No safe haven for your money?

By John F. Wasik (Reuters)

Washington is now acting out a scene from Tennessee Williams’ classic play Glass Menagerie. The ever-fragile players are about to shatter .

Yet this is not the time to turn a farce into a tragedy. A default on U.S. debt will make the 2008 debacle look like a Simpson’s episode. Interest rates will soar through the roof. Everything from mortgage rates to adjustable credit card financing will skyrocket. Payrolls may be imperiled along with Social Security and Medicare payments. Think economic crash and burn — in a big way.

If the credit rating of U.S. debt is downgraded from AAA, that will automatically signal to the global bond market that investors should demand higher yields for taking more risk. Standard & Poor’s has put the U.S. on its ominous “CreditWatch” status and will downgrade unless a debt deal is struck soon.

Money moves exponentially faster than politics these days. If bond managers get even a whiff of actual default, they will move their funds out of U.S. Treasuries at the speed of light. That tsunami may devalue anything measured in dollars, including U.S. stocks; corporations would then fire even more people and halt capital investment. Unemployment would hit Depression-era levels. Americans would wistfully recall the days of nine percent joblessness.

More importantly, a debt default will be a smack-down to the credibility of the U.S. as an issuer of the highest-quality bonds. It will also clobber the liquidity of anyone who holds U.S. paper, from Chinese banks to Europeans hoping to escape debt debacles in Greece, Ireland, Portugal, Spain and Italy. Trillions could flow out of Treasuries into countries perceived as fiscally sound.

Here’s PIMCO’s Bill Gross, the biggest bond fund manager by assets, writing in the Washington Post: “Global investment managers have global choices these days, and a solvent Germany or Canada is just a wire transfer away for trillions of potential investment dollars looking for a safer haven.”

Gross said several weeks ago that he sold U.S. Treasuries from his PIMCO portfolio. “The debt ceiling must be raised and not be held hostage by budget negotiations,” Gross concludes. “Don’t mess with the debt ceiling, Washington. Bond and currency vigilantes will make you pay.”

Both parties have now entered the “break it, you own it” phase of their bickering. Who do you pay first in the event of a default? The military? Air-traffic controllers? Who gets burned? Social Security recipients? National Park visitors?

How do you avoid getting walloped? If the White House and Republicans can’t agree on a plan to avoid default, it would be silly to retreat into gold or other precious metals. You can’t use bullion to buy food, medicine or pay utilities.

Worst-case scenario: To protect yourself against interest rates ballooning, you could short Treasury bonds. This is incredibly speculative — and risky.

One approach is to buy leveraged exchange-traded funds such as the ProShares Ultrashort 20+ US Treasury ETF. This fund promises a return 200 percent of the inverse performance of a 20-year U.S. Treasury-bond index. So if interest rates soar, you can make a lot of money, or just offset the losses in every other part of your portfolio.

Of course, this is a money-loser if politicos come to their senses and interest rates don’t climb dramatically. A lower-risk approach may be to hold onto a high-quality money-market fund that mostly holds corporate debt. Cash would be king — as long as it didn’t involve defaulted U.S. debt. In truth, though, no one really knows what will happen or what the safe havens will be.

There are other ways of defusing this mindless political kabuki: Take Social Security and Medicare off the table for now. Discuss them separately in a series of expert town hall forums over the next year. Besides, these programs should never have been held hostage in the perfunctory debt-ceiling passage. They are largely self-funded by payroll taxes and merit separate treatment.

The American people, who overwhelmingly support social insurance benefits, deserve an intelligent dialogue on whether all or part of these programs should be cut or privatized under the Republican template. When I talked to a packed room of fiscally conservative older Americans Wednesday night on whether they wanted to see Medicare or Social Security privatized, not one raised a hand.

Wiser heads may prevail, although it’s ironic that shorting Treasuries is not only an uber-cautionary strategy, but a portfolio position held by a key player in the debt talks — Rep. Eric Cantor (R-Va.), the House Majority Leader, at least in his 2010 financial disclosure statement.

Is Cantor merely trying to speculate on inflation returning, which countless pundits have been forecasting for years? Or maybe, since he’s at the center of this maelstrom, he’s cynically hedging his bets.

We’re not playing checkers here. The pieces can break in a disastrous way.

Check your insurance!

2011-06-21T15:17:00.000-07:00

8 home issues your insurer doesn’t cover

By John F. Wasik (Reuters)

You won’t believe this, but my house was hit by lightning — twice.

I know this isn’t supposed to happen. Fortunately nobody was hurt and the house didn’t burn down. Yet I think a deity (maybe Thor or Zeus) was reminding me to check my insurance coverage and install lightning rods.

Checking your homeowner’s insurance is a matter of seeing 1) what they won’t cover and 2) your out-of-pocket expenses, based on your deductibles.

Since I carry a $1,000 deductible on my homeowner’s policy, which reduces my premium, I know anything under that threshold is on me.

It could have been worse. In the case of my dual lightning strikes, I only had to pay to replace (2) circuit boards from my garage-door opener, a sump pump and computer board in my stove. Those expenses totaled about $900. The garage-door opener repair service generously offered to send in a claim directly to my insurer, which was helpful, but it still wouldn’t exceed the threshold of my deductible.

I discovered in researching this subject that even if my lightning-related expenses had exceeded $1,000, my insurer may not have reimbursed me anyway since power-surge damages typically aren’t covered. I had bought a cheap surge protector to protect my garage door opener, which didn’t do much good against a million volts. (I noticed in the hardware store, though, that more expensive surge strips carried insurance in case any appliance got fried, so that was some reassurance).

Since I live in the Midwest, I’m most concerned with water and wind damage. In the winter, we get these gremlins called ice dams that back up on frozen gutters and leak into the house. Roof vents have also leaked in the past, which have caused extensive ceiling damage upstairs. Insurance covered that.

What gets tricky is that insurance rarely pays for water that accumulates from burst pipes, broken sump pumps or sewers. Tornadoes and hurricanes? Sure, but not minor floods and seepage.

Here are some other problem areas when it comes to homeowner’s insurance:

Roof damage
As I mentioned above, big storm damage is generally covered. If you’re hit by a hailstorm, then claim payment depends on the size of the hail and what it did to your roof and vehicles.

Termites and rodents
It’s amazing how much damage a critter can do, but insurance generally doesn’t cover pest destruction. Exterminators aren’t covered, either. You’ll need a trapper for skunks and other varmints.

Home office equipment
Most home policies don’t cover computers, copiers and fax machines, especially when it involves power surges. You may need a separate rider or business equipment policy. Surge protectors and uninterrupted power systems usually protect your key equipment.

Liability
What if someone is injured on your property and they sue you? Most policies have liability protection, but check on the limits. Generally $1 million is common, but you can always buy more coverage.

Flooding
As I mentioned above, this is generally not covered. If you live on a flood plain, buy low-cost government flood insurance separately.

Normal wear and tear
Don’t expect your insurer to pay to replace a 20-year-old roof that hasn’t been damaged by a storm, old siding or other items that just wear out.

Mold
Since this became a huge problem a few years ago, many insurers stopped covering this and added exemptions, except in rare cases. Check your policy “endorsements” to see if your insurer covers this. In insurance jargon, an endorsement or “rider” is a clause insurers add to your policy that says they will or won’t cover a certain kind of claim.

Earthquakes
Like flooding, this may require a special policy or coverage, depending upon where you live.

Keep in mind that, depending upon how much you want to spend, you can always buy more insurance. You can even get coverage to protect against identity theft. Generally, though, you can save the most amount of money by keeping deductibles high, which lowers premiums.

No matter what kind of policy you get, make sure you have inflation protection and replacement cost coverage. Even though the value of the contents of your home or apartment may have declined, the cost of replacing them hasn’t.

College Costs too Much

2011-06-06T14:21:00.000-07:00

Is college worth the investment?

By John F. Wasik (Reuters)

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Is a college education worth it? In the free market of ideas, maybe. In a labor market that can’t be sustained by wage growth or job creation, probably not. Another bubble may be bursting.

The college degree payback may be long and may not materialize for decades. A six-figure education may not be a guarantee to higher real wages in the near future and it may not be worth going into debt to finance it.

I’m not alone in this sentiment. A widespread public skepticism is fueled by poor short-term job prospects. It’s not surprising that 57 percent of those surveyed by the Pew Research Center said that higher education doesn’t provide a good value and 75 percent said it’s just too expensive for most people.

As young people attempt to enter the workforce and face an unemployment rate twice that of the majority of the general population, you have to take pause and examine what’s happened to create this bleak situation.

After World War Two, employment was plentiful. People who wanted a decent job in manufacturing or the white-collar sector could find one and stay there for 30 years. About one-third of private-sector workers were guaranteed union benefits, healthcare (even in retirement) and defined-benefit pensions. Productivity was on the rise and consumers drove the economy because they had plenty of disposable income and little debt.

That era, called the “Great Prosperity” by former Labor Secretary Robert Reich, ended in roughly 1977. Over the past 30 years, collective bargaining, decent manufacturing jobs and guaranteed benefits began to disappear. I remember that time because I was just getting out of college in the middle of a nasty recession and took a low-paying job myself.

Because high-paying manufacturing jobs were offshored over the past generation, workforce preparation increasingly focused on services and the white-collar sector. While office-oriented employers mostly demanded workers have college degrees, there were no extra payments for overtime. Guaranteed pensions were thrown into the maw of the stock and bond markets in the form of 401(k)s. Healthcare was also eroded.

Real wages, that is, what you earned after you subtracted inflation and taxes, entered a freefall in the past two decades. “Rather than be out of work, most Americans quietly settled for lower real wages,” Reich recently told Congress, “or wages that have risen more slowly than the overall growth of the economy per person.”

That brings us back to the value of a college degree. If the price of college had tracked real wages, net job growth or just inflation, then college tuition should have fallen dramatically in recent years relative to the outgoing economic tide of the middle class.

Yet the depletion of household wealth and earnings in recent years has made the gap between college bills and incomes even wider. While consumer inflation has soared some 107 percent since 1986 (through late 2010), college tuition has ballooned 467 percent.

Why the huge disparity between consumer prices and higher education bills?

Colleges benefited from a huge influx of students — the children of baby boomers — so they didn’t see their enrollment numbers decline significantly. The opposite was true; leading them to believe that there was a robust demand for their services. Universities kept investing in bricks and mortar and hiring professors while raising their prices to pay for it all. At the same time, states dialed back on their funding for public universities.

Then the catastrophic meltdown of 2008 skewered the economics of paying for college. Those who lost home equity had less collateral for home-equity loans or cash-outs. Bond returns were dismal and stocks had a bum decade.

Responding to this massive wealth evaporation, roughly about the time the U.S. housing market (and then stock market) collapsed, private non-profit colleges started a wave of tuition discounting, according to the National Association of College and University Business Officers.

Discounting reached an all-time high of 42 percent last year, the group reported, with 88 percent of freshmen receiving institutional grants. I expect this trend to continue as more and more families pull out of four-year colleges.
In the interim, if more students attend community colleges, eschew loans and encourage their children to take advanced-placement courses in high school — and demand tuition discounts — the paradigm will continue to shift and prices for bachelor’s degrees will fall across the board.

When the bubble bursts, though, it won’t be for the expectations that Americans have for their children after college. After all, even the Pew study shows that college graduates will likely have a $20,000 annual earning advantage over high-school grads.

A college education is a value relative to future earnings, vocational success and its ability to lift you above the economic burdens of underemployment and stagnant earnings. Right now, that equation just doesn’t measure up for most families.

Warnings on structured products

2011-06-02T14:16:00.000-07:00

I wrote about these products in a Demos/Nation Institute study and pieces in Morningstar.com, The New York Times and AARP Magazine.

While the SEC and FINRA are now issuing warnings about these products, they stopped short of saying there would be future or ongoing probes. Tell the agencies you want a full investigation.

Here's the SEC notice:

SEC, FINRA Warn Retail Investors About Investing in Structured Notes with Principal Protection

FOR IMMEDIATE RELEASE
2011-118

Washington, D.C., June 2, 2011 — The Securities and Exchange Commission’s Office of Investor Education and Advocacy and the Financial Industry Regulatory Authority (FINRA) have issued an investor alert called Structured Notes with Principal Protection: Note the Terms of Your Investment to educate investors about the risks of structured notes with principal protection, and to help them understand how these complex financial products work. The retail market for these notes has grown in recent years, and while these structured products have reassuring names, they are not risk-free.

Structured notes with principal protection typically combine a zero-coupon bond – which pays no interest until the bond matures — with an option or other derivative product whose payoff is linked to an underlying asset, index or benchmark. The underlying asset, index or benchmark can vary widely, from commonly cited market benchmarks to currencies, commodities and spreads between interest rates. The investor is entitled to participate in a return that is linked to a specified change in the value of the underlying asset. However, investors should know that these notes might be structured in a way such that their upside exposure to the underlying asset, index or benchmark is limited or capped.

Investors who hold these notes until maturity will typically get back at least some of their investment, even if the underlying asset, index or benchmark declines. But protection levels vary, with some of these products guaranteeing as little as 10 percent — and any guarantee is only as good as the financial strength of the company that makes that promise.

“Structured notes with principal protection contain risks that may surprise many investors and can have payout structures that are difficult to understand,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy. “This alert is a ‘must read’ for investors considering these products, especially those with the mistaken belief that these investments offer complete downside protection.”

“The current low interest rate environment might make the potentially higher yields offered by structured notes with principal protection enticing to investors,” said FINRA Senior Vice President for Investor Education John Gannon. “But retail investors should realize that chasing a higher yield by investing in these products could mean winding up with an expensive, risky, complex and illiquid investment.”

FINRA and the SEC’s Office of Investor Education and Advocacy are advising investors that structured notes with principal protection can have complicated pay-out structures that can make it hard to accurately assess their risk and potential for growth. Additionally, investors considering these notes should be aware that they could tie up their principal for upwards of a decade with the possibility of no profit on their initial investment. Structured Notes with Principal Protection: Note the Terms of Your Investment also includes a list of questions investors should ask before investing in these products.

For additional information regarding the SEC and FINRA’s educational outreach and program, please visit www.investor.gov or www.sec.gov/investor or www.finra.org.

2011-05-11T12:58:00.000-07:00

Family finances for a fairytale romance

By John F. Wasik (Reuters)

When the honeymoon’s over, the hard work begins. Talking about money isn’t romantic, but it’s a great ongoing topic that may ensure a long marriage.

While I don’t think Kate and Will will need any of my humble yeoman’s advice, discussing money issues on a regular basis is a good relationship builder. Here are five ways to steer clear of fiscal disharmony:

Put it all out on the table. The kitchen or dining room table is a great place to discuss expenses, bills, income and goals. Make a point of setting aside some time every month. Surveys show that money problems are among the leading cause of divorce. Is one or both partner a debtaholic? Get help and get a “debt score” to see if you have a problem. Clean the table first, both physically and metaphorically.

A home is where the heart is. But it’s often a bad investment, except for maybe Windsor Castle and Buckingham Palace, which are not only taxpayer-maintained but indirectly income producing. Most of us commoners, though, have to fix our own roofs, heat/cool our manor homes and suffer through one of the worst housing recessions in history. Owning a home is an emotional experience, yet don’t forget to tally up what it will cost you over time in taxes, maintenance, insurance and financing. The math may not add up, even with tax breaks. Renting is no sin.

Teach your kids about money. You can do this in so many fun ways. Give them piggy banks. Have them save their birthday and special-event money from grandparents. Give them an allowance. Set up a savings account and have them watch the balance grow. Assign them chores and pay them. Help them save at least half of what they earn. Charming guides for little ones include “Money Mama and the Three Pigs” by Lori Mackey and “The Great Piggy Bank Adventure“. Since kids get most of their ideas on money from their parents, start them off saving and realizing the fruits of their young labor.

Choose college prudently. Although I think the future heirs of England may just sneak into the Oxbridge system, for the rest of us, keeping our children out of debt after college is essential for a lower-stress adulthood. Spending the greatest amount of money on the biggest name-brand school isn’t always a wise choice. Community colleges are still the best bargain in higher education and save an average $3,000 a year (or more) over public universities. They offer virtually the same first- and second-year courses close to home. Before they even get into middle school, set up a 529 college saving plan for them. You can withdraw the money tax-free for education. Utilize the internet to find the best programs and available scholarships. Find the best cities for their higher education through the College Destinations Index.

Keep talking and saving. Life is an ocean that’s ever changing. There will be turbulent times of stress and illness. And old age is no parade with white horses. While the British mostly seem content now to take care of our fairytale couple well into their old age, the rest of us need to think about out-of-pocket medical expenses and long-term care. That ultimately means more savings. Do it automatically by auto-debiting money from your checking account into your money-market fund. Keep an emergency kitty. Consider long-term care insurance.

Most importantly, don’t forget to laugh after you put your money goals on auto-pilot. Most of us will never be dukes and duchesses of Cambridge or barons of Carrickfergus or be members of a moldy, unnecessary and taxpayer-funded monarchy. Still, we can live our lives productively in our own little palaces.

The key is ensuring that our castles and everything in them can be paid for without sacrificing our happiness. Oh, and Willie, don’t leave your royal hosiery lying about. Even a baron’s stinky socks can be an annoyance. In relationships, as in money, everything adds up over time.

How to avoid Madoff Madness

2011-04-26T06:52:00.000-07:00

Madoff madness is our own

By John F. Wasik (Reuters)

Bernie Madoff’s failings are not the mark of some isolated monster, although his crimes are heinous. He is so much like every one of us that failing to recognize this fact will imperil us at every financial turn.

This is one of many revelations in Diana Henriques’s stunning new book The Wizard of Lies: Bernie Madoff and the Death of Trust.

The man who bilked $65 billion from friends, family, institutional investors and charities knew what he was doing. As far as we know, he wasn’t incapacitated from bipolar disorder, substance abuse, schizophrenia or some gargantuan chip on his shoulder to prey upon the wealthy. He stole and lied consistently to all and told Henriques he was fully aware of his mammoth deceit every step of the way.

Madoff was not a man conspiring in a bunker. He went to countless high-society parties, gave to charities and was admired by most who encountered him. Yet when he finally admitted his fraud, it was a surprise that ruined individuals and charitable foundations. His own son, trying to escape the shadow of his father’s foul deeds, committed suicide.

The scale of his crime can’t be overstated. As the serial falsifier of whole portfolios, Madoff claimed to manage twice as much money as Goldman Sachs, Henriques states.

“He was faking everything,” Henriques writes, “from customer account statements to regulatory filings, on a scale that dwarfed every other Ponzi scheme in history.”

Next to the mavens of the 2008 meltdown, Madoff may be the Stalin of Ponzi villains (there are always other scamsters out there). Yet any attempts to personify him as a three-headed hydra will miss the main point of Henriques’s masterful narrative. Here’s the clincher, which Henriques saves for page 345:

“The Madoff case demonstrated with brutal clarity another truth that we simply do not want to face about the Ponzi schemer in our midst: He is not “other” than us, or “different” from us. He is just like us — only more so.”

This chilling revelation illuminates human nature itself. We want to believe that someone like Madoff is “taking care” of us — and our money. When some negative vibe buzzes in our ear like Jiminy Cricket, we compartmentalize it in the part of our brain that is like a dead-letter file. We don’t question the reality of outlandish claims and can’t own up to our avarice.

I’ve seen so much investor denial in the past three decades of covering finance that I could spend the rest of my life writing about it. Some of it flies beneath the radar like high-yielding structured products that are loaded with risky and complex derivatives.

Most of the deception, though, lies in banal investments like variable annuities or overpriced 401(k)s. We’re fleeced every day, but may not know it because of our trust in our advisers, a brand name or simply a bold promise.

Here’s a short list of what we need to know about investing, but routinely fail to ask ourselves with any skepticism:

If an adviser is pitching a six percent yield when most one-year certificates of deposits are returning one percent, what kinds of risks will you be taking to achieve that return? How much can you lose if the promise doesn’t pan out?
Can the adviser beat a broad-market index like the S&P 500 on a regular basis? Most can’t. If they have a few good years, they are lucky, not skillful, and luck doesn’t last long in investing. Most lag the market averages over time after management expenses, taxes and inflation. It’s a fact of life.
Is your principal really protected? Outside of low-yielding FDIC-insured product, you will pay dearly for any guarantees. How much will it eat into your principal? What are the commissions and internal fees?

How do we avoid the Madoffs of the world when we consistently trust people we shouldn’t and fail to ask the right questions?

Henriques suggests that we need mandatory financial education in school and be required to get a license after we are tested on basic money skills.

While I agree that everyone needs this skill set — and it should be taught beginning in middle school — I’m not sure if licensing is the way to go. Plain-language, gob-smacking tobacco-like warnings on investments that state “this is hazardous to your wealth” are another alternative, although crooks always manage a way around disclosure.

Ultimately, we need to turn off our brain’s belief and trust circuits to avoid hazardous investing. The truth is often not in our heads, but in our guts.

“That is the most enduring lesson of the Madoff scandal,” Henriques concludes, “in a world full of lies, the most dangerous ones are the ones we tell ourselves.”

Earth Day Gold

2011-04-22T07:01:00.001-07:00

By John F. Wasik

The best Earth Day investments

All that’s green isn’t gold.

As we wring our hands over another Earth Week amidst the Gulf oil spill anniversary and the Japanese nuclear crisis, it’s hard to remember that we can’t buy or invest our way out of our current predicament.

We need to redefine how we can become better stewards of our planet. While I think we need a moon-program-sized clean energy and resource preservation plan, it won’t come by buying green products and investments.

Case in point: I was recently solicited by Green Alpha Advisors, LLC, which says it performs “money management for environmentally focused capital.” They manage funds in a separately managed account offered through brokers that invest in a host of environmentally friendly companies.

Since I was solicited through email via The Sierra Club, a revered environmental group that I’ve been a member of for many years, this firm has a verdant endorsement for investors like myself. All of the right keywords in their marketing materials sounded good: clean energy, smart grids, sustainable commerce and zero-carbon transportation. So far, so good.

Their “Sierra Club Green Alpha Portfolio” returned 6.44 percent from inception (Dec. 27, 2010 through Feb. 28, 2011), compared to 5.85 percent for the broad-based Russell 3000 Index, so that had a good ring to it as well. Then I started to dig into the fee structure and the picture became grayer.

Green Alpha was charging an annual minimum management fee of 2.95 percent if you invested less than $50,000; they lowered their fee to 1.79 percent if you had at least $100,000 under management. There were also additional transaction charges (through the broker Charles Schwab) for “the buying and selling of securities in your account.”

I was also piqued that, unlike an open-ended mutual fund or exchange-traded fund (ETF), I didn’t get full disclosure of all of the stocks they held in their portfolio. The manager stated in an email that “only our current clients have access to all of the securities in the portfolios,” although they seem accommodating in that “management fees are negotiated on a client-by-client basis.”

In the ETF space, you can own a lot of green stocks for a lot less. Let’s say you wanted to concentrate on solar-energy stocks, not a bad bet as we still gape at the horrors of nuclear power and the perils of oil, coal and natural gas.

The Market Vectors Solar Energy ETF, will give you a sampling of this sub-sector. Its annual management expense ratio (in addition to a brokerage transaction fee) is 0.65 percent annually.

An even better approach is to avoid betting on just one technology and to spread bets across several promising sectors. The PowerShares Cleantech Portfolio ETF invests in an index of more than 70 stocks across the world. They charge 0.67 percent annually.

Will investing in these portfolios prevent climate change or reduce U.S. dependence on fossil fuels? Not directly. Yet if you can extend your philosophy of green investing into daily practice and political activism, you may have a much more meaningful impact.

Our family not only recycles more than we throw out, we compost our kitchen waste to make soil. Although we’d like to drive less in our suburban locale, when weather permits, we take our bikes to the supermarket, library and hardware store. We patronize local farmer’s markets and try to grow much more of our own food — and freeze or can it.

Will some of this lead us to a cleaner environment? It won’t without a big, clear voice asking our politicians to support clean and smart energy policy through a renewable energy portfolio standard — literally mandating that we get away from fossil fuels by a certain date. We have the technology. All we need is the political will and the ability to price carbon and its harmful effects on the environment.

It doesn’t matter whether you believe climate change is caused by man or not. Supporting clean energy and resource conservation is the right kind of stewardship for the finite gifts of our planet. That’s an investment that keeps on paying dividends.

Fighting Wall Street: Part II

2011-04-18T06:57:00.000-07:00

Consumer cops: Why we need Mary Schapiro and Elizabeth Warren now

Two women are fending off a vicious man-handling of investor protection.

As Congress pettily wrangles over the debt limit and the next budget, Mary Schapiro and Elizabeth Warren are fighting to protect you against the ravages of Wall Street.

Wall Street and its Republican allies would like to make the Dodd-Frank financial reforms disappear. The money trust has been pouring millions into lobbying to eviscerate the budget of the Securities and Exchange Commission and blocking the formation of the Consumer Financial Protection Bureau.

Mary Schapiro, who chairs the SEC, said she can’t kick start the myriad pro-investor rules of Dodd-Frank without adequate funding. Republicans, lead by Budget Committee Chairman Paul Ryan, want to “starve the beast” in their fiscal year 2012 proposal.

Ryan’s new budget proposal wants to cut off the SEC budget at its knees by giving the SEC $112 million for fiscal year 2012. That effectively freezes the top securities regulator’s funding at 2008 levels. The current budget deal gives the agency a slight increase in funding.

Remember what happened to Wall Street in 2008? The Obama Administration wants $308 million for the SEC to prevent another year like that from happening. The money trust has deliberate amnesia.

While the SEC gathers most of its revenue from fees and fines, it can’t seed key investor protections like an office of investor advocate without the additional funds. Its budget was supposed to double under Dodd-Frank over the next five years. The money trust wants to keep the status quo and de-fund the agency.

Schapiro, who told a group of business journalists last week that investor protection would be hobbled if she didn’t get adequate funding, said under current budget proposals “there will be fewer cops on the beat.”

Also on the chopping block is one of the most powerful investor safeguards of Dodd-Frank: fiduciary duty for brokers. This one rule, endorsed by an SEC study earlier this year, would make brokers legally responsible to put their clients’ interests first. Right now, they only have to follow flimsy “suitability rules,” which gives them leeway to sell a raft of unsuitable investments like derivative-loaded “structured products.”

Although the SEC said it is still writing the fiduciary rule, after intense industry lobbying and the objection of two of its Republicans commissioners, Schapiro told me the agency would do “more economic analysis” on the proposal and take it up again in the second half of this year.

As a long-time observer of the agency, I can tell you that once the SEC decides to re-study a proposal, it’s often a death knell or produces an indefinite delay. The agency has been sitting on a proposal to reform onerous 12(b) 1 fees on mutual funds for years, even though these are marketing expenses that needlessly eat into your returns.

Elizabeth Warren is fighting a separate battle to save the funding and independence of her consumer bureau, which President Obama asked her to start up. Republicans have proposed that another commission run the agency or answer to other regulators, which is the bureaucratic equivalent of neutering it.

The consumer bureau, Warren hopes, would curb anti-consumer credit practices in banking. Her common-sense approach is simple: Boil every credit agreement down to a plain-language form that tells you how much it will cost you, is it affordable and is it the best deal. That’s something that would benefit every American who gets a credit card, mortgage or other financing.

Not only are GOP proposals punitive to Warren’s fledgling agency, they are unfair. No other banking agency would have to answer to a commission or be hostage to Congressional appropriations. The Office of the Comptroller of the Currency, a banking regulator, has a single director and obtains its budgets from bank fees, for example.

“We’re not going down without a fight,” says Warren, who is also a proponent of making the free market work for consumers in promoting accountability and competition.

There shouldn’t even be a fight over these two agencies. After the money trust nearly deep-sixed the global economy in 2008, triggered a massive recession and unemployment, they should welcome more cops on the beat. They are like three-year-olds with a pile of money and an endless supply of finger paint. They need parental supervision or things will get messy again.

Warren and Schapiro are right. You don’t police banks and brokers by stifling oversight. Let Washington know you want to keep politics out of your portfolio.

New Budget Busts Americans

2011-04-10T18:11:00.001-07:00

From Reuters.com

Budget wars: The middle class loses big time

John Wasik

Now that federal government shutdown has been averted, it’s a good time to examine what’s at stake for most of America in the crucial next round of budget talks.

Not doing anything to reduce the size of government debt will be catastrophic. Not much quibble there. But acting hastily and cutting the wrong things can be even more costly to social and economic welfare.

Neither the Republican nor the Democrat’s budget plans for 2012 will meet the major challenge of sustaining social programs while cutting the most egregious waste.

Since the GOP budget proposal has been published, let’s eye that first. The 2012 budget template, released by Paul Ryan, Republican chairman of the House Budget Committee on April 5, cuts $6.2 trillion from government spending over the next decade. Some clarity is needed here in the semantics of this plan. Cutting is not the same thing as “improving” or “reforming.”

One of the hallmarks of the Ryan plan — a GOP campaign document for 2012 — is cutting top personal income-tax rates from 35 percent to 25 percent. As part of his “path to prosperity” theme, he estimates that along with other cuts and a lower corporate tax, this will create 2.5 million private-sector jobs, lower the unemployment rate to four percent by 2015 and add $1.5 trillion to real Gross Domestic Product over the next decade.

That claim is not only unrealistic, it’s never been supported by any sound economic science. During and after the George W. Bush era, when tax rates were cut on income, capital gains and dividends, unemployment rose and GDP eventually fell.

Would cutting taxes again — actually reducing revenues further and creating a bigger structural deficit — make a difference this time around? This is not only wrongheaded, it makes no mathematical sense. You can’t reduce the deficit by eliminating a key and ready source of revenue.

The trickle-down theory once again rears its ugly head. The GOP plan effectively snuffs progressive taxation on the wealthy. As Joseph Stiglitz, a Nobel Prize-winning economist, says in a recent Vanity Fair piece, “there is ample evidence that something has blocked the vaunted ‘trickling down’ from the top one percent to everyone else.”

The ultra-wealthy used to pay their fair share. From the 1940s to the 1980s, the top tax rate — even during the Eisenhower Republican-dominated 1950s — ranged from 70 percent to 91 percent.

I’m not advocating a return to those lofty rates, but right now you’re a tax chump if most of your income is from wages.

It pays big time to have inherited wealth and investment income, both of which will be largely spared in the GOP’s misguided budget crusade. Stock dividends and capital gains qualify for the 15 percent rate. Additionally, estate taxes went from a $1 million exemption and 55 percent rate in 2000 to 35 percent and a $5 million exemption as of last year.

Since the GOP also wants to privatize Medicare — reintroducing expensive private insurers to the program — the middle class will be digging deeper into savings to cover premiums and larger out-of-pocket costs, especially those under 55. It’s the equivalent of turning the popular, guaranteed health program into a massive 401(k)-style boondoggle. Only private insurers will benefit. You will be on your own and likely to come up short during the most vulnerable time of your life.

The Ryan document also savages the self-funding health reform law, which attempts to reduce healthcare costs over time by allowing exchanges to introduce real competition to private health insurance.

No fewer than five glaring boxes in the Ryan report call for the repeal of self-funding health reform, suggesting that this will somehow slay the triple-headed fiscal demons of Medicaid, Medicare and job losses.

As much as I abhor the GOP plan, I’m no fan of the Obama budget, either, which leaves in place funding for a bloated military and two and half (I’m not sure what to call Libya) needless wars. Neither party even touched Social Security nor the trillions that corporations either bank off shore or avoid through tax breaks.

What both sides need isn’t more patience. They have clearly dug their ideological trenches and will battle it out at our expense. They need to curb their respective dogmas. Real prosperity comes from mutual benefit, sacrifice and universal incentives, not unrelenting giveaways for one percent of society.

Create Your Personal Protection Plan

2011-03-21T06:32:00.000-07:00

Saving safeguards: How to avert financial disaster

By John F. Wasik (Reuters)

The Japanese tsunami and nuclear disaster has triggered a lot of serious thinking about personal disaster planning.

While my hopes and prayers are with the Japanese people as they attend to their needs and recover, it’s an ongoing reminder that we have to consider and plan for worst-case scenarios in our own lives.

Protecting against a disaster requires financial triage. Most of us never think about the need to do this until faced with a life-changing event. The single-best “first responder” safeguard against all kinds of catastrophes is a combination of adequate savings and insurance.

You need a protection plan in case a Black Swan (rare but troubling) event hits your life. In one year, my family experienced serious illness, major loss of income and lightning hit our house. What are the odds of that happening?

Fortunately, I was doubling our normal monthly savings two years prior to our annus horribilus. Although the rate of return was practically zero, I kept cash in a liquid but safe money-market mutual fund. That way I could cover at least a year’s worth of mortgage, property taxes and the basic deductible for our health insurance plan (almost $6,000 at the time). I also had enough to cover the out-of-pocket amount for our home insurance policy ($1,000).

A brief note on insurance: Don’t sweat the small stuff. You want to cover huge bills like serious illnesses and accidents along with catastrophic losses like house fires. Several of my neighbors have been scorched after lightning strikes (one couple had no home insurance and had to spend all of their savings).

Higher deductibles will lower your premiums, but make sure to cover major losses that are annually adjusted to inflation.

One policy that I was tempted to cancel but glad I have is disability insurance. This covers you in the event that a severe disability prevents you from earning income. If your employer offers this coverage, take it. There are two kinds: short-term (for a temporary disability), and long-term (permanent).

I’ve known far too many people who’ve been disabled by strokes, heart attacks, surgery and cancer. If your household would suffer greatly from loss of income due to disability, you need to buy this policy before life insurance. While pricing disability coverage on your own is expensive, look for group plans. I found a policy through my college alumni association that was reasonably priced. It was a deal compared to buying individual plans through brokers.

My catastrophic savings plan is multi-tiered. I have a short-term cash account (money-market fund) for monthly bills, a mid-term fund and a long-range plan. The mid-term account I keep in a short-maturity bond fund. It’s designed as a back-up to my short-term kitty.

As I discovered during our health emergency, out-of-pocket costs are usually more than your deductible — expensive drugs were not covered. Then we had ordinary living expenses such as taxes, home repairs (our washer died), dental work and day-to-day bills that had to be paid along with medical bills.

We also had a family stock investment club account — that we invested in over the past decade for fun — although we had to cash that in as well to cover medical bills. This was another welcome back-up, though.

The third leg of our protection plan is long-range savings. We have 401(k)s, 529 college savings plans, Roths and individual retirement accounts (IRAs). We were fortunate that we didn’t have to tap any of these funds, although we didn’t contribute to them, either. They are an absolute last resort for cash since the tax hit on withdrawals would only net around 60 cents on the dollar.

I regard my “ready money” savings strategy as a faithful friend in the way that Ben Franklin saw it. It may not provide as much comfort as a great spouse or partner, wonderful children or a dog (I’m counting these blessings), but it sure can pay some bills and allow one to rebound in the worst of times.

Why US Home Market Still Reeling

2011-03-14T07:18:00.001-07:00

Home market isn’t on rebound yet

By John F. Wasik

Are we there yet? Is the U.S. home market on the upswing?

As Alan Greenspan would say, “there are shoots,” although a true spring in housing is still hampered by a chilly economic climate throughout most of the country.

One positive sign came from new mortgage applications, which jumped to the highest level in three months last week, according to the Mortgage Bankers Association.

As Congress and state attorneys general wrangle with a number of reforms to seed a housing rescue, most of the country is not out of the woods. Yale Economist Robert Shiller warned recently that housing prices could “slip another 15 to 25 percent”.

Foreclosures and defaults are continuing unabated. Most of the news concerning housing is still frosty. The S&P Case-Shiller Index (for the fourth quarter of last year), showed prices in 19 out of 20 markets surveyed down for December over November. Washington, D.C. was the only major market that rose.

Cities gob-smacked by the bust — Las Vegas, Miami, Phoenix and Tampa — all hit new lows in December. Even markets that weren’t inflated as much in the bubble saw new lows (Atlanta, Charlotte, Seattle and Portland, Oregon).

Although the percentage of distressed sales is still alarmingly high at more than one-third of all sales, according to CoreLogic, they are down from their peak in January of 2009.

Why would I be remotely optimistic that we’re not in a sustained double-dip housing recession? Unemployment has been improving of late. That’s always a plus for housing and figured in the meager spurt in mortgage applications.

The other hopeful sign is that Congress slowly seems to be moving to fix what’s broken in the housing market. The Obama’s Administration main housing aid program, known as “HAMP,” is targeted for elimination.

Good riddance. HAMP has been so ineffective that Elizabeth Warren, the new consumer financial bureau adviser, likened it “bailing out the boat with a teaspoon as it takes on gallons of water.”

An even more aggressive — and potentially helpful — proposal is being discussed by major banks and state attorneys general trying to settle over alleged “robo-signing” mortgage abuses.

The states’ proposal would allow homeowners to write down principal balances while renegotiating mortgage terms. Although it’s too early to tell, this one measure could prevent a large number of foreclosures. It’s only fair since homeowners attempting to refinance were unable to negotiate lower payments based on home values that crashed. Congress has failed to allow mortgage holders to write down balances in bankruptcy court, so this could provide some buoyancy for the ever-sinking housing market.

There are millions of foreclosures in the pipeline that create a shadow inventory of homes. Banks can still dump these properties on the market, which will further depress housing prices.

Only keeping people in their homes and stimulating sales could forestall a full double dip. Back in Washington, policymakers are sluggishly attempting to restructure the debt-besotted mortgage insurers Fannie Mae and Freddie Mac, which were seized by the Treasury Department in late 2008. The companies now account for more than 80 percent of the U.S. mortgage market.

One item that the Fannie/Freddie reconstructive surgery team needs to consider: Softening the rule that credit scores be nearly perfect for home buyers.

In recent years, the mortgage insurers have raised the standards so high that only a few qualify for loans now. One mortgage broker friend of mine says her business is so dismal (citing the credit score problem) that she’s getting out of it.

If the states and Feds can get on the same page, maybe they’ll figure out that keeping people in their homes is still a good idea — and one way to buoy the market. Otherwise, expect the long winter in U.S. housing to continue. Better to be a hedgehog than a groundhog.

Health Reform Still Makes Sense

2011-03-10T06:14:00.001-08:00

How health reform de-funding will cost you

By John F. Wasik, Author The Cul-de-Sac Syndrome

Although corporate and conservative interests have done a stellar job of demonizing “Obama Care,” it makes no economic sense whatsoever to de-fund this landmark legislation.

In a major concession triggered by pending state lawsuits challenging the health reform law, President Obama recently signaled he was flexible on the law’s insurance mandate. Yet that would require Congress to shift the major building blocks of the plan back to the states, many of which are ill-prepared to design their own plans.

We’re back to a cagey political poker game. Obama has called to see the cards of his opponents. They either come up with a winning hand or fold. Being martyrs to the cause proves nothing, though.

Tea-partying House GOP members who want to kill health reform, and (in some cases) refused to sign up for federal health benefits, are paying the price and experiencing first-hand the cruelty of individual insurance markets.

My own Congressman (Joe Walsh, R-Illinois), eschewed federal coverage at the expense of endangering his own wife, who has a pre-existing condition. Although I didn’t vote for this fellow, I can tell him from my own experience that he’s going to pay sky-high premiums, not get any real discounts from providers with his meager health-savings account and may not even get private coverage for his spouse.

Misguided principles are trumping sound politics. Health reform is one of the best consumer laws in a generation. Not only would the health reform law over time create employment, it’s good for small and large businesses alike.

According to a Center for American Progress study, the health law would create up to 4 million jobs. That’s in addition to saving lives by expanding health access for all, eliminating the inhuman denial of coverage for those with pre-existing conditions and reducing costs for businesses.

Starving the law of funding — which is what the House GOP said it plans to do — will immediately raise taxes for small businesses. Currently they receive a 25- to 35-percent tax credit for paying for health insurance for employees. It will also trigger a cascade of roadblocks that will prevent some 30 million Americans from saving on insurance through widely-available exchanges in three years.

One of the keystones to health reform has been an attempt to move insurance marketing toward free-market principles. Today’s system is upside down. Instead of creating one large pool to include both the sickest and healthiest Americans, those with pre-existing or chronic conditions are “underwritten” out of most private non-group coverage.

Individual buyers (under age 65) can’t shop for themselves across state lines for the best rates or get into any federal program. They are restricted to their own states, which are typically controlled by a handful of large insurers who can keep competition low and rates high. Instead of an ability to pick the best insurer, it’s the companies who select their clients.

In theory, the insurance exchanges that will go into effect in 2014 will end the apartheid of the sick and chronically ill. Should Congress do anything constructive with health reform enhancement, it should put exchanges and consumer protections on the books next year or create an option to buy-in to Medicare.

Ironically, the health insurance industry, which lobbied vigorously against reform, has the most to gain from the law going forward. Mandatory purchase requirements will deliver them some 32 million new customers.

Yet by pouring millions into GOP coffers and indirectly encouraging Republican governors and attorneys general to battle the individual mandate in federal courts, they should be chary of what they initially desired.

I asked Wendell Potter, a former health insurance company executive with a conscience, what he thought of the industry’s perverse death wish. Potter, who authored “Deadly Spin,” a brilliant insight into corporate public relations, told me “they [the industry] need the revenue stream” from the potential new customers. “Their business practices were not sustainable for the long haul. Without the individual mandate, their costs will explode.”

Granted, the health reform law is loaded with flaws. It won’t ensure universal coverage for all Americans and may not reduce costs all that much. We will need a single-payer system to better address many of these shortcomings.
As an economic booster, though, the health act is still potent and should be enhanced. The Congressional Budget Office predicts it will shave $124 billion from the federal deficit by 2019 and $1 trillion in the subsequent decade.

The best kind of economic growth comes from a confident populace that’s willing to take risks to succeed. They can’t do anything if they are still at risk of bankruptcy from simply getting sick.

How Unions Benefit Everyone

2011-02-26T09:41:00.000-08:00

Save the badgers! When unions go bust, middle class follows

By John F. Wasik (Reuters)
Author, The Cul-de-Sac Syndrome

We are all Wisconsin badgers now. If collective bargaining goes, forget about personal economic progress for middle class Americans.

The huge demonstrations in Madison, Wisconsin, over the union-busting proposal of Gov. Scott Walker have impact on us all. Ditto that for similar moves in other states like Ohio and Indiana.

There’s something deeper and more malignant in efforts to strip public employee unions of collective bargaining. They are the last bulwark of organized labor in the U.S. Corporate interests want them crushed and are using budget deficits as a sledge hammer. That’s also the rallying cry of the majority of the GOP-dominated House, which voted to de-fund the National Labor Relations Board.

It’s an age-old saga: labor vs. capital. In the case of Wisconsin, the real plot wasn’t a concerted effort to reduce a state budget deficit. The state was in the black until the Governor insisted on corporate tax cuts.

Public-sector workers are actually willing to compromise on contributing more to their retirement and healthcare. Walker’s all-or-nothing proposal wanted to eliminate their ability to collectively bargain. It was clear from his caudillo attitude that he wanted to bust the unions.

Walker’s union animus is fed by the money that flowed into his campaign coffers. The politically regressive Koch Brothers, whose companies include Georgia Pacific, donated more than $43,000 to Walker’s campaign.

The Koch Brothers’ various interests in Wisconsin also would benefit from no-bid sales of state assets, which was conveniently inserted in Walker’s “budget repair” bill. A spokesman for Koch Industries denied that the company would benefit.

A prank call further revealed the iron-fisted tactics Walker was willing to employ to crush the unions. Corporate money can be freely used as a cudgel against unions under the wretched “Citizens United” Supreme Court ruling. Business interests can donate unlimited amounts to political campaigns and pursue their anti-labor agendas unheeded.

I have a sense of what it was like before labor-backed social benefits of Social Security and Medicare didn’t exist. Old-age poverty was rampant. Maybe you didn’t go to the doctor when you left the workforce. You couldn’t afford it. Life was indeed nasty, brutish and short, to quote Thomas Hobbes.

Without unions, it’s a divide and conquer world where each of us become weak private contractors — if we can even get to the bargaining table without getting fired. Benefits will continue to erode and communities will suffer. There’s not much left to unionized America as it is — 88 percent of the workforce is not represented through collective bargaining.

Then there are the vaunted fringe benefits that most of the labor force enjoyed at one time and now are the envy of most white-collar workers chafing at puny 401(k) balances. Defined-benefit pensions used to guarantee a monthly retirement payment for the rest of your life. In 1980, two-thirds of American workers had this great coverage.

Now most Americans are scared to death they won’t have enough money in their 401(k)s, which corporate America adores because it contributes so little, loads up with excessive vendor fees and doesn’t guarantee. Employers don’t have to offer a 401(k) at all or even put money in them. Here’s your lump sum, good luck!

America was a prosperous nation under the forced savings of defined benefit plans. Now we borrow for everything, although that won’t work for retirement. Only one-in-five workers get old-style guaranteed pensions now. Most of them are in the public services or old industrial companies.

I’m not saying that given this age of diminished expectations and global competition that public employees can’t contribute more to their own health and retirement plans. They have said that they will and they understand the new reality.

But you don’t confront working people by first smashing the bargaining table and telling them they can hit the bricks if they don’t like it. That’s so 19th century and smacks of robber barony. We’ve come too far to sink into corporate feudalism.

Making Gun Ownership Safer

2011-02-18T06:26:00.001-08:00

Why gun insurance should be mandatory

It’s been over a month since the Arizona shootings rocker our nation’s soul and Congress still has yet to address gun control. What gives? Egypt is no doubt at the forefront for Obama, but Congress is alarmingly quiet on the issue. Is it that a Supreme Court ruling last year and the power of the National Rifle Association are still unmovable obstacles to real reform? Only New York Mayor Michael Bloomberg seems to be beating the drum for this serious issue.

There might be a way to reduce the incidence of gun violence if viewed through the unique lens of risk management: Require both gun buyers and sellers to purchase liability insurance.

Before you get up in arms (I mean this literally) about my views on the Second Amendment, I want to be clear: I’m not against people owning guns, hunters or the right to bear them. I’ve shot guns and enjoyed skeet and target shooting enroute to becoming an Eagle Scout. My father owned guns and kept them in the house when I was growing up. He encouraged me to learn how to use pistols and rifles. I’m well schooled in gun safety.

In certain cases, though — such as a deranged adult, a teenage gang banger or a domestic violence perpetrator — guns should not be easily accessed. Unfortunately, there’s no way we can keep guns away from the most violence-prone through background checks. And we have no effective ways of gauging whether the mentally ill or substance abusers will turn violent.

Instead, the mandatory purchase of liability insurance would obey commonly accepted actuarial rules of risk-based pricing. In common English that means the people judged by objective industry research to be most likely to commit a gun crime will pay the highest premiums. What about those who use “straw buyers” or private sellers? Make all gun sellers purchase insurance.

There’s a precedent for mandatory insurance that’s hard to ignore. Nearly every state requires “dram shop” insurance for bar owners. That covers business people from the harm their patrons might do if they’ve been over-served. Everyone from corporate directors to dry cleaners buy insurance to protect themselves and the people they serve.
Insurance companies are well versed at measuring and pricing risks. They’ve been doing it for hundreds of years. Have you filled out a life or health insurance application lately? They can search credit records, detailed medical histories and get more information on you than you can imagine.

Risk-based pricing is fueled by a whole body of research that identifies who might be a victim in a gun crime or accident. Elderly people living in Florida gated communities, for example, don’t commit a whole lot of gun crimes. Far too many kids are at risk: Some 90,000 children were killed by gunfire between 1979 and 2001, according to the Children’s Defense Fund. That’s almost twice the number of soldiers killed in the Viet Nam war. In fact, American children are more at risk from firearms than any other industrialized country.

Most civilized people accept the idea of insurance in all of its forms. We know that younger drivers pay more for individual auto premiums because they have higher accident rates. Homeowners along the Atlantic coast pay more for homeowner’s coverage because they are more likely to be hit by hurricanes than those in the Midwest. You’ll pay much more for life and health insurance if you smoke or have a chronic disease.

Homeowner’s insurance pricing offers a familiar model: You get premium discounts for safety devices like smoke detectors, alarms, deadbolts and sprinklers. Under gun insurance pricing, you would get significant reductions for trigger locks, home gun safes and attending safety training classes, so most responsible gun owners would be rewarded.

If you think that the mandatory insurance idea is onerous, think again. You can’t finance a home mortgage without homeowner’s and title insurance. Want to buy a car? Most states require liability insurance. Forget about employing anyone in most states without worker’s compensation or unemployment coverage.

As it stands now, only 22 cities and two counties in California require gun dealers to buy liability insurance, according to the Legal Community Against Violence. It’s not known if any jurisdiction requires buyers to purchase liability coverage, although a state legislator in Illinois proposed such a law in 2009 (it was defeated). Note: the NRA itself currently endorses “excess liability” insurance for gun owners.

Under the insurance model, a steep premium may not only make it harder for a violence-prone individual to buy a gun, it may help society pay for the costs of gun injuries. Combined medical and legal expenses connected with gun violence are costing Americans an estimated $100 billion a year.

Will criminals still be able to get guns? Unfortunately, yes. But those unbalanced individuals seeking to buy a gun quickly though legitimate retailers will face the intense gauntlet of the insurance industry. It’s certainly not a total solution, yet it has some tangible value for society.

Photos; Top: Toy pistols handed in by residents are pictured during the “Guns Exchange Program” at a working class neighbourhood in Monterrey February 9, 2011. REUTERS/Tomas Bravo

Bottom: Weapons recovered from defendants accused of trafficking illegal firearms to Mexican drug cartels are displayed along with a .50 Caliber Machine Gun after a news conference in Phoenix, Arizona January 25, 2011. REUTERS/Joshua Lott

Why the Home Mortgage Break Needs to Go

2011-02-14T12:58:00.000-08:00

Kill the mortgage deduction and give it to entrepreneurs

By John F. Wasik (Reuters)

This is a subject I discussed in my book The Cul-de-Sac Syndrome, which is now in paperback and ebook.

Somehow I don’t think President Obama had the home-mortgage interest deduction in mind when he mentioned the U.S. tax code before the U.S. Chamber of Commerce this week.

Yet winding down and eliminating this write-off for homes would be good for business. It’s unfair, doing nothing to revive the housing market and can be put to better use shifting it to entrepreneurs to create jobs.

Most of the job creation in the U.S. economy comes from small businesses, which typically have no public shareholders to sate and are not primarily interested in fattening pay packages of overpaid executives.

The home mortgage deduction needs to go because it doesn’t make housing less expensive, either. If anything, it makes homes more expensive because the subsidy inflates prices. Most homebuyers don’t even itemize to take advantage of it. Nixing it would make homes more affordable.

As Alan Mallach, senior fellow at the Center for Community Progress, wrote in this space: “It is one of the most regressive parts of the tax code, since it affects all house prices, including the price of houses bought by lower-income home buyers, who rarely itemize and get little benefit from the deduction.”

Mallach cites one study found that “barely 10 percent of homeowners earning less than $30,000 take the deduction, but they pay higher prices for their homes to benefit more well-off homeowners. On top if this, it is projected to add $120 billion to the federal deficit next year.”

Will getting rid of the write-off deep-six the already flagging U.S. home market? Mallach noted that Italy pared its residential housing deduction in 1992 and maintains a higher home ownership rate than the U.S.

Why give a break to entrepreneurs? Won’t they squander it? True, many businesses won’t make it out of start-up mode, but those that become profitable become employment engines. Small and medium-sized enterprises account for 60 to 70 percent of most jobs in industrialized countries. Why not give those that are struggling to survive a tax break if they can create more employment?

According to Robert Litan of the Kauffman Foundation in Kansas City, between 1980 and 2005, nearly all U.S. net job creation was produced by small firms.

When President Obama exhorted corporations to spend the “$2 trillion sitting on their balance sheets” to bring down the 9-percent unemployment rate, he was preaching to a tone-deaf choir. Although they wanted to hear that the corporate income tax would be reduced — and that message was delivered — he should have talked about how he was going to help small and medium-sized businesses.

Big public corporations have long relied upon anti-social incentives when it comes to employment. They can fatten their bottom lines when they lay off people, cut benefits, take over other companies and sit on cash. The market often rewards them for doing so and executive stock options go up in value.

The White House should be studying what Singapore, Hong Kong and New Zealand are up to, which were rated as the three best places for the “ease of doing business” by the World Bank. And instead of talking before the mega-corporate club of the U.S. Chamber of Commerce, he should talk to some innovative entrepreneurs around the country.

A more socially responsible tax code needs to reward people for productive activity. Giving Americans a huge break to buy an overpriced home has already gotten millions into trouble. It’s the one part of the American Dream that has turned into a nightmare.

Investing During Turmoil

2011-02-07T07:04:00.000-08:00

Egypt: Mummy’s curse or economic boom?

By John F. Wasik
Author, The Cul-de-Sac Syndrome

Did the Egyptian rebellion open up a gold mine for civil reforms or a mummy’s tomb of economic perils?

I choose to think there are some robust opportunities presenting themselves as Egypt and other countries press their demands for freedom from oppression. On the political side, if you subscribe the “big wave” theory that Egypt’s mass protests will trigger similar revolts in other Arab states, then the resulting reforms — should they happen — may fuel prosperity and greater distribution of wealth.

The markets, of course, have a laser focus on Egypt and its ramifications. There’s a huge commodities rally going on; some of it is guided by fear and speculation but most of it is driven by demand.

I’m rooting for the Egyptians to get a better shake from their thuggish government. For a country of 83 million, most of Egypt’s wealth is concentrated at the top and little of its resource wealth is shared.

Compare the most populous country in Africa to the tiny oil-drenched Gulf State Qatar, which reported about $145,000 in GDP per capita and has one of the highest growth rates in the world at 19 percent. My source, by the way, is the U.S. Central Intelligence Agency, which apparently was behind the curve on unfolding events in the land of the Pharaohs. They weren’t watching Twitter closely enough.

As Jack Ablin, chief investment officer of Harris Private Bank, notes in his current market update, Egypt’s per-capita gross domestic product is $6,200, which even lags Tunisia’s $9,500 and most of the Arab world.

The most immediate reaction of the markets as the revolt unfolded was to sell stocks and buy U.S. Treasury Bonds, gold and energy stocks (and other commodities), which is typical. The widespread fear is that the Arab “street” will emulate Egypt and Tunisia and somehow curtail oil production in other oil-producing states. I don’t buy this idea — yet.

If you believed the panic peddlers and bought into the oil-scarcity scenario, you’d be long natural resources stocks. Just don’t focus on one region, though. Get a piece of energy growth regardless of what happens in the Middle East. Expanding economies from China to Brazil are going to demand more oil to make everything from gasoline to plastics.

Of course, if you were optimistic that Egypt is going to sort out its political crisis in a way that will economically benefit most of its people, you could bet directly on the country through the Market Vectors Egypt Index, a basket of stocks that trade on that country’s exchange. (Normally a reasonable vehicle, the ETF halted trading on Jan. 31.)

Let’s look at some other strategies:

Energy prices continue to rise no matter what happens.
I think this is a safe bet due to rising global demand in emerging economies. In that case, move into the Vanguard Energy ETF or the Rydex S&P Equal Weight Energy ETF.

Petro-energy price increases trigger more clean energy production.
This has always seemed like a reasonably good wager to me, although it’s happened in fits and starts and is a much more powerful trend in China, Japan and Europe. The Powershares Cleantech Portfolio or Van Eck Global Alternative Energy ETF are good places to start. President Obama highlighted a clean energy drive in his State of the Union speech, although he still must get any new legislation through the climate-change hostility of the GOP.

Energy prices will drop in the short term after the panic buying.
This is always a possibility when there’s blood in the streets; energy prices will drop once the protests die down. Want to be adventurous and take much more risk? Short (bet on the price falling) energy through the ProShares Ultrashort Oil & Gas ETF, which moves in the opposite direction of energy prices.

Do you want to think less and invest more? Don’t trouble yourself with which scenario may play out. These things are hard to predict.

Spread your money across all commodities through an ETF like the Powershares DB Commodity Index Tracking Fund, an efficient way to invest in a basket of in-demand goods like crude oil or zinc. Even if there isn’t more unrest and widespread hoarding, there will be growth in this sector.

How to Win the Debt Collection Game

2011-02-01T13:38:00.001-08:00

When debt collectors call, hang up

By John F. Wasik (Reuters)

Author, The Cul-de-Sac Syndrome

My father was recently disturbed by some calls he was getting regarding debt collection. Why are they calling me, he wondered?

At first, he was worried because he was unsure if he had forgotten to pay a bill or had co-signed on a loan for a sibling. I told him that debt collectors can’t call you for something you don’t owe. If there was something due, they would have to send you something in writing. It was probably a scam. He ignored the calls and they stopped.

Debt harassment is a perennial problem, yet most people get intimidated when they get these calls, particularly this time of year. You have many rights, but most people don’t understand what they can do to protect themselves.

The Fair Debt Collection Practices Act is actually one of the better consumer protection laws on the books. Policed by the U.S. Federal Trade Commission (FTC), it has a number of safeguards that are designed to prevent harassment.

The FTC logged almost 120,000 debt collector complaints in 2009, which was up slightly from the previous year. Most of the inquiries involved in-house or third-party collectors, who make money on getting consumers to pony up.

You don’t have to endure abuse from collectors. Here are some of the major ways that they try to hound you and what you can do:

Outright harassment.
Nearly half of the complaints filed with the FTC involved repeated calling at odd times. Some collectors even used threats of violence. Under the debt collection act, they are not allowed to call you at inconvenient times, use obscene language or threaten you in any way. If you are being threatened, call your state attorney general’s office.

Collecting a debt that is not due.
Many collectors have the wrong information or want a payment that is overbilled. You have a right to review and challenge all claims against you, but get the written documents. Don’t do anything over the phone.

Calling your workplace.
They can’t call you at work. Again, tell them to submit any claims by mail.

Disclosing debts to third parties.
The only thing collectors are allowed to do is to use other people to locate you. They can’t discuss your debts with neighbors or family members.

Failure to send written notices.
As I mentioned earlier, they have to send you exactly what the claim is, the amount owed, to whom it is due and whether it’s been verified. Of course, you can dispute any of this information. You need the paperwork to deny their claims.

Failure to stop calling you.
Once you submit a dispute in writing, they are not supposed to call you anymore. You can also request that they “cease all communication” or refuse to pay the debt, but this won’t stop creditors from taking you to court. If you can’t pay the debt, it’s best to talk with them directly to work out a repayment plan. Bankruptcy is another option.

Still being hounded? You can cite them the law or complain to the FTC. A good guide to battling unjust debt collectors is Fred Williams’s “Fight Back Against Unfair Debt Collection Practices” (FT Press, $21.99).

Whatever you do, don’t sign up for a debt reduction or repair service. These firms will charge you money to do something you can do yourself. You can usually negotiate with creditors and don’t need a third party.
Even if you are just now going through a stack of December credit card bills as I am (yikes), what should you be looking for?

Check for unwarranted fees that are tacked on or changes in your finance rate. Were you over the limit on your charges for the month? Did the bank wrongly assess a late fee?

Keep in mind you can dispute all fees and ask that they be removed. If you don’t get satisfaction, take your business elsewhere — after you pay your bill.

Fire Your Broker!

2011-01-25T08:09:00.000-08:00

Fire your financial adviser, unless they are a fiduciary

By John F. Wasik
Author, The Cul-de-Sac Syndrome

If you have a conventional stock broker or agent acting as a financial adviser working on commission, fire them.

Now that the SEC has endorsed a “uniform fiduciary standard of conduct” for brokers and investment advisers, there’s no reason to settle for anything less. This is a financial professional who, by law, must put your interests first.

In the past, the SEC did little to protect you from the ravages of a commission-driven world. Few knew the difference between a “financial consultant” (a broker) or a “certified financial planner” or “registered investment adviser.” The latter two are fiduciaries.

Having a fiduciary is one of the best investor protections around. If they wrong you, you can sue them. As a requirement of the Dodd-Frank financial reform law, the SEC needs to write the rules codifying this key investor protection and Congress needs to rubber stamp it.

It’s also time to move on to fix the broken system that deals with investor disputes. With brokers and agents, you typically sign away your right to sue. You are then subject to inadequate “suitability” standards that don’t offer much protection at all. Not only is it extremely difficult to sue, you are forced to settle most disputes in an industry-run arbitration system.

Countless investors are cowed by the process of proving that they were sold inappropriate investments by brokers. Although the industry doesn’t release the numbers — they should — most investor arbitration lawyers say that about 80 percent of wronged investors settle with brokerage firms for a fraction of what they are owed rather than go through arbitration.

Not surprisingly, investors don’t like the fact that even if they choose the arbitration process — which is billed as a cheaper alternative to litigation — it will cost them thousands in an attempt to get their money back and will face at least one industry member on a three-person arbitration panel. It’s like having a lawyer being the foreman of a jury in a legal malpractice trial.

The securities regulator FINRA is examining alternatives to remove the industry representative and give investors the right to sue in court. We can only hope these become permanent options.

The even bigger scandal is that securities brokers will be still largely self-regulated by an industry organization called FINRA. The group is charged with policing firms, providing background checks on brokers and running its arbitration forum.

How, you wonder, can an industry that powerful and wealthy effectively police itself and more than 600,000 brokers? The bumbling fictional film detective Inspector Clouseau would have been a better regulator in recent years.

FINRA missed the 2008 meltdown, the Madoff scam and failed to prevent more than $150 billion in losses in complex and structured investments that made their way into retail products like mutual funds, according to a soon-to-be published study I conducted for The Nation Institute.

Even if the new SEC rule covers all broker-dealers and advisers, it may not fully cover insurance agents, who sell securities products in the form of troubling variable and equity-indexed annuities. That’s another reason that you shouldn’t rely upon anyone other than a fiduciary for comprehensive financial advice.

In the past, the securities and insurance industries have relied upon more disclosure as an alternative to more protection for investors. Have you read a prospectus for a complex financial product lately? Does it clearly spell out the risks and costs? Most don’t.

Risky investments don’t need more disclosure — they already have plenty of that — they need cigarette-type labels that tell you up front “this investment is hazardous to your wealth.”

The SEC and FINRA still aren’t doing their jobs in an age in which ladders, toy packaging and dry cleaning bags have better warnings. Making most financial professionals fiduciaries is positive development, but you need to take the first step in hiring one now to ensure that your best interests are being served.

Home Finance Essentials

2011-01-19T06:46:00.001-08:00

What mortgage brokers don’t tell you: Hidden penalties abound

By John F. Wasik (Reuters)
Author, The Cul-de-Sac Syndrome

There’s a host of information a mortgage broker or banker won’t tell you up front that may increase the cost of your financing.

You could pay much more on a mortgage than your initial quote rate based on a rating system used by government mortgage insurers Fannie Mae and Freddie Mac. Brokers and bankers rarely tell you this coming in the door. They want to lock you in to a loan as soon as possible. With rates rising, this is really important to know.

In the wake of the biggest real estate meltdown in American history, the devil’s in the details when you apply for a loan. This hidden rating system will penalize you with a higher rate if your credit score is low or you apply for certain types of loans. It’s being employed by Fannie Mae and Freddie Mac, the government’s captive mortgage entities, which account for about 80 percent of new loans now.

As of January 1, mortgage brokers and bankers have to tell you that you may not get the best rate if your credit report is flawed, although they may not give you essential details up front on what else could bump up your finance rate.

You need to ask about how you will fare in the Fannie/Freddie “risk-based pricing” regime, which is basically a computer-run scoring matrix run by your banker. Here are some factors that could raise your cost of credit:

Credit scores (based on the FICO system) below 740.
High loan-to-value ratios (the percentage of the property’s value that’s mortgaged). The more equity you have or the more money you put down, the lower your rate.
Adjustable-rate, Interest-only or 40-year loans.
Cash-out refinancings.
Investment properties.
Condominiums and cooperatives.
Manufactured homes.
Multiple-unit properties.

The risk-based pricing program evaluates the type of loan, your credit score and loan-to-value ratio and determine what “add-ons” will boost your quoted rate, if any.

A low FICO score — say below 620 — may add at least a half-percentage point to your loan. An interest-only loan may increase your rate by three quarters of a point. Those financing buying investment properties will likely pay the highest rates — up to one and three-quarter points more.

As with all loans, it pays to pull your credit report before you apply for a loan or refinance. Certain items such as record errors or bumping up against credit limits can be fixed fairly easily and raise your credit score. Outstanding bills such as medical debts may also hurt.

“We encourage people to be more informed,” says Dick Lepre, a senior loan officer with RPM Mortgage in San Francisco. “If they want the best rates they need to keep their credit score at or above 740. They must be vigilant about things such as medical collections which are often the result of confusion regarding medical co-payments.”

You can request a free credit report from www.annualcreditreport.com. Just be careful not sign up for credit monitoring services that will cost you additional monthly fees. The Federal Trade Commission spells out some of the pitfalls of so-called free services.

One other side effect of risk-based pricing: The stricter underwriting rules also make it more difficult to qualify for a loan, which is not much help to markets that are swimming in properties and won’t get back on their feet unless demand returns.

Hindsight seems to rule the day as the government struggles to alleviate the home crisis. If only the mortgage barons had some realistic underwriting standards five years ago. It would have prevented a lot of heartbreak.

Illinois and Its Financial Disease

2011-01-14T16:09:00.000-08:00

The Prairie State pestilence: Pensions, budget woes spread

By John F. Wasik (Reuters)

Author, The Cul-de-Sac Syndrome

The fiscal malady that plagues Illinois — and its painful treatment — may be coming to a state, county or municipality near you.

What will cure this spreading pox on the populace? Higher taxes, lower spending and that rare commodity: political honesty.

I feel the pain since I live in Illinois and will pay higher taxes. This couldn’t be more personal to me. My daughters’ school district is owed state money and has fired teachers. My father’s teachers’ pension fund (among others) has been methodically underfunded for years. I went down to our state capitol last year with other University of Illinois alumni to lobby the state legislature to pay more than $400 million in unpaid education bills.

The Prairie State’s teaching moment was ignited by the Illinois legislature’s passage on January 11 of a tax increase that will raise $6.8 billion for state coffers and impose spending limits. The personal income tax will climb from three percent to five percent; the corporate levy from seven percent from 4.8 percent. It’s a mere finger in the dike as the state still needs to borrow to cover pension obligations. The rates may ratchet down over time.

Sad as this may sound, the Chicago Cubs have been managed better than the Illinois budget. The state was running a $13 billion budget deficit, which could balloon to $15 billion; it was in the worst fiscal shape of any state. Its shortfall was nearly twice that of California, which has nearly three times the population.

As a taxpayer, I’m outraged that things got this bad. As a citizen, though, I still want education to be fully funded, public-employee pensions to be honored and my state to invest heavily in infrastructure and job-creating programs.

While Illinois is a poster child for horrendous fiscal management, other states and municipalities are hurting in a similar way. Banking analyst Meredith Whitney says 50 to 100 municipalities may file for bankruptcy. JPMorgan Chase CEO Jamie Dimon recently echoed that concern.

In good times, many governments were generous with retirement and health benefits. They kept doling out the goodies with the assumption that widespread economic growth and a robust stock market would bail them out.

Yet the best intentions were declared on the road to hell. The stock market tanked three times in the last decade and took down public pension fund returns. Bond yields are abysmal. The ongoing housing crisis pummeled nearly every state by reducing income, property and sales tax revenues. Public pension payments were grossly inflated by bumping up salaries and bonuses in the final years of service.

The recession zapped state revenues by more than 30 percent between 2008 and 2009, the U.S. Census Bureau reported. That meant more teacher layoffs, furloughs for university professors and cutting services in countless communities. I went through my local school district’s budget with other citizens with a fine-toothed comb last year. It was like picking fleas off a lion.

The federal stimulus plan of 2009 helped somewhat, but not enough to offset a collective $130 billion state budget shortfall, according to the Center for Budget and Policy Priorities. Some 40 states project budget gaps totaling $113 billion for next year and 46 states posted a deficit last year.

With the new bailout-averse Congress in place, it’s unlikely that we’ll see another major stimulus plan being passed that will ease the burdens on state houses and city halls. In the interim, sacrifices will abound.

Pension formulas will be downgraded. Benefits will be cut. Public employees will have to dig deeper into their pockets to pay for pension and health-care benefits. And taxes will certainly be raised if cuts fail to restore balance.

Not all taxes need to be onerous and unfair, though. It’s once again time to consider a tax on carbon, raising a motor fuel tax that hasn’t kept pace with inflation and a tax on financial speculation.

If I believed that states could “grow their way” out of their fiscal messes, I’d say wait on new taxes. Yet that won’t likely be the case in most states where jobs have been permanently vacuumed away by emerging economies. The best tax would be one that spurs a reinvention of the economy while creating private-sector employment and channels money back into communities. It would be a hallmark of social capitalism.

If only Illinois (and many other states) wasn’t too broke to take this next step. It would restore my faith in Prairie Populism. I might even root for the hapless Cubs again.

Resolutions for the Financially Fussy

2011-01-03T14:44:00.000-08:00

6 top financial trends for 2011

By John F. Wasik (Reuters)

Author, The Cul-de-
Sac Syndrome

Although the old Chinese curse “may you live in interesting times” has a certain irony about it, this year will certainly not be dull for investors.

To prepare for it, you’ll need a plan, as always. I suggest you craft an investment policy statement that puts down in writing your goals and the amount of money you don’t want to lose. Then plan accordingly.

Resolutions are not on my list, nor is a budget, which doesn’t work for most people. Just stick to growing your money in a sustainable way.

And don’t pay any attention to forecasts. Stocks will fluctuate. There will always be volatility. Focus on a point in the future and figure out how to get there. Here are some trends already in motion that will help you in the coming year:

More brokers will be fired. If you have an adviser who makes recommendations based on commissions, they will never fully be in your corner. Make your own decisions. Only hire advisers and planners who are fiduciaries and will take responsibility — and can be sued — for their bad advice. (Sometime this year, the Securities and Exchange Commission will rule on whether all brokers should be fiduciaries, which will be a beneficial change.) If you need an adviser, hire a fee-only certified financial planner (www.napfa.org).

More investors will buy into auto-pilot portfolios. Wall Street has snookered Americans for years. They have conned people into believing that diving in and out of stocks and funds will boost your wealth. Well, it does increase wealth — theirs. Investing doesn’t have to be complicated. Stop investing in actively managed funds, most of which don’t beat the market over time. Figure out how much risk you can take and find a passive index portfolio at Folio.com or myplanIQ.com that meets your criteria for risk. Every major fund and ETF company also offers passive funds. Automatically invest in your 401(k) and other retirement plans. Rebalance every year according to your investment plan statement and goals.

Your taxes can come down even more. Sure, the government will give you a break on payroll and income taxes, but there’s more you can do. Appeal your property taxes. Property prices are averaged over the past three years by most assessors, so you should be due a reduction in your assessed valuation. Check your payroll tax withholding. Getting a refund every year isn’t necessarily a good thing. You’ve essentially handed the government free use of your money for a year. If your withholding rate is too high, lower it and give yourself a raise.

Stocks will gain. According to data on Presidential market cycles, stocks rarely decline in the third year of a term. If you can afford the risk of being in the stock market, make sure you are invested through an all-market index fund such as the iShares Dow Jones US Index Fund (IYY). That way, all your bets are covered and you don’t get sucked into a risky single stock or sector.

Interest rates will rise. I know, pundits have been predicting this for the last three years and if the economy remains moribund this year, then they will be wrong again. If, however, demand for credit escalates and corporations start to spend their $2 trillion hoard of cash, rates will climb to reflect higher demand for credit. Just make sure you are not in long-term bond funds, because they will suffer the biggest declines. Treasury Inflation-Protected Securities or I Bonds will pay you more if inflation rises (www.treasurydirect.gov). Of course, any secure bond that you can hold to maturity will be okay.

Commodities will gain. A rising tide lifts all boats. A robust recovery in global economies means greater demand for commodities from coal to rare-earth metals. China, India and Brazil — and a host of other developing countries — all need several commodities to grow. Invest in a basket of them through the Powershares DB Commodity Index Tracking Fund (DBC), which follows a big basket of commodities.

Of course, all my market trends are based on the economy healing itself in the coming year and no major economic catastrophes.

There are always plenty of wild cards, though. That’s why it makes sense to create a low-cost, no-worry autopilot portfolio that samples big pieces of the stock, bond, real estate and commodities markets. It may not be interesting, but dull works better than daring and you don’t get penalized for betting wrong on trends.

Check Your Retirement Plan at Year End

2010-12-29T15:33:00.000-08:00

Is your 401(k) plan ripping you off?

By John F. Wasik (Reuters)
Author, The Cul-de-Sac Syndrome

For most of us, a 401(k) is like a big rock that we don’t want to turn over. We’re afraid of what may be skittering out when we do.

An untold number of 401(k) plans are charging employees too much to manage and administer their retirement kitties. The gremlins of excessive fees add up over time.

While it doesn’t sound like a lot, a one percentage point increase in plan investment fees can cut your retirement income by 28 percent over a work life of 25 years, according to the U.S. Department of Labor (DOL).

Lately, though, employees have silently been winning battles in getting these fees reduced and restoring hope for a decent retirement. Combined with a new DOL rule that will provide expense disclosure, this has been a watershed year for employees fighting to get a decent 401(k) program.

Some 85,000 employees in the $6 billion General Dynamics Corporation (GD) 401(k) plan recently won a settlement in a lawsuit against the company. The workers claimed that they were being overcharged on fees within the plan.

As part of the settlement, the defense contractor’s insurers will put $15 million back into the plan, which will then be regularly reviewed by independent consultants to see that the employees are getting a fair shake on the fees. The company denies any wrongdoing.

Along with another recent case against Caterpillar, Inc. (CAT) by its employees, the General Dynamics suit is a landmark. This litigation represents some of the first victories by employees over bosses who bury and pass along needlessly onerous expenses in 401(k)s.

The General Dynamics settlement is a keystone because it appoints a watchdog, who is in charge of getting the best deal for employees on plan services. For example, administrative fees will be monitored by an independent fiduciary not connected to the company.

Some plans also charge high fees for middlemen called recordkeepers, who are involved in most 401(k)s. Instead of charging reasonable flat fees, these administrators were getting a percentage of assets under management, which was an awful arrangement for employees. The General Dynamics settlement mandated lower expenses for employees.

“Recordkeeping is a commodity,” says Jerome Schlichter, a St. Louis-based labor attorney who represented the General Dynamics employees and workers in similar cases. “Every 401(k) needs one, but cost has nothing to do with the size of the account. It should be a flat fee.”

Schlichter first filed a wave of similar suits against 14 large employers in 2006. Two of the cases have been dismissed, three are in the process of settlement and nine are outstanding.

These suits have shed needed sunlight on practices that few employees know about and most employers are loath to admit. Here are some things you should check with your 401(k) administrator, CFO or human resources department before the end of the year:

Do you have retail-class funds within your 401(k)? This is the equivalent of Wal-Mart going into another store, buying something off the shelf and charging you the same undiscounted price. Funds within 401(k)s should be institutionally priced. That means expense ratios less than 0.10 percent annually for a stock index fund and 0.15 percent for a bond fund.
No-bid funds. Your plan administrator should get the best diversified portfolio at the lowest cost. They should bid out services and fund management on a regular basis to do this. That’s their responsibility under federal law.
Independent Review. An outside expert such as a fiduciary should thoroughly vet the plan to see that vendors are giving you the best price. Every plan can and should do this.

If you have no other contact with your company’s human resource department this year, make sure they are following up on getting you a fair shake in your 401(k). The savings will add up over time and boost your retirement fund.

Every dollar counts in a 401(k) these days since the average American has saved less than 7 percent of the desired amount for a comfortable retirement, reports a Wells Fargo survey.

In the case of General Dynamics, employees will see an additional $1.2 million in their plan.
Sometimes turning over that rock can be quite profitable.

A Holiday Story

2010-12-25T08:25:00.000-08:00

Getting the best return on life

By John F. Wasik (Reuters)
Author of The Cul-de-Sac Syndrome

I was in a homeless shelter recently with my daughters and neighbors serving a hot meal to some folks who didn’t have a roof over their heads.

They smiled gratefully and thanked us as they sampled my pasta recipe and other dishes. This was a frozen moment when I had to ponder the investment one makes not in stocks, bonds and funds, but life itself.

My friend Mitch Anthony, speaker and author of “the Bean is Not Green,” always has great insights on this process. He says we need to take stock of our “return on life (ROL).”

Return on life is about measuring what’s important to you in non-tangible terms. A warm place to sleep. A job. Health insurance. A decent meal with people you love.

To evaluate your return on life, you literally have to stop thinking about money. Just stop. Look at what you have and what you can give. What do you value?

“Everyone has a unique set of values,” Mitch tells me. “We have a vision of life. What adds to or subtracts from it? What are our responsibilities to others?”

To gauge ROL, we need to know how much and how often we value certain things. Are we spending too much time at work or worrying about it at home? Do the things that matter most occupy the least amount of our daily existence? What have we put in the backs of drawers that need to be revealed?

In order for us to have this self-conversation, we need to throw out some ideas that have dominated the financial arena and poisoned our lives.

Forget about forecasts.
Nobody has a decent crystal ball, especially after 2008. The world is moving too fast. You can’t plan your life around a business channel. What are your needs? How can you best address them with current resources and time?

Stop focusing on performance.
So you didn’t get a raise or bonus this year. Did you achieve what you set out to do? Are you getting closer to your goals? Life isn’t a steady upward curve. It really looks more like the stock market, which is a jagged line.

Forget about timing.
Some people can plan careers and they are defined by certain milestones: Becoming a manager or partner, getting the big raise, retiring. Life going forward won’t be that simple. We will gradually retire or work into our ninth decades. We will un-retire and pursue different careers. Work isn’t what it used to be.

The one thing we shouldn’t embrace is regret, that indisputable anxiety that we’ve not gotten the best return on life. Or to quote Stephen Sondheim from A Little Night Music: “Isn’t it rich/Isn’t it queer?/Losing my timing/this late in my career?”

The best ROL leaves us with no residue of remorse. It flows organically, like an idea whose time has come. You won’t find it jumping out at you from the business headlines or a blog.

How do you know you’re making a good life investment? You can feel it in your gut, your neck and your heart. I’m not talking about a mutual fund or bond that may or may not pay you back. I’m talking guarantees with the full faith and credit of what makes you tick.

For some, it may be learning piano or a new language. For others, it may be volunteer work or a trip to Antarctica.

I can tell you I’m finding immense pleasure just cooking for my family and others, taking that daily walk and breathing deeply. I can’t value any of these things in monetary terms, but they have value beyond words. I can measure them in warm smiles.

Most importantly, you can gauge your return on life in terms of what you can do for others. This is the compound interest of giving and it could be anything from a kind word to going to a friend’s funeral and talking with survivors.

There’s going to be so much in life that will make you sick with anger and grief. You’ll get a much better return from your life energy if you can multiply good will. That’s the most valuable asset of all.

Happy holidays and peace, prosperity and health!

Halt HAMP

2010-12-10T13:21:00.001-08:00

Cut the government’s home modification program

By John F. Wasik, author of The Cul-de-Sac Syndrome

The government’s Home Affordable Modification Program (HAMP) should be scrapped. It was flawed from the beginning and is not going to get much better in helping people keep their homes. It’s time to start over.

This is not a Scrooge-like gesture, and it certainly won’t decrease the surplus population of foreclosed homes on the U.S. market. The HAMP should be put out of its misery because it’s ill conceived and can be replaced with some more effective measures.

If the White House was truly serious about preserving homeownership, it would have never designed HAMP the way it did. It was loaded with laughable incentives for lenders to lower rates on troubled mortgages, including a $1,000 payment to servicers and lenders. What was the White House thinking? Just getting a decent lawyer to open a file could cost a bank $1,000.

Although the government said it has started more than 3.7 loan modifications, it ignores a stark economic reality: in many cases it makes more sense for the bank to continue to foreclose than to work with the borrower. And the people who are in the worst trouble still can’t afford the loan even at a lower interest rate or are jobless.

Bankers won’t say this, but may prefer foreclosure to modification. Then they can get defaulted loans off their books and eventually lend more money. They can also resell the property once it passes through foreclosure. And during the process, they can assess even more fees for late payments.

The most egregious flaw in HAMP and related programs is that it’s voluntary. In far-too-many cases, banks don’t have to do much of anything except show up in court with their team of lawyers, knowing that homeowners are broke and can’t afford decent representation. Banks don’t even have to return phone calls.

Little wonder that Darrell Issa (R-California), the incoming chairman of the House Oversight Committee, wants to dump HAMP. Let’s say that the government has succeeded in obtaining 500,000 permanent loan modifications where mortgage rates are reduced.

If you round up the number of foreclosures from 2008 to the present to about 6 million, that means that more than 90 percent of defaulted loans go into foreclosure. That’s an appalling record if you’re a government agency trying to save homes. Even if the banks manage to survive federal and state probes into allegedly “robo signing” dodgy loan documents, HAMP still won’t be of much help to struggling homeowners.

Persistent unemployment — at 9.8 percent nationally — is going to push even more homeowners into foreclosure. Even the Fed’s $600 billion QE2 easing of long-term rates isn’t going to stem this ongoing tragedy.

Yet killing HAMP without replacing it with a better program is irresponsible. At least three alternatives loom:

Rent-to-own. Let’s say mortgage servicers are granted the property’s title subject to agreement of the borrower and other interested parties as an alternative to foreclosure. Homeowners are not evicted and become renters at a lower monthly payment. They can rebuild equity and can repurchase at a new market value in the future.

Unemployment Forbearance. While these programs are already offered by some lenders, make them widespread and flexible. Lose your job? You can skip principal payments and only pay interest until you or a spouse/partner are re-employed.

Bankruptcy Write-Off. What if you file to reorganize your debts? There needs to be a provision to write down mortgage balances in some way. You can do that with every other kind of debt.

Any change in HAMP will have to acknowledge that the program does nothing to square a home’s mortgaged value with its current market value. In the hardest-hit areas, home prices have dropped from one-third to one half.

Corporations revalue and dispose of downgraded assets all the time and take write-downs every quarter based on various forms of depreciation. Why can’t homeowners do the same? Turnabout is fair play. After all, didn’t the Fed dole some $3.3 trillion in aid to banks during the meltdown, including some $1.25 trillion in distressed mortgage-backed securities?

Congress has imbued the tax code with multiple tax breaks to promote homeownership. You can deduct everything from mortgage interest on first, second and home-equity loans, escape capital gains taxes in most sales and even write off property taxes (if you itemize).

The biggest break of all would be to legally trigger the right to re-negotiate a home mortgage if a property declines in value. If the American dream is still important to Washington, this is a game changer.

Gold Headed for a Bust?

2010-12-01T06:30:00.000-08:00

By John F. Wasik (Reuters)
Author, The Cul-de-Sac Syndrome

John Wasik

Coming soon: the loud thud of a gold bust

Some time in the future the price of gold will crash and it won’t have a fairy-tale ending for the millions of investors who piled on in recent months.

If I could tell you when gold was going to bust, I’d likely be wrong or bigger than Warren Buffett, so I won’t even try. Just be incredibly cautious now. There are too many signs that gold is frothier than a Starbucks cappuccino.

It’s not that I don’t nod in agreement when gold bugs rant about why their metal holds a special value now. The dollar is in deep trouble as the U.S. sinks deeper into debt. Will Portugal and Spain be the next Ireland on the bailout boulevard? Ben Bernanke may not be able to put a dent in U.S. unemployment or the intractable housing crisis.

And yes, I also know the argument on how gold is nowhere near its inflation-adjusted equivalent of its high in January, 1980. According to the Leuthold Group, gold will have to hit $2,400 an ounce to match the $850 high mark it hit in 1980 in real terms. That doesn’t mean it will, of course.

Yet the back story of the world’s financial insecurity isn’t necessarily about gold being the last or only store of value. It just may be the most popular red herring at the moment.

One flaw in the “gold can still climb to $2,000″ argument is that the last boom was due to the hyperinflation of the 1970s and early ’80s. Everyone who is leery of the U.S. debt flooding the bond market is right to suspect that a new version of stagflation (no growth, higher prices) may be upon us.

Right now, though, we’re in a deflationary mode. This “deleveraging” could go on for some time as demand for credit stays low and foreclosures continue to ravage the housing market. Home prices are still falling in some places and hot money has shifted to stocks and commodities because of record-low yields in Treasury securities and savings vehicles.

I also tend to side with the behavioral view of why gold is so popular. Not only is it a play against the continued pessimism on the dollar, it’s a psychological refuge. People think it’s secure because it’s tangible. There’s still a finite amount of gold in a time when you can still print as many dollars as you want — something the Federal Reserve is doing in the short term.

Then there’s the less-often discussed side of gold. Why are they beginning to sell gold in vending machines? Why is the leading gold exchange-traded fund, the SPDR Gold Trust, up more than 19 percent year-to-date even though inflation is barely 1 percent?

Is there an unholy alliance here between a false threat of inflation and irrational exuberance? I think so. I smell a strong aroma of the dot-com mania.

The real story to me is demand for commodities overall. Every developing country needs copper, tin, coal and a host of minerals to build their infrastructures. So they are bidding up prices from the mines of Chile to the coal pits of Australia. That much makes sense to me and it’s definitely a long-term trend.

So I’m suggesting that you become less of a conquistador obsessed with the sun metal and focus on a broad, long-term (buy and hold) portfolio that includes a basket of commodities. You can protect yourself against inflation and take advantage of commodity-price increases.

My two best suggestions are the PowerShares DB Commodity Index (DBC), which holds a number of leading commodities, and the PIMCO Commodity Real Return Strategy Fund (PCRDX), which holds treasury inflation-protected securities and commodity derivatives. It’s a staple in my individual retirement account to stave off inflation.

As for gold, if you’re a real nervous Nellie, maybe you’ll want to invest directly in the metal through coins (Maple Leafs or Pandas are handsome collectibles that I own) or bullion.

Just keep in mind that gold doesn’t pay any dividends, is not directly linked to corporate earnings and has no intrinsic value. And when the hyperinflation fervor goes away, gold will be about as exciting as its less glamorous cousin: lead.

A man displays gold bars at the Sacombank gold bar factory in Vietnam’s southern Ho Chi Minh city January 22, 2010. REUTERS/Kham

A Guide to Charitable Giving

2010-11-23T06:14:00.000-08:00

Giving your own way: Doing charity right

By John F. Wasik (Reuters)
Author, The Cul-de-Sac Syndrome

Charity can get complicated. There is no “wrong” way of giving, but you can certainly maximize your gift in a number of ways.

We all give in our own way. A neighbor recently invited us to help at a homeless shelter. That was his way of giving back.

Service tends to be the best gift because it’s a direct contribution and you can often feel the results. I still can’t express enough gratitude for the meals my neighbors prepared when my wife was ailing last year.

What if you simply want to target a handful of charities to maximize your donations this year? There are thousands of organizations in ever greater need; contributions to the 400 biggest groups dropped 11 percent last year.

Aid to those in poverty is also welcome and addresses a growing need. According to the Census Bureau, some 44 million people in the U.S. fell below the poverty line last year, up from 40 million in 2008.

There is another way of helping that is focused on charitable efficiency. I know this is a strange word to use in altruism, yet it refers to how much of your dollars actually reach the “mission” of the charity.

Like for-profit corporations, non-profits can grossly overpay their executives and waste money.

Some charities burn up a lot of money paying for expensive promotions and events. The more-efficient groups employ more than 80% of their income on programs that actually help people in need.

One of the first places to look when vetting a charity is its Form 990. This will show you how much the group is spending on expenses relative to income. Although it will give you some idea of its efficiency (ratio of income to program spending), you might be better served by using a service like Charity Navigator, which rates thousands of charities. Guidestar is another reliable source.

If you’re concerned about a tax deduction, you’ll need to ask a different set of questions, such as:

* Is the charity registered with the IRS as a 501(c) 3 or 501 (c) 4 group? The IRS permits a deduction for the former but not the latter, which may do lobbying.

* Do you itemize? If you don’t list specific donations on Schedule A on your federal tax form, you can’t claim write-offs, which are limited to from 30 percent to 50 percent of your adjusted gross income. See IRS Publication 526 for a list of what you can deduct.

* Be careful with benefit events. You can only deduct the amount exceeding the fair market value. So if you attended a charity dinner for $250 and the dinner was worth $50, you can only deduct $200. You can’t claim a deduction for your services or for political contributions.

* Stock and other financial gifts are deductible at fair market value. This can get complicated, though, especially if this is involved with estate planning. As with other tax matters, contact your tax planner or lawyer.

You can also be quite creative in the way you give. You could combine service with direct cash gifts. I’ve seen many volunteers who work regular hours with a charity or hospital and provide donations through their estate plan.

Speaking of estate planning, you can contribute before you die through regular ongoing gift programs, set up annuities or charitable remainder trusts, which trigger a larger gift when you pass.

Flummoxed about deciding which cause is worth your contribution? You can delegate your money and decision making to a donor-advised fund, which leaves the donations up to professional managers. These entities are run by nearly every large mutual fund organization such as Fidelity Investments, T. Rowe Price and the Vanguard Group.

Whatever option you choose, keep in mind that charitable planning is a cautious art and shouldn’t be done on impulse. Thousands of charities spend too much on telemarketing (avoid those that do) and too little on the people they are supposed to help. By being careful and doing research, you can aid a lot more people.

Photo: A girl makes a cash donation to the United States fund for UNICEF in Philadelphia, Pennsylvania, January 15, 2010. REUTERS/Tim Shaffer

Going Global for Profit

2010-11-18T19:23:00.000-08:00

How to sail the QE2 investment cruise

By John F. Wasik (Reuters)

Author, The Cul-de-Sac Syndrome

If only “QE2″ stood for the famous cruise ship Queen Elizabeth II. When she was sailing (she was retired in 2008), you could plunk down a tidy sum, be guaranteed a handful of exotic locales and come back home safely.

Cruising is probably not the appropriate metaphor for the acronym for the U.S. Federal Reserve’s recent QE2 or “quantitative easing,” which will buy at least $600 billion in long-term U.S. Treasury Bonds. It’s an investment voyage of sorts and could be profitable if you concentrate on overseas ports of call.

The Fed hopes that by bringing down interest rates — and indirectly printing money — that the lower costs of doing business will compel U.S.-based businesses to hire workers and stimulate the doldrums-like economy.

I don’t believe that will happen in a significant way, although if I’m a chief financial officer, I will relish the fact that I can sell more long-term debt at low rates. It certainly will help the bottom line of thousands of corporations. As an individual investor, though, I see QE2 as a way of pounding down the value of the dollar relative to other currencies. That may boost the U.S. export economy somewhat, but not if other countries do the same thing or on a bigger scale. (Hello, China).

Nevertheless, investors who hold stocks or bonds from non-U.S. countries can benefit from the relative drop in dollar valuations. Combined with overseas economic growth, this is a trend worth investing in long term as it may take years before Uncle Sam gets on his feet again.

As Standard & Poor’s strategist Alec Young observed in a recent report, “international equities are huge beneficiaries of QE2-induced cross-market trends…a falling greenback boosts dollar-denominated overseas equity returns.” While it’s too soon to tell if this is a long-term trend, the market has embraced the idea of a cheaper buck. The S&P 500 stock index surged 2.5 percent on November 4 in anticipation of QE2.

Are we watching a genuine rally or just short-term optimism that will be dashed by growth that doesn’t materialize in the U.S.? Many economists are saying that if the Fed’s move backfires, it could fuel an inflationary surge, so keep your eye on increases in the producer price index. Commodity prices have been soaring of late, although much of the run-up is attributed to demand in emerging economies.

In the interim, you need to ask yourself if you have enough exposure to non-U.S. equities and bonds. Financial planners generally advise that non-retirees keep up to 40 percent of their portfolio in international shares.

And don’t neglect domestic companies that have large non-US operations or are major exporters like Caterpillar, Intel and Archer Daniels Midland. They will clearly benefit from the dollar decline. (These are not recommendations, only examples).

Even better vehicles than single stocks are mutual funds or exchange-traded funds. They offer low-cost ways of investing in hundreds of stocks and bonds. This is the pick of the litter:

iShares Emerging Market Index ETF (EEM). The fund invests in the top companies in developing countries.

iShares S&P/Citigroup International Treasury Bond Fund (IGOV). A good way to sample bond yields from across the world.

Vanguard FTSE All-World Stock ex-U.S. ETF (VEU). Don’t like U.S. stocks? This world fund excludes them.

As we watch what QE2 does to the U.S. economy, just keep in mind one thing: This is one of the last arrows in the Fed’s quiver. The Fed may not even hit its target or put a dent in unemployment. If the U.S. economy continues to slide, look for more rough waters ahead.

Photo: The Queen Elizabeth 2 reaches the end of her journey as she arrives in Dubai November 26, 2008. REUTERS/Jumana El Heloueh

How to Ensure Fed Stimulus Won't Fall Flat

2010-11-16T17:05:00.000-08:00

By John F. Wasik (Reuters)

Author, The Cul-de-Sac Syndrome

John Wasik

The Federal Reserve can buy all the US Treasury bonds it wants, but it won’t do much other than make corporate treasurers waggily over being able to borrow at incredibly low rates.

As a last-ditch effort to stimulate the US economy, the Fed’s $600 billion initial purchase of US debt, also known as “QE2,” could be better spent directly helping Americans and easing the housing crisis.

Part of the problem is not that interest rates aren’t low enough — short-term rates are practically zero — it’s that there’s little demand because nobody is getting financially ahead through employment, homeownership or 401(k)s. There’s no sense in the middle class of a “wealth effect.” Fear is ruling now. So here are some proven approaches that might help:

A Payroll Tax Holiday. The Fed could boost employment by redirecting its QE2 purchases to offset a payroll tax holiday. This would directly put money in both employers’ and employees’ pockets. It might even stimulate some hiring.

A Really Potent Housing Credit. What would happen if the Fed intervened in the housing market in a meaningful way instead of buying distressed mortgage securities and Treasury debt? It could redirect money (with Congressional blessing and IRS oversight) into paying for homebuyer tax credits.

The last round of $12.6 billion in buyer’s credits ($8,000 for newbies and $6,500 for others) proved to be somewhat successful; 1.8 million people bought homes. Why not even add a sweetener of an additional $1,000 rebate to those who buy vacant, short sale, bank-owned or foreclosed homes? And instead of offering it for a few months, offer it for two years, or at least until the inventory of some 19 million empty homes is whittle down to about 1 million homes or less.

A Retirement Funding Boost. Let’s overhaul the fabled 401(k), the retirement plan that was never meant to be a mainstay of long-term savings. Some 40% of Americans don’t even have access to them at work, with minorities, young people and low-income workers showing the lowest participation rates, according to Demos, a New York-based policy center. Why not make a tax-free contribution to all Americans in a no-fee, universal savings account? Savers would face a tax penalty if they withdrew the money before retirement age, but could still use the assets to borrow against in a pinch.

Since the Fed is now a super-regulator in the wake of financial reform, why doesn’t it impose limits on 401(k) fees, which costs workers an average 20 percent of their retirement kitty over a working life? They could mandate that program expenses can’t exceed those of the federal government’s Thrift Savings Plan. This is probably more of a mission for Congress, though, which has avoided addressing this massive rip-off for years.

Direct Help to States. It’s no secret that a combination of the Great Recession and housing crisis have knocked the stuffing out of state, local and school board revenues. Inflation-adjusted state tax revenue fell nearly 15 percent during the downturn, which was the biggest decline in 50 years, according to the Lincoln Institute of Land Policy. Teachers are being laid off or furloughed and the overall quality of education in the US is suffering.

If the Fed wants to create — or at least preserve employment — it can direct money to the states. I know this is not what the Fed normally does as baron of the banking system, but at least it can make funds available for borrowing to state treasuries through member banks at zero interest. That’s the minimum it can do. Look at the myriad toxic securities-buying programs it set up for Wall Street in 2008!

I realize that many of these suggestions are beyond the Fed’s purview as it’s not in the fiscal stimulus business per se. Yet as a divided Congress begins to organize and study ways of reviving the economy, further enabling the federal government’s debt addiction will do little to find buyers for vacant homes or convince businesses to start hiring.

Without consumers flush with money and gainfully employed, the private sector won’t budge. Lowering long-term interest rates won’t hurt, but it won’t compel banks to lend money in a low-demand environment. It’s like a crazed dog chasing its tail. The Fed still has an awful lot of sticks to throw — if it can only send them in the right direction.

John F. Wasik is author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.”

How to Invest After the Mid-Term Elections

2010-11-08T18:01:00.000-08:00

5 profitable post-election predictions

By John F. Wasik
Author of The Cul-de-Sac Syndrome

Remember that classic carnival ride, the “tilt-a-whirl?” That’s what financial planning will be like under the new Congress, when Republicans control the House of Representatives and the Senate is divided.

Some big decisions need to be made about taxes, retirement and estate planning laws – moves that Congress didn’t make before they recessed for the election.

The wrenching move to the right and the political wrangling about these key topics could be dizzying. That means you can either get motion sickness watching the two parties battle, or you can try to plan for your long-term goals no matter what comes out of Washington.

The most important legislation that didn’t get passed — or even seriously discussed — had to do with tax rates. The estate tax expired at the end of last year. So if someone you knew expired this year, then maybe you and other heirs get a free pass. (Congress could still pass a retroactive tax, though).

Income-tax brackets are also still in limbo. The Bush-era tax rates ranged from 10 percent to 35 percent; they previously ranged from 15 percent to 39.6 percent. Come 2011, if Congress does nothing, the higher rates will automatically return. And low 15 percent rates on dividends and capital gains will also rise. That brings me to my first prediction:

The Bush-era tax rates will remain. I don’t think either party will mess with them on the eve of a presidential election year. The sluggish economy is also a linchpin. There might be some compromise on when the higher rates will kick back in — maybe two or three years from now — if Congress can even reach an agreement on that. For now, though, I would say it’s not likely you will be hit with higher income taxes next year.

The estate tax will return with higher exemptions. Even mega-investor Warren Buffett agrees that some estate tax is necessary. While I don’t think we’ll see a return to the pre-Bush top rate of 55 percent on estates valued at more than $1 million, we’ll see some compromise on how much of an estate will be exempted from the tax. My guess is that Congress will use a proposal crafted by Senators Blanche Lincoln (D-Ark.) and Jon Kyl (R.-Arizona) as a starting point. They suggested a $5 million exemption and 35 percent rate, which is the top marginal income tax rate now. Look for the GOP-dominated House to go for an even higher exemption: $10 million wouldn’t surprise me.

Deficit cutting will eventually impact entitlements. This is a roundabout way of saying the House will begin the painful discussion of how to sustainably fund Social Security and Medicare. On the House side, I would expect to see a revival of personal savings accounts, which were floated during the Bush years, which would be carved out of Social Security contributions.

Medicare, which may run out of money in 18 years, has gotten some breathing room from health care reform, although tax increases or benefit cuts may still be on the table. Some GOP and Tea Party members have also said repealing health reform is at the top of their agenda, so this is a wild card. I don’t think any serious action will take place in 2011 on any of these programs. No matter what happens, fund your Roth IRA or 401(k). Somewhere down the road, a tax increase will eat up more of your retirement funds. Having tax-free income (you pay taxes only on the contributions in Roth funds) will be a big plus.

Retirement savings may be bolstered. There have been “Auto IRA” proposals in various House and Senate committees for years to bolster retirement savings at small businesses that both parties have supported. Yet these programs have never reached the floor of either chamber. They might make it through next year.

Stocks will be a smart investment. Neither party will have any impact on the business cycle. Corporations have trillions sitting in their treasuries; the more mature companies are still paying healthy dividends that beat most pathetic money-market fund yields. It doesn’t make sense to sit on the sidelines waiting for something dramatic to happen. Invest in stocks through an index fund such as the Vanguard Total World Stock exchange-traded fund.

The only thing I can guarantee is that the coming Congressional conflicts won’t be dull. You’ll see all sorts of fur fly over tax rates and paring the federal budget deficit. Just make sure that you’re positioned to take advantage of any economic rebound. That’s one thing that everyone wants to be optimistic about.

Getting the Best Investments for Your Portfolio

2010-11-03T18:29:00.001-07:00

By John F. Wasik (Reuters)

Author of The Cul-de-Sac Syndrome

In ETF war, investors finally win

Imagine a financial services war in which prices dropped and benefited both investors and providers.

Such a conflict is waging in the exchange-traded fund (ETF) arena, where commission and fund management fees (”expense ratios”) are both coming down. This is exciting for cost-conscious investors because it can boost your total return with only a handful of funds.

Because you are paying less upfront (no sales charges) and annually (management expense ratios), your net return can be higher.

Leading discount brokers such as Schwab and TD Ameritrade have slashed their commissions on some popular ETFs to zero. Fund managers like Fidelity and Vanguard have also zeroed out commissions for select ETFs through their brokerage platforms.

ETFs are useful tools that most mainstream investors probably don’t know about or understand. They are pools of securities like mutual funds, only they trade on exchanges. Repriced constantly when the market is open, you can only buy them through brokers. Most ETFs are passive index portfolios, so they can keep costs low — much lower than actively managed mutual funds.

Not only are you getting to buy an elite group of ETFs without paying a brokerage fee — only if you buy through the above-mentioned brokers — you’re getting passive broad-basket ETFs at rock-bottom management expenses.

Let’s say you want to buy a global stock fund to get a sampling of stocks across the world. If you went through a full-service broker like UBS, the Swiss bank and brokerage, they might pitch you their Global Allocation A fund (BNGLX). For the privilege of investing in this fund, they’d charge you a stiff 5.5% upfront sales charge plus 1.22% annually in management expenses.

Suppose you wanted to buy a global stock index fund on your own. You could buy the iShares MSCI (ACWI) Index ETF through Fidelity’s online brokerage commission free and pay 0.35% annually. So not only do you get a worldwide stock portfolio, you’re saving three and half times the annual expenses over the UBS fund and the commission.

Picking the right no-commission ETF can get confusing, though. Do you just pick the cheapest funds? The ones with the greatest diversification? Yes and Yes.

It’s fairly simple to construct a core portfolio that will give you most of the world’s stock and bond markets. This is the kind of portfolio you buy and hold. To determine how much you should hold in stocks, it should roughly match your age. The older you get, the less stocks you should own. Disclosure: I own ETFs and mutual funds from Vanguard, iShares and Fidelity in my 401(k)s.

You want your core portfolio to protect against inflation, provide some growth and income. Here’s a low-cost, boiled-down portfolio that gives you a piece of most assets:

The Cheapo Core Portfolio

Fund: Schwab US TIPS Type: (inflation-protect. bonds) Ticker: SCHP Expense: 0.14%
Fund: Vanguard Total Bond ETF Type: (US bonds) Ticker: BND Expense: 0.12%
Fund: Vanguard REIT Type: (real estate trusts) Ticker: VNQ Expense: 0.13%
Fund: iShares World Type: (global stocks) Ticker: ACWI Expense: 0.35%
Fund: PowerShares DB Com Index Type: (commodities) Ticker: DBC Expense: 0.85%

Bear in mind that not all ETFs are commission-free, nor are they worth considering.

The commission war has not touched the entire $1 trillion universe of ETFs — and that’s a good thing. If you want to actively trade ETFs, you should pay more, if for no other reason than to discourage you from market timing and attempting to pick hot sectors at the wrong time.

Fortunately, unlike the real-world shooting wars, the ETF battle will be a win-win situation for those who need to save more for retirement and other goals.

Getting Your College Savings Plan in Shape

2010-10-26T06:33:00.000-07:00

By John F. Wasik (Reuters)

A ‘pure’ savings plan for college can still work

You can still put aside enough money for college if you save. Is this the latest American myth?

According to reader Bill H., a “pure” savings approach worked for his children. It also helped they were good students, obtained scholarships and went to state schools.

“When my kids were born I just started putting money away,” Bill tells me. “Mainly, I would save the entire paycheck from any outside income I had…I usually had about $3,000 a year in outside income.”

“I would also try to save about 10 percent from every regular pay check. My salary was not huge, probably averaged about $40,000 to $45,000 a year, but I was usually saving about $7,000 to $8,000 a year.”

Investing in insured certificates of deposit and conservative stock and bond mutual funds, Bill kept at it for 17 years, when he averaged about 7 percent annual return (good luck getting that today) and had accumulated $200,000. He then took the money out of the stock market five years ago and placed the money in insured CDs.

From the interest on his CDs (about $12,000), he was able to fund one daughter’s college payments, supplemented with other savings, her part-time work and a scholarship.

Is this a fairy tale? Bill says he’s able to save because he lives modestly in his Georgia community.

“I drive the same truck I’ve driven for 12 years; my wife has driven the same car for 10 years,” he says. “My kids worked and paid for their own cars. They have no bills other than house, insurance, utilities, clothing and food (about $1,700 monthly). Our biggest bill is taxes.”

As American families are scaling back plans to pay for their children’s college educations, Bill’s family stands out. They are habitual savers and neither of their two daughters will graduate with college debt.

According to a Gallup poll, on average, families have saved about $28,000 for college. Most have to go into debt to foot six-figure tuition bills.

Some of the college savings shortfall is due to family confusion over the best vehicles for college savings. Each state has its own “529” savings plan with multiple options. The Gallup poll showed that nearly half of those surveyed weren’t sure of the best college savings plan. Here are some good ways to get started:

* Don’t just explore your state’s 529 plan, you can choose from any state. I went out of state to invest in Vanguard’s Upromise plan because of the lower costs and conservative management. I wasn’t disappointed since my state (Illinois) had to police an errant bond-fund manager who lost money in mortgage securities.

* Any savings from lifestyle choices are worthwhile. Want to give up cable and save the difference? How about cutting back on your restaurant meals? Any savings can be banked.

* Put your spending to work for you. Both Upromise and Baby Mint, set aside a percentage of your spending with certain vendor and credit cards into college savings funds. I’ve been using Upromise for year and have saved thousand for my daughters.

* Don’t forget scholarships. Several neighbors of mine have negotiated with colleges for “tuition discounts” because their children were good students. Colleges always officially deny they do this, but they can cut their fees if you have other universities making offers.

The most-effective savings program is one that involves an all-out effort. It always surprises me how many ways you can accumulate college funds. You just have to be careful about your choices.

Photo: A graduating senior waves as she arrives at the commencement for Barnard College, where U.S. Secretary of State Hillary Clinton spoke, in New York, May 18, 2009. REUTERS/Chip East

John F. Wasik is the author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream

Making Money No Matter How Bad the Economic Climate

2010-10-20T06:25:00.000-07:00

How I beat Yale’s David Swensen

By John F. Wasik (Reuters)

It’s not every day that one’s portfolio beats David Swensen, the great money manager of the Yale endowment.

According to the blog Seeking Alpha and MyPlanIQ, that’s what I did over the last year with my humble “Nano” portfolio. How is it possible that I (narrowly) beat Swensen’s portfolio, the product of a man widely considered to be one of the best institutional money managers in the world?

Created in 2006, the Nano is about small expenses, simplification and asset classes that don’t always move in the same direction. There are only five funds in it (see below), and I spread out my money evenly — 20% in each fund. I tried to cover most stocks and bonds with some real estate and Treasury Inflation-Protected Securities (TIPS).

The Nano portfolio was my concerted effort to create a passive, “lazy” portfolio that you would rebalance every year and mostly forget about until you were close to retirement.

While I’d love to continue hoisting my flag, I will warn you that past performance is no guarantee of future return. And I’m no David Swensen, who has an incredible long-term record with Yale. My picks also didn’t make the final cut for MyPlanIQ’s “playoffs” for lazy portfolios. They calculated their returns with their software, which is not open to my scrutiny, so my 0.24 percentage-point besting of Mr. Swensen is no big deal.

Sadly, my bragging rights hit a brick wall when you look at my three year-returns — losing almost 2 percent. But let’s put that in perspective: That’s still not bad considering the S&P 500 Index lost more than 40 percent in 2008. Yet it pales in comparison to Harry Browne’s Permanent portfolio, which gained 7.4 percent during that period.

Browne’s secret it that it performs well when fear rules and stocks are being clobbered; only a quarter of its holdings are in the iShares S&P 500 Index ETF (IVV).

The remainder of Browne’s portfolio is in the SPDR Barclays Capital Long Term Treasury ETF (TLO), money-market funds and the SPDR Gold Trust ETF (GLD). Since gold prices have soared and hit all-time highs in recent years — Browne has traditionally been an ultra-conservative investor — this doesn’t surprise me.

If you absolutely need an ostrich-like “safe not sorry” approach, then stick with Browne. Looking for more growth and have more than a decade to invest before you retire or simply want to take more risk? Then the Nano might be a good fit.

I would be remiss if I didn’t confess that there has been a huge wild card surface since I first crafted the Nano. Like millions of Americans, 2008 changed everything from my career direction to my family portfolio.

Our overall buy-and-hold allocation before that dreadful year was about 70% bonds, 30% income. I’m a believer in long-term growth from corporate earnings around the world.

Then the piano fell from the sky in late 2008, and my wife couldn’t stomach the idea of having all that money in stocks. So we shifted to a 50% stocks, 50% income mix. I would call this a “domestic” rebalancing. Nobody likes to lose money — even if you’re looking at paper losses and don’t plan to retire soon.

I plan to continue to eat my own cooking and would even add two more funds to the Nano portfolio: The Pimco Commodity Real Return Strategy Fund D (PCRDX) for even more diversification and the SPDR Barclays International Treasury Bond Fund (BWX). The core funds include the Vanguard Total Stock Market ETF (VTI); Vanguard Total International (VGTSX); Vanguard REIT (VNQ); iShares Barclays TIPS Bond (TIP) and iShares Barclays Aggregate Bond (AGG).

Echoing my post-2008 chastening, this is a more conservative “son of Nano” portfolio that places more emphasis on income. Place about 14% in each fund. Disclosure: I own most of these funds in one form or another.

No matter what you do, don’t blindly embrace any style of investing before you do a gut check. You really have to make your own decisions as to how much risk you can afford to take.

Still, it’s great to have a sunny year, although it’s always the stormy ones you have plan for to secure your future.

John F. Wasik is a Reuters columnist and author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.

Caption: David Swensen, Yale University Chief Investment Officer, speaks during an asset management forum in Seoul April 12, 2010. REUTERS/Truth Leem

Most Don't Get Same Deal as JR Ewing

2010-10-16T12:23:00.000-07:00

Most Investors Don't Get "JR" Deal When Battling Wall Street Brokers

By John F. Wasik (Reuters)

It would be great if investors who got fleeced by a bad broker got most of their money back like Larry “JR Ewing” Hagman.

The actor who played the rapacious Texas oil baron got more than $11 million in damages and legal fees from Citigroup’s Smith Barney brokerage (now run by Morgan Stanley) unit in a securities arbitration award. Despite his instructions to the contrary, his broker had shifted most of Hagman’s portfolio into stocks, which got burned in the 2008 meltdown. Citi denies any wrongdoing.

Yet Hollywood is not Main Street. Not by a Texas mile. Most investors aren’t made whole when burned by brokers, nor do they reap punitive damages. Most are offered — and agree to — settlements from the brokers.

“In the hundreds of cases I read (in 2008), what appeared to be punitive damages were awarded in less than 5% of the cases,” said Louis Straney, a securities arbitration consultant based in Santa Fe, New Mexico. “Even attorney’s fees and costs are rare, awarded less than 15% of the time.”

The brave minority that chooses to fight the system faces long odds in arbitration hearings. The securities arbitration forum is run by FINRA, a unique industry-run organization that somehow is allowed to police itself, license brokers and protect Wall Street’s interests.

When investors agree to settle, we have little idea how much they receive (or how much they were fleeced) since the industry makes them sign confidentiality agreements when they get their settlements — most likely for a fraction of what they lost. Only settlements of a certain size are required to be reported in the FINRA system.

Brokers have never liked the idea of you suing them. When you sign any standard brokerage agreement, you are locked into their mandatory binding arbitration. While this may be more efficient and less costly than litigation, it can severely limit your ability to recoup your money.

What happens if you go through arbitration and don’t recover any funds or don’t agree with the three-arbitrator panel’s (there is no jury of your peers) decision? You generally can’t appeal it all the way to the Supreme Court. Only in the cases of outright fraud is a decision challenged.

Should you wrestle your way through an arbitration hearing — some 80% of investors don’t make it this far — unlike a court decision, arbitrators don’t have to explain their findings. Since at least one of the arbitrators represents the industry at each hearing (except in new pilot programs), that adds to the perception that brokers have the upper hand.

So there’s a good reason that investors feel they’re not going to get a fair shake when they’ve been wronged by brokers. A University of Cincinnati Law School study found that many survey participants who went through arbitration “with recent comparable experience in a civil court case perceived (securities) arbitration as unfair by comparison.”

Perhaps responding to years of criticism from the plaintiff’s bar and state securities regulators, FINRA recently announced a proposal to allow investors to opt for an all-public arbitration hearing. That means an industry representative wouldn’t be directly involved in a dispute decision.

In a FINRA pilot program that gave investors this new option, some 60 percent chose this route. Reflecting what usually happens when people challenge their brokers, most settled and only 23 of the 560 cases thus far resulted in an award for investors. Still, investors won in 71% of the cases arbitrated with the “all-public” panel versus 50% for a panel with at least one industry arbitrator.

Even with the improved prospect of getting an award, unless the Securities and Exchange Commission decides to remove mandatory arbitration from brokerage agreements — it’s studying that option now — wronged investors may still be stuck in a troubled system run by the brokerage industry.

They certainly won’t be as fortunate as the man who played oilman JR Ewing. Most often they’ll come up disappointed and broke.

John F. Wasik is author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.

How to Broadcast Clean, Solar Power

2010-10-15T07:07:00.001-07:00

This is a talk I gave at the Northbrook Public Library on the dream of electrical genius Nikola Tesla. He was able to broadcast electricity, which is a core technology for beaming solar-produced power from space to earth stations. This could be a huge source of clean energy in the future.

http://www.chicagopublicradio.org/Content.aspx?audioID=44922

Why Home Prices Won't Rebound Soon

2010-10-12T06:40:00.000-07:00

By John F. Wasik (Reuters)

Don’t hold your breath on home appreciation

You may see two full moons in a month before home prices start rising again across the U.S. The rip tide of a huge home inventory, increasing foreclosures, unemployment and more bank woes continue to roil the housing market in most regions.

If you think you’ll see a profit from selling your home or hope to get a home-equity loan based on recent appreciation, you may have to wait a while — maybe a few years.

A host of demons continue to bedevil the U.S. home market. The worst of these gremlins is unemployment. Home sales and prices are directly linked to the number of people working. A jobless rate around 10 percent doesn’t spur home sales.

Nobody is in a hurry to buy homes. According to a recent report by Ned Davis Research, housing prices may not begin to appreciate until the jobless rate goes to 7 percent or lower.

Once the jobless rate gets to about 6 percent, the firm estimates that home prices may begin to rise roughly 2 percent annually or track the historical level of inflation.

“Yes, there is a light at the end of the dark housing tunnel,” writes Joseph Kalish, the report’s author, “but it will take at least two years and possibly more to get there.”

Complicating any housing rebound scenario is the fact that there are millions of unsold homes on the market and more are being acquired and resold by banks through foreclosures.

Kalish estimates that this “excess supply” is between 1.4 million to 2.5 million units. Even with record-low mortgage rates, in a slack economy, those homes don’t sell, so new homebuilding makes no economic sense.

The huge home inventory also puts pressure on banks to sell the homes they own at below-market prices just to get them off their books. Remember, banks are not in the real estate business; they don’t want to own and rent homes.

This tsunami of foreclosures and vacant homes is likely much worse than what most big bankers are willing to admit. Christopher Whalen, a financial analyst with Institutional Risk Analytics in Torrance, California, told the conservative think tank American Enterprise Institute on October 6 that “non-payment by borrowers and mounting foreclosure backlogs are creating the conditions for the collapse of some of the largest U.S. banks in 2011.”

In Whalen’s view, the biggest banks should have been broken up in 2008-2009 instead of propped up with TARP and Federal Reserve funds. Ironically, megabanks like Bank of America got bigger during the crisis by absorbing troubled subprime mortgage-gorged firms like Merrill Lynch.

The recent halt to foreclosure processing by major banks, Whalen noted, was an indication that banks are up to their necks in bad debts that are only getting worse. “The use of loan modification to make bad credits appear ‘current’ is an economic fraud perpetrated by Washington that is already becoming apparent via foreclosure moratoria,” Whalen stated.

Banks are being swamped with defaults put on overdrive by massive unemployment. The so-called “underemployment” rate of those still looking for full-time jobs but working part-time or who have abandoned their search is 17 percent. These folks can’t afford mortgage payments.

There is one silver lining to all of this mayhem. It’s likely that mortgage rates will remain low for at least another year, possibly longer. Refinance if you can. If you need to repair or add onto your home, now’s a good time.

On the savings side, your only consolation is that you can find thousands of FDIC-insured institutions that are not having financial problems. Credit unions are another strong option. There’s plenty of no- or low-fee competition for your checking, credit card and savings accounts.

You won’t get rich from investing in insured certificates of deposit or other savings accounts, but you won’t lose any money, either. Now is the time to reduce your debts as the megabanks struggle to stay afloat.

John F. Wasik is the author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.

Photo: REUTERS/Rick Wilking

TARP Terrorized the Economy

2010-10-05T18:22:00.000-07:00

By John F. Wasik (Reuters)

The bailout was a bust for most American taxpayers

Was the bailout of the U.S. banking, auto and insurance industries worth it?

As the Troubled Assets Relief Program comes to a close, I won’t be popping any champagne corks. The Federal Reserve and U.S. taxpayers are still owed at least $2 trillion and at least two black holes remain in the bailout scenario.

The conventional wisdom is that life as we knew it was preserved and a 1930s-style depression (or worse) was averted.

Yet for millions of Americans, the bailout hasn’t helped them a bit. They are still punch drunk and often jobless from Wall Street’s and the bankers’ Las Vegas benders.

Former Goldman Sachs manager and author Nomi Prins tells me “Main Street is not better off, because it did not receive the lion’s share of the grandiose focus, subsidies, monies and removal of toxic asset aid that the banking sector inhaled into the top levels of their institutions.”

Prins, who authored the definitive autopsy of the meltdown in “It Takes a Pillage,” challenges the idea that the bailout money ever trickled down to people who needed it the most.

“That’s why defaults, delinquencies, foreclosures, bankruptcies and unemployment rates have risen — none of which is an indication of Americans doing better, even as banks repaid TARP and are eager to put the whole ‘mess’ behind them,” Prins said.

You don’t have to look too deep into housing forecasts to see that the U.S. home market still resembles a typhoon-devastated country.

The shadow inventory of homes that could be reverting back to lenders is staggering. There may be as many as “four to 12 million foreclosures yet to come” touching nearly every neighborhood in the country, according to real estate author Ilyce Glink.

One of the reasons the housing debacle seems like a bottomless pit is that the widespread unemployment triggered by the meltdown is pushing ever more homeowners into foreclosure. The American Dream is shattered for them.

While the stated jobless rate is hovering around nine percent, it’s really 12 percent to 20 percent when you include inner-city residents and those who have stopped looking for work and no longer receive unemployment checks.

Meanwhile, the two entities that were supposed to lend stability to the housing market and middle-class neighborhoods — Fannie Mae and Freddie Mac — are on life support.

Will the Obama Administration wind them down, buy their bad loans or simply privatize them? We probably won’t know until well after the November election. In the interim, Prins estimates that taxpayers are on the hook for a nearly $7 trillion implicit guarantee of the mortgage companies and their debts.

Am I ignoring TARP’s silver lining? Financially, it wasn’t a complete bust and taxpayers made money on the funds repaid. The largest financial rescue in history has produced some dividends for the U.S. Treasury. Big banks, Wall Street, goliath insurer AIG, the mortgage market, GM and Chrysler all got loans and will survive — at least until the next crisis.

On paper, taxpayers reaped anywhere from a 10.2 to almost 20 percent return, according to The Banker magazine. That’s $6.8 billion in dividends from institutions like Bank of America, JP Morgan Chase and Wells Fargo.

Along the way, money market funds got rescued, Fannie and Freddie became wards of the state and the world’s largest banks and insurers were saved from their rapacious derivatives trading.

The true measure of whether the $8 trillion pledged thus far on the total bailout was well spent, however, is gauged in lost opportunity cost and unaddressed social capital needs.

Could the financial rescue money have been better spent fixing some $2 trillion in dilapidated levees, bridges, water systems, dams, roads and schools?

Would we have been better off investing the TARP funds in alternative energy, our moribund public transportation infrastructure, curing cancer or providing world-class educations for children struggling to compete in a global economy?

It’s painful to say that while the bailout perhaps saved millions of jobs, it did nothing to create new ones — save for a handful of bureaucrats counting the billions that went to a fortunate few.

John Wasik is also the author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.”

How to Lose Big Money to Small-Time Scamsters

2010-10-04T18:31:00.000-07:00

By John F. Wasik (Reuters)

Top investment scams gone wild

bernie madoff | ETFs | investment scams | ponzi schemes

It’s not hard to find the hottest investment scams. Just read the business headlines. What’s making money?

The who’s who of scamsters are not household names like Bernie Madoff. They are guys working the Internet, selling the next “green technology” or smoothly working Ponzi schemes in church groups. They might even be your neighbor.

I just got an email from someone I didn’t know in England who claims he was beaten and stranded. And all he needed was about $10,000 to get back home! Coincidentally, I also met a fellow with the same story on the streets of Baltimore, although he was asking for considerably less.

These frauds are often hard to identify because our skeptical reasoning is often clouded by trust and greed (on our part), which the perpetrators count on when they work their wiles.

I had a chance to catch up with some state securities cops recently. They are spotting some compelling pitches that are trapping investors all over the country.

Forex Trading. This is short for foreign exchange and currency, which is roughly 50 times the size of the stock market. Schemes involving market-beating software and techniques abound. The biggest banks and institutions trade every day. You think you can beat them?

Exchange-Traded Funds. While ETFs are perfectly legitimate listed pools of money, the idea that you can use them to make a killing on gold, foreign stocks or a single industry is ludicrous. Nobody has a product that can best the market consistently.

Environmental Technologies. Sure, wind and solar look awfully good right now, but the chances you will be able to get in on the ground floor of a breakthrough technology at a good price are slim to none.

Neighbors Selling to Neighbors. Regulators call this “affinity fraud.” They could be part of an association, church, group or investment club. One such scam, called “blind real estate pools,” involve brokers who sell interest in properties — that they don’t actually own. Joe Borg, Alabama Securities Commission director, said he’s seen these schemes popping up in the south. Military families near major bases also are being pitched “Iraqi dinar” schemes, where they are speculating on an upsurge in the country’s currency.

Commodity Scams. Name the commodity and there’s some kind of scam attached to it. With the price of gold hitting record highs, gold-mining fraud has become popular in the West. Others may involve oil and gas extraction.

“Off the books,” special or private placement deals. Unlisted securities are always a perennial trouble spot. Believe me, no small investor is going to get a better deal than the banks and guys on Wall Street. The only people getting rich off of these opportunities are the purveyors of them.

Variable Annuities. Like ETFs, these are legitimate insurance products, although they are rarely suitable for most investors.

How do you avoid these deceptions? Employ the smell test. Are the returns touted far above market rates? Is high performance promised in a short period of time? What are the total fees and commissions involved before a single dollar is invested?

Do some realistic comparisons. Remember, the S&P 500 stock index was down 10 percent over the past decade despite rising 23 percent last year. Also ask for a prospectus and if what is being sold is a listed security.

Better yet, check the background of the broker or adviser selling the investments. Do they have a criminal or disciplinary record? You should be able to check their registration with your state securities regulator or through the securities industry’s BrokerCheck system or through the SEC.

John F. Wasik is the author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.

Photo: Accused swindler Bernard Madoff exits the Manhattan federal court house in New York January 14, 2009. REUTERS/Brendan McDermid

Why Stocks Make Sense Now

2010-09-21T06:35:00.000-07:00

Investing in the under-the-radar recovery

By John F. Wasik (Reuters)

Two main theories about the global economy dominate these days: 1) We’re headed for a double-dip recession, and 2) things are getting better at a thick, syrupy pace.

I subscribe to the slow-as-molasses rebound view. While I don’t rule out another European debt crisis, the worsening of the U.S. home market and unemployment or any other calamity, things are slowly getting better. It’s time to start investing in stocks again.

When there’s so much conflicting news in the business headlines, I tend to listen to influential institutional investors like Dan Farley, who manages more than $190 billion for Boston-based State Street Global Investors.

I heard Farley run through some relatively optimistic numbers last week at the Morningstar ETF conference in Chicago. Although Farley admits there are still a bunch of wild cards in the economy, he’s somewhat upbeat.

“Right now, we’re in a stable but shallow recovery mode,” Farley said. “Corporate cash is at a record high of 50 years, and equities have room to grow.”

“Banks are no longer tightening loan requirements and starting to lend; companies are starting to borrow. Hiring plans, inflation and durable goods orders are likely to pick up until (factory) capacity utilization picks up.”

Why look for a silver lining when the U.S. is staring at a $13 trillion national debt, some European countries are still in trouble and the jobs picture remains dark? Farley uses words like “anemic” to describe the nascent recovery and he’s certainly not sanguine about employment, which he doesn’t think will fully rebound until 2015.

Corporations now have a “cash horde” that they can spend on hiring, dividends, stock buybacks or acquisitions, Farley notes.

Naturally, with billions flowing into bonds and gold, this hardly seems like the time to be talking about investing in stocks. For millions, the market psychology is still a “blood in the streets” mentality. But if Farley is right, it’s a good time to position your portfolio for future gains.

Patience is critical now. We’ll eventually exit this trough of the business cycle; companies will have the money to rebuild.

All of this prognostication is for naught if you take a narrow-minded approach to recovery investing. The U.S. may take a long time to fully bounce back, but that shouldn’t stop you from looking at a number of sectors, countries and opportunities. Here are some mistakes to avoid:

Don’t Make Concentrated Bets: That means avoiding trying to pick winners in individual stocks. Your risk is much higher that way. It’s better to pick a basket of stocks like an index fund.

Only focusing on the U.S: Most of the valuation of the world’s stocks is outside America. A better approach is a broadly-diversified world stock fund like the Vanguard Total World Stock Index exchange-traded fund (VT). You get 2,900 holdings in 47 countries in this index fund for a management fee of 0.30% per year (compared to about 1.4% for the average global fund).

Ignoring Dividends: As noted above, big, established corporations have lots of cash for dividends. The SPDR Dividend ETF (SDY) is a good vehicle for capturing these payments.

Ignoring the Little Guys: Not all of the growth will come from the blue chips. The little guys — small and medium-sized companies — tend to bounce back faster during a recovery. The iShares Russell 2000 Index ETF (IWM) owns a broad basket of these stocks.

Ignoring the Developing Countries: You never know where the more robust growth will occur. Will it be China, Indonesia, Brazil, Chile or India? Why even make a bet on a single country? The iShares MSCI Emerging Markets ETF (EEM) does the picking for you.

Another temptation that overly confident investors try to make is to guess exactly when the market is going to turn around. Nobody knows that date and few bet correctly.

You can ease back into the market gradually. If your investment reflexes are like molasses (mine sure are), this is a low-risk approach of getting a piece of the recovery.

John F. Wasik is the author of The Audacity of Help: Obama's Economic Plan and the Remaking of America (www.audacityofhelp.net)

Corporate Dollars and Campaigns a Toxic Brew

2010-09-20T06:07:00.000-07:00

The quickest way to bruise your brand

By John F. Wasik

Corporate dollars and political campaigns are like oil and water for well-established retail brands.

Despite the troubling flexibility provided by the Supreme Court case Citizens United, which allowed more direct corporate and union contributions to political campaigns, this freedom can be perilous.

Target learned first-hand how political donations could damage its brand. A public relations disaster followed its contribution to a group backing Tom Emmer, a Republican candidate for Governor in Minnesota, where Target Corp. is based.

According to a study by Brandweek, a trade publication, Target’s reputation was hurt in early August when the donation was revealed — and still hasn’t recovered. The publication’s BrandIndex report showed the company lost one-third of its “buzz” score in 10 days last month, recovered modestly, then fell again during a media backlash. Target’s stock price fell to under $51 a share by Aug. 30, but has since recovered to close above $53 recently.

Not only did the contribution result in a blizzard of op-eds, blogs and negative publicity, it seeded a boycott campaign from the well-funded progressive organization MoveOn PAC.

Brand damage can be severe when corporations muddy their image by backing campaigns.

In Target’s case, shoppers who liked their clean, well-lit discount stores generally expected Target’s image to be apolitical. You don’t have to wander far from a Target checkout to see how the company supports a wide variety of community non-profits. Overt political leanings alienated an untold number of customers.

Direct political funding is bad for business because high-profile retail brands are expected to project this welcoming, multi-cultural image devoid of any agenda outside of free enterprise. They want your business, but they need to do it without a partisan message.

While we wouldn’t be surprised to see a gun manufacturer supporting a pro-second amendment politico, we would be appalled to see a fast-food chain back a pro-life or pro-choice candidate. It’s a horrible fit and sullies a company’s marketing message.

That’s not to say corporations can’t deliver their political dollars in other opaque ways. There are still more than 10,000 lobbyists on Capitol Hill and thousands more in state capitols. They can cloak their donations through trade groups, “527″ organizations or “Astroturf” groups that appear to be grassroots, but are seeded and organized by corporate dollars.

Jane Mayer’s recent New Yorker piece shed light on the Koch family’s various political groups and libertarian promotions.

Have consumers of Koch Industries’ Georgia-Pacific products such as Quilted Northern bath tissue and Brawny paper towels resented the Koch family’s funding of anti-Obama campaigns? Their right-wing bankrolling has largely flown under the radar of mainstream media, yet is constantly monitored by groups such as Sourcewatch.org.

No matter how many watchdog groups there are, corporations have far more money and ways to evade an ever-dimming media spotlight. Corporate-funded “Super PACs” are raising hundreds of millions for mid-term Congressional races.

Super PACs feature groups like American Crossroads, run by former George W. Bush adviser Karl Rove. The group has raised more than $17 million and includes donors like Dixie Rice Agricultural Corp.

Meanwhile, money keeps pouring into campaigns like a breach in an old dam. Political fundraising — now exceeding $2 billion in this cycle — according to the Associated Press, will probably break records this year.

In addition to unions such as AFSCME, IBEW, Laborers and SEIU, the “heavy hitters” in political contributions are AT&T, National Association of Realtors and Goldman Sachs. These groups represent more than $355 million in political donations, based on data through August 22, according to OpenSecrets.org.

As it stands now, it’s unlikely Congress will do anything to dampen the impact of the Citizens United ruling before the November election. Yet open disclosure of direct and indirect special-interest funding is essential, something the proposed Disclose Act attempts to mandate.

No matter what brand of politics you subscribe to, you should know which corporations are backing candidates and why. Corporations already have more than enough lobbying muscle – and those efforts should be fully exposed.

John Wasik is also the author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.”

Get a Good Deal on Closing Costs

2010-09-14T06:59:00.000-07:00

How to get a good deal on closing costs

By John F. Wasik

Getting a Good Deal on Closing Costs

Reading the Fine Print is Essential

By John F. Wasik

Although you can get a great deal on mortgage rates, you can easily pay too much on closing costs.

The necessary expenses of appraisals, title insurance, credit checks and other fees can add up to thousands of dollars. You can reduce those costs by getting multiple quotes and negotiating.

With 30-year loan rates averaging around 4.3 percent and 15-year rates at 3.8 percent nationally, according to Freddie Mac, now’s a great time to refinance or buy.

Shopping multiple sources pays off. With closing costs up 37% — that’s an average $3,741 on a $200,000 loan according to bankrate.com, you can put a lot more money in your pocket while getting some of the best rates in a generation.

When I refinanced late last year, I started the process knowing that getting a decent rate was only part of my mission. I wanted to get closing costs under $2,000, which was challenging considering I was seeing most quotes above $3,000.

Not only are closing costs numerous, they can get onerous. In addition to making money on the loan, many lenders will slap on “junk” fees like processing or underwriting. You can avoid these fees by going to another lender or negotiating.

The best financing strategy involves first detailing the fees and your total cost.

“Are you getting the best rate possible for the lowest fees,” says Sam Tamkin, Chicago-based attorney who handles real estate closings. “And if you’re getting an adjustable-rate loan, do you understand how they adjust?”

It’s not unusual for buyers and refinancers to pay from 3% to 5% of the total cost of the home in closing costs. The total expenses are largely a factor of where you live. Large metropolitan areas tend to be most expensive. Here’s a strategy that will help you reduce costs:

• Always sample a variety of lenders and brokers. Consider Internet services, local banks and credit unions. You may be able to apply online for basic quotes, but make sure you get a good faith estimate of all costs. You may need to make some phone calls to get closing estimates.

• Compare all fees. Some lenders charge underwriting and processing while others don’t. If you find a lender with a desirable rate — and their fees are high relative to other lenders — ask them to trim their closing costs. Do this before you sign up for a credit check and send in your Social Security number.

• Title Insurance is costly, yet required. It can range in price from $150 to $1,000 or more. Some states regulate the price. A good mortgage broker may be able to get you the best price.

• Read your HUD-1 statement carefully. This is the form that lists all closing costs before you close and is available at least one day prior to closing. Keep in mind that you can walk away if previously undisclosed fees were added.

While I’ve found that the best rates are often obtained through mortgage brokers — they do the searching for you — there is no such thing as a “no cost loan.” They make their money through a “yield spread premium.” So their profit would be charging you 4.4% on a 4.3% loan — a “spread” of 1 percentage point — for example.

Although there have been several efforts to streamline the closing process, it still can be confusing and you will need to review a mountain of forms. Fully understand what you are signing.

Got any perplexing financial concerns? Let me know. johnwasik@gmail.com

John F. Wasik is author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream (www.culdesacsyndrome.com).”

Although you can get a great deal on mortgage rates, you can easily pay too much on closing costs.

The necessary expenses of appraisals, title insurance, credit checks and other fees can add up to thousands of dollars. You can reduce those costs by getting multiple quotes and negotiating.

With 30-year loan rates averaging around 4.3 percent and 15-year rates at 3.8 percent nationally, according to Freddie Mac, now’s a great time to refinance or buy.

Shopping multiple sources pays off. With closing costs up 37 percent — that’s an average $3,741 on a $200,000 loan according to Bankrate.com — you can put a lot more money in your pocket while getting some of the best rates in a generation.

The best financing strategy involves first detailing the fees and your total cost.

“Are you getting the best rate possible for the lowest fees?” asks Sam Tamkin, Chicago-based attorney who handles real estate closings. “And if you’re getting an adjustable-rate loan, do you understand how they adjust?”

It’s not unusual for buyers and refinancers to pay from 3 percent to 5 percent of the total cost of the home in closing costs. The total expenses are largely a factor of where you live. Large metropolitan areas tend to be most expensive.

Here’s a strategy that will help you reduce costs:

• Always sample a variety of lenders and brokers. Consider Internet services, local banks and credit unions. You may be able to apply online for basic quotes, but make sure you get a good faith estimate of all costs. You may need to make some phone calls to get closing estimates.

• Compare all fees. Some lenders charge underwriting and processing fees while others don’t. If you find a lender with a desirable rate — and its fees are high relative to other lenders — ask to trim the closing costs. Do this before you sign up for a credit check and send in your Social Security number.

• Title Insurance is costly, yet required. It can range in price from $150 to $1,000 or more. Some states regulate the price. A good mortgage broker may be able to get you the best price.

• Read your HUD-1 statement carefully. This is the form that lists all closing costs before you close and is available at least one day prior to closing. Keep in mind that you can walk away if previously undisclosed fees were added.

While I’ve found that the best rates are often obtained through mortgage brokers — they do the searching for you — there is no such thing as a “no cost loan.” They make their money through a “yield spread premium.” So their profit would be charging you 4.4 percent on a 4.3 percent loan — a “spread” of 1 percentage point — for example.

Although there have been several efforts to streamline the closing process, it still can be confusing and you will need to review a mountain of forms. Fully understand what you’re signing.

John F. Wasik is author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream and a Reuters columnist.

Photo: Home for sale in Los Angeles REUTERS/Mario Anzuoni

Cut Your Property Tax Bill

2010-09-09T07:31:00.001-07:00

By John F. Wasik

This may sound crazy, but you need to lower your home’s value.

I’m not suggesting you damage it in any way. Just challenge what your local assessor is saying it’s worth so that you might be able to lower your property taxes. I try and do this every year with some success.

With property values still down across the board in most places, now is the best time to appeal your home’s value. We’re entering the season in which assessors release valuations of how much your home is worth for tax purposes. Their valuation is one part of the basis for your property tax bill. The valuation times local tax rates (for schools, fire protection, etc.) equals your real-estate bill after exemptions and other local factors are applied.

Most counties give you a limited window in which to appeal your valuation – typically about a month. After that, you’ll have to wait until next year to do an appeal. Don’t wait. You’ll need to do a lot of homework to win a successful appeal. Because only 30% of all homeowners appeal their assessment, you have a good chance of getting a hearing on how to lower your valuation.

You will be appealing last’s year valuation – not this year’s – since property taxes apply only to the previous year. So what’s happening in your market now isn’t relevant to your assessor. Also don’t confuse an assessed valuation with a market value. They are not the same thing. A market value goes through a real estate appraisal process for purposes of selling a home. Your local assessor makes a much more basic calculation based on your neighborhood, type of home and improvements.

Here’s what you need to know:

• Is Your Property Record Correct? It’s public information as to how many bedrooms and bathrooms you and your neighbors have. Check your assessment record. If they have you incorrectly listed for an extra bath or finished basement, go right to the assessor to fix that. It could easily lower your tax bill.

• Are comparable homes valued less than yours? Assessors are concerned about consistent valuations. Compare your home with similar houses of equal footage, improvements, lot size and other characteristics. If you file an appeal, you will need “comparable” home examples. Present recent professional appraisals.

• Is your home new? You will need a sales contract to show what you paid. If it declined in value, then make a case with recent sales figures. Any factor that may have caused your home to drop in price should be presented.

Most simple errors can be corrected with your assessor. If that doesn’t work, you can appeal on the county and state levels with real estate boards of appeals.

Keep in mind that most appeals fail because homeowners don’t present the facts logically and succinctly. Most county appeals hearings only give you a few minutes to state your case. If you’re emotional and try to argue based on your gut feeling, you will lose.

You can hire lawyers and appraisers to help in your appeal. If you take them on, make sure you pay them based on contingency or a flat fee. Lawyers will take one-third of your tax savings. Avoid those who bill on an hourly basis.

If you win your appeal, you could save from a few hundred to a thousand dollars on your tax bill.

To most homeowners, lower tax bills are much more alluring than granite counter tops. Your homework is worth the effort, won’t impact your market value and will make your home more appealing when you go to sell.

John F. Wasik is the author of The Cul-de-Sac Syndrome.

Photo: Home for sale in San Francisco. REUTERS/ROBERT GALBRAITH

From reuters.com

Labor Day, Not Groundhog Day

2010-09-06T11:52:00.000-07:00

By John F. Wasik

On Labor Day, I think about sacrifice.

I think of my mother, who passed on Labor Day two years ago after a long struggle with leukemia. She was well educated, yet left school to marry my Dad and raise my three brothers and I. When she became engaged, she was at Mundelein College (now Loyola University Chicago). She could have done anything in the workforce, although at the time, women were mostly teachers and secretaries (she was one at the time). I always wonder what my Mom would've done if she hadn't gone the 1950s route and ended up in tract home in suburbia with squat lawns and squashed ideals.

Without a doubt, I think my Mom could've been a private investigator with the moxie of Lizbeth Salander in the Stieg Larsson series. While I hated "The Girl wit the Dragon Tattoo" -- I thought it was unrealistic -- readers around the world have been captivated by her character.

I also think about my friend Tom Geoghegan, who just wrote "Were You on the Wrong Continent?" (New Press, 2010). I've known Tom for more than 30 years. We met while he was defending a group of steelworkers from the Southeast Side of Chicago who had lost everything when the phony shell company that owned their mill went bankrupt and couldn't pay a single benefit owed them. Tom sued the company and it's sneaky previous owner -- then International Harvester (now Navistar) -- and won them a modest settlement. Not too far from that mill, thousands of workers had won and lost their jobs. Some even lost their lives fighting for their rights such as the 10 workers who were shot by police at nearby Republic Steel on May 30, 1937, the "Memorial Day Massacre."

For the Wisconsin Steelworkers, who were the subject of more than 200 pieces I wrote for (the long-defunct newspaper) Daily Calumet, the settlement was more than about breach of contract. It was the clear dissolution of the great American social contract. Remember that? It was the unwritten deal that a corporate employer would pay for your health care, retirement and attempt to ensure your well being during a working career. That meant freedom from fear, to paraphrase Franklin D. Roosevelt. It was the New Deal writ large and labor unions were the guarantors.

As a Harvard-educated labor lawyer, Geoghegan is acutely aware of how frayed and tattered the social contract has become. Companies close down factories and wreck communities. The workers are left with little to nothing. Globalization forces the business to find cheaper labor in Mexico, China or Viet Nam. It's a constant race to the bottom if you are in a high-wage country. Well, maybe not, and that's the strange interplay of sacrifice and hope when we look at the future of American labor.

Geoghegan sees the European Model of Social Democracy as a beacon in the Western World. Germany offers a prime example. Once ridiculed for its rigid model of union-management partnerships, huge social safety net and six-week vacations, Germany seems to have evaded the ugliest aftershock of globalism.

In the European "worker-first" system, both mothers and fathers get paid leave after the birth of a child; work weeks are shorter; there's lots of vacation time (three times as much as the US); nursing home benefits, national health care and workers who are not only allowed to work with management -- but sit as active members in boardroom decisions.

Is this the horrible socialist peril that ravaged the Soviet Union? Hardly. Social democracy thrives. The Germans have an export surplus, high productivity, a vibrant manufacturing base and low debt. They didn't suffer from a housing meltdown and their banks didn't need bailing out. Of course, German unemployment is still a problem (although it's a few points lower than the US) and taxes are high, yet look what they get for their public-sector dollars.

In the US, even after health and financial reform, we are still hostage to the private insurance industry (with a lot more consumer safeguards) while the biggest banks have grown bigger still to corner even more investment capital.

What about those big, evil European Unions? In Germany, the unions have protected benefits instead of bargaining them away just to survive. Germans have high savings rates and pension plans not tied to the stock market. "Most Germans have big supplements from collective bargaining," writes Geoghegan. In the US, unionized workers are clinging to mostly government sector jobs. The white collar workforce has to deal with endless work without pay, shrinking benefits and uncertain pensions, which are underfunded to the tune of $260 billion.

If Americans can somehow get around the dual dogma that we must be the world's supercop, suppress unions at all cost and assume that corporate interests have primacy, we might be able to see the light that social capitalism -- profits generated in the public welfare -- could work. Obama has certainly tried, only to run into the relentless buzzsaw of corporate-funded propaganda and misplaced Tea Party rants. So I doubt if Geoghegan will change any minds, but his way of illuminating the disparities between corporate capitalism and social capitalism is nothing less than brilliant.

What of labor in this time of dislocation and torment? Can we hope for a rebound on the heels of a technology boom -- think railroads, telegraph, electricity, internal combustion engines and computers? Is there one great wave of innovation that will efficiently employ capital and demand labor? After all, some seven million jobs were lost during the last decade as capital was funneled into financial and real estate speculation.

Capital is more like water than heat. It will accumulate in the lowest point eventually -- whether that represents the cost of labor, materials or both. Here are a few startling possibilities in the Great Reckoning:

* Maybe the social contract was torn up a long time ago and few of us noticed. I have friends facing lay-offs in once-steady jobs in government and places like IBM (I once thought I would have a steady job with Big Blue). It could be that globalism is forcing more of us to be independent contractors and find specialized niches for our products and services (see Tim Ferris's "The Four-Hour Workweek.")

* We will need to use the part of our minds that thinks spatially, non-sequentially, creatively (in language and numbers) and in images and designs. Do we need new homes, medicines, transportation and factories? Very much so. But what they teach in schools with rote learning and old formulas isn't going to cut it. Labor should be infused with imagination not endless meetings and spreadsheets. Enlightened labor rebuilds assembly lines that are more productive.

* Emotional Intelligence Will be Key. It's not about us anymore. It's about competing with the brightest minds in China, India, Taiwan, New York, San Francisco and Sydney. We will need to transcend our skills and backgrounds to create personalities than can deal with change, not routine. Labor has to be smart and savvy, not repetitive and un-inventive.

* Networking will have to be less about the Internet and texting. We will need to understand how people best function in different situations, cultures, work and education environments. Facebook isn't enough. Google isn't enough. An iPhone and iPad won't make us any smarter if we don't learn from others and build on our mistakes.

* We will need to rebuild our view on capital. There's tremendous value in infrastructure such as clean air/water/food, rail lines, broadband, electrical grids and a hundred other things we ascribe to civilization. None of these things are free and if we don't invest in them, we regress in a social sense. As Richard Florida observes in his essential "The Great Reset," it's "important to spend money on the right kinds of infrastructure." In my way of thinking, all public schools and secondary education are essential infrastructure. As we should have modern airports, we need more funding for education on every level. A tax on speculation and carbon could fund this goal.

We've come to a groundhog day as we evaluate how to best employ our labors and capital. We can either put both in a productive mode of social progress or keep squandering it on financial engineering and debt creation. If we are truly to recognize the exchange of labor for money, it's time to stop looking for magical rodents in holes and start digging in for the next century.

John F. Wasik is the author of "The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream."

A New Way to Figure Out How to Retire

2010-09-02T07:30:00.001-07:00

By John F. Wasik

Could you read another report that shows how little Americans have saved for retirement in these troubled times? I know it’s difficult, so I came up with a simple formula for figuring out how much you need.

Pencil in how much money it would take for you to live comfortably for 25 years. Include items that are not covered by insurance – deductibles, travel, home maintenance, taxes. Then project how much Social Security and retirement income you will have by the age in which you cast that not-so-longing last glance at your office door.

The difference between your comfort zone amount and your retirement kitty is the worry gap. That’s the amount you need to make up by working longer, saving aggressively or downsizing your lifestyle.
For millions, the worry gap is a pretty deep crevasse. It’s hard to fill it up with money when your 401(k) is underfunded and the bills keep arriving. In a job-losing, no-raise economy, it looks like a bottomless pit.

A recent survey – one that I always take note of – showed that some two-thirds of those polled in the two lowest pre-retirement income levels will be running short only 10 years into retirement. These folks, as monitored by the annual Employee Benefit Research Institute’s (www.ebri.org) “Retirement Readiness” study, are saving the least for retirement.

Yet even those in the highest-income groups are still going to be facing problems paying for basic expenses and uninsured medical bills. Remember that Medicare has co-pays for hospital and medical services and is in severe fiscal trouble.

The EBRI study also broke down who was most at risk. “Early” boomers (those aged 56-62) had a 47 percent chance of running out of retirement funds. Their younger peers (ages 46-55) and “Generation Xers” (ages 36-45) are about 44 percent at risk.

Where do you stand? If you are going to come up short, there are myriad ways of conquering the worry gap. Here are some options:

• Downsize. Do you expect to live in the same space when you’re older? Can you live in half the square footage? A smaller home or apartment lowers your living costs. A move from a single-family home to a condo, co-op or townhouse can mean lower property taxes, maintenance and financing costs. This makes most sense for empty nesters. The key theme is that the American Dream shouldn’t be tied into the size of your shelter — it should revolve around what you can afford and how much you save.

• Rethink Retirement. For many, completely retreating from the workforce completely is a bad idea. It may lead to poorer health, early death and annoying one’s spouse/partner full time. Being in the workforce longer means continued benefits and the ability to save. You may also get a free match in an employer savings plan. If you suffer from a disabling condition or chronic illness, this is not an option, so look at how you will cover medical expenses.

• Automate Savings. If you’re in a 401(k), sign up for automatic enrollment and increases. If you don’t have to think about contributions, you’ll save more. Even if you don’t have an employer plan, you can set up auto-debits into Individual Retirement Accounts.

• Fund Your Roth. Roth IRAs and 401(k)s are looking good right now. While your contributions are taxed, your withdrawals are not (subject to a few rules). Most retirement plan withdrawals are taxed at full marginal rates. I think income taxes are going up to cover Medicare’s shortfalls, so Roths rule.
The best thing you can do is survey yourself, your family/spouse/partner and take a hard look at your comfort zone. You may have to throw out some preconceptions about retirement, but don’t ignore the possibility that some adjustments may be needed.

John F. Wasik is the author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream (www.culdesacsyndrome.com. From my column on reuters.com)

Five Ways to Cut College Bills

2010-08-25T19:21:00.000-07:00

By John F. Wasik (from my Reuters column)

I can hear the quaver in the voice of my neighbors as they send their children off to college this week. Not only do I sense the emotion of having a child leave home, but the anxiety of what it’s going to cost.

The financial part, at least, doesn’t have to cause insomnia. There are a number of routes to find money for college that few explore. Yet you have to plan ahead to find these sources of cash.

Few comprehend that the rate in increase in college costs has outpaced consumer inflation by a factor of two — from 5 percent to 8 percent. That’s why some 73% of families surveyed by student lender Sallie Mae reported that they were either reducing spending or working more to pay college bills.

With most big states experiencing fiscal crises, state schools, which used to be relative bargains, have been increasingly exposed to college inflation. They’ve had to jack up their tuition bills to cover their expenses.

It’s unlikely that state schools will resolve their fiscal shortfalls any time soon as the housing crisis has devastated state tax revenues.

How about private colleges? They are already charging top dollar — an average $26,273 for tuition alone for the 2009-10 school year, according to The College Board. Combined with room and board and other fees, private colleges are easily billing between $30,000 and $50,000 a year.

But there are a number of ways to cut bills. Here are some of the least known:

* Ask for a Tuition Discount. Most colleges don’t call it this and certainly don’t advertise the fact that they offer reductions from their “sticker” price. Once you’ve completed financial aid forms, ask for additional money off. Always cite special circumstances — loss of parental income, unreimbursed medical care. Put everything on the table and ask for work-study programs and grants (which don’t have to be paid back).
* Go to Community College First. This has become an increasingly popular option. Most colleges have the same core requirements that can be taken at community colleges for a fraction of the cost. Students can also stay at home so you don’t have to pay room and board. About one-third of all college students go the community college route, which charge an average $2,544 annually.
* Grandparents. They can help by either directly paying tuition bills or contributing to a 529 college savings account. While they don’t get a tax deduction for their contribution, the money grows tax deferred in the 529 until it’s withdrawn.
* Hidden Grants and Loans. Do you belong to an ethnic group or service organization? There are thousands of groups that offer scholarships and grants. A great source is the database at www.finaid.com. There’s more than $3 billion available, so do your homework once you get accepted.
* Network. Who in your network can help you? Employers may offer assistance. Affinity groups may have grants. Contact the college to see if departments offer special programs for students in specific majors. Peer-to-peer lending is emerging as an alternative. These networks offer access to direct lending. See www.lendingclub.com, www.prosper.com and www.Greennote.com.

None of these options present easy-money solutions to college financing.

You’ll have to get ahead of the game well before you send out entrance applications; research and negotiations take months to yield results. (Community college is always a viable fall back at the last minute, though).

Going into debt for a six-figure education will set young adults behind if they want to buy a car, home and live a sustainable, happy life. In order to get a decent education, you’ll need to first educate yourself on the myriad opportunities to avoid that debt trap.

John Wasik is the author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.”

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