Say Goodbye to Your Retirement and 401K

[bcassill]

The hacks on Wall Street are at it again. They know that the debt bubble continues to implode, the FED is out of bullets, and with it the giant derivatives Ponzi scheme. The financial house of cards is collapsing for lack of liquidity and, more importantly, credit, the very life blood modern finance. Every dollar that is destroyed due to a default on a credit card, business loan, or mortgage is a dollar that is sucked from the economy. In the modern economy money is created as an instrument of debt, a promise to pay someone back. Normally, this debt is backed by a hard asset (like a home or auto) or by your willingness to trade your productive labor. In recent years, however, credit was extended to finance anything that could produce a revenue stream. This is the underlying mechanism for the carry trade (i.e. borrowing a currency at low interest rates and investing it in another nation's bonds or equities markets) and other speculative financial activities like borrowing money to purchase mortgage securities from a pool of subprime mortgages that have been fraudulently rated AAA by a complicit ratings agency. If you are going to speculate, it is always better to do it with someone else's money. Borrowing to invest in speculative investments is called "leverage" and it allows you to use just a little bit of your own money and a whole lot of other money created out of thin air to go and play the markets. This is the reason why the American financial sector, alone, has almost as much total debt as all of the business and consumer debt in the United States combined. This is the REAL reason behind the current crisis. People running up their credit cards and buying houses they couldn't afford is only a very, very small part of the story. The real crime is the borrowing of money by Wall Street firms and major banks around the world to engage in speculative trading activities.

The problem now is that the only party extending cheap credit is the FED through their ability to print money. Everyone knows that they cannot continue doing this without creating a hyperinflationary death spiral. They need to keep the game going with another source of cheap money, but how?

The answer is your retirement funds. Your social security was spent long ago by profligate politicians, but there are trillions in 401K's and pension funds all over the country waiting to be tapped if they could only get their hands on it. They know that no one is crazy enough to voluntarily give up their money, so they need a little spin. The scam works something like this.

Someone says "Hey, people are losing their retirement money. That's wrong. We need a way to protect people's retirement savings with an iron clad guarantee! The government needs to do something about this!" So, the government steps in and takes your money and gives you an IOU that says you will get a "guaranteed" pension when you retire. Sound familiar? ("social security, cough, social security"). The government then turns around and allows Wall Street access to those trillions and trillions of dollars that were just sitting there on the sidelines.

Gene J. Koprowski of the Money News has this to say:

Unions Want to Take Over Your 401(k)

One of the nation's largest labor unions, the Service Employees International Union (SEIU), is promoting a plan that will centralize all retirement plans for American workers, including private 401(k) plans, under one new "retirement system" for the United States.

In effect, government pensions for everyone, not unlike the European system and regardless of personal choice.

The SEIU, which was integral to the election of Barack Obama as president (emphasis mine), is working with the left-leaning Economic Policy Institute (EPI), and the National Committee to Preserve Social Security and Medicare, on SEIU's plan, called "the Retirement USA Initiative."

Claiming that the retirement system in place now has "failed most Americans," EPI vice president Ross Eisenbrey, told a labor union publication that "account balances have fallen by a third since late 2007, leaving many older workers unable to retire just as our economy is shedding millions of jobs.”

And from the SEIU's own blog:

SEIU, Coalition Partners Launch Retirement USA Initiative

Initiative will work to establish principles for a visionary retirement income system

SEIU partnered with The Economic Policy Institute (EPI), the National Committee to Preserve Social Security and Medicare and the Pensions Rights Center to launch Retirement USA, an initiative working for a new retirement system that, along with Social Security, will provide universal, secure, and adequate income for future retirees.

Why do we need the Retirement USA Initiative?
Because the system we have now has failed most Americans---a harsh reality that EPI Vice-President Ross Eisenbrey spelled out at the launch of the initiative yesterday:

"Only half of full-time workers have a retirement plan through their employer, and coverage is much lower for part-time workers. Participating in a plan doesn't mean a worker is adequately preparing for retirement. The median 401(k) account balance was only $25,000 in 2006---$40,000 for workers approaching retirement age. In other words, half of those who had a 401(k) were nearing retirement with less than $40,000 in their account. "Account balances have fallen by a third since late 2007, leaving many older workers unable to retire just as our economy is shedding millions of jobs. The failure is broad and deep. It's not just a few people falling through the cracks: most of us are already in the ravine. In the private sector, only two in 10 of us have a secure pension. Three in 10 have only a 401(k) or similar savings plan-and the rest of us are totally out of luck."

The Retirement USA principles will be used by SEIU and its partner organizations in this initiative as a framework for evaluating how well proposals would fulfill the goals of universal coverage, and secure and adequate income. The principals would include concepts such as:

• Pooled assets that are professionally managed; (emphasis mine)
  
• Shared responsibility among employers, employees and the government;
  
• Payouts only at retirement;
  
• Benefits that could move with you even if you change jobs

"The financial crisis and the economic recession have shone a spotlight on the inadequacies of today's system," said Stephen Abrecht, Director of Benefits and Capital Stewardship for SEIU. "The time to act is now."
Karen Ferguson, director of the Pension Rights Center, has invited others to submit proposals for a new system, which will be examined at the fall conference. Proposals will be posted on the Retirement USA web site at www.retirement-usa.org.

Of course, this wouldn't work if the government just mandated it. People might get mad. You need a "consumer friendly" complicit union or other entity to come up with the idea first.

The funny thing (or not so funny) is that folks like former Treasury Secretary Paulson are making noises as to the insolvency of Social Security and Medicare. "Sorry, we already spent the money. Sucks for you." Of course, it'll all be blamed on the bad economy, the avalanche of retiring Baby Boomers, and the fact that no one "saw the crisis coming" until it was too late. You can be sure to get a similar sob story about your "guaranteed" retirement pension when the bill comes due.

Meanwhile, the Criminal Oligarchs of Wall Street will have enjoyed another streak of record breaking bonuses over the next few years while the rest of the nation sinks deeper and deeper into economic depression.

If it is not clear to you now that Obama and fellow cabinet members Summers, Geither, et. al. are nothing more than whores of the Wall Street money interests (just like the last President and the one before that), then maybe a little refresher of the Lehman smoking gun might jog your memory:

Senator Kaufman Makes A Stand Against The Criminality Exposed By The Lehman Examiner Report, Questions The Core Principles Of US Democracy

How Lehman, With The Fed's Complicity, Created Another Illegal Precedent In Abusing The Primary Dealer Credit Facility

Lehman Brothers Dies While Getting Away With Murder: Regulatory Capture

The "Repo 105" Scam: How Lehman Fooled Everyone (Including Allegedly Dick Fuld) And How Other Banks Are Likely Doing This Right Now

Presenting The Lehman Bankruptcy Examiner Report

Ratigan And Spitzer Discuss Repo 105, Conclude "Civil Cases Will Be Brought"

These stories basically show that the NY Fed and the SEC had full knowledge of Lehman's securities fraud. And the person in the middle? Why none other than our friend Turbo Timmy Geithner.

Wresting control back from these greedy, evil morons will not be easy. These folks are not going away quietly. This process is not going to be quick or clean.

[Raz]

Re: Say Goodbye to Your Retirement and 401K

The hacks on Wall Street are at it again. They know that the debt bubble continues to implode, the FED is out of bullets, and with it the giant derivatives Ponzi scheme. The financial house of cards is collapsing for lack of liquidity and, more importantly, credit, the very life blood modern finance. Every dollar that is destroyed due to a default on a credit card, business loan, or mortgage is a dollar that is sucked from the economy. In the modern economy money is created as an instrument of debt, a promise to pay someone back. Normally, this debt is backed by a hard asset (like a home or auto) or by your willingness to trade your productive labor. In recent years, however, credit was extended to finance anything that could produce a revenue stream. This is the underlying mechanism for the carry trade (i.e. borrowing a currency at low interest rates and investing it in another nation's bonds or equities markets) and other speculative financial activities like borrowing money to purchase mortgage securities from a pool of subprime mortgages that have been fraudulently rated AAA by a complicit ratings agency. If you are going to speculate, it is always better to do it with someone else's money. Borrowing to invest in speculative investments is called "leverage" and it allows you to use just a little bit of your own money and a whole lot of other money created out of thin air to go and play the markets. This is the reason why the American financial sector, alone, has almost as much total debt as all of the business and consumer debt in the United States combined. This is the REAL reason behind the current crisis. People running up their credit cards and buying houses they couldn't afford is only a very, very small part of the story. The real crime is the borrowing of money by Wall Street firms and major banks around the world to engage in speculative trading activities.

The problem now is that the only party extending cheap credit is the FED through their ability to print money. Everyone knows that they cannot continue doing this without creating a hyperinflationary death spiral. They need to keep the game going with another source of cheap money, but how?

The answer is your retirement funds. Your social security was spent long ago by profligate politicians, but there are trillions in 401K's and pension funds all over the country waiting to be tapped if they could only get their hands on it. ...

If it is not clear to you now that Obama and fellow cabinet members Summers, Geither, et. al. are nothing more than whores of the Wall Street money interests (just like the last President and the one before that), then maybe a little refresher of the Lehman smoking gun might jog your memory:

Senator Kaufman Makes A Stand Against The Criminality Exposed By The Lehman Examiner Report, Questions The Core Principles Of US Democracy

How Lehman, With The Fed's Complicity, Created Another Illegal Precedent In Abusing The Primary Dealer Credit Facility

Lehman Brothers Dies While Getting Away With Murder: Regulatory Capture

The "Repo 105" Scam: How Lehman Fooled Everyone (Including Allegedly Dick Fuld) And How Other Banks Are Likely Doing This Right Now

Presenting The Lehman Bankruptcy Examiner Report

Ratigan And Spitzer Discuss Repo 105, Conclude "Civil Cases Will Be Brought"

These stories basically show that the NY Fed and the SEC had full knowledge of Lehman's securities fraud. And the person in the middle? Why none other than our friend Turbo Timmy Geithner.

Wresting control back from these greedy, evil morons will not be easy. These folks are not going away quietly. This process is not going to be quick or clean.

Thanks, bcassill. You get it.
But untill everyone "gets it" there will be no "change that we can believe in".

[charliebrown]

Re: Say Goodbye to Your Retirement and 401K

If they do this it will be wor. I will yank my funds if possible, pay all the penalties and go JTABEB. I am already pulling all my funds out of vang treas mm. There is zero yield, and after the sunday night circus, I no longer wish to fund the fed gvt. I know someone out there will scoop up my tbills, but I can't control that. I can control myself.

[jimmygu3]

Re: Say Goodbye to Your Retirement and 401K

Gene J. Koprowski of the Money News has this to say:

Unions Want to Take Over Your 401(k)

One of the nation's largest labor unions, the Service Employees International Union (SEIU), is promoting a plan that will centralize all retirement plans for American workers, including private 401(k) plans, under one new "retirement system" for the United States.

In effect, government pensions for everyone, not unlike the European system and regardless of personal choice.

The SEIU, which was integral to the election of Barack Obama as president (emphasis mine), is working with the left-leaning Economic Policy Institute (EPI), and the National Committee to Preserve Social Security and Medicare, on SEIU's plan, called "the Retirement USA Initiative."

Claiming that the retirement system in place now has "failed most Americans," EPI vice president Ross Eisenbrey, told a labor union publication that "account balances have fallen by a third since late 2007, leaving many older workers unable to retire just as our economy is shedding millions of jobs.”

And from the SEIU's own blog:

SEIU, Coalition Partners Launch Retirement USA Initiative

Initiative will work to establish principles for a visionary retirement income system

SEIU partnered with The Economic Policy Institute (EPI), the National Committee to Preserve Social Security and Medicare and the Pensions Rights Center to launch Retirement USA, an initiative working for a new retirement system that, along with Social Security, will provide universal, secure, and adequate income for future retirees.

Why do we need the Retirement USA Initiative?
Because the system we have now has failed most Americans---a harsh reality that EPI Vice-President Ross Eisenbrey spelled out at the launch of the initiative yesterday:

"Only half of full-time workers have a retirement plan through their employer, and coverage is much lower for part-time workers. Participating in a plan doesn't mean a worker is adequately preparing for retirement. The median 401(k) account balance was only $25,000 in 2006---$40,000 for workers approaching retirement age. In other words, half of those who had a 401(k) were nearing retirement with less than $40,000 in their account. "Account balances have fallen by a third since late 2007, leaving many older workers unable to retire just as our economy is shedding millions of jobs. The failure is broad and deep. It's not just a few people falling through the cracks: most of us are already in the ravine. In the private sector, only two in 10 of us have a secure pension. Three in 10 have only a 401(k) or similar savings plan-and the rest of us are totally out of luck."

The Retirement USA principles will be used by SEIU and its partner organizations in this initiative as a framework for evaluating how well proposals would fulfill the goals of universal coverage, and secure and adequate income. The principals would include concepts such as:

• Pooled assets that are professionally managed; (emphasis mine)
  
• Shared responsibility among employers, employees and the government;
  
• Payouts only at retirement;
  
• Benefits that could move with you even if you change jobs

"The financial crisis and the economic recession have shone a spotlight on the inadequacies of today's system," said Stephen Abrecht, Director of Benefits and Capital Stewardship for SEIU. "The time to act is now."
Karen Ferguson, director of the Pension Rights Center, has invited others to submit proposals for a new system, which will be examined at the fall conference. Proposals will be posted on the Retirement USA web site at www.retirement-usa.org.

Of course, this wouldn't work if the government just mandated it. People might get mad. You need a "consumer friendly" complicit union or other entity to come up with the idea first.

The funny thing (or not so funny) is that folks like former Treasury Secretary Paulson are making noises as to the insolvency of Social Security and Medicare. "Sorry, we already spent the money. Sucks for you." Of course, it'll all be blamed on the bad economy, the avalanche of retiring Baby Boomers, and the fact that no one "saw the crisis coming" until it was too late. You can be sure to get a similar sob story about your "guaranteed" retirement pension when the bill comes due.

Meanwhile, the Criminal Oligarchs of Wall Street will have enjoyed another streak of record breaking bonuses over the next few years while the rest of the nation sinks deeper and deeper into economic depression.

If it is not clear to you now that Obama and fellow cabinet members Summers, Geither, et. al. are nothing more than whores of the Wall Street money interests (just like the last President and the one before that), then maybe a little refresher of the Lehman smoking gun might jog your memory:

Senator Kaufman Makes A Stand Against The Criminality Exposed By The Lehman Examiner Report, Questions The Core Principles Of US Democracy

How Lehman, With The Fed's Complicity, Created Another Illegal Precedent In Abusing The Primary Dealer Credit Facility

Lehman Brothers Dies While Getting Away With Murder: Regulatory Capture

The "Repo 105" Scam: How Lehman Fooled Everyone (Including Allegedly Dick Fuld) And How Other Banks Are Likely Doing This Right Now

Presenting The Lehman Bankruptcy Examiner Report

Ratigan And Spitzer Discuss Repo 105, Conclude "Civil Cases Will Be Brought"

These stories basically show that the NY Fed and the SEC had full knowledge of Lehman's securities fraud. And the person in the middle? Why none other than our friend Turbo Timmy Geithner.

Wresting control back from these greedy, evil morons will not be easy. These folks are not going away quietly. This process is not going to be quick or clean.

Just a couple reality checks here. Moneynews.com is part of far-right-wing Newsmax, so consider the source. The SEIU has 2 million members across the US, Mexico and Canada, so they represent less than one half of one percent of the US population. There is no evidence that the Obama administration supports their stupid plan.

Interesting that 'Bush-can-do-no-wrong' cheerleaders Newsmax are the source of the main story of your post, but then you go on to reference Lehman links, which is a scandal and crisis from the Bush administration. Oh, nevermind. Obama's a commie who wants to take our retirement funds. Run for the hills!

-Jimmy

[don]

Re: Say Goodbye to Your Retirement and 401K

Just a couple reality checks here. Moneynews.com is part of far-right-wing Newsmax, so consider the source. The SEIU has 2 million members across the US, Mexico and Canada, so they represent less than one half of one percent of the US population. There is no evidence that the Obama administration supports their stupid plan.

Interesting that 'Bush-can-do-no-wrong' cheerleaders Newsmax are the source of the main story of your post, but then you go on to reference Lehman links, which is a scandal and crisis from the Bush administration. Oh, nevermind. Obama's a commie who wants to take our retirement funds. Run for the hills!

-Jimmy

Jimmy, you left out the part about Obama taking our guns :rolleyes:

[ASH]

Re: Say Goodbye to Your Retirement and 401K

The problem now is that the only party extending cheap credit is the FED through their ability to print money. Everyone knows that they cannot continue doing this without creating a hyperinflationary death spiral.

I don't think it is as simple as that. (It probably isn't as simple as I'm going to describe it, either.)

Lets say a bank over-leverages its capital to speculate by buying what turns out to be a junk asset, such as a MBS with a high loan default rate. Now there is a deflationary problem, because losses recognized on that asset eat into the bank's capital, and threaten the bank with insolvency. Fractional reserve lending (a form of leverage) works in both directions. You can create a lot of money lending against a small pool of reserve capital, but if losses eat into that small pool of capital, the same leverage acts to reduce your ability to lend.

So the Fed buys the junk asset from the bank and pays the bank by creating reserves out of thin air (as one does). Now the bank no longer has a solvency problem and the junk asset is on the balance sheet of the Fed. Creating the reserves to pay for the junk asset solved the bank's (deflationary) solvency problem. However, depending how much the Fed paid for the bad asset, it's not necessarily the case that the bank ends up with reserves in excess of what it needs to cover other losses (which would be a future inflationary problem). Yes, bank reserves are sky-high right now, but the reason for that is that banks continue to take loan losses on the rest of their portfolios, and -- some semblance of sanity having returned to loan issuance -- there aren't as many good credit risks out there to lend to. The bad asset was a widening hole in the bank's capital which the Fed filled in. If you think about it, the Fed is essentially replacing some of the money that was created when the bank over-leveraged to buy the bad asset in the first place, rather than adding net new money to the system. My point is that money-printing to buy bad assets is balanced by money destruction caused by those assets going bad; it is categorically different than when a central bank monetizes its government's debt without any balancing destruction of money.

Monetization threatens hyperinflation if it rapidly increases the supply of spendable money, as it would if the Fed were buying larger and larger quantities of Treasury bills, and the Treasury were spending the proceeds from those bond sales. However, printing money to buy bad assets from banks in order to keep them solvent doesn't necessarily result in an increase of spendable money -- it merely prevents the banks from failing. This game, which helped to arrest a deflationary spiral (suspension of mark-to-market was also a big help) isn't really constrained by the threat of hyperinflation in the same way that monetizing Treasuries is.

Of course, there is the problem of getting those bad assets off the Fed's balance sheet in the event that if over-shoots and needs to suck up excess reserves. But that's another debate.

Someone says "Hey, people are losing their retirement money. That's wrong. We need a way to protect people's retirement savings with an iron clad guarantee! The government needs to do something about this!" So, the government steps in and takes your money and gives you an IOU that says you will get a "guaranteed" pension when you retire. Sound familiar? ("social security, cough, social security"). The government then turns around and allows Wall Street access to those trillions and trillions of dollars that were just sitting there on the sidelines.

I think this is backwards. Wall Street already has access to America's retirement savings in IRAs and 401(k)s, and is used to collecting nice management and trading fees from that money. The tax advantages for IRAs and 401(k)s is very similar to the mortgage tax deduction -- it has the effect of channeling money into mutual funds and brokerage accounts run by Wall Street, much as the mortgage tax deduction helps the real estate industry.

Wall Street is not behind the initiative to convert individual retirement accounts into government bond schemes. Wall Street makes far more money on managing funds and trading fees than it could possibly make on managing the same amount of money in staid bond portfolios.

The factions that want this are (a) the government (which needs someone to buy its bonds), and (b) progressive idealists who actually see this as an anti-Wall Street measure (and who don't understand economics well enough to understand the problems with funding retirement from government bonds).

[jtabeb]

Re: Say Goodbye to Your Retirement and 401K

If they do this it will be wor. I will yank my funds if possible, pay all the penalties and go JTABEB. I am already pulling all my funds out of vang treas mm. There is zero yield, and after the sunday night circus, I no longer wish to fund the fed gvt. I know someone out there will scoop up my tbills, but I can't control that. I can control myself.

By the time they DO THIS, it will be too late. If you HAVEN'T MOVED BEFORE IT HAPPENS, you get trapped like a rat on a sinking ship full of hungry cats.

Get it?

(Not picking on you, just trying to send a word to the wise for the good of all)

[jtabeb]

Re: Say Goodbye to Your Retirement and 401K

I don't think it is as simple as that. (It probably isn't as simple as I'm going to describe it, either.)

Lets say a bank over-leverages its capital to speculate by buying what turns out to be a junk asset, such as a MBS with a high loan default rate. Now there is a deflationary problem, because losses recognized on that asset eat into the bank's capital, and threaten the bank with insolvency. Fractional reserve lending (a form of leverage) works in both directions. You can create a lot of money lending against a small pool of reserve capital, but if losses eat into that small pool of capital, the same leverage acts to reduce your ability to lend.

So the Fed buys the junk asset from the bank and pays the bank by creating reserves out of thin air (as one does). Now the bank no longer has a solvency problem and the junk asset is on the balance sheet of the Fed. Creating the reserves to pay for the junk asset solved the bank's (deflationary) solvency problem. However, depending how much the Fed paid for the bad asset, it's not necessarily the case that the bank ends up with reserves in excess of what it needs to cover other losses (which would be a future inflationary problem). Yes, bank reserves are sky-high right now, but the reason for that is that banks continue to take loan losses on the rest of their portfolios, and -- some semblance of sanity having returned to loan issuance -- there aren't as many good credit risks out there to lend to. The bad asset was a widening hole in the bank's capital which the Fed filled in. If you think about it, the Fed is essentially replacing some of the money that was created when the bank over-leveraged to buy the bad asset in the first place, rather than adding net new money to the system. My point is that money-printing to buy bad assets is balanced by money destruction caused by those assets going bad; it is categorically different than when a central bank monetizes its government's debt without any balancing destruction of money.

Monetization threatens hyperinflation if it rapidly increases the supply of spendable money, as it would if the Fed were buying larger and larger quantities of Treasury bills, and the Treasury were spending the proceeds from those bond sales. However, printing money to buy bad assets from banks in order to keep them solvent doesn't necessarily result in an increase of spendable money -- it merely prevents the banks from failing. This game, which helped to arrest a deflationary spiral (suspension of mark-to-market was also a big help) isn't really constrained by the threat of hyperinflation in the same way that monetizing Treasuries is.

Of course, there is the problem of getting those bad assets off the Fed's balance sheet in the event that if over-shoots and needs to suck up excess reserves. But that's another debate.



I think this is backwards. Wall Street already has access to America's retirement savings in IRAs and 401(k)s, and is used to collecting nice management and trading fees from that money. The tax advantages for IRAs and 401(k)s is very similar to the mortgage tax deduction -- it has the effect of channeling money into mutual funds and brokerage accounts run by Wall Street, much as the mortgage tax deduction helps the real estate industry.

Wall Street is not behind the initiative to convert individual retirement accounts into government bond schemes. Wall Street makes far more money on managing funds and trading fees than it could possibly make on managing the same amount of money in staid bond portfolios.

The factions that want this are (a) the government (which needs someone to buy its bonds), and (b) progressive idealists who actually see this as an anti-Wall Street measure (and who don't understand economics well enough to understand the problems with funding retirement from government bonds).

Sorry man, I respectfully disagree with all the above.

Please read this, and then tell me what the differences are (change church lands for bad assets or government bonds, but SERIOUSLY that's about it!)

This has happened before and it is a well understood process, it AIN'T different this time. (Notice this is during the REPUBLIC period, AFTER the fall of the Monarchy)


I shit you negative, I read this and I see NO meaningful difference between then and now.

But don't take my word for it. Read it yourself and YOU CAN point out the differences that I missed. (Hint, I don't think you will find any, but MAKE SURE YOU TELL ME IF YOU DO!)

http://mises.org/books/inflationinfrance.pdf

[sunskyfan]

Re: Say Goodbye to Your Retirement and 401K

I think the problem is that the 401ks are already gone and the losses have not been "realized". This is the floating lie that we currently live with. To prevent political revolution the Hobson's Choice will be made to convert your worthless 401k to government promises. I am pretty convinced that this will happen.

As for the FED holding on to bad assets the question becomes, are there any obligations carried with these assets beyond the financial ones? For instance, if the FED owns an house and keeps it empty to prevent legal obligations of ownership to actualize who pays the taxes for the fire department and the the schools not to mention the political disruption when people connect their home price stagnation to the FED owned house across the street not to mention the homeless jobless guy's resentment that the house stands empty.

[bcassill]

Re: Say Goodbye to Your Retirement and 401K

I don't think it is as simple as that. (It probably isn't as simple as I'm going to describe it, either.)

Lets say a bank over-leverages its capital to speculate by buying what turns out to be a junk asset, such as a MBS with a high loan default rate. Now there is a deflationary problem, because losses recognized on that asset eat into the bank's capital, and threaten the bank with insolvency. Fractional reserve lending (a form of leverage) works in both directions. You can create a lot of money lending against a small pool of reserve capital, but if losses eat into that small pool of capital, the same leverage acts to reduce your ability to lend.

So the Fed buys the junk asset from the bank and pays the bank by creating reserves out of thin air (as one does). Now the bank no longer has a solvency problem and the junk asset is on the balance sheet of the Fed. Creating the reserves to pay for the junk asset solved the bank's (deflationary) solvency problem. However, depending how much the Fed paid for the bad asset, it's not necessarily the case that the bank ends up with reserves in excess of what it needs to cover other losses (which would be a future inflationary problem). Yes, bank reserves are sky-high right now, but the reason for that is that banks continue to take loan losses on the rest of their portfolios, and -- some semblance of sanity having returned to loan issuance -- there aren't as many good credit risks out there to lend to. The bad asset was a widening hole in the bank's capital which the Fed filled in. If you think about it, the Fed is essentially replacing some of the money that was created when the bank over-leveraged to buy the bad asset in the first place, rather than adding net new money to the system. My point is that money-printing to buy bad assets is balanced by money destruction caused by those assets going bad; it is categorically different than when a central bank monetizes its government's debt without any balancing destruction of money.

Monetization threatens hyperinflation if it rapidly increases the supply of spendable money, as it would if the Fed were buying larger and larger quantities of Treasury bills, and the Treasury were spending the proceeds from those bond sales. However, printing money to buy bad assets from banks in order to keep them solvent doesn't necessarily result in an increase of spendable money -- it merely prevents the banks from failing. This game, which helped to arrest a deflationary spiral (suspension of mark-to-market was also a big help) isn't really constrained by the threat of hyperinflation in the same way that monetizing Treasuries is.

Of course, there is the problem of getting those bad assets off the Fed's balance sheet in the event that if over-shoots and needs to suck up excess reserves. But that's another debate.



I think this is backwards. Wall Street already has access to America's retirement savings in IRAs and 401(k)s, and is used to collecting nice management and trading fees from that money. The tax advantages for IRAs and 401(k)s is very similar to the mortgage tax deduction -- it has the effect of channeling money into mutual funds and brokerage accounts run by Wall Street, much as the mortgage tax deduction helps the real estate industry.

Wall Street is not behind the initiative to convert individual retirement accounts into government bond schemes. Wall Street makes far more money on managing funds and trading fees than it could possibly make on managing the same amount of money in staid bond portfolios.

The factions that want this are (a) the government (which needs someone to buy its bonds), and (b) progressive idealists who actually see this as an anti-Wall Street measure (and who don't understand economics well enough to understand the problems with funding retirement from government bonds).

Your points are well taken. However, per your third paragraph above "So the Fed buys the junk asset from the bank and pays the bank by creating reserves out of thin air (as one does).", the result of the Fed exchanging newly printed money for bad assets with the banks is not a net-net operation. What you have to consider is that much of those "bad" assets are leveraged or in other words were originally paid for with credit. As the value of these securities collapses due to defaults and declines in the value of the underlying secured assets, the credit to purchase the security would simply be written off like any other loan gone bad. The problem is that the Fed is trading HARD CURRENCY for credit, hence everyone's concern about the $1 trillion in reserves the banks have sitting with the Fed. Much of the excess money not on reserve has already made it's way into the open economy courtesy of the Fed's open market purchase operations (why do you think that the stock market has been in an almost vertical climb since March '09).

Your last paragraph is only partially true. As a rule, Wall Street firms cannot use or borrow against 401K and pension funds for speculative investment purposes like they can with something like Money Market accounts which firms used for short term liquidity in the past (this is how off balance sheet entities like SIV's were financed: borrow short term from the money markets and buy long term higher yield mortgage securities all the while using the commercial paper market to roll over your short term debt over and over). Essentially, the plan under discussion has raised it's ugly head in many guises from a voluntary program of rolling part of your 401K into US Treasuries to cooked up schemes like this that would essentially allow the government to use your hard earned savings for various programs to "support" market operations via the Fed and U.S. Treasury much like they are already doing with the printing press. You get an IOU, they get your money, and the Wall Street fat cats continue to get their subsidized bonuses courtesy of you, the tax payer. :eek::mad:

[aaron]

Re: Say Goodbye to Your Retirement and 401K

Every dollar that is destroyed due to a default on a credit card, business loan, or mortgage is a dollar that is sucked from the economy. In the modern economy money is created as an instrument of debt, a promise to pay someone back.

Aren't defaults inflationary? All that money that would have been paid back to the bank (destroyed) is now left in the economy. I know I have a lot more money to spend than before.

[ASH]

Re: Say Goodbye to Your Retirement and 401K

Sorry man, I respectfully disagree with all the above.

Please read this, and then tell me the differences are (change curch lands for bad assets or government bonds, but SERIOUSLY that's about it!)

Hey JT -- thanks for the link, but I don't have time to read 77 pages right now. I think the difference you are looking for is clearly stated in my original post. There is a difference between monetizing Treasury bonds without an offsetting reduction in the money supply (which has a good analogy to your French example), and monetizing bad assets to make good inadequate bank capitalization.

In one case, you can get hyperinflation because the money that is created to buy bonds is spent by the government, increasing the amount of money in circulation, and reducing its purchasing power accordingly. When the central bank is a tool of the central government, then the amount of money which is 'printed' is determined by the funding needs of the government, and the system is susceptible to a positive feedback loop.

In the second case, the money that is created replaces bank capital that was destroyed by loan defaults, or collapse of an inflated asset valuation. The amount that is 'printed' isn't determined by anyone's need to spend, but rather by the deficiency of bank capital that must be made good. Nor is the new money spent -- it goes to rebuilding the capital which supports existing accounts rather than becoming the basis for new lending. This type of policy is likely to lead to inflation because of overshoot, lag, and other imperfections... but unlike your example or the case of monetizing and spending government bonds, there is no positive feedback loop to close. The inflation which results from excess bank reserves (overshoot) when lending eventually picks up is not a forcing function for further monetization that would increase reserves.

[bcassill]

Re: Say Goodbye to Your Retirement and 401K

Thanks, bcassill. You get it.
But untill everyone "gets it" there will be no "change that we can believe in".

The really sad fact is that I actually voted for the guy (Nobama). I really couldn't vote for McCain after Gramm's "We're a nation of whiners, and we're in a mental recession." comment. That and Palin simply scared the hell out of me given McCain's age, and her seeming inability to grasp basic policy issues: "Drill baby, drill. And I've got foreign policy experience because my state is next to Russia." Personally, I've always thought McCain was an alright guy, though looking back on it, his campaign was likely every bit as infested with Wall Street roaches as Obama's turned out to be.

[jtabeb]

Re: Say Goodbye to Your Retirement and 401K

Hey JT -- thanks for the link, but I don't have time to read 77 pages right now. I think the difference you are looking for is clearly stated in my original post. There is a difference between monetizing Treasury bonds without an offsetting reduction in the money supply (which has a good analogy to your French example), and monetizing bad assets to make good inadequate bank capitalization.

In one case, you can get hyperinflation because the money that is created to buy bonds is spent by the government, increasing the amount of money in circulation, and reducing its purchasing power accordingly. When the central bank is a tool of the central government, then the amount of money which is 'printed' is determined by the funding needs of the government, and the system is susceptible to a positive feedback loop.

In the second case, the money that is created replaces bank capital that was destroyed by loan defaults, or collapse of an inflated asset valuation. The amount that is 'printed' isn't determined by anyone's need to spend, but rather by the deficiency of bank capital that must be made good. Nor is the new money spent -- it goes to rebuilding the capital which supports existing accounts rather than becoming the basis for new lending. This type of policy is likely to lead to inflation because of overshoot, lag, and other imperfections... but unlike your example or the case of monetizing and spending government bonds, there is no positive feedback loop to close. The inflation which results from excess bank reserves (overshoot) when lending eventually picks up is not a forcing function for further monetization that would increase reserves.

If THAT's the best you got ASH, I'd suggest it's REALLY time for you to pour through those 77 pages. (I think you'll find all the above points CONTRADICTED by historical example).

Hence my claim "It's NOT different, this time".

[radon]

Re: Say Goodbye to Your Retirement and 401K

In the second case, the money that is created replaces bank capital that was destroyed by loan defaults, or collapse of an inflated asset valuation. The amount that is 'printed' isn't determined by anyone's need to spend, but rather by the deficiency of bank capital that must be made good. Nor is the new money spent -- it goes to rebuilding the capital which supports existing accounts rather than becoming the basis for new lending.

This is an important distinction. Creating money like this only legitimizes past inflation by preserving the book value of assets. It cannot fuel new inflation because it doesn't expand the capital base nor does it leave the banking system.