I was worried about the markets today. March 31, 2010 marks the end of the US Federal Reserve's buying of mortgage backed securities-- an effort to try to stabilize the US housing market, the banking industry and keep the economy from a double dip recession. Year-to-date, the US Fed has purchased nearly $1.5Trillion in troubled mortgage backed securities.
What happened?
Good ole Fannie Mae and Freddie Mac (Government Sponsored Entities) said they will take the Fed's place and purchase MBS to keep the $5Trillion MBS market stable.
Of course no one asked where Fannie and Freddie were going to get the money to do this. After all, the FED can just print the money it wants to spend. But Fannie and Freddie rely on the US government to use US taxpayer dollars to absorb the losses.
Now maybe you understand why the following news report about certain US Government actions taken on Christmas Eve 2009 occurred:
"On Christmas Eve, Treasury's said it would allow the cap on funding commitment under agreements with the two GSEs to "increase as necessary to accommodate any cumulative reduction in net worth over the next three years." This was announced although neither firm is near the original $200 billion per institution limit established under the agreements. Total funding provided under these agreements through the third quarter has been $51 billion to Freddie Mac and $60 billion to Fannie Mae. Treasury also made the requirements to reduce the GSEs portfolios more flexible.
Treasury said it was removing the caps to "leave no uncertainty about the Treasury's commitment to support these firms as they continue to play a vital role in the housing market during this current crisis."
Hmmmmm...
Wednesday, March 31, 2010
Wednesday, March 10, 2010
Pension Confiscation and Haiti
"President Obama has announced that he will push forward with his healthcare plan. Commendably, the president has pledged to avoid adding to the deficit, promising that tax increases and spending cuts will cover the full cost of the overhaul. But one tax increase in the president’s plan spells trouble for the economy. For households with incomes above $200,000 ($250,000 for married couples), the 2.9 percent Medicare payroll tax on labor income would be extended to interest, dividends, capital gains, and profits from passive investments in partnerships and S corporations." (Associated Press 2010.03.09)
Now we could say, Good! Let's soak those rich bastards! But after the cheering and more importantly after it actually occurs, here is then what happens to the rest of us working stiffs.
(1) There is no way to safely get gains greater than 2.9% and still make a profits so conservative investing techniques slow down.
(2) Remember that the 2.9% medicare tax is in addition to any income tax applicable to the gain also, so the return needs to be well above 5% to make any money at all.
(3) To get the higher gains, the risk is too great.
(4) Investment stops by the top 1% of the country-- who do most of the investing anyway.
(5) Financial firms lay off people.
(6) Financial (brokerage) firms pay less taxes because their profits fall.
(7) Investment arms of banks close - more layoffs more decreased taxes.
(8) The value of securities fall overall because the market for securities has been destroyed.
(9) Pension plans that are holding securities find their asset balances falling below solvency levels established by the federal government.
(10) Failing pension plans are forced to turnover their assets to the US Government's Pension Benefit Guaranty Corporation resulting in benefit cuts to the affected people.
(11) The unaffected people with 401K savings find their nest eggs now having been decimated by the same events turn to the government which will require them to turn over to the government all of your savings in return for a government supplied annuity.
(12) Argentina Redux. "come to papa.".
Now we could say, Good! Let's soak those rich bastards! But after the cheering and more importantly after it actually occurs, here is then what happens to the rest of us working stiffs.
(1) There is no way to safely get gains greater than 2.9% and still make a profits so conservative investing techniques slow down.
(2) Remember that the 2.9% medicare tax is in addition to any income tax applicable to the gain also, so the return needs to be well above 5% to make any money at all.
(3) To get the higher gains, the risk is too great.
(4) Investment stops by the top 1% of the country-- who do most of the investing anyway.
(5) Financial firms lay off people.
(6) Financial (brokerage) firms pay less taxes because their profits fall.
(7) Investment arms of banks close - more layoffs more decreased taxes.
(8) The value of securities fall overall because the market for securities has been destroyed.
(9) Pension plans that are holding securities find their asset balances falling below solvency levels established by the federal government.
(10) Failing pension plans are forced to turnover their assets to the US Government's Pension Benefit Guaranty Corporation resulting in benefit cuts to the affected people.
(11) The unaffected people with 401K savings find their nest eggs now having been decimated by the same events turn to the government which will require them to turn over to the government all of your savings in return for a government supplied annuity.
(12) Argentina Redux. "come to papa.".
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