Money, Wealth and You, Part 2: A brief review of reality

1.  American Pensions

Following is from John Batchelor Show Schedule March 5, 2013. I don't know who wrote this  summary for a show segment but the remark at the end about "selfish Boomers" is silly. The rest is not.

Washington State’s Pensions in Crisis Too

Add Washington to the list of blue states with grossly underfunded public pension systems. A great new investigative piece in the Seattle Times finds that the state is using fanciful figures to provide teachers and taxpayers with misleading assurances about the safety of the pension system, one of the largest in the nation:

After consulting with several economists and pension experts, The Times decided to use discount rates derived from yields on long-term state general-obligation bonds, matched to each individual plan’s duration. The rates ranged from 3.48 percent to 6.26 percent. Those rates were used to compute present-day values of each plan’s projected future payments, using data provided by the state actuary’s office. The values were compared to the market value of each plan’s assets, as disclosed in their financial statements. Looked at this way, funding levels varied widely from plan to plan. Though none was fully funded, the two plans that cover local police and firefighters came closest: They were about 83 percent funded, generally considered a reasonably healthy level. On the other hand, the gap between assets and liabilities in the original (and now closed ) state workers’ plan grew from $3.7 billion to nearly $10 billion. The gap in the original teachers’ plan, also now closed, widened from $1.8 billion to $6.8?billion.

  The investigation found that the system as a whole was underfunded to the tune of almost $31 billion. Much like we’ve already seen in California, cash-strapped local governments will be asked to make up the difference by upping their contributions to the plans.

Take the time this Monday morning to read the whole thing. It’s as well-written a summary of a pension crisis story as you’re likely to get, [emphasis mine] and this is a story that’s being repeated all across the nation. Then, if you haven’t already, have a look at how much you or your loved ones are relying on generous promises made by state bureaucrats to fund your retirement—and start asking some hard questions.

  Then take a look at what’s coming, as all over America battles will erupt over whether to cut services to poor people and kids today to honor unrealistic promises made to retired workers. Will non-state workers who don’t have pension programs vote to slash the funding for their kids’ education? Will a generation that’s been systematically lied to and bilked by irresponsible Boomers tax itself to the eyeballs to give the Boomers a stress-free retirement that younger folks won’t be able to share? A world of ugly is coming in American retail politics, and the Democratic Party in particular is going to be split by conflicts among different wings of its large coalition

2. American savings accounts:
 September 17, 2011:
Bank deposits soar despite rock-bottom interest rates 
E. Scott Reckard
Los Angeles Times


Consumers worried about the economy are pumping cash into checking, savings and money market accounts. But the banks don't need their money and have slashed interest rates to discourage customers.

Americans are pumping money into bank accounts at a blistering pace this year, sending deposits to record levels near $10 trillion on escalating fears that the U.S. economy is on the verge of another implosion.There's no sign that the flood into checking, savings and money market accounts is slowing down. In the last three months, accounts at U.S. commercial banks have increased $429 billion, or 10%, almost double the increase for all of last year.

There's one big problem: Banks don't want your money."Banks and credit unions are doing everything they can to get rid of the cash except make loans," said Mike Moebs, a Lake Bluff, Ill., banking consultant.

He said banks are driving away deposits by refusing to renew CDs at higher rates and by imposing fees on checking accounts for depositors who don't use other, profitable financial services as well.

During the housing boom, banks gobbled up deposits — including plenty of "hot money" provided by brokers chasing high interest rates for their clients — to fuel binges of mortgage and construction lending. The collapse of home prices and the ensuing financial crisis caused nearly 400 banks to fail, more than at any time since the savings and loan meltdown in the 1980s.

The latest flood of deposits has occurred in spite of banks paying the lowest interest rates on record for money they know could flow back out if the economy improves. Similar "flights to safety" with huge deposit inflows occurred in late 2008, when the financial crisis struck, and in 1999, when fears of massive defaults on Russian debt panicked investors.

The large amount of cash only adds to expenses such as paying for deposit insurance premiums. With lending standards tight as a drum after the financial fiasco, and demand for loans growing only slightly, banks have been doing everything they can to demonstrate how little they need new cash.In the most obvious sign, they have slashed interest payments to discourage customers. Wells Fargo & Co., which has the most branches in California, halved its payments on one-year certificates of deposits to 0.1%; Citigroup, which paid 2% in 2009, dropped its payment to a paltry 0.3%.

And in a possible glimpse into the future, one New York banking giant is even charging big customers for the right to park money there. The Bank of New York Mellon is forcing institutional clients to pay fees if they deposit more than $50 million into an account.

For bankers like John Biggs, who runs Santa Rosa, Calif., thrift Luther Burbank Savings, the strategy was to always court deposits using high rates to enable growth while keeping costs down. Now he's not sure what to do.In 2007, Luther Burbank was offering a whopping 5.4% interest rate on a one-year CD. The Sonoma County bank used money from new customers to expand into Southern California by opening branches in Encino, Burbank, Pasadena and Beverly Hills.

Those days are definitely over. Biggs' savings bank now pays just 0.9% on the investment. That means for every $100 his customers lock up for a year, they'll get back just 90 cents extra — a difficult thing to explain, he says, to retirees accustomed to living off their interest checks.

Still, it beats the 35 cents that savers in Southern California would get from Bank of America, the 30 cents they'd get from Citibank and the 10 cents they'd get from Wells Fargo, according to researcher Bankrate.com.

"In all honesty, I'm not happy," said Biggs, who has been with the company since the mid-1980s. "Our philosophy is that we are a savings bank; we are rate payers. We will continue to pay you rates at the top of the market. That's just not very good right now."Part of the problem, he said, is that the "government has chosen to drive down rates to abnormally low levels" — a reference to the Federal Reserve slashing interest rates to the bone to encourage Americans to borrow money cheaply and spend it.

But the negligible bank rates have punished retirees and others who depend on interest income, which plunged 40% to $546 billion last year from $903 billion in 2008, according to the federal Bureau of Economic Analysis.

The Fed has pledged to hold short-term rates near zero through mid-2013 unless the economy improves as a way to combat the nation falling back into a recession. That's going to continue to cause pain to savers, and could force banks to become even more stringent about their intake of new deposits.

Bankers such as Robert H. Smith, former chairman of L.A.'s Security Pacific Corp., say the industry is being throttled by a combination of the weak economy and regulations that were tightened in the aftermath of the financial crisis.

"What little demand that is out there for loans is regarded very skeptically [by the banks] because of the pressures from the regulators," said Smith, who sold Security Pacific to Bank of America 20 years ago and is now a founding director of Commerce National Bank in Newport Beach.

The banks also have another problem: what to do with all the billions of dollars in temporary deposits being parked by giant corporations, institutional investors and retail customers.

Like Biggs' depositors, they are stashing it in a safe but unrewarding place: Federal Reserve banks, which are paying them an interest rate of just 0.25% to tend the funds. Such deposits rose to more than $1.6 trillion at the end of August from about $1 trillion a year earlier, according to the Fed.

And until new lending grows strong and depositors start pulling funds out to invest elsewhere, banks will have little reason to increase rates. They now are even lower than in 2003, when the Fed pushed rates down to then-record lows after the Internet bubble popped."I never imagined yields would get lower than what we saw in 2003," said Greg McBride, senior analyst with Bankrate.com. "Well, in Japan maybe. But not here."

Money, Wealth and You, Part 1: "We're drowning in a sea of complexity"

MICHAEL WRIGHT: What happened in the gold market last week? Every gold expert has a different opinion about what caused the price crash.

PUNDITA: When you mix millions of unsophisticated investors with sophisticated ones, toss in high-speed computerized trading mechanisms, and shake this together with the monetary policy of major central banks and the bottom lines of mega-hedge funds and exchange-traded funds, then add the Twitter Knee-jerk method of news dissemination, anything can happen. And it can happen with blinding speed. If you pile on top of this sophisticated investors chewing their nails to the quick about the present state of the global economy and the Federal Reserve's dollar-creation spree, you're looking at chaos. That's what happened in the gold market last week.

MICHAEL: You're saying you know what happened to gold but because you know you're not going to say.

PUNDITA: The crystal ball is out for repairs again. I have a guess as to what toppled the first domino but my guess is as good as anyone's. The point is that this is the Age of the Masses, so whether it's war or money or gold, there's an awful lot people in the mix; they're generating an awful lot of factors that combine in an awful lot of ways. This situation is the real 'Black Swan' in this era. It's not any single catastrophic event; it's the Age of the Masses interwoven through all the large events that impact societies.

Recently a former FDIC official said it best: "We're drowning in a sea of complexity." She was referring to the huge number of hideously complex regulations strangling the U.S. banking industry, but the observation applies across the board.

What she didn't say is that it was the attempt by American banks to escape from drowning in the sea of complexity that fueled the expansion of the shadow banking system, which at that time was almost completely unregulated. At first the expansion was a good idea; it allowed money to flow to freely, which kept business expansion --

MICHAEL: Hold on; this isn't a criticism but you analyze so many factors that often when you talk I can't keep up.

PUNDITA: Okay; here's a way to understand fast. A portion of the illegal traffic from Mexico to the U.S. for decades wasn't really immigration; it was Mexicans fleeing their banking system. This was because it could take them years and huge bribes just to attempt to get a loan from their bank -- any kind of loan, small or large. This was killing legitimate business in Mexico. Business loans are the lifeblood of an economy and the blood couldn't flow freely through the arteries of Mexico's economy. So borrowers applied to American banks for loans. They had to do this in person, which meant crossing the border illegally in a lot cases. And they couldn't walk into an American bank and say, "Hi, I've just popped in from Mexico. Can you lend me a half million dollars?" It was a process that could involve staying in the USA until the loan came through.

However, something like that situation was also happening to American borrowers. This is the hidden part of the boom in offshoring U.S. manufacturing to China and other low-wage countries. Governments in those countries, through their banking system, were making instant, no questions asked loans to Americans who wanted to set up a manufacturing plant in the country. There was no way American banks could match that deal because they had to operate within the U.S. business-banking model, which includes a huge number of regulations.

Add to this, the banks in offshore tax havens were doing the same thing that banks in offshore manufacturing hubs were doing. If an American company had money in a small offshore tax haven, that was the company's ticket to getting fast loans from the banks in the country, and often bigger loans than an American bank might be able to provide given the regulations in the U.S.

MICHAEL: So the big flight of money from the USA wasn't all about getting tax breaks.

PUNDITA: Right. The upshot was massive capital outflows from the United States -- and from the U.S. banking system. The big U.S. banks took one look at all this and instead of doing a John Galt -- folding their arms and saying, 'We'll just wait for the house of cards to collapse,' they came up with an ingenious way to beat the dealer. The dealer being a combination of U.S. banking and business regulations and China's lack thereof.

Beating the dealer involved a lot of complicated paperwork, but the basic idea is simple: If a bank can't write the kind of loans a business asks for, it can do this in a roundabout way. How? Set up investment divisions and financial investment vehicles for corporate customers that allow them to quickly raise capital from financial markets. And because technically these money transfers aren't legally defined as loans but as investments, banks and their borrowers could circumvent masses of red tape.

That's how the shadow banking system, which had always existed in a small way for the banks' biggest customers, took off.

Expanding the shadow system was a great patch to the creaky machinery of the U.S. banking system. But it didn't factor in the Age of the Masses. When millions of individual and corporate investors and thousands of non-bank institutions from around the globe piled into the shadow system, this created huge markets in derivative paper -- basically, investment vehicles derived from nothing more than betting on the direction of various financial markets. These markets are now so various I wouldn't be surprised to learn there's one that trades on price moves in loans made to tea shop owners in Tahiti. So even if the bottom hadn't fallen out of the mortgage derivatives market, it would have eventually fallen out of another kind of market.

MICHAEL: By trying to get away from one house of cards American banks helped create another.

PUNDITA: That's one way to put it. If you drill down to bedrock that's what happened to gold. To really understand the gold story you need to see the gold market as getting tangled up with the shadow banking system. This led straight to the proliferation of what's called the paper gold market -- investment instruments based on the action of the gold market.

MICHAEL: Chasing its own tail.

PUNDITA: Pretty much. Now, in February, if I recall, there was an unsettling news story related to gold. The reaction to the news might have toppled the first domino, but this is getting into the weeds. The important concept is that trading in paper gold is just one part of the complexities of shadow banking.

The shadow system got so complex that only two people in the entire world were able to correctly estimate its size in the United States. These were two guys at the International Monetary Fund. They pointed out that no one -- no one, to include central bankers and government economists and the IMF -- had thought to figure rehypothecation into their calculations. Don't ask me what rehypothecation is because clearly only two people actually understand it -- those guys at the IMF.

Once they corrected everyone's math, this showed that the size of the shadow banking system, just in the USA, had been underestimated by roughly half. So instead of $5 trillion, it was about $10 trillion. When this corrected figure got into the London Financial Times, the ground shook. It wasn't an earthquake. It was American economists and bankers fainting in unison from shock.

That was in 2010. What the size of the American shadow banking system is today -- maybe only those two guys at the IMF have a good guess. But just to give you an idea, BlackRock currently manages $4 trillion. That's more money than the Federal Reserve manages. Think of it: a single Wall Street investment firm manages more money than the central bank of the United States of America.

MICHAEL: Then American monetary policy is a joke.

PUNDITA: Well the Fed policy of keeping the rate of borrowing money very low since the 2008 crash is a big factor in both the current size of the shadow banking system and BlackRock's portfolio. So while the Fed's current policy of easy money is questionable, it's not a joking matter. However, given the scope of the shadow system, it is a joke for anyone to claim that nationalizing the Federal Reserve, or abolishing it, would fix what's wrong with the U.S. economy and the banking system.

MICHAEL: From what you're telling me, fiscal policy is the caboose on a runaway train.

PUNDITA: Age of the Masses. Combine penicillin with democracy and this is what you get. Unimaginable amounts of money chasing any scheme that might return a profit. You just try putting fiscal or even monetary policy up against that tsunami.

Now just see, this is one benefit of tyrannies; people living under them are so scared they keep what money they can scrape together sewn into their clothing. Once government lightens up, they have money burning a hole in their pockets. There are uncounted millions of people who are very happy to help them invest it, and save it.

MICHAEL: And spend it.

PUNDITA: Oh they never say spend. They always say save. "Look! Save 60 percent if you act now!"

So there is a correlation between the rise of democracies and the rising waters in the sea of complexity.

MICHAEL: Nobody but the strongest can swim in that kind of sea. How are people supposed to live, to raise a family and build a career, when they're up against so much complexity just trying to manage their personal finances? There's a lot of fear right now; people are afraid they're going to be wiped out again when the next market bubble bursts. It's a vicious cycle and it keeps getting more violent.

PUNDITA: It's not called a vicious cycle for nothing. However, there might be a way to short out the cycle without crashing civilization as we know it. Doing this would allow American individuals to build and preserve wealth and without trying to navigate the sea of complexity.

MICHAEL: I'm all ears.

PUNDITA: Okay, we can talk about it the next time.

MICHAEL: Thank you. This conversation has been illuminating for me. I'm still chewing over the idea of using tax havens to scare up loans.

PUNDITA: Yup, that's the deal for many American businesspeople. Park your money in our bank in our glorious downtown banana republic, and we won't put you through a ringer to get a loan.

MICHAEL: People talk about drug lords doing money laundering by setting up businesses. Could the laundering also include writing a lot of loans? At least since the 2008 meltdown. American banks got stingy with loans after that.

PUNDITA: [laughing] Michael, anybody can be a shadow banker -- you, me, drug lords, anybody. That's what peer-to-peer lending is about, although technically it's too informal to be considered part of the shadow system, and such arrangements are confined to outright lending. But the rise of P2P, which can be done by anyone with money to loan, illustrates why attempts to regulate the shadow system are just piling more complexity on top of chaos.

MICHAEL: After tying up the banking system, the regulators want to bring on the same conditions that led to the huge shadow system?

PUNDITA: Not only that, they plan to actually enforce regulations on the shadow system. That will only create a bigger and more complex and diffuse shadow banking system than exists now -- a shadow-shadow system.

Try to imagine the enforcement mechanism at that point. Millions of employees from a global version of the Federal Deposit Insurance Corporation fanning out to interview the owner of every pizzeria, fast food stand, halal butcher shop and kosher bakery on the planet. "Hi, I'm from the Global Deposit Insurance Corporation. I need you to fill out these forms so we can see if your capitalization rate is sufficient to write loans."

[laughing] Welcome to the Three Stooges era of banking.

MICHAEL: You're having fun. After almost 12 years of being immersed in war maybe you needed a break.

PUNDITA: Heck, all I've done is switch from watching the Ghost of 1939 chase defense policymakers in circles to watching the Ghost of 1929 chase economists in circles.

Ben Bernanke won't stay in the Federal Reserve building in Washington after midnight because of the Ghost of 1929, which considers the Fed its personal domain. The ghost entertains itself in the wee hours by making a racket that sounds like 40,000 1930's-era bank teller windows slamming shut at the same time.

The Ghost of 1929 even put in appearance at Davos this year. A brainstorming session on how Big People can restore Little People's trust in the financial system was interrupted by mysterious squeaking noises. These were finally identified by a student of the French Revolution as the sound of a portable guillotine being wheeled into place. So much for the lore that the ghost won't hang out in Switzerland because it's scared of Swiss bankers.

MICHAEL: [laughing] You really are having fun.

PUNDITA: Jump in, the water here in the sea of simplification is nice and calm.

MICHAEL: Societies live with their ghosts.

PUNDITA: Yes they do. In the USA we live with the Ghost of 1939 and the Ghost of 1929. That's understandable when you consider the trauma that World War Two and the Great Depression visited on Americans. So it's only natural that policies were created in the attempt to insure that such horrific events never again happened to Americans. Yet when it gets to the point where policymakers are chased into vicious cycles by reactions to trauma, it's time to realize we don't need more policies. We need ghostbusters.

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Typical American 2

For readers who feel in need of a little translation of yesterday's Pundita post; i.e., didn't spend 12 hours studying saturation cable news TV coverage of the Boston Marathan Bomber manhunt:

At least as early as 2011 an "unnamed" foreign government asked the FBI to check out Tamerlan Tsarnaev for ties to Chechen terrorist groups. CBS reporter Bob Orr dug up that information yesterday. According to this CBS report, at first the FBI denied they'd received any such request, which for some unfathomable reason John Miller pegged as coming from Moscow. By then, however, Tamerlan's mother was shooting off her mouth to a Russia Today reporter, so the FBI rolled over and admitted they'd investigated him.

Officially the Bureau found nothing alarming about Tamerlan's behavior (although that's not what his mother told RT about their opinion of him; see the CBS report). But given U.S. policy on Russia ("We don't care if it's a terrorist, anarchist or stalinist as long as it gives Putin grief"), he would have had to be firing live rounds on K Street before the FBI could have officially designated him a security threat. He was, from their conversations with him, officially a typical American. So what if he hung out at a few extremist websites? So did millions of other typical Americans.

The 'Typical American' theme popped up several times yesterday on all national American TV stations covering the manhunt, which means only reporters for the Weather Channel weren't trying to discover why two seemingly well-adjusted brothers would want to blow up Americans. With big brother Tamerlan by then dead from numerous gunshot wounds and shrapnel and maybe also a Mercedes SUV being driven over him by little brother in the haste to run a police barricade, energetic reporters scared up former classmates and acquaintances of the manhunt's objective in an effort to get inside his head.

The reporters learned that by all accounts little brother was a completely typical American -- smoked a little pot and got along with everybody, as one former classmate put it.

Have a nice day!

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Hi! I'm a typical American! I smoke a little weed, kill a few Americans when I'm upset and have a list of grievances as long as your arm

It's because of me that the Department of Homeland Security will need to install closed-circuit television cameras in your home and the Department of Education is educating your children not to bully typical Americans or exclude us from their prom parties. Not to worry, these measures are just to insure that untypical Americans don't say or do anything to upset typical Americans.

Have a nice day!

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