The commission looking into the 2008 financial crisis hasn’t filed its report yet, and it looks like there will be differences of opinion over the conclusions. One point of contention is the extent to which federal housing policy helped push the increase in subprime mortgages and overinvestment in houses. Peter Wallison is a long-time critic of federal housing programs, especially Fannie Mae and Freddie Mac. In this interview he explains that despite his skepticism of the entities, he didn’t realize until recently how much they encouraged subprime mortgages and the securitization of those mortgages.
Wallison also has interesting insights into the decision not to save Lehman Brothers. He points out contradictions between Ben Bernanke’s different public statements on the question and also statements made by the Fed staff. He also reveals the irony between one of Bernanke’s explanations and subsequent events. Bernanke believed taking over Lehman’s assets would be a sure loss for the Fed and the government because of the poor quality of the assets. Yet, the Fed and the government have to keep pouring money into the economy to try to offset the effects of Lehman’s bankruptcy.
I’ve long believed China’s role in global economic imbalances hasn’t been discussed enough in public. The debate seems to be coming out of the closet with the Fed’s QE 2 policy. China and other countries have attacked the Fed policy, claiming it is designed to devalue the dollar and stimulate U.S. exports. Ben Bernanke recently fired back at China and other Asian nations, claiming that fixing the value of their currencies to the dollar is keeping their currencies artificially low to stimulate their exports to the U.S. and other countries.
The Fed chairman’s message, though scholarly in tone, was unusually blunt in laying blame for inflationary pressures in emerging markets and for tensions over currencies on countries like China. A chart accompanying his comments also pinpoints Taiwan, Singapore and Thailand as aggressively trying to hold their currencies down, while India, Chile and Turkey aren’t.
“Why have officials in many emerging markets leaned against appreciation of their currencies toward levels more consistent with market fundamentals?” Mr. Bernanke asks. Mainly, he says, because they are sticking to a long-term strategy of pushing for export-led growth with cheap exchange rates.
There’s some truth in Bernanke’s argument, but it’s also incomplete. China and other Asian nations probably are pegging their currencies to the dollar to help their export positions. But the real problem is the way China soaks up the dollars in its economy to keep domestic inflation manageable, and then reinvests those dollars. That’s part of what kept U.S. interest rates artificially low in the 2000s and stimulated overinvestments in housing and other assets, because China invested a lot of those dollars in treasury bonds and other U.S. debt. China now appears to be investing some of those dollars in non-dollar-based assets, which could cause long-term U.S. interest rates to rise while the Fed focuses on buying treasury bonds in the five to 10-year range. This will reduce the benefits of the Fed’s QE 2 program and push up the value of the other assets China buys.
We’ve reported how the prices of tax-exempt bonds have been falling since the end of August. Several analysts are forecasting that this is just the beginning of problems, not the end of them. Over the last two years many people pointed to high yield bonds or commercial real estate as “the next shoe to drop” in the financial crisis. These analysts believe tax-exempt bonds are more likely to default and trigger other problems.
Historically only a small amount of tax-exempt issues defaults, and the default rate is well below that of corporate bonds. There were a couple of dramatic defaults recently, but last year the number of defaults rose while their dollar amount declined. Yet, there are reasons to believe the worst is to come.
Private firms dramatically reduced writing insurance to guarantee payment of tax-exempts. State revenue fell sharply during the crisis and still is well below peak levels. The largest issuers of tax-exempts, such as New York and California, has the worst financial problems. States were able to paper over their problems in 2010, because federal stimulus programs transferred a lot of cash to the states to cover holes in their budgets. At the same time, demands for services from the states increase.
Tax-exempts are looking attractive on the surface. Their yields are higher than treasury yields, so the after-tax yield is much higher than on treasuries. But those higher yields come with the risks outlined above. You could capture opportunities by carefully buying tax-exempts from well-managed states and localities or that are backed by reliable income from a particular source. But don’t chase the highest yield unless you believe the states and localities solved their financial problems instead of papering over them while hoping the crisis would end quickly.
Selling a small business always is tough. You need to find a buyer who wants to pay your price and has the financing. In this economy, that’s especially tough.
One strategy I’ve mentioned in the past and that remains underused is the employee stock ownership plan (ESOP). It has tax benefits for the seller. The business itself provides some or all of the financing in some cases. And long-term employees rewarded through the plan. The ESOP is a good way to transfer management from you to the key employees who’ve been working in the business.
If you’re ready to sell your business and retire, or move on to another challenge, consider an ESOP. Here’s a quick review of the strategy.
Don’t feel bad if you find variable annuities complicated. Especially complicated are the living benefits provisions designed to make the policies more desirable to people. Living benefit riders can make withdrawals from the annuity easier and could help pay for long-term care. But they are complicated.
How complicated? A report prepared for financial advisors and annuity sellers describes 23 living benefit provisions from 17 insurance companies. It costs $9,000 and runs over 300 pages. Click here to learn more about the report and some key issues about variable annuities.
The Baby Boom generation born from 1946-1964 generally has been treated as one monolithic group by observers. More recently people are learning there are big differences between the early boomers (the first of which turn 65 in 2011) and the later boomers who are still in their 40s. The early boomers were famous for procrastinating about retirement, believing they always would be young, and refusing to save for retirement.
Younger boomers are very different. They’re already concerned about retirement, saving money, and focused on income. Where the early boomers sought capital gains in stocks and real estate, the later boomers want retirement income. They don’t know much about annuities, but they’re far more attracted to annuities already than the older boomers.
Annuities can be confusing. They’re not for everyone, but the sales pitches make it hard for anyone to decide whether or not they’re a good deal. Here’s a simple article that gives three reasons why Baby Boomers should consider putting some of their money in annuities.
You can’t plan for long-term care expenses without some idea of the potential cost. The costs vary greatly around the country. Someone who will receive care in New York City will pay considerably more than someone in Idaho, whether the care is at home, in an assisted living facility, or in a nursing home. There are several regular surveys of national costs that are useful in your planning. We’ve recommended the Genworth survey in the past.
The latest cost estimates are from the annual MetLife survey. You can find some details here. The most expensive state is Alaska, followed by Connecticut, Hawaii, New York, and Massachusetts. Interestingly, the most and least expensive states are different for nursing homes and assisted living are different.
Another interesting point: MetLife announced this week announced it will stop selling long-term care policies. Low interest rates and other factors made it difficult to profit from the policies. MetLife was the fourth highest seller of long-term care policies, according to at least one survey.
I continue to receive a lot of questions about the five-year waiting period for taking distributions after Roth IRA contributions and conversions. There’s a lot of confusion about the rules. It is slightly different for conversions and for contributions. It also is different for income taxation of distributions and the 10% early distribution penalty on distributions. Here’s how I described the rules in the May 2010 issue of Retirement Watch.
The five-year waiting period also generates many questions.
Only qualified distributions from a Roth IRA are tax-free. For a distribution to be qualified, the Roth IRA must be open at least five years. For regular Roth IRA contributions, the five-year rule is met if any Roth IRA owned by the taxpayer is at least five years old. If you opened a Roth IRA in 2000, for example, any distributions you take out of any regular Roth IRA now are tax-free.
The rule is different for converted Roth IRA amounts. A new five-year waiting period starts for each conversion. That means income and gains from the converted amount are taxable if withdrawn within five years of the conversion.
For most people, however, the five-year waiting period doesn’t matter. The rules for taxing Roth IRA distributions are that distributions are first considered to be of after-tax contributions. Distributions of after-tax contributions (such as converted amounts on which you paid the conversion tax) are tax-free. Only after all after-tax contributions (whether regular contributions or converted amounts) are withdraw are you withdrawing potentially taxable income and gains. So, the five-year rule doesn’t matter, unless you withdraw all or most of the IRA within five years. Even then, you’ll pay taxes only on the accumulated income and gains distributed not on the after-tax contributions.
The five-year period for either type of contribution begins on Jan. 1 of the year of the contribution or conversion, not on the date of the contribution or conversion.
One way banks responded to the erosion of their finances is to charge more and higher fees to their customers. The fees increase income and enable the banks to build their capital base. A number of these fees are unnecessary and avoidable if you prepare before being high with them. This article identifies six banking fees you shouldn’t have to pay and tells you how to avoid them.
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