I must apologize (again) for being a lousy steward of my own blog.  When I get swamped, this is the one I let slide.  The debate has gone on many more rounds, and I’ll try to get caught up.

Round 18 — Paul

Tom –

So let me get this straight. We could just dissolve or phase out Social Security? Then start a public education campaign to let everyone know to put aside 15% each year in an IRA, Savings Account, or Market Index Fund? And no government agency is needed to regulate these plans? Or to make sure people even comply?

Like we can trust the banks again? And put our faith in markets? Without any Congressional hearing to determine why the banks all failed?

Did we ever get a Ken Starr? Investigating banks? And holding weeks of hearings with bipartisan committee members? Could Congress not cooperate in finding out what happened? Just so we can have a transcript like THE STARR REPORT?

Consider the following examples of free-market mishaps from the not-too distant past.

In the late 1980′s, when the Savings & Loan Crisis unfolded, Charles Keating emerged as a principal actor. Keating had been CEO of Lincoln Federal Savings & Loan. Where he had directed tellers to recommend Lincoln high yield bonds (aka junk bonds) to elderly depositors. While falsely assuring them the bonds were government guaranteed.

After the collapse of Enron in 2001, hundreds of employees were dismayed to learn their IRA’s were leveraged on Enron stock. And many of those employees worked for utilities Enron had acquired.

When Bernie Madoff fell, it developed that dozens of bright and famous people were invested in his scam. Many through so-called ‘feeder funds’ Madoff cultivated. Funds that seemed to have no apparent link to him. Surprising victims who never thought their funds were only fronts.

Amid the Sub-Prime Crisis we learned that almost ‘half’ of all sub-primes were issued to people who could have qualified for conventional mortgages. But sub-prime brokers had incentives to sell their type of mortgage x.Which was obviously too complicated for common folks to grasp.

Furthermore this whole dispute regarding robo-signings (foreclosures signed by robots) has yet to be resolved to anyone’s satisfaction. Attorney Generals in several states feel the robo-signings violated ‘their’ state laws.

So where do you get this notion we can trust free markets?

And what makes you think common people really have a grasp of where to put their money? Again, so many of Madoff’s victims were bright and prosperous. People you would think ‘had’ the best advice.

Finally let me ask, if Social Security is dissolved, which agency will help those seniors who ‘lose’ their retirement plans? Because with no regulation or oversight a huge number of people will lose their nest eggs long before retirement. What do we do with them then? Get specific on this point.

Paul

 

Round 18 — Tom

Paul –

So let me get this straight. We could just dissolve or phase out Social Security?

It would have to be phased out. We can’t renege on the financial obligations we made to people who were forced to pay into the system their entire working lives. Everyone below retirement age should be allowed to opt out in return for giving up a percent of benefits, based on age. I’d happily opt out and let them keep 100% of my supposed benefits, but that’s me. The alternative to is let this Ponzi scheme crash the country.

Then start a public education campaign to let everyone know to put aside 15% each year in an IRA, Savings Account, or Market Index Fund? And no government agency is needed to regulate these plans? Or to make sure people even comply?

Make sure people comply? Do you think it’s your job to force people to save for retirement, Paul? What, if anything, does the term “a free country” mean to you, anyway? If people choose not to save for retirement, it’s not your job or mine to threaten them with violence (every law, EVERY SINGLE LAW, is backed up with the threat of violence) and order them to do so.

Most people would opt for having the 15% withheld from their paychecks and automatically invested, as milions of Americans already do with their 401ks. As for making sure the plans are legitimate, fine, let the government inspect their books. Protecting people from fraud is a proper function of government.

Like we can trust the banks again? And put our faith in markets? Without any Congressional hearing to determine why the banks all failed? Did we ever get a Ken Starr? Investigating banks? And holding weeks of hearings with bipartisan committee members? Could Congress not cooperate in finding out what happened? Just so we can have a transcript like THE STARR REPORT?

Of course you’ll never get a congressional hearing to determine why the banks failed. You really think Congress wants to expose its own role in producing the big bubble and crash? You think Chris Dodd and Barney Frank want to hold hearings so they can remind the citizens how they fought tooth and nail to prevent greater oversight of Fannie and Freddie? You think Congress wants to drag Andrew Cuomo up to Capitol Hill and ask him to explain why he ordered the GSEs to start buying more sub-prime loans? You think Congress wants to grill Obama on why he sued Citibank to force them to make more of exactly the type of loans that went bad? You think Congress wants to grill Bill Clinton on why he reduced the amount of capital Fannie and Freddie were required to maintain?

The government has no interest in getting to the bottom of this mess, because it was government-induced. The banks failed because they wrote too many bad mortgages, and they wrote too many bad mortage because the “affordable housing” crowd in government enabled them to do so — and in many cases ordered them to do so.

Consider the following examples of free-market mishaps from the not-too distant past.

In the late 1980′s, when the Savings & Loan Crisis unfolded, Charles Keating emerged as a principal actor. Keating had been CEO of Lincoln Federal Savings & Loan. Where he had directed tellers to recommend Lincoln high yield bonds (aka junk bonds) to elderly depositors. While falsely assuring them the bonds were government guaranteed.

So he engaged in fraud, which is illegal. I guess if we make fraud double-double illegal, it’ll never happen again. But I’m not advocating forcing seniors to go out and pick stocks and bonds. I’m advocating allowing people to make their own investment decisions. Most of them would probably pick the safe route and go with simple index funds. If others want to make riskier investments, it’s not up to you or me to decide that we know better than they do and impose our preferred plans on them. That’s what I mean by the amazing arrogance of The Anointed. You’re so convinced that other people are too stupid to make their own financial decisions, you feel justified in forcing them to accept your superior wisdom on these matters and stick with a dismal retirement plan that is racking up trillions in unfunded liabilities — all for their own good, of course.

After the collapse of Enron in 2001, hundreds of employees were dismayed to learn their IRA’s were leveraged on Enron stock. And many of those employees worked for utilities Enron had acquired.

I see … hundreds of people who were foolish enough not to diversify their portfolios got burned, so this means everybody should be forced into giving up 15% of their paychecks in exchange for a 1.5% return on investment — or a negative return if you die young — that is bankrupting the country. Yes, I see the logic there.

When Bernie Madoff fell, it developed that dozens of bright and famous people were invested in his scam. Many through so-called ‘feeder funds’ Madoff cultivated. Funds that seemed to have no apparent link to him. Surprising victims who never thought their funds were only fronts.

Well, you’ll got me on that one. Since multi-millionaires were seduced into going after big gains by a scam artist, this proves that working class people can’t be trusted to put 15% of their pay into an index fund and retire far better off than they will with Social Security.

Amid the Sub-Prime Crisis we learned that almost ‘half’ of all sub-primes were issued to people who could have qualified for conventional mortgages. But sub-prime brokers had incentives to sell their type of mortgage. Which was obviously too complicated for common folks to grasp.

And this relates to the ability of people to stick 15% of their paycheck into an index fund or savings-account IRA how, exactly? The only reason the banks were able to keep writing mortgages for less and less credit-worthy people is that the Fed kept creating the new magic money to fuel the borrowing frenzy.

Furthermore this whole dispute regarding robo-signings (foreclosures signed by robots) has yet to be resolved to anyone’s satisfaction. Attorney Generals in several states feel the robo-signings violated ‘their’ state laws.

The people trying to get out of their mortgages because of contract pages being robo-signed happily took the money and bought the houses … but now they’re trying to get out of their contractual obligations on a technicality. If the banks canceled mortgages for people whose copies were robo-signed and told them they no longer had a mortgage, would that be okay with you?

So where do you get this notion we can trust free markets?

Paul, if you can cite cases of people getting ripped off by buying index funds, please do so. Show me the headlines about the great Charles Schwab scandals. If people are ripped off by brokers, it’s a legitimate function of government to punish everyone involved and demand reparations.

The biggest financial disaster of our lifetimes was caused by Fannie and Freddie (protected from scrutiny by Barney Frank and Chris Dodd) cooking their books, bundling crappy mortgages into securities (mortgages only written because Fannie and Freddie were anxious to snap them up) and selling them to investors. The biggest financial crisis of our lifetimes was goverment-induced.  Meanwhile, Social Security is racking up trillions of dollars of debt that future generations will never be able to pay. So where do you get this notion that we can trust the government?

And what makes you think common people really have a grasp of where to put their money? Again, so many of Madoff’s victims were bright and prosperous. People you would think ‘had’ the best advice.

Madoff’s victims were financial high rollers looking for the big score. Common people do have a grasp of where to put their money. That’s why 401Ks are so popular. That’s why most people take advantage of employer retirement programs. And it’s why most people would opt to have their 15% withheld and invested in something like an index fund. Again, what you are saying is that common people are too stupid to make those decisions, and therefore you should be able to force your preferred plan upon them.

Here’s what you don’t seem to grasp: even if, by some miracle, your preferred plan turned out to be better for them financially, that doesn’t entitle you to force it on them. If people would rather risk their money in an index fund for the sake of retiring with more money and owning actual accumulated wealth that they could pass on their children, it’s not your place to decide you know what’s best for them and force them into Social Security instead.

Finally let me ask, if Social Security is dissolved, which agency will help those seniors who ‘lose’ their retirement plans? Because with no regulation or oversight a huge number of people will lose their nest eggs long before retirement. What do we do with them then? Get specific on this point.

I did get specific. People who paid into Social Security must be given what they were promised. It would be unconscionable to take their money for 40 years and then renege on that promise. For everyone who isn’t nearing retirement, there should be the offer to opt out. The longer you were in the system, the higher the percent of the original promised payment you’d receive. But if we don’t phase out this ridiculous Ponzi scheme, the payments will stop someday anyway, because the government will finally run out of suckers willing to lend it more money.

Tom

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3 Responses to “Debate With A Leftist Pal, Part 18”
  1. TonyNZ says:

    Good to see you back. The statement about “common people” really showed a high degree of liberal arrogance.

    This just crossed my radar tonight.

    As a farmer that relies almost exclusively on international dairy trade, I can tell you that the fear of slowing exports is not “overblown”. One of the biggest threats to our dairy export industry (and I can’t see how it would be different to the American dairy export industry) is not being able to keep up with the expansion of developing countries’ export markets. Increasing production potential and efficiency is one way of countering this. The idea of capping production when prices are low is absolutely absurd, as efficient (high) production is what keeps good farmers in business when the bad farmers go broke. This just brings the good farmers down to the bad farmers level, keeping them all on the brink rather than letting the industry sort itself out.

    They are right though, this move would lead to New Zealand farmers making more money at the expense of American farmers.

    If something like this was proposed in New Zealand I Think what there would be some quite vociferous opposition. New Zealand farmers can make a scene. I do wonder what a tractor driving up the steps of the US congress building would result in…

    You hit it on the head when you said efficiency is what keeps good farmers in business while bad farmers go broke. In America, people have these warm, fuzzy feelings about farmers and don’t think anyone in farming should ever go broke. If a restaurant, clothing store, software firm, etc., go broke — hey, that’s the market. But if a farmer goes broke, it’s considered a disaster. That’s why politicians won’t just let markets do their job.

  2. KPatrick says:

    In these debates about Social Security, I only ever hear it framed as government-run retirement accounts vs private-run retirement accounts. I don’t think liberals really understand the implications of calling SS a “Ponzi scheme”. They seem to ignore it as if it were just an empty insult.

    Social Security pays out to its current retirees with money it receives from current non-retirees paying into the system. This is simply a wealth transfer.

    Private retirement accounts pay out to their retirees with profits made investing their money over their working years. Retirees live off wealth that was actually created. They are receiving shares of profit from other people who used this savings over the years to actually build businesses and expand capital. Furthermore, if they don’t liquidate their accounts the instant they “retire”, they’re not actually retired at all. Their money is still working and contributing to the economy.

    That is a huge difference. None of the money flowing through Social Security is ever allowed to build the wealth that retirees are supposed to live on. Even worse, any yearly surplus is “invested” in the Federal government, allowing them to piss it away on more government waste and bureaucracy, further inhibiting wealth creation.

    How can any reasonable person defend this?

    A reasonable person couldn’t. But Paul is convinced people are too stupid to make investments and therefore should be stuck in an inferior system because he, in his wisdom, has decided it’s better for them. That’s just part of the liberal mindset. Thomas Sowell wrote an entire book on that mindset titled “The Vision of the Anointed.”

    The irony here is that Paul isn’t exactly a smashing financial success and thinks I should have to buy his health insurance for him since he can’t afford it. How that qualifies him to decide what other people should do with their retirement investments escapes me.

  3. Minor point, but Madoff’s scam wasn’t built on wildly exaggerated returns, and his victims weren’t “swing for the fences” types. The beauty of his scam was that he reported good gains in up markets and still slightly positive gains in down markets.

    What Paul and his ilk are able to ignore with savant-like focus is that Madoff sat across the desk from scores of our regulatory saviors, on multiple occassions, and was able to lie, bluff, and bully them with impunity into ignoring the evidence right in front of them for years. This in spite of outside observers voiciferously trying to tell the feds, at great personal and reputational risk, exactly how Madoff was cheating. Over all those years, the regulators never did the equivalent of reviewing a Madoff bank reconciliation.

    In a very real sense, sh*tbags like Madoff understand that the feds are their best assistants in their schemes. It’s certain that many of those smart, saavy, high net worth folks he took for billions at some level reduced their guard with the certainty that surely, with a portfolio of the size Madoff was managing, the SEC et al were paying enough attention that he couldn’t just simply be flat out lying with impunity.

    Cheers

    Excellent points.

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