Tuesday, December 16, 2008

William Baldwin Speaks

"How on earth is the Federal government going to pay its bills? ... One method is to put a means test on every federal benefit. If you don't need Social Security or Medicare, your benefits get clipped. ... The other approach is to sandbag people. Wait until after they have made a commitment of capital and then hit them up. The government, to be sure, does not really want to punish saving. It's just what when the Treasury is hungry for funds, it makes sense to go after those citizens who are hardworking and frugal. You can't pick an empty pocket. ... Municipal bond coupons, once exempt, will be taxed. ... Retirement accounts will be looted. ... Don't count on Roth accounts, now totally tax-free to stay that way. Lastly, a proven revenue raiser, albeit one you can't find in the federal budget is inflation. ... Under the circumstances, it's a bad bet to buy long-dated bonds. Scary as it is from month to month, I think the stock market is less hazardous for someone investing for 20 or 30 years", my emphasis, William Baldwin (WB) at Forbes, 17 November 2008.

"Who's going to win the next roll of the dice--fixed income savers praying for deflation, even if it means another Great Depression, or fixed-rate mortgage borrowers praying for a weak dollar?," WB at Forbes, 8 December 2008.

WB has this knocked. See my 23 November 2008 post.

Bet on inflation.

6 comments:

Anonymous said...

Wouldn't inflation crush the banks with long dated assets?

After so much effort to save the banks...

Am I confused? (Don't answer that!)

Independent Accountant said...

Anonymous:
This is what happened to the S&Ls between 1979 and 1986. As interest rates went up, the value of the fixed-rate mortgages they held fell and they became insolvent. This is why financial institutions should "match maturities", i.e., to avoid interest rate squeezes. As for inflation crushing banks, consider, banks also have liabilties which are dollar denominated. As long as a bank can pay its depositors,it is "solvent". Or so the bank thinks.

Anonymous said...

It mentions Roth IRA. What about SPE-IRA and/or Regular IRA? Will they also be affected, and if so, how?

Thanks.

Independent Accountant said...

Anonymous:
No one knows how Congress will change the tax laws. My posts on 6, 23 and 25 November 2008 are relevant to your question: Ben Franklin Was Right, War Story and Ben Franklin-2. We only
know the tax laws will change.

Printfaster said...

What we need is 10% yield on AAA fixed income securities and 3% home mortgages. 10% to take care of those on fixed income, and 3% to let people keep their homes.

Let's see the Fed engineer that. Of course there is this small problem of getting the banks to provide loans.

Anonymous said...

I think the gross figure for commercial banks is about 60% deposit funded and 40% wholesale market funded...

So even if the deposit base remains in place and requires slightly higher rates the wholesale funding will be crushing? Eh?

I wonder what the comps are on term funding between now and S&L time...

Duration mismatch the hobgoblin of fractional banking... :{