Archives For September 2011

Front page in today’s WSJ was an article about how Bank of America is planning to start charging their customers $5 per month when they use their debit cards. Other banks are testing such fees.

Why the new fee?

According to the article, the fee is in response to a part in the Dodd-Frank Financial Reform Bill that will limit the amount banks can charge businesses for transactions (“swipe fees”). Those fees have been capped at $.24 per transaction. They are currently $.44 per transaction. This change will supposedly cost banks $6 billion per year in lost revenue.

What’s funny (maybe funny is the wrong word) is this quote from Dick Durbin:

Sen. Dick Durbin (D-Ill.), who championed the legislative provision that led to the caps, said in a prepared statement: “After years of raking in excess profits off an unfair and anticompetitive interchange system, Bank of America is trying to find new ways to pad their profits by sticking it to its customers. It’s overt, unfair, and I hope their customers have the final say.”

Come on, Dick! Do you honestly think banks will just accept $6 billion in lost revenue? HARDLY! This is simply another case of how government involvement leads to unpleasant consequences (I was going to say “unplanned consequences” but I can’t see how new customer fees could be an unplanned consequence of new regulations).

This is a relatively small issue for me but one of the retailers I visit, Spec’s Liquor, has a two-tiered system for charging customers. Customers who pay with cash or debit card, receive a discount. Those who pay with credit card, do not. So, I’ll either have to pay with debit and incur a banking fee, pay with cash (I seldom carry cash), or use my credit card and forgo the discount.

I am happy to report that Christopher Dodd, Barney Frank, and Dick Durbin will be happy to reimburse you for your fees. Just send them the bill. (Unfortunately, that was a joke.)

Check out this table I made showing the month-to-date and year-to-date returns for the indexes I follow on AFM. Notice what an impact one day’s market performance has on the both the month-to-date and year-to-date numbers.

Great piece in today’s WSJ: A Short History of the Income Tax by John Steele Gordon.

Distilled into bullet points:

• After the Civil War, the government relied mostly on the tariff for revenues, which was basically a consumption tax that hit the poor much harder than the rich.

• An income tax on the “rich” was attempted in 1894. The income tax was to be 2% on incomes above $4,000 (less than 1% of the households at the time). It was challenged and eventually struck down 5-4 by the Supreme Court.

• President Taft “…proposed a constitutional ammendment to legalize a personal income tax, while meanwhile imposing a tax on corporate profilts.”

• The 16th Amendment was ratified in 1913 and the income tax was created.

• The new tax was 1% on income above $3,000 and reached 7% on incomes over $500,000.

• There were many deductions, which drastically reduced effect income tax rates.

The author closes out the piece with a couple of interesting points:

Unfortunately the corporate income tax, originally intended as only a stopgap measure, was left in place unchanged. As a result, for the last 98 years we have had two completely separate and uncoordinated income taxes. It’s a bit as if corporations were owned by Martians, otherwise untaxed, instead of by their very earthly—and taxed—stockholders.

This has had two deeply pernicious effects. One, it allowed the very rich to avoid taxes by playing the two systems against each other. When the top personal income tax rate soared to 75% in World War I, for instance, thousands of the rich simply incorporated their holdings in order to pay the much lower corporate tax rate.

There has since been a sort of evolutionary arms race, as tax lawyers and accountants came up with ever new ways to game the system, and Congress endlessly added to the tax code to forbid or regulate the new strategies. The income tax act of 1913 had been 14 pages long. The Revenue Act of 1942 was 208 pages long, 78% of them devoted to closing or defining loopholes. It has only gotten worse.

Finally, he closes with this, which I totally agree with:

The other pernicious consequence of the separate corporate and personal income taxes has been a field day for demagogues and the misguided to claim that the rich are not paying their “fair share.” Warren Buffett recently claimed that he had paid only $6.9 million in taxes last year. But Berkshire Hathaway, of which Mr. Buffett owns 30%, paid $5.6 billion in corporate income taxes. Were Berkshire Hathaway a Subchapter S corporation and exempt from corporate income taxes, Mr. Buffett’s personal tax bill would have been 231 times higher, at $1.6 billion.

If you have time, check out this interview with University of Chicago Economist, Robert Lucas that was in this weekend’s WSJ. Some interesting tidbits from the piece:

Mr. Lucas is visiting NYU for a few days in early September to teach a mini-course, so I dash over to pick his brain. He obligingly tilts his computer screen toward me. Two things are on his mind and they’re connected. One is the failure of the European and Japanese economies, after their brisk growth in the early postwar years, to catch up with the U.S. in per capita gross domestic product. The GDP gap, which once seemed destined to close, mysteriously stopped narrowing after about 1970.

The other issue on his mind is our own stumbling recovery from the 2008 recession.

For the best explanation of what happened in Europe and Japan, he points to research by fellow Nobelist Ed Prescott. In Europe, governments typically commandeer 50% of GDP. The burden to pay for all this largess falls on workers in the form of high marginal tax rates, and in particular on married women who might otherwise think of going to work as second earners in their households. “The welfare state is so expensive, it just breaks the link between work effort and what you get out of it, your living standard,” says Mr. Lucas. “And it’s really hurting them.”

Turning to the U.S., he says, “A healthy economy that falls into recession has higher than average growth for a while and gets back to the old trend line. We haven’t done that. I have plenty of suspicions but little evidence. I think people are concerned about high tax rates, about trying to stick business corporations with the failure of ObamaCare, which is going to emerge, the fact that it’s not going to add up. But none of this has happened yet. You can’t look at evidence. The taxes haven’t really been raised yet.”

On why he voted for President Obaman:

I ask about a report that he voted for Barack Obama in 2008, supposedly only the second time he had voted for a Democrat for president. “Yeah, I did. My parents are dead for a long time, but my sister says, ‘You have to vote for Obama, for what it would have meant for Mom and Dad.’ I felt that too. It’s a huge thing. This [history of racism] has been the worst blot on this country. All of a sudden this charming, intelligent guy just blows it away. It was great.”

Guilt isn’t a very good reason to vote someone into office.

Quote of the Day – Annuities

September 23, 2011

I would like to get into the habit of posting a quote of the day every day but for now I’ll post them when I come across them.

Today’s (rather long) quote comes to us from the pages of The Ultimate Financial Plan: Balancing Your Money and Life* by Tim Maurer and Jim Stovall in the chapter on annuities:

In the realm of personal finance, no word has been dragged through the mud more times than the A-word—Annuities. Yet annuities survive and even thrive. How they do is not a mystery.

There is not an outcry on the part of consumers demanding annuity products. The reason for the continued vibrancy of annuity sales is that they pay a big honkin’ commission to the selling broker or agent. And, as most of the financial sales tactics exposed in this book, I’m especially qualified to make such a statement, because I have sold them myself. I wasn’t a bad person in those days, conniving to separate people from their hard-earned money for my own selfish benefit. Conversely, every time in years past when I sold an investment product to a client for a commission, I did so thinking it was in their best interest. My recommendations met all the legal requirements of suitability required of a broker, but I acknowledge to you now that in hindsight there is no question my judgment was partly influenced by the amount of money I could make (or not make) on the sale.

And how could it not be? Let’s say you, as a salesperson, had three different products to sell with the following characteristics: one would pay you one percent for every year that the investment continued to be held by the client, one would pay you 5.75 percent up front followed by .25 percent each additional year, and another would pay you 12 percent—all up front. Which one would you be likely to pick, all things being considered equal?…

He goes on to say that the, “…sale of annuities is justified entirely too often because of the massive commissions going ot the broker or agent selling the product.”

I couldn’t agree more. It’s almost like, “Sell first, justify later.”

My belief is that if high cost annuities (variable and the like) were that great for customers, they would have the same payout as a traditional mutual fund.

*Affiliate Link

From today’s WSJ:

The latest move by the chairman was a decision to dramatically recast the Fed’s $2.65 trillion securities portfolio in an effort to reduce long-term interest rates. The Fed plans to shift its holdings so it will have more long-term U.S. Treasury bonds and more mortgage debt than previously planned. It hopes the lower rates will boost investment and spending and provide a shot of adrenaline to the beleaguered housing sector.

The shift toward longer-term Treasury securities was largely expected but slightly bigger than many in the markets had anticipated, and the action on mortgage bonds was a surprise.

What it is exactly:

Under the new program, which resembles a 1961 Fed-Treasury program called “Operation Twist,” the Fed will sell $400 billion in Treasury securities that mature within three years and reinvest the proceeds into securities that mature in six to 30 years, significantly tilting the balance of its holdings toward long-term securities. In addition, it will take the proceeds from its maturing mortgage-backed securities and reinvest them in other mortgage-backed securities. For the past year, it has been reinvesting that money into Treasury bonds, shrinking its mortgage portfolio.

Fed officials have become more concerned about the health of the mortgage market in recent months, with senior officials, including Mr. Bernanke, urging the rest of the government to find ways to support the sector. There has been growing concern in the mortgage industry in recent weeks that even as U.S. Treasury yields have been declining, mortgage rates haven’t fallen as much, preventing many homeowners from refinancing their home loans. The difference in yield between a 10-year Treasury note and a conventional 30-year mortgage has widened by almost half a percentage point.

The goal is to pull long-term interest rates down, which should bring down mortgage rates, which could spark home buying which could help the housing market. Lots of “coulds.”

I have limited knowledge about this stuff but I have to say I’m skeptical. Interest rates are already low and lots of people can’t refinance either because of poor credit or their house isn’t worth as much as it used to be so there’s no advantage to refinancing. Or, they don’t have a job.

The market is skeptical too. As of this writing, the Dow is down nearly 340 points (after dropping 283 points yesterday).

So what do you think? Will it help?

Source: Fed Launches New Stimulus (WSJ)

I read a rather unflattering review of Thomas Friedman’s newest book “That Used to Be Us” in today’s WSJ. I have not read the book, nor do I plan to. I read the bulk of “The World Is Flat” several years ago and decided I had had enough of Mr. Friedman. That said, I want to share this paragraph from the review in today’s paper:

If the authors’ frustration [with America as it is today] is unoriginal and ill-defined, their optimism is terrifying. America will rebound—we will become the us that we used to be again, you might say and Mr. Friedman does—when we regain our ability to do “big things” through “collective action.” Collective action is a phrase that means “the federal government.” Among the big things that we will do are rework American industry, through regulation and taxation, to drastically cut carbon emissions. Another one of our big things is a big increase in the gasoline tax. We will also impose on us a new big carbon tax. We will use revenues to create a “clean energy” industry with millions of “green jobs” like the ones that were eliminated earlier this month at Solyndra. Readers will wonder, like the early environmentalist Tonto, “What do you mean ‘we,’ kemo sabe?”

I hope that’s not the future of America.