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Archive for Wednesday, September 17, 2008

Should you be worrying about the economy?

September 17, 2008

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On the street

How much impact does the nation’s financial trouble have on your presidential vote?

None at all. Peace is my No. 1 issue.

More responses

Lehman Brothers spirals into bankruptcy. Merrill Lynch survives, but only under new ownership by a nationwide bank. AIG, the world's largest insurer, teeters on the brink.

It's all enough to give investors, account holders and any other regular ol' Americans plenty of reason to wince.

And to step back, consider the facts and take an unemotional look at financial reality.

"These are unusual things going on," said Mark Hirschey, Anderson W. Chandler distinguished professor of business at Kansas University, where he teaches classes in investments and security analysis. "I mean, you could have made a lot of money if you could've known that Lehman Brothers would go to 18 cents (a share), or that American International Group - the biggest insurance company in the world - would run into trouble. Or that Merrill Lynch would get bought out by Bank of America.

"These are very big changes, (but) the changes we see this week are characteristic of a market bottom. These are not characteristics of the start of trouble. These are characteristics that you see at the time trouble is solved."

To help ease our minds a bit, here are some answers to some basic questions surfacing in recent days regarding the economy, financial markets and our accounts, both in banks and through investments:

Q: Is money in mutual funds insured - by the government or someone in the private sector?

A: "It's not insured," said Kathleen Diehl, director of compliance for the Office of the Kansas Securities Commissioner, which regulates agents and brokers in the state. "Mutual funds are securities, and there is no vehicle like the FDIC. If you have money in a bank, up to $100,000 is insured by the FDIC. That does not cover securities.

"If you invest in the stock market, it's not as though you're going to lose those mutual funds. They're always going to belong to you, but their value will fluctuate. :

"You can't insure against market loss. There are many people going into the market that don't understand that."

Even if a company that sets up a mutual fund goes bankrupt, the owners of those funds - including individual investors - would not lose all the funds invested, said Mike McNamee, of the Investment Company Institute, a trade group in Washington, D.C.

That's because the funds themselves actually own the stock of many other companies. The only way the mutual fund's money would evaporate would be if all the companies included in the fund suddenly lost all their value.

Brokerage accounts, meanwhile, do carry some insurance: $500,000, said Herb Perone, of the Financial Industry Regulatory Authority.

"You're insured against the broker taking the money and going to Ecuador," McNamee said. "You're not insured against the broker putting it in IBM (and losing money)."

What about consumer banks? Are they safe?

That's not the important question to ask, said Bob DeYoung, Capitol Federal professor of finance at KU.

Ask yourself questions to be sure you fall within the Federal Deposit Insurance Corp.'s insurance limits:

¢ Do I have deposits in a single bank of less than $100,000?

¢ Do I and my spouse have less than $100,000, each, in accounts at a single bank?

¢ Do I have less than $250,000 in retirement accounts - such as an IRA or other such accounts - at a single bank?

"As long as your deposits don't exceed those numbers, you don't need to worry at all," DeYoung said, noting that all such accounts are insured up to those particular amounts by the FDIC. "It's too complicated to figure out if your bank is safe or not."

But he answers the question anyway: Yes, consumer banks generally are safe.

"We have 7,000 banks in this country, and we've had a dozen or a dozen and a half fail in the last six months," said DeYoung, a former Federal Reserve economist and director of research for the FDIC. "And in those cases, not a single depositor has lost money if their deposits are below those levels. :

"Walk into your bank, and they'll be more than happy to explain those rules to you. They want your money."

What are the pros and cons of moving money out of the market?

Hirschey sees nothing but cons in bailing out of stocks at this point.

"Right now?" Hirschey said, incredulously. "This is a horrible time right now to move money out of the market. Risk is not incurred when markets go down. Risk is incurred before markets go down.

"The stock market today is down about 18 percent, year to date, and about 26 percent from the top. Then was the time to sell, not now. Now is not the time to sell. Now is a very good time to be fully invested in high-quality companies with attractive long-term potential."

When to get out depends on how a person measures risk, he said.

"If you're looking at day-to-day volatility, the chances are only about 55 percent that the market will be up tomorrow," he said. "Nobody can predict that the market will be up or down tomorrow. It's volatile.

"However, if you extend the time frame, the questions is: What's the chance that the market will go up over the next five years, or the next 10 years, and whether I'd be better off with my money in (Treasury) bills instead of stocks.

"For your long-term retirement planning, stocks are the place to be. And this is an especially good time to buy stocks, because stock prices are down and bond prices are up. Interest rates are very low. That means that long-term bonds are very risky now. Right now the 30-year bond pays 4.08 percent. Over the last 30 years, stocks have returned about 12 percent, so there's a huge difference.

"The difference between stocks and long bonds is the difference between a comfortable retirement and just squeaking by."

Should I be worried about my insurance companies?

Sandy Praeger, a Lawrence resident who serves as Kansas insurance commissioner, spent part of her day Tuesday seeking to comfort policyholders nationwide about the financial problems facing AIG.

The key, she said, is that none of the insurance companies owned in the U.S. by AIG were in trouble. All such companies are regulated by state insurance commissioners, superintendents and others charged with protecting the public's interests.

"They are all financially strong and solvent today," said Praeger, who serves as president of the National Association of Insurance Commissioners.

Comments

Windlass 5 years, 7 months ago

John McCain has just refuted his 26 years of work in the Senate by saying he's now "for' regulation of investment banks._______He wants to be elected, knows what people need to hear. What makes good sense, however, is the "gospel truth"; the perfect sense that amounts from those two always-reliable alarm-sounding words: Buyer Beware when these folks, the McCain's and Palin's, make press releases.

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JohnBrown 5 years, 7 months ago

What's truly interesting is how John McCain has just refuted his 26 years of work in the Senate by saying he's now "for' regulation of investment banks.This a Financial Katrina.

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logrithmic 5 years, 7 months ago

Blessed,Better read up on inflation my friend. Cash is far from king.

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Blessed_with_Freedom 5 years, 7 months ago

No worries here... We subscribe to the Dave Ramsey plan - Cash is King, Debt is Dumb.If people are living a life they can't afford, then those people should be worried.

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samsnewplace 5 years, 7 months ago

Everyone should be worrying about the economy, including the presidential hopefuls.

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Windlass 5 years, 7 months ago

Everybody likes to blame the republicans but what about our great congress that hasn't done anything to curb the problem? Nobody has done anything (obama, mccain, or bush) to stop faulty lending the root problem with our economy right now.----------------------------------------------------------------The Democrats don't hold the power in the Congress. This has been 8 years of pure one-party Republican power-lusting.

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Windlass 5 years, 7 months ago

What would be the best way to break special interests' hold on our politicians?VOTE the politicians out after only 1 term. For Senators, that's every 6 years. For Congress, that's every 4 years.

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denak 5 years, 7 months ago

We should "be" worried about the state of the English language.The title should read: Should you worry about the economy?Dena

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BuffyloGal 5 years, 7 months ago

"Interesting little fact here. The American people have more power than the President and the Congress.It's called VOTING."-------I never voted for any of these companies to take on the power they have had, nor did I vote for Greenspan. Being a republic and being a capitalist society are different.

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Richard Heckler 5 years, 7 months ago

How will the rest of the U.S. economy be affected if the republicans social security privatization plan is enacted?Put simply, moving to a system of private accounts would not only put retirement income at risk--it would likely put the entire economy at risk.The current Social Security system generates powerful, economy-stimulating multiplier effects. This was part of its original intent. In the early 1930s, the vast majority of the elderly were poor. While they were working, they could not afford to both save for retirement and put food on the table, and most had no employer pension. When Social Security began, elders spent every penny of that income. In turn, each dollar they spent was spent again by the people and businesses from whom they had bought things. In much the same way, every dollar that goes out in pensions today creates about 2.5 times as much total income. If the move to private accounts reduces elders' spending levels, as almost all analysts predict, that reduction in spending will have an even larger impact on slowing economic growth.The current Social Security system also reduces the income disparity between the rich and the poor. Private accounts would increase inequality--and increased inequality hinders economic growth. For example, a 1994 World Bank study of 25 countries demonstrated that as income inequality rises, productivity growth is reduced. Market economies can fall apart completely if the level of inequality becomes too extreme. The rapid increase in income inequality that occurred in the 1920s was one of the causes of the Great Depression.http://www.dollarsandsense.org/archives/2005/0505orr.html

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moderate1 5 years, 7 months ago

Everybody likes to blame the republicans but what about our great congress that hasn't done anything to curb the problem? Nobody has done anything (obama, mccain, or bush) to stop faulty lending the root problem with our economy right now.

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zzgoeb 5 years, 7 months ago

The bottom line on bailouts is this; as long as the company is profitable, the profit is "privatized", but as soon as the place goes t*ts up, the loss is "socialized" to the tax payers, ie, you and me!!! Bush One did this to us as VP in 88 on the S&L collapse(remember the Keating Five starring Johnnie McC?", now Jr. and "Angler" will continue it for our great-great grandkids to pay off!As for stocks and bonds, if you are nearing retirement, you better be out of the mutual funds by now, or you DID lose 20 percent, no matter what the experts are saying about "staying in".

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logrithmic 5 years, 7 months ago

Another part of the equation:AIG CEO's golden parachute? $30 million. I wonder... do you think he's Republican or Democrat?

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logrithmic 5 years, 7 months ago

Here's McInsane's flip flop today on the AIG bailout:"The focus of any such action should be to protect the millions of Americans who hold insurance policies, retirement plans and other accounts with AIG. We must not bail out the management and speculators who created this mess."This is an out and out lie. The bail out will not affect common shareholders of the company as it has already lost 90% of its value. AIG has fallen from $70 per share to $2.26 per share over the last year. Go here to see the details:http://finance.aol.com/quotes/american-international-group-inc/aig/nysWhat McCain is suggesting is that by bailing out AIG, we're somehow keeping these those who have AIG as part of their 401Ks from losses. Guess what? The loss has already happened.

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Windlass 5 years, 7 months ago

Interesting little fact here. The American people have more power than the President and the Congress. It's called VOTING.

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logrithmic 5 years, 7 months ago

Who do you think runs the Federal Reserve? It has been under the control of Republicans since Reagan, who appointed Alan Greenspan in 1987. Ben Bernancke was appointed by George W. Bush a couple of years ago. So, for the last 21 years, the Federal Reserve has been under the control of Republicans. And the Treasury has been under control of Republicans for the last eight.I agree with Ron Paul, btw. I was actually considering voting for him if he had run as an independent.

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Windlass 5 years, 7 months ago

Yup - never as worried as I am about our City Commission and the money they pee away at the same time they claim they have no money to provide a city service. Voters should be listening to what Corliss and his ilk are telling them - that they are not competent for their jobs.

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invictus 5 years, 7 months ago

Time to realize that the Federal Reserve Bank has more power than our entire government and it operates outside the democratic process. Ron Paul where are you? No one can challenge the power of the Federal Reserve Bank. Sorry but you cannot transform this into a right vs left debate, it is so much bigger than that.

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logrithmic 5 years, 7 months ago

And MSNBC reports that the FDIC, the corporation designed to insure bank accounts up to $100,000 is itself facing a shortfall of money and plans to borrow $20 billion to cover future bank collapses (think Washington Mutual, etc.). According to some, there are over 117 banks on the verge of collapse. Check it out:http://www.msnbc.msn.com/id/26747301/Thanks Herr Bush and Herr McSame!

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logrithmic 5 years, 7 months ago

Inflation has been much higher than what is reported. The government is lying to us about the cost of living.When true inflation is factored in, the S&P 500 has actually dropped in real value by 15% over the presidency of Herr Bush. This means if you invested in a mutual fund at the beginning of 2001, your money buys only 85% of what it did prior to your investment. You are losing ground.This is being accelerated by these takeovers of major corporations. This is reverse socialism working to protect the very wealthy. It is the Donald Trump cure of "too big too fail."Here is what the NY Times reported this morning is: "Fearing a financial crisis worldwide, the Federal Reserve reversed course on Tuesday and agreed to an $85 billion bailout that would give the government control of the troubled insurance giant American International Group. The decision, only two weeks after the Treasury took over the federally chartered mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank's history. With time running out after A.I.G. failed to get a bank loan to avoid bankruptcy...."That's right. A bank would not loan AIG money. Think about that. Why if a bank would not loan the company money to cover its margins would the government deem it necessary to put the taxpayer at risk by giving the company $85 billion? Where is this $85 billion going to come from? It will come from Treasury notes provided to the Federal Reserve. We are being forced to invest our hard earned tax dollars in this company that virtually nobody made any money off of. Were there people who made money off of AIG? Most certainly. And it is these people who should foot the bill, not the general taxpayer like you or me.You know why they call the Republicans the Grand Old Party? That's because they're having a grand old party on you and me. Break out the champagne. We have saved AIG. Congratulations folks. While you struggle to put gas in your car, the fat cat Republicans are practicing socialism to save their butts....God bless America....

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BrianR 5 years, 7 months ago

Yes, I am very worried about the economy.

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jafs 5 years, 7 months ago

Yes TS, there will always be crooks.The problem is that our government has abdicated the regulation and enforcement of those regulations when it comes to big businesses.Without those, there are fewer checks on the abilities of crooks to steal and commit fraud.

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Tom Shewmon 5 years, 7 months ago

Remember the MCI/Worldcom scam? Enron? Our very own Westar? There are always going to be crooks running some companies. Here are a few:http://www.forbes.com/2002/07/25/accountingtracker.htmlhttp://en.wikipedia.org/wiki/Corporate_scandalOf course, many want to think this kind of activity is expressly reserved for Republicans.

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logrithmic 5 years, 7 months ago

First folks, these so-called experts want you to believe that all is well. That by having less than $100 K in a bank account, your money is protected. This is a flat out lie. Inflation is the enemy. Having money in an FDIC insured account does not protect it from inflation. The moves by the Fed and Treasury over the last few days to bail out wealthy shareholders of these companies, the friends of Herr Bush and McInsane, are inflationary to the max. In the coming year, your money simply won't buy as much as it used to. You'll scratch your head and wonder why? The reason? Printing all this money to buy these companies puts too much money in the system.Too much money chasing too few goods means money becomes increasingly worthless. Simple truth. Take that to the bank.Second, it will mean that you and I must increasingly work harder or invest in riskier things just to stay even with inflation. The twin elements of finance capitalism are risk and reward. We are taught that with ever greater risk comes the opportunity of ever greater reward. But you have not received any reward from the government purchases of AIG, Freddie, Fannie, and the help provided to JP Morgan to buy out Bear Stearns or the help provided to Bank of America to buy out Merrill Lynch. Nope, no reward at all. Instead you have been asked to assume the risk. The risk has been socialized across all of us. The result? The dollar is becoming worthless.Before these bailouts, our national debt stood at $10 trillion (primarily because of massive amounts of military spending we now have bases in 160 countries - and the two Bushwars). With the bailouts, some estimate that our national debt has ballooned almost overnight to $15 trillion. Add this to the $30 trillion of unfunded liabilities for Social Security and Medicare and it doesn't take a ph.d. to understand that are nation is basically insolvent.What does this mean? A run on the dollar is closer than we think. When that happens, our economy as whole might collapse. The government may be forced to walk away from its bonds. If this happens, the world's largest economy will lie in ruin. It's going to be a nasty eye-opening and horrible taste of reality. Can the American government recover from default? What will happen? No one really knows.The rightwing wants to say that it's the liberals that "tax and spend." Meanwhile, the rightwing champions "borrow and spend" philosophy, treating our currency and our government as a piggy bank that it literally loots to cover its losses. It doesn't get any uglier than this. And just because it's Wall Street, don't get fooled. This is good old socialism, except socialism for the big rollers, the Gordon Geckos. Socialism for the rich. The rest of us are stuck with the bill.Enjoy the fruits of your labor.

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ExxonMcCain 5 years, 7 months ago

Yes- only stupid bible beaters named windell would say that every is fine and jesus is coming soon....just like they have been saying for hundreds of years....

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Chris Ogle 5 years, 7 months ago

Fannie and Freddie is now owned by "we the people" at cost of over $ 4,000,000,000,000.00 (yes trillion)....should we be worried?

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KS 5 years, 7 months ago

I have no pitty for AIG. Let them go! There will be plenty of insurance carriers out there fit, ready, willing and able to pick up the pieces.

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igby 5 years, 7 months ago

Oh! This is very comforting!Lol.Where will you put your money if you do pull out?401k's and Sec. 1035 accounts will be taxed for early withdrawals.

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