The More Imagined Than Real AIG Panic

Human error was instrumental in the financial meltdown of 2008/2009,and

various bubbles that we have had in the past.

                                           

In each case, there has been finger-pointing, usually by anti-business politicians and by bureaucrats whose immediate impulse is to blame big business and bankers; the usual scapegoats. That is the litany of criminalization in left-wing lexicon.

                       

I have always blamed human error. Whether it be loose monetary policy of the Federal Reserve, in inflating currency, or inappropriate accounting rules for normal securities market situations, actions that hasten the ruin of investment liquidity.

                       

In the case of AIG, the value of its derivative insurance coverage was also being determined on the basis of fictitious existing market value. This time, not on possible claims in the future, at the maturing of company obligations, but at supposed current valuations.

                       

That produced a condition that induced premature bankruptcy, in a panic venue; a rush to judgment when cool heads and hands ought to have been the hallmarks of expertise. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

           

Use of Credit Default Swaps

                       

Just a few years ago CDS, or credit default swaps, were considered by some politicians to be the cause of the financial meltdown 0f 2008-09..

                       

Politicos conveniently forgot the real cause of the financial meltdown, which would have pointed to much of their past political activity. That financial debacle owed much more to Washington antics and influence than it did to Wall Street.

                       

Credit Default Swaps are needed in a burgeoning market by a number of industries, particularly big banks.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

                       

TIPS and I-Bonds

                       

I have to repeat what I have been saying for years; TIPS and I-Bonds are not a panacea to avoid inflation risks of the market place, one of many varieties of risk that beset the investor.

                       

You get the secure return that the U.S. Treasury provides and an inflation cover. But you can get risk mitigation with ordinary corporate bonds provided you use the wise principle of “duration” I describe in my writing, And with diversification, using low-cost mutual funds.

                       

Risk avoidance does not mean an avoidance of secure wealth accumulation over the years.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Too-Big-to-Fail Banking is Growing

                       

The Glass-Steagall Act, created under the Banking Act of 1934, was terminated during the Clinton administration. It had separated regular banking from investment banking activity.

                       

However, it’s easier to talk about the separation of investment banking and ordinary banking, than accomplishing its implementation.

                       

The question of proprietary trading arises. Both regular and investment banks had executed such trades, ordinary banks to a lesser extent. Moreover, such trading generally represented a very small, insignificant amount of activity and income.

                       

Furthermore, the definition of what is a proprietary or “prop” trade is hard to delineate.

                       

The result, with all our populist politicians, we have bombast, finger-pointing, and economic panic and damage.

                       

We wound up with Dodd-Frank, a complex maze of regulations that has, as one of its missions, an attempt to separate commercial and investment banking. And preventing banks from getting too big to unwind as failures.

                       

The result so far: Banks are getting bigger and the risk of failing is ever-larger. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

                       

CEOs Earn Too Much?

                       

They may if they earn commissions and options of hundreds of millions a year. But who is to say what is too much? Some politician or bureaucrat.

                       

Do baseball players also earn too much money?

                       

They certainly do, if they earn up to $30 million a year for playing a kid’s game. And which many amateurs do for nothing, but just a little less efficiently. The real difference in their ball-hitting capability is not learned the hard way but in their luck in having eyes to see the ball.

                       

Do gymnasts deserve more than they earn?

                       

They get practically no income despite all the incurred pain, and years of training and practice, and the need to overcome initial physical fear. Unless there's media hype in an Olympics.

                       

From my personal experience with all three practices, it is difficult to see how bureaucrats and politicians  are so ready to damn CEOs  for making “too much” money while other genuinely overpaid groups are left to make their fortunes politically undisturbed.

                       

And ballplayers are indirectly being financed by bailout funds of their bosses’ subsidized ballparks. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

Teachers’ Prejudices and Slants

                       

I did it in graduate school. I followed what my instructors or professors said were financially or politically correct, while knowing the correct version I had wanted to express.

                       

Unfortunately this is the case too frequently in all our schools and universities, When instructors are found, by survey, to overwhelming follow only one political slant, it affects all ideas they convey to students.

                       

Not only effects on political slants but also interpretations of financial problems and their remedies. This is very evident today with the economy and the huge ongoing budget deficits.(See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)

                       

A Bond Solution to a Poor Common Stock Future

                       

There is a possible solution to the quandary of a possibly poor future common stock market. It concerns the use of the corporate bond market and proper implementation of duration, to suit the investor’s personal investing and retirement horizon.

                       

But be sure you invest in a low-cost bond mutual fund where dividends earned are automatically reinvested in shares of the same fund each month.

                       

Corporate bonds can help overcome inflation and the dearth of income and potentially limited growth from stocks. Estimated earnings can well be at least 6% on a net, net, net basis, if strategy is wisely used. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)