The Wall Street Journal Guide to The End of Wall Street as We Know It by Dave Kansas, Part 2

[This is the second half of my review of Dave Kansas's The Wall Street Journal Guide to The End of Wall Street as We Know It.  If you haven't already, you might want to read part 1 first.]

According to Kansas, in September of 2008 the Bernanke-Geithner-Paulson troika thought that a government rescue of Lehman was unnecessary.  “They felt some confidence that they could let Lehman Brothers fail without causing too much of a wider crisis.”  If true, this will go down as one of the greatest misjudgments in financial history and suggests a shocking lack of understanding of markets by those supposed to regulate them.  But Kansas may be scapegoating the troika for a more systemic problem.  Regulators worked hard for weeks to avoid a Lehman failure.  But they did so without a clear legal mandate and without any kind of formalized fund to draw on.  When the Fed convened what turned out to be a weekend-long meeting of Wall Street’s leadership before the terrible Monday, Geithner kicked it off by announcing that “There is no political will for a Federal bailout.”  In other words, elected officials in Washington, afraid of a backlash from voters, would not acquiesce to a bailout and without them the regulators were powerless.

The horrible week that followed Lehman’s death was eventful.   Merrill Lynch was absorbed by Bank America.   AIG was bailed out.   Money market funds experienced panic redemptions.  The SEC banned short selling of financial stocks.   By Thursday afternoon the stock market was down nearly 10% on the week, before rallying on what turned out to be false hopes of a quick government bailout of the banks.  Kansas’ narrative peters out shortly after this, presumably because it is here that he started writing his book.

The second half of The End of Wall Street is taken up with advice for readers  on what to do now with their own finances in light of the “new world order.”  This personal finance advice is undoubtedly the marketing hook for the book, the reason its creators imagined that people would buy it, and the reason they hired Kansas to write it.  (He is Editor at Large at FiLife.com and the author of The Wall Street Journal’s Complete Money and Investing Guidebook.)  Unfortunately, it is also the weakest part of The End of Wall Street.  The advice is not unsound, indeed with regard to reasonableness it is above average.  But it is generic and vague.  Pay down your debts, particularly credit cards.  Young people should invest mostly in stocks, older folks less so.  Do not obsess over the value of your home and think of it as a roof over your head, not as an investment. Read more »

Why You Should Convert Your Traditional IRA to a Roth

In 2010.  Or not.

I recently wrote a post on how to choose between the two kinds of IRA, traditional and Roth.  In a nutshell, the big deciding factor is the tax rate you are paying now versus what you will pay when retired.  If you are paying a higher rate now, go traditional.  If you will pay a higher rate when retired, then Roth is for you.

The core difference between the IRA types is deceptively simple.  With a traditional, you don’t pay taxes on money you put in, but do pay taxes on the way out.  A Roth is the other way around, the money that goes in is after-tax,  but the money that comes out is tax free.  But like that old bit about the butterfly’s wings causing a storm, this clear difference between IRA types propagates into uncountable obscure details.bouncy castle sales

One of those dark corners of the IRA world is the option to convert an existing traditional IRA into a Roth, which involves paying income taxes on the amount converted.  (And no, there is no such thing as a conversion in the other direction that would cause a big tax refund.)

Currently, and until next year, you cannot convert if you have an income over $100K.  Not only does that rule go away next January, but there is a special 2010-only deal: you can delay the taxes due and spread them out over two years, 2011 and 2012, which is an interest-free loan from Uncle Sam.  (In any other year, it would be all due in the year in which you convert.)

Is this a good idea for you?  Two things need to  be true.  First and foremost, you need to be pretty sure that your income tax rate in 2011 and 2012 will be lower than the tax rate you pay in retirement.  This is the usual traditional vs. Roth question, made a little harder because you need to guess your tax rate in a few years from now as well as your tax rate in retirement.

Read more »