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 »

Adminstrative Announcement

This weekend I will be attempting to switch this blog over from one hosting environment to another, something that will allow for more flexibility and features in the future. The look of the blog will change somewhat right away, and probably continue to morph over the next few weeks as I twiddle with things.

I mention this because the switch-over may cause a short term outage at some point today or tomorrow. Of course, if you are reading this, the blog is obviously currently up.

[Update: Blog is now safely up in WordPress on new host, so hopefully no more downtime.  But theme is ugly and none of the internal links function.  Workin' on it....]

The Wall Street Journal Guide to The End of Wall Street as We Know It by Dave Kansas, Part 1

Of the passel of hastily written books now on the shelves discussing the financial crisis and what to do about it, The Wall Street Journal Guide to the End of Wall Street as We Know It by Dave Kansas may have the best title. But like the other members of its micro-genre, it is not likely to become an enduring classic. Kansas is a web and newspaper reporter by trade and the entire book can be usefully thought of as an extended magazine article, what in an earlier age might have been called a pamphlet. It was written over a few weeks in the last months of 2008, was on shelves as a paperback by the end of January, and will probably outlive its usefulness by late summer. It will next be seen many years from now when unearthed by a graduate student doing research into the contemporaneous reaction to the Panic of ’08, or whatever it is that the current crisis winds up being called.

But as a long magazine article, the book has its merits. If you weren’t paying close attention to events in the financial world last year and now feel at a disadvantage at dinner parties, The End of Wall Street will help. Even relatively close readers of news accounts will find tidbits and pieces of the big puzzle they have missed. For example, the book points out that the average FICO scores of sub-prime borrowers actually improved as the housing bubble grew. While the sub-prime borrower of ten or fifteen years ago might have been sub-prime due to a bad credit history, by 2006 a sub-prime borrower typically had adequate credit but was buying more house than he could truly afford.

Kansas also provides a modicum of analysis and reflection, roughly what you would expect from a reporter given a book to fill but only a short time to do it. He deftly points out that the troika at the helm of the government’s handling of the crisis in the fall of 2008 was made of Fed Chairman Ben Bernacke, New York Fed President Tim Geithner and Treasury Secretary Henry Paulson. Kansas does not say it, but he clearly means the reader to notice that the new administration has merely contracted that troika into a duo.

And although he cannot resist blaming the Usual Suspects of crooks and overly clever bankers, Kansas does so with a light hand. The fiasco in mortgage bonds was propelled by the same forces that propel the economy in good times, avarice and optimism. As Kansas deadpans, “Creating new regulations that will eliminate greed is practically impossible.” Nor, he might have added, is it necessarily a good idea.

The fuse for the powder keg was lit in June 2006 when, according to the S&P Case-Shiller Indexes, house prices in the US peaked, having gone up 190% in ten years. It took some time to play out, but after years of aggressive lending and borrowing on the almost universally held theory that house prices never go down, the result was nearly pre-ordained. There are wrinkles that made it worse, such as the peculiar structure of the mortgage bond market, but as Kansas makes clear, these are complications to the core disease. A truly vast number of bad loans got written and, due to the nature of the beast, they all went south at the same time.

It is what happened next that made our current situation dire. As Kansas tells us, within living memory there have been several large-scale financial crises that failed to destroy Wall Street, and some of those failed even to cause a recession. The tech-telecom bubble burst at the start of this decade, vaporizing trillions in stock market wealth and littering Wall Street with worthless telecom debt. That came only a few years after the Asian Crisis and Russian Default Crisis culminated in the collapse of Long Term Capital Management, which caused dramatic late night meetings of the leaders of Wall Street, but not, apparently, any long term repercussions. And a few years before that, almost the entire S&L industry went up in flames.

Kansas calls these disasters Dog That Didn’t Bark moments, events that historians will realize hold significance for what did not happen rather than what did. Indeed, the fact that no really terrible damage was done only encouraged further risk taking. But in retrospect, the financial system was lucky to weather those storms as well as it did. The seawalls were just strong enough and the ad hoc and somewhat haphazard government rescue efforts were just adequate enough to see us through. When a slightly bigger hurricane made landfall it was revealed just how insufficient the financial system’s defenses had really been all along.

The levees were breached on Monday, September 15, 2008. That was the day Lehman Brothers failed, defaulting on its debt and turning what had been an atmosphere of fear and foreboding into one of panic. Investors reasoned that if the debt of a firm as significant as Lehman could become worthless then nothing was safe. All of a sudden everybody started hoarding cash, refusing to lend to anybody under any circumstances.

Lehman had been widely known to have been in serious trouble for some time, so a person might wonder why its failure could have come as such a shock to the system. As late as the Friday before, the credit default market was pricing the likelihood of a Lehman default in the following year at only 7%. This apparent incongruity can be explained by the fact that almost everybody on Wall Street believed that even though Lehman was probably insolvent, the government would never allow such a key player to default. Of course, that is exactly what happened.

[Stay tuned for part 2 of this review early next week.]

Frugal Friday Feb. 27

Another quiet week in the frugalosphere.

In a follow-up to last week, I must report that Almost Frugal gave into temptation and bought a new dishwasher after all. This in spite of the dozens of encouraging comments she got, cheering her on in her efforts to live dishwasher-free. It almost makes you wonder why she bothers blogging if she’s going to lose her mind and spend money like a drunken sailor.

Speaking of blogging, today’s Little People Wealth has helpful post about how you can get some free cheese. All you have to do is review the cheese on your high traffic cheese-related blog. Finally, a tip we can all use.

As true devotees of frugalism know, being frugal is not merely a way to get rich, it is a lifestyle. Frugal posts this week explored taking this further and transcending the Frugal Lifestyle (FL) and living what might be called the Substance Abuser Lifestyle, or SAL.

Money Saving Blog brings us a list of 20 things in your house you can sell. This post begins with the commonplace observation that “the first thing that I do when I suddenly realize that money is getting tight towards the end of the month is to look around my home to see if there is anything that I can sell.” This is a good start, but I think that really living the SAL would mean looking around in other people’s homes for things you can sell.

Bargaineering suggests Dumpster Diving. The post is short on details, but apparently in some garbage heaps there are more things you can sell.

The Greenest Dollar picked up the SAL pace with a post on living in shipping containers. It’s an informative post, but the author lost my interest when she started discussing how much it costs to buy a container. Of course, a serious SAL practitioner would find one.

Not to worry. Tight Fisted Miser has an informative post, with a follow-up the next day, on what he calls “Extreme Frugal Housing Options.” His first suggestion is to live in a van, which he thinks he would really enjoy, but concedes that his “GF” would not. (I’m not sure what GF stands for. In context, girlfriend seems unlikely. Goldfish? Grandfather?) If not a van, he suggests an RV, which again he worries that GF would not like. Also, they’re hard to handle on the road and burn a lot of gas. But, then again, there’s no room for a dishwasher.