This from The Rude Awakening:

The American people voted for change…and now they’re going to get it. But the change they get may not be the change they expect Obama to deliver. Something more sinister may be coming our way.

After an historic election and inauguration, president-elect Obama will enter office with a huge list of challenges. These challenges — from a contracting economy to large-scale corporate bankruptcies to soaring national indebtedness — will undoubtedly restrict his agenda.

Let’s hope Obama recognizes the need for incentives, profits, and capital investments in the economy. The economy cannot be taxed and regulated without potentially severe consequences. Former Fed Chairman Paul Volcker (and the last Fed chairman to provide adult supervision for the banking community) is an Obama adviser. So Obama should be apprised of the consequences of Carter-era deficit spending and money printing.

At the very least, Obama must act as a check on the potential for a Democrat-dominated Congress to turn a recession into a depression.

For example, some in Congress are floating a proposal to steal your 401(k), sell the proceeds, and invest in “government-guaranteed” retirement accounts. The only thing this Marxist idea would guarantee is a depression. Call or write your congressman if you feel that your 401(k) is in danger. We shouldn’t allow them to steal more from prudent savers than they already have.

Keep in mind that presidencies rarely resemble campaigns. President Bush campaigned on limited government and a humble foreign policy, and we got the opposite. To top it off, we had the illusion of real growth, with credit and housing bubbles that led to the greatest misallocation of resources in history.

The free market has been falsely accused for this financial crisis. But the free market didn’t get us here; a combination of government spending and crony capitalism did. Much ink is wasted on how we need to re-regulate Wall Street, but the fact is that the problem would never have grown so large without agency conflicts.

The agency conflict on Wall Street is the mentality of “heads I win, tails you lose.” CEOs, traders, and mortgage-backed security factories were paid more for taking more risk. So it shouldn’t surprise us that they overdosed on leverage to magnify returns, without considering risk.

Performance pay should be based on creating long-term shareholder value, not on meeting next quarter’s earnings estimate. A good place to start would be bonuses in the form of restricted stock that does not vest for 10 years. I doubt Lehman would have blown up if employees were paid modest salaries with the potential for sizeable ownership stakes in the future.

Much of our current mess resulted from totally complacent, incompetent boards of directors. Carl Icahn has good ideas for how this can be addressed without excessive regulation. Icahn explains how most corporate boards behave like government bureaucrats in this post . In my view, we need an economy in which everyone acts like owners, rather than CEO-pillagers.

A banking system built upon on a foundation of paper money also contributed to this crisis. The Treasury and Fed allowed institutions to grow “too big to fail.” Without taxpayer subsidies (i.e., Fannie and Freddie — two of the worst crony capitalist institutions in history) and the subsidy of Fed rate cuts, housing prices would have kept growing in step with household income. Instead, house prices went to the moon. Precious capital was thrown into a black hole when mortgage-underwriting discipline went out the window and homebuyers deluded themselves with bubble psychology.

When the current deflation fears are finally slain by widespread recognition that paper money is limitless, we’ll probably see a return to inflation and higher long-term interest rates.

For now, though, demand for bonds remains strong (rates remain low). So the government will likely keep issuing record amounts of new Treasuries and use the proceeds for bailout after bailout, instead of for productive uses. In other words, the government will toss billions of dollars at walking corpses like AIG – a company that produces nothing but spectacular losses and embarrassing headlines – instead of tossing billions of dollars at companies that produce essential items like barrels of oil or bushels of wheat. When governments toss easy credit toward non-productive industries, the supply of currency soars relative to the supply of goods and services. We call this phenomenon, “Inflation.”

The U.S. government’s massive borrowing requirements over the next several months will absorb a lot of the private capital that would otherwise fund various productive enterprises. So that means that farmers and miners and manufacturers will struggle to secure the credit and investment they need to finance their production. And if farmers can’t get credit, they can’t plant crops, which means that grain supplies are likely to fall…and prices to rise.

As Albert Einstein observed, “The significant problems we face cannot be solved by the same level of thinking that created them.” If the federal government proposes “solutions” to this crisis with the same type of thinking that got us here, we could be in for a very long period of economic pain. America’s status as a destination for foreign capital is at stake.

If the new government fails to act wisely and understand how we got here, the only “government guarantee” we’ll have is depression.

Source: Government-Guaranteed Depression

This blog was among the first to warn last month about a proposal to wipe out the tax advantages of 401(k) plans.  During the last week or so, probably because of Mr. Obama’s election, this has caught fire on the Internet.  And like many things that catch fire on the Internet, people are inclined to present the issue in the most dire form imaginable.  So a plan to wipe out the tax advantages of 401(k) plans has morphed into a plan to “confiscate” 401(k) accounts — probably because Argentina’s government did something similar a few weeks ago.

Is it really a confiscation plan?  Well, yes and no.  Let’s unpack some of the nuances, because only then will we have an indication how far this ugly thing might go.

During a hearing last month, Rep. George Miller (D-California), the chairman of the House Committee on Education and Labor, suggested that “high-income” earners be no longer allowed to make tax-deferred 401(k) contributions.  Miller has since back-pedaled on this notion, and nothing has been put in the form of legislation yet.  So the spotlight has now shifted to a proposal by the star witness at the hearing, an econ professor at The New School in New York named Teresa Ghilarducci.

She’s unveiled the plan in conjunction with the left-wing Economic Policy Institute; it’s available in .pdf form on EPI’s website.  The gist of it is this:

1) Wipe out the tax-deferral feature of 401(k)s because it’s mostly the “wealthy” who enjoy that feature.

2) Force everyone to contribute 5% of their income to a “Guaranteed Retirement Account” (GRA) which invests entirely in government bonds and returns an inflation-adjusted 3% a year.  Half of this “contribution” would come from you, half from your employer.  It would be on top of whatever you “contribute” to Social Security.  In exchange for losing the tax advantages of your 401(k) contribution, the government would graciously kick in an extra $600 a year to your GRA.  As Mrs. Bakerman said on The Bob Newhart Show, “Isn’t that nice?”

As awful as all of this is, confiscating existing 401(k) balances and converting them to GRAs is not part of the plan.  Not now.  In her prepared testimony to Congress, Ghilarducci said:

Short term, I propose that since 401(k) accounts and the like are financial institutions — the bank about where 38% of the workforce can intend to save for their retirement — Congress let workers trade their 401(k) and 401(k) – type plan assets (perhaps valued at mid-August prices) for a Guaranteed Retirement Account.

Short-term, then, this is voluntary.  But long-term?  That’s the problem.  Everything about this has a slippery-slope vibe that means you can’t preclude the possibility of a forcible conversion of 401(k)s to GRAs.  And yes, if that were to happen, if everyone’s stock and bond holdings were liquidated in one fell swoop and switched into Treasuries, Dan Amoss is absolutely right — that would bring on a government-guaranteed depression.

Would our Congresscritters and the president do something that mind-bendingly stupid?  Seems far-fetched.  But there’s that Argentine thing.  So you can’t rule it out.  We’ll be watching.

Source: Unpacking The 401(k) Confiscation Rumor

This from the Guardian (UK):

Investors should start seeing the effect on year-end balance sheets, and reforms under the Pension Protection Act of 2006 are likely to complicate matters by forcing companies to spend cash to shore up their plans.

“If your pension plan was invested mainly in equities and equities are off 20 percent, all of a sudden you have a 20 percent shortfall,” William Hernandez, chief financial officer of paint maker PPG Industries Inc , told Reuters in an interview earlier this month.

“It is going to force a huge number of companies into making large contributions next year, at the worst possible time,” he added.

Companies in the Standard & Poor’s 500 index <.SPX> are on their way to record underfunded status and few plans are expected to turn a profit this year, S&P’s senior index analyst Howard Silverblatt said in a note to clients last week.