[EDITORIAL NOTE: If you have written any blog posts on political issues this week, be sure to get links to me by the end of today for the Sunday Election Issues post. If you're wondering what I'm talking about, see this post.]
A couple of weeks ago, I received an email from a 60-something reader who told me he and his wife lost all their retirement savings in one of the Enron/savings-and-loan-style financial debacles and have not recovered. They will never be able to retire.
I’ve spent most of this week wondering how many elders – those near retirement and retired – are now in the same black hole.
On Monday, the Dow dropped 504 points followed by 450 points on Wednesday. The rise yesterday doesn't help much and it is likely the volatility will continue. Even people who are conservatively invested lost dramatic amounts of money, to which I can personally attest. By the time I turned my modest savings (meant to ensure reasonably decent care should I become sick or disabled) into cash late Wednesday, it had lost 25 percent of its value in two-plus days. (Gulp) That’s after a previous four or five percent had been nibbled away over the past few months.
[Although I’m not here to discuss Social Security today, if anyone ever again tries to sell you privatized Social Security as President Bush did in 2005, just point them to this week when even big money market funds, as solid as cash for decades, have begun losing value.]
Don’t let the financial pundits or even presidential candidates try to tell you the current financial problem is complicated. It’s simple: banks with lax or barely-existent credit standards gave mortgages to millions of people who could not afford them and then sold those bad mortgages to financial institutions that bundled them into various kinds of securities instruments that they bought and sold to one another many times over, raking in big commissions on every sale.
When home owners began defaulting on the loans, money, in the form of mortgage payments, disappeared and the securities instruments became valueless, leaving the banks with more debt than assets. (It's hard to finance a takeover with a bunch of empty houses no one can afford to buy.)
Of course, there are other factors contributing to the financial mess, but that’s all you really need to know to understand what has happened. Well, except one more thing that explains how the banks were allowed to make themselves so vulnerable:
During the Great Depression in the 1930s, Congress passed the Glass-Steagill Act which created the Federal Deposit Insurance Corporation (FDIC), the organization that insures commercial bank accounts up to $100,000. It also separated banks into two types: commercial banks (the ones most of us use for our checking and savings accounts and personal, auto and home loans) while allowing investment banks – Merrill Lynch, Lehman Brothers, Bear Stearns, etc. – to operate with fewer restrictions and therefore make riskier financial deals with potentially bigger returns.
If you don’t count my mother who, in her old age, kept gold coins in tin cans around her house, Glass-Steagill restored confidence in the banks for our grandparents and parents, and it worked well for more than 60 years. By the time I was old enough for my own bank accounts, there was no question about their safety.
Then in 1999, President Clinton signed the Gramm-Leach-Bliley Act which repealed Glass-Steagill. (You remember former senator Phil Gramm, don’t you? He was Senator McCain’s top economic campaign advisor until a couple of months ago when Gramm accused Americans of being whiners.)
What Gramm’s Act did was allow investment and commercial banks to consolidate, blurring the financial lines between them, leading to the same kinds of abuses that produced the Glass-Steagill Act in the first place - abuses that have resulted in the financial troubles we have today.
In searching the web for news stories about how much ordinary people - small investors and those with their retirement money in IRAs and 401(k)s - have lost this week, I found only one from Nicholas von Hoffman in The Nation yesterday:
"For Mildred, a professional woman around sixty years of age, Great Depression II has started. I am going to have to work the rest of my life, she said. I can't retire.
"She is not a rich woman, and her retirement investments have been decimated by the perpendicular drop in the stock market. Despite a lifetime of working and saving, like a thrifty squirrel burying acorns in the backyard, she's now broke...
"According to the Securities Industry Association, over half the households of America - something like 57 million families - own stocks directly or through mutual funds. McCain and Obama might bear in mind that this block of 100 million or so Americans are the very heart of the middle classes they both cannot praise enough."
Most reporters and columnists are more concerned with job losses on Wall Street as in this story Chancy of driftwoodinspiration emailed:
“The demand for financial services will in no way disappear as the automobile pushed out the horse and buggy a century ago. Although unemployment on Wall Street will undoubtedly rise, many workers will be reabsorbed elsewhere in the industry. The current financial crisis calls out for new products and services as well as more, not less, information about what is safe and profitable in the future environment.”
- Wall Street Journal, 18 September 2008 (subscription probably required)
It won’t be me calling out for new products and services. Unless the winner of the November election pushes Congress for more bank regulation (repeal of Gramm-Leach-Bliley would be a good start), I’m thinking I trust a coffee can under the bed more than any bank for the time being.
There is no telling how many Americans have been wiped out, or close to it, this week. As bad as it is for younger people, they have two or three decades to recoup. Old people, like Mildred, retirees who rely on small investment portfolios to supplement Social Security and the man who wrote me two weeks ago, do not.
But don’t expect any help. There is bail-out money – borrowed from China – but only for banks, along with golden parachutes for their executives who created this train wreck. The rest of us are on our own.
ADDENDUM: Although, as I said above, today's post is not about Social Security, this video arrived in my inbox this morning from Jan Adams of Happening Here who writes the Gay and Gray column for Time Goes By. It is pertinent:
[At The Elder Storytelling Place today, Brenton "Sandy" Dickson tells of his adventures with Yoga (Stretching and Bending at 70).]