Will Executive Pay Caps Work?

I think it will, and here's why.

As a reminder, the Obama Administration has proposed a new approach to the companies seeking bailouts: Top executives at these companies must cut their pay to $500,000 (excluding stock) The average reader may think "That's a nice piece of change!" until you realize that these cuts are very, very deep. However, extraordinary circumstances warran extraordinary ideas. Obama's plan is creating, at least on the surface, even conservative political allies on this idea:

"In ordinary situations where the taxpayers' money is not involved, we shouldn't set executive pay," said Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee.

"But where you've got federal money involved, taxpayers' money involved, TARP money involved, and the way they have spent it, with no accountability, is getting close to being criminal." Source

Supporters of his move on executive pay included the leader of the Republicans in the U.S. House of Representatives, John Boehner. Many Republicans in the Democrat-controlled Congress have been resistant to government bailouts, even when fellow Republican Bush was president.

"I think if anybody is looking to the taxpayer to help bail their company out, these kind of executive compensation limits are appropriate," Boehner said.

Republican Representative Mike Pence, who said he had opposed the finance sector bailout to begin with, said, "maybe it is going to wake up American business -- that there is a cost when you invite the 800 pound gorilla of government into your boardroom." Source

I think executive pay restrictions is a good way to make the private industry think twice before heading to the feds for public funds. But there's more--as I mentioned above, the 500,000 cap excludes stock. The Obama Administration wants to allow companies to pay their top executives past the 500,000, but it has to be in frozen stock. By frozen, I mean they cannot cash out that stock until they pay the government back, then all caps (including the salary) will be lifted. How is this "good"? Well, if the executives has enough strategy to turn around a company, the stock price will most likely rebound, and the CEO is rewarded for..let's say it together now...PERFORMANCE!

Bailout Bonanza!

Remember that 700 Billion Bailout? It's a "shade" higher now…

And the shade we're talking about is the size of the one caused by a solar eclipse. The government, hoping you don't know how to add, wants you to believe that they're asking for "only" $700 billion in bailout money from the much-publicized bailout. However, the number now is about 10 times the original asking amount. Again: the number now is about 10 times the original amount—about 8.3 TRILLION dollars. Here's the invoice, as of Monday December 8th:



Not included: a $15 billion bridge loan to the Big Three American automakers.


Some numbers are so big most people just gloss over the number. But taxpayers are on the hook for it, and it is a really big number. Just how much will $8 trillion cover? Look at the federal departments' average annual budgets below, funded primarily with taxpayer dollars:



NASA: $17B

US Postal Service: $34B

Dept of Labor: $10B

EPA: $7B

Dept of Treasury (in a normal year): $12B

Dept of Energy: $24B

Dept of Transportation: $12B

Dept of Justice: $20

Dept of Agriculture: $20

Dept of Interior: $10

Dept of Homeland Security: $120B

Dept of Defense: $515B



Total: $801B



So the money the government has pledged to save our capitalist system is enough to run these government entities for 10 years, and they are giving this money out to a handful of banks and financial entities within the next year or two. There is now a plan to give the Big Three auto companies $15 billion, (small potatoes now) and a pending stimulus package of between 700 billion and 1 trillion dollars. And the automakers are, in my opinion, trying to scare people into believing that they either need bailout money or that they will cease to exist. It's a false either-or choice (but more on that later on).


Our leaders are telling us deficits don't matter. I'm not an economist by any stretch, but to me it doesn't seem to pass the common-sense test. But man, I really hope they're right. I really want their plan to work. Because if it doesn't work, we're really going to be in trouble after we add more to the stratospheric rise of our debt to other countries if said countries lose faith in our ability to pay the debt back.

Ha! You Got (Tax) Shifted!

It’s what happens when state governments get real smart at taking your money away. Let’s say that you really don’t like taxes (that would probably be all of you). Well, because taxes are really unpopular politically, some state governments have engaged in long-practiced method of collecting needed revenue when times are tough (and sometimes when times aren’t so bad). Let’s call it… You Got (Tax) Shifted!

Here’s how it works.

You want low income taxes despite the fact that the cost of running the state/federal government gets more expensive? OK, lawmakers say. We won’t raise your income taxes. So they appeal to the federal government for “relief” (that means cash). However, people across the country don’t want that to happen either. Thus, local governments will increase their sales taxes. But then if that fails, what happens next? Something has to go to be cut, (or go up to bring in more revenue) So what will go up are...other things you don’t really get as upset about. Like:

- Bridge and Road Tolls
- Mass Transit Fares
- License Vehicle Registration/Tag Fees
- Monthly/Yearly Parking fees
- Parking Ticket fees/Speeding Ticket fees


And/or they start cutting back on services. Libraries and other public-service entities close earlier and shut off lights. Small businesses raise fees and cut back on hours as well. People work less. Here in NYC they are talking about eliminating entire lines of subway service and raising fares...again. These consumption fees are not “taxes” per se, but they still work in the same way by bringing in revenue to keep businesses are state-run services afloat. Of course, you can avoid many of these by not consuming these services, but it’s unlikely that you will stop driving, stop parking, flying, riding, etc. Otherwise, our economy, which depends on you spending money, will continue to tank.

The Market Has a Cold 'Tussin Can't Help!

I know many of you may have some jitters regarding the stock market. The government has decided to spend $850 billion to "fix" whatever is plaguing the markets. As I mentioned last week, there are a lot of things I don't like about it, but the government has decided to give it a whirl, and well, us regular folks are just going to have to sit back and watch what happens. In one year, the Dow has fallen nearly 5,000pts. Panic still continues to be prevalent in world market, and even rational investors tend to be nervous. But let me attempt to explain what you as an individual investor should be doing.

I can only speak to long-term investors at this point--those who have at least over 5 years or so until they can retire. You have to look at as if the stock market has a "cold." All these Fed Rate Cuts, nearly nationalizing companies, buying up bad debt, and propping up real estate prices are like cough suppressants--it will only prolong the process. in a common cold, the body "coughs" to try to expel that Nasty Green/Yellow Stuff from your body. A cough suppressant keeps you from coughing, and forces the body to expel it in other ways. The market has a cold and has to cough out all these bad things we've done over the past few years.

I STILL hear real estate commercials asking if you want to "Flip and Grow Rich." Some will never learn. We have a housing glut now--too many houses on the market--and prices have to fall to a reasonable point to adjust to market conditions. Yet, some still don't want to let the market "work this out of its system." Remember when computers used to go for $2000-3000 or more and this was seen as "reasonable"? Now you can find a computer with the processing speed, performance, and quality for a third of that price because the technology has become so abundant. Housing is no different. Don't get me wrong--I think housing is a great investment, but banks are getting very conservative now and not lending as freely as they used to. The era of NO MONEY DOWN!, CDOs, and Adjustable Rate Mortgages are (hopefully) on the way out.

Bottom line, if you cannot take these stick market dips, then you probably need to pull out, but you do so at your own peril. Me, I'm staying put. A good investment portfolio has you nearly 100% invsted in stock in your twenties, and probably shifting to more conservative investments (like bonds, annuities, and by 10% increments in your thirties and forties and then 15% increments in your 50s and 60s.) That way, if you are close to retirement, your investments will be less dependent on the whims of the market. My 401(k) investmetns at this point
are in 100% stocks right now. In my late thirties I'll probably go to 90-10 (stocks/bonds), then 80-20 in my forties, then 65-35 in 50s, and down to maybe 35-65 in my 60s and beyond. These short-term market jitters should not be bothering you if you have a long way to go.

Yes, I know that Wall Street has done some stupid and greedy things in the past few years and we all have to pay for it now. They are taking it on the chin right now, and should. Next week I'm thinking of covering Credit Default Swaps and how it adds even more stupidness to our current situation. I know such topics may be a bit dry, but once you know how we left our Store to be managed by irrational folks before, you'll be alert if it ever rises again.

This Week's 5 Hot Links

1. An ATM scam story has made small ripples across some places in California, where a “skimmer” is attached to ATM machines and can steal your card info. It’s doesn’t appear to be all that serious, but Cali readers should be on guard.

2. If you haven’t noticed, those much-publicized economic stimulus checks are already arriving in bank accounts electronically for those of you who received tax refunds via direct deposit.

3. And already, (as we mentioned before) tourist locations and stores are offering deal, after deal, after deal to make sure you don’t hold on to it too long.

4. If the economic slowdown is really hurting your budget, The Street suggests stocking up on non-perishables. If you’re single, it might not make much difference, but hey it depends on you.

5. And the blogger over at the highly recommended Free Money Finance gives some high-school based tips for shopping smarter.

Enjoy your week guys. Spring is finally arriving here in New York.

Feds: Rebates Checks Are Coming Next Week

If you filed your taxes electronically and received your tax refund via direct deposit, the government will be sending your stimulus money as early as next week, ahead of schedule. This is probably one of the few instances in American History where you'll hear "government," "sending your money," and "ahead of schedule" in the same instance, so they must really think we're in a pickle economically. The Economic Stimulus package checks will be sent to you via direct deposit if you filed for a refund using direct deposit.



Here is the schedule for the payments, based on Social Security number:

Those who sign up to receive a 2007 tax refund via direct deposit will receive checks first.
According to the Internal Revenue Service, direct deposit payments will be made the week of April 28 to recipients whose Social Security numbers end in 00-20.

Direct deposit payments will be made May 2 to people whose numbers end in 21-75.

The final round of direct deposit payments will be made May 9 to people whose numbers end in 76-99.

…and for you paper people out there, you will receive a paper check:

[Paper] Checks will be mailed May 16 to those whose numbers end in 00-09. A second round of checks will be mailed May 23 to those whose numbers end in 10-18.

A May 30 mailing will be made to people whose numbers end in 19-25.

Mailings will be made June 6 to those whose numbers end in 26-38; June 13 to numbers 39-51; June 20 to numbers 52-63; June 27 to numbers 64-75; July 4 to numbers 76-87; and July 11 to those whose numbers end in 88-99

Source: http://www.wkyc.com/news/news_article.aspx?storyid=85299



Well, the big question now becomes: What will you do with yours? Spend? Pay off debt, or save? (And yes, I know this money is most like borrowed, will run up deficits, and will most likely be funneled to foreign countries, most likley China and Japan). Me, I probably plan to split mine among all three options, being that it's money I never counted on having in the first place. $200 will probably go to savings, $200 to finish off a small credit card debt, and $200 to defer the high cost of to airline purchases I'll be making for the summer. (Or a Wii-- it depends on things).



How about you?

Should We Allow Retirement Funds to be Used for Real Estate Investing?

No.

That’s it, no….

Oh, still around? Let’s talk about why. But first, some background. John Crudele, a columnist for the New York Post, penned

this article —in it, he talked about how the two major political parties are not facing reality, blasé blasé..you’ve heard the drill. To note, he says:

…my belief that the only stimulus package we can afford right now is one that allows people to spend their own money.

He was on the right path. It’s good point. Then, he goes wildly off course as to what this entails:

In other words, what we need is a simple law change that will permit Americans to use their own retirement money - without being killed by taxes - for such things as buying real estate.

What? Use their retirement money to buy real estate? But you can already do that you say. Yes, but with limits. It’s used to purchase your first home, and it’s limited to $10,000. Some employers require you to roll over the money to an IRA (and you have to pay it back). But there is a reason that the government makes it very difficult to pull money out of 401(k) and IRA plans—they are made for retirement purposes. Hence, the name.

Imagine for a moment that after running up student loan debt, credit card debt, and then home-equity loan debt, Americans start tapping into their last basket of (usually) forced savings—the 401(k) or IRA plan. What happens if we as a country haven’t learned from our lesson and begin buying homes way above our means because the “attractive” intro rates? You end up in a very bad position. You end up with millions of Americans (with the help of the doom-and-gloom media) playing on the emotions of everyone to bail us out of our problems (again). Only this time, it would cost a whole lot more because we would put a lot more stress on an already-fragile Social Security and Medicare program. Basically we’d further the citizen’s dependence on the government to survive. And that’s not a good thing.

Check's In the Mail in May - Your Plans?

The Stimulus and the Response

President Bush and the Congress has signed the Welfare for Everyone er, Economic Stimulus Package that will go out to some 150 million Americans starting in May. Most taxpayers will receive $600 if you earned more than $3,000 in 2007, $1200 for married taxpayers, and $300 per child under 17, according to the package details. Here are some more details via WhiteHouse.gov that you probably didn’t know:

- For 2008. Taxes on the first 6,000 you earn ($12,000 for married couples) will not be taxed (previously the tax rate was 10% ). Your adjusted gross income should be less than $75,000 ($150K for couples), including salary and bonuses to receive the full check. Phase-outs begin above these income levels.

- The total spending will be to the tune of $100 BILLION+. Most of us don’t understand the concept of how much money $100,000,000,000 is, but it is a lot of money being sent out to Americans.

So, why is the government doing this? Besides it being an election year and the slowing of the economy, the government seeks to try to soften the blow to the economy by giving you a cushion of cash to fall on. The theory is that if you give people money, they will go out and spend it on American Products that will directly affect the US Economy.

Is it a great idea? I don’t think it’s the best idea, considering some of the news on the ground about how people actually plan to spend their checks. From a Bloomberg article we find that Americans have other plans rather than spending the money on the good old USA:

The stimulus plan Congress approved this month may provide less of a jolt to the U.S. economy than intended, as most Americans plan to save rather than spend their tax rebates, a Bloomberg/Los Angeles Times survey shows.

Only 18 percent of respondents said they will spend their rebate on purchases, while slightly more than three in 10 said they prefer to use the money to pay off debt, and a third said they'll pocket it.

``People in Washington assume that about 40 percent of the money will be spent,'' said Douglas Elmendorf, a senior fellow at the Brookings Institution, a Washington-based research organization. ``Much less would be disappointing.''

I bet it would be. Do "People in Washington" lose consciousness after they enter the Beltway?

There are so many things in this little snippet that I find rather surprising. Less than 20% plan to spend the money—which, honestly, I have to see myself. Expect a huge “Economic Stimulus Sale” Blitz from US companies in May and June to compete with consumers' discipline to save and pay off debt. Then, consider the fact the most of the products you’ll be buying—clothing, computers and other high-end electronics, go to other countries, most likely China. I'm not going to lie to you--I'm blessed to be in a fairly decent spot financially, and that check is going to a splurge purchase--I got my eyes on a new TV or an airline ticket for my family's summer family reunion. I bet I'm not alone.

Lastly, remember that the US Government doesn’t have billions of dollars stored up in a bank somewhere to dole out when times get bad. They will most like follow the China Boon Economic stimulus plan, which is described below:

1. Borrow money from China for the US Economic Stimulus Package and give to Americans to spend.

2. Americans spend money at companies that send most of the profits back to China.

3. The US Government pays back the original money, with interest.

Sound good? Well, it’s probably the most likely scenario. I’d be pleasantly surprised if we use our Federal government check to pay off debt and save for later. The Feds would be happy if you spend the money. Personally, I think the best option would have been to spend the money on improving our Country’s infrastructure and educational pursuits. It would have taken longer to make an impact, but I think we would be better off than we would in say, 6 months from now when we find out the economic stimulus package didn’t go according to plan.

See you next week.

Our Scary Future? Not so much.

Halloween is nearing, and if you take a look around the world, on the surface things appear pretty gloomy—especially for those who plan to invest in the stock or housing market. Check out this scary quote:

US FED CHIEF WARNS WALL STREET

The weakness in the U.S. housing market "is likely to be a significant drag on growth in the current quarter and through early next year," U.S. Federal Reserve Chairman Ben Bernanke warned.

Source: http://www.cnn.com/2007/BUSINESS/10/16/bernanke.speech/

Ooo..scary.

That is, until you read, the very next few sentences:

But he hinted that it may not get that much worse and that investors and lenders may have learned from their mistakes.

"Rather than becoming more crisis-prone, the financial system is likely to emerge from this episode healthier and more stable than before," he said in a speech to the New York Economic Club Monday night.

Reading that, I know what you're thinking—who goes to economic club meetings? Nah, more likely I hope you realize that the Fed Chair says our dire situation won't last much longer. He hints towards refraining from a rate cut, and I think it's all to the good that he takes that path of action. You see, constantly tinkering with our economy every time it corrects itself does nothing but slows the correction process.

Today's society goes through great length to protect your from risks—toilet gaskets, scares from China, and yes, the Fed will try to interject to save investors from making poor decisions. However, great risk brings great reward—and sometime great failure. However, you are designed to rise from failure, not be destroyed by it. Failure makes you battle-tested—and when people jump through hoops to insulate you from failure, then it hurts even more down the road.

Another hyped craze is the alleged Housing Market craze. (Yes, I know, I've been sucked in myself). However, it's sometimes better to focus on the bigger picture. About 90% of all mortgages are being paid on time an actual homeownership is relatively stable.

All You Need to Know

Look, I'm not saying the road won't get bumpy from sometimes. It doesn't mean however, that you should stop driving altogether. It doesn't mean you start looking for someone to bail you out of your decisions either. All you need to know is to focus on the long-term future and to ignore the weekly scares blasted to you on the news shows every week.