Tuesday, July 30, 2013

THE STOCK MARKET vs. SOCIAL SECURITY, PART III: Privatization ... Wall Street's Bailout in Perpetuity Plan

Last month in Part I of my stock market vs. social security comparison I took a look at how much one could reasonably expect to get out of the stock market and social security over their lifetime. I wrote that, assuming you live a normal retirement, you could expect a privately managed investment account to eat up as much as one-third of your $500,000 retirement nest egg - leaving you with about $350,000. Social security, on the other hand, would return about $556,000 of the $598,000 that you contributed to the system.

Later, in Part II of my stock market vs. social security comparison I looked at what would happen to private investment accounts and social security accounts under worst case scenarios. We learned that private investment losses during another 2008-like market meltdown would be greater than losses to social security accounts, by far.

In spite of these realities Wall Street's political representatives in Washington (i.e. congressional republicans) are aching to "privatize" social security. They believe the return on investment would be much greater if the trillions of dollars now running through the social security system were invested in the market.

There are three points to consider before we compare the "return on investment" argument between the stock market and social security.

First, the privatization crowd in Washington wants America to forget that social security was never designed as an investment or retirement account. It's an insurance policy, period. Comparing rates of return, as if social security were a retirement account, is a political red herring.

On another level, while "privatization" sounds sexy and mysterious to many it's not. It simply means the trillions of dollars now running through the social security system would be shifted to the fine people on Wall Street. Seen in the proper light, privatization is code for letting Wall Street pick the pockets of the American taxpayer, again.

Finally, social security has not contributed one dime to our budget deficits. In fact it's running trillion dollar surpluses, and continues to lend money to Uncle Sam.

So the logical question is Why does the privatization crowd in Washington want to send social security funds to Wall Street, especially since Wall Street crashed so spectacularly in 2008? There are two reasons.

First, conservatives in Washington don't like that social security is a successful social program. It does what it's supposed to do. People get paid on time, and it's one of the most efficient and cost effective programs we have. It is a model insurance program for the rest of the world, which the free marketeers of America loathe.

Second, when the trillion dollar bailout crutch from the Federal Reserve and the federal government ends (and it will) Wall Street and the biggest banks know that they will be in trouble.

For example, back in December of 2011 the Federal Reserve had to step in and dump (swap) hundreds of billions in U.S. dollars into Europe or else European market players would have had to sell their dollar denominated assets (stocks and such). This sudden sell-off would have depressed the U.S. stock market and, it was feared (yeah, again), lead to panic sell offs in America and around the world.

But this is nothing new. The Federal Reserve has been dumping trillions of dollars into the market, and artificially propping Wall Street up, since before it crashed in 2008. In fact, from the time the market collapsed in 2008 through March 2013 the Federal Reserve and the federal government have intervened with money dumps and other market supporting activities on at least 1,230 days (over 80%).

And the results have been positively spectacular. Check out the chart below. The grey lines represent when the federal government or the Federal Reserve was not intervening in the market.

What we have is a market system that is addicted to government market interventions, which come in the form of favorable legislation and regular market bailouts. The people who support "privatizing" social security understand this (then again, maybe not). When the market interventions and the Federal Reserve money dumps end the money market gravy train that began in the 1980s will be over.

Simply put, Wall Street needs something to replace their current dependence on favorable legislation, bailouts and the Federal Reserves trillion dollar money shower. Shoving the trillions now sitting in social security accounts into the waiting hands of Wall Street would do the trick.

Call it Wall Street's bailout in perpetuity plan. And it will be paid for, once again, by the American taxpayer if Wall Street gets its way.

- Mark 

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